e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
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Commission File
No. 0-28298
Onyx Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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94-3154463
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(State or other jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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2100 Powell Street
Emeryville, California 94608
(510) 597-6500
(Address, including zip code,
and telephone number,
including area code, of
registrants principal executive offices)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock $0.001 par value
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Nasdaq Global Market
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Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Act).
Large accelerated
filer o Accelerated
filer
þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act):
Yes o No þ
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant based upon the last trade price
of the common stock reported on the Nasdaq Global Market on
June 30, 2006 was approximately $507,225,721.*
The number of shares of common stock outstanding as of
February 28, 2007 was 46,585,480.
TABLE OF CONTENTS
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement for
its 2007 Annual Meeting of Shareholders (which will be filed
with the Commission within 120 days of December 31,
2006), are incorporated herein by reference into Part III
of this Annual Report on
Form 10-K.
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Excludes 11,347,009 shares of Common Stock held by
directors, officers and stockholders whose beneficial ownership
exceeds 5% of the Registrants Common Stock outstanding.
The number of shares owned by stockholders whose beneficial
ownership exceeds 5% was determined based upon information
supplied by such persons and upon Schedules 13D
and 13G, if any, filed with the SEC. Exclusion of shares
held by any person should not be construed to indicate that such
person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the
Registrant, that such person is controlled by or under common
control with the Registrant, or that such persons are affiliates
for any other purpose.
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PART I.
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These
statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industrys results,
levels of activity, or achievements to differ significantly and
materially from that expressed or implied by such
forward-looking statements. These factors include, among others,
those set forth in Item 1A Risk Factors and
elsewhere in this Annual Report on
Form 10-K.
In some cases, you can identify forward-looking statements by
terminology such as may, will,
should, intend, expect,
plan, anticipate, believe,
estimate, predict,
potential, or continue, or the negative
of such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, events, levels of activity, performance or
achievements. We do not assume responsibility for the accuracy
and completeness of the forward-looking statements. We do not
intend to update any of the forward-looking statements after the
date of this Annual Report on
Form 10-K
to conform these statements to actual results, unless required
by law.
Unless the context otherwise requires, all references to
the Company, Onyx, we,
our, and us in this Annual Report on
Form 10-K
refer to Onyx Pharmaceuticals, Inc.
Overview
We are a biopharmaceutical company building an oncology business
by developing and commercializing innovative therapies that
target the molecular mechanisms implicated in cancer. With our
collaborators, we are developing small molecule drugs with the
goal of changing the way cancer is
treatedtm.
A common feature of cancer cells is the excessive activation of
signaling pathways that cause abnormal cell proliferation. In
addition, tumors require oxygen and nutrients from newly formed
blood vessels to support their growth. The formation of these
new blood vessels is a process called angiogenesis. We are
applying our expertise to develop oral anticancer therapies
designed to prevent cancer cell proliferation and angiogenesis
by inhibiting proteins that signal or support tumor growth. By
exploiting the genetic differences between cancer cells and
normal cells, we aim to create novel anticancer agents that
minimize damage to healthy tissue.
Our first commercially available product,
Nexavar®
(sorafenib) tablets, being developed with our collaborator,
Bayer Pharmaceuticals Corporation, or Bayer, was approved by the
U.S. Food and Drug Administration, or FDA, in December 2005
for the treatment of individuals with advanced kidney cancer.
This approval and our subsequent launch of Nexavar marked the
availability of the first newly approved drug for patients with
this disease in over a decade. Nexavar is a novel, orally
available multi-kinase inhibitor and is one of a new class of
anticancer treatments that target growth signaling. We and Bayer
are jointly marketing Nexavar in the U.S. under our
collaboration agreement.
In July 2006, Nexavar was approved by the European Commission
for the treatment of patients with advanced renal cell carcinoma
who have failed prior therapy or are considered unsuitable for
such therapy. Bayer is commercializing Nexavar in Europe, as
well as in all other territories outside the U.S. where
Nexavar is approved. As of the end of 2006, Nexavar had been
approved in approximately 50 countries worldwide with
multiple additional applications pending.
The approvals of Nexavar were based on data from our pivotal
Phase 3 trial in patients with advanced kidney cancer.
Study results demonstrated that there was statistically
significant longer progression-free survival in those patients
administered Nexavar versus those patients administered placebo.
Progression-free survival is a measure of the time that a
patient lives without evident tumor growth. Based on these data
and discussions with the FDA, we and Bayer offered access to
Nexavar to all patients in the Phase 3 kidney cancer trial.
As a result, patients who were previously administered placebo
in the trial could elect to receive Nexavar.
We and Bayer are also conducting several clinical trials of
Nexavar in other tumor types, including pivotal studies in
advanced hepatocellular carcinoma, also known as liver cancer,
metastatic melanoma, or advanced skin
cancer, and non-small cell lung cancer. In February 2007, we and
Bayer announced that an independent data monitoring committee,
or DMC, had reviewed the safety and efficacy data from the
pivotal liver cancer trial and concluded that the trial met its
primary endpoint resulting in superior overall survival in those
patients receiving Nexavar compared to patients receiving
placebo. The DMC also noted that there was no indication of
imbalances between the treatment arms with regards to serious
adverse events. Subsequently, we and Bayer made the decision to
stop the trial early and allowed all patients in the
Phase 3 liver cancer trial to be offered access to Nexavar,
enabling them to crossover to Nexavar treatment. In
December 2006, we and Bayer announced that we did not meet our
primary endpoint in our pivotal metastatic melanoma clinical
trial. Also, in December, we announced results from a randomized
phase 2 trial evaluating Nexavar in combination with
dacarbazine, or DTIC. The study showed a trend toward improved
progression-free survival (PFS) in patients in the Nexavar arm
versus patients in the placebo arm. Based on 80 progression
events, median PFS was 21.1 weeks and 11.7 weeks
respectively for Nexavar in combination with DTIC as compared to
DTIC plus placebo. Overall survival data are maturing. We and
Bayer may decide to initiate additional clinical trials in
metastatic melanoma based on the final results from this trial.
We and Bayer are undertaking a wide variety of early stage
studies, as well as studies being conducted by independent
investigators, to evaluate the safety and effectiveness of
Nexavar in combination with other therapies in a wide variety of
cancers. To date, we and Bayer have also reported results from
several early stage studies combining Nexavar with a range of
chemotherapeutic agents.
With Bayer, we share a vision of rapidly making Nexavar
available worldwide to patients with advanced kidney cancer. We
also intend to invest significantly in Nexavar in order to
assess its possible use in the treatment of other cancers. We
believe that Nexavar has the potential to change the way
cancer is
treatedtm
by offering patients an effective oral agent that is generally
well tolerated, and can be combined with current standards of
care thereby improving the length and quality of patient
survival.
In a previous collaboration with Warner-Lambert Company, now a
subsidiary of Pfizer Inc, we identified a number of lead
compounds that modulate the activity of key enzymes that
regulate the process whereby a single cell replicates itself and
divides into two identical new cells, a process known as the
cell cycle. Mutations in genes that regulate the cell cycle are
present in a majority of human cancers. Warner-Lambert is
currently advancing a lead candidate from that collaboration, PD
332991, a small molecule cell cycle inhibitor targeting a
cyclin-dependent kinase, or CDK. In September 2004, we announced
that Pfizer initiated Phase 1 clinical testing of this CDK4
inhibitor.
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Our
Product Candidates
Certain trials of our product candidates, sponsored by either
Onyx or our collaborators, are listed below.
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Product/Program
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Technology
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Indication
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Current Status
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Nexavar (sorafenib)
Tablets
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Small molecule inhibitor of tumor
cell proliferation and angiogenesis, targeting RAF,
VEGFR-1,
VEGFR-2,
VEGFR-3,
PDGFR-ß,
KIT, FLT-3,
and RET.
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Advanced kidney cancer
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Approved in U.S., EU and other
territories worldwide
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Single-agent trial for liver cancer
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Phase 3
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Combination trial for metastatic
melanoma
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Phase 3
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Combination trial for non-small
cell lung cancer
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Phase 3
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Various single-agent trials for
kidney and liver cancer
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Phase 2
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Combination trials for kidney and
liver cancer, as well as metastatic melanoma
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Phase 2
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Single-agent trials for breast,
non-small cell lung and other cancers
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Phase 2
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Combination trials with standard
chemotherapies for melanoma, colorectal, non-small cell lung,
ovarian and other cancers
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Phase 2 and 1b Extension
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Additional combination trials with
other anticancer agents
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Phase 1b
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PD 332991 (licensed
to Pfizer)
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Small molecule inhibitor of
cyclin-dependent kinase 4
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Multiple cancer types
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Phase 1
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Nexavar
Nexavar is an orally active agent designed to operate through
dual mechanisms of action by inhibiting angiogenesis, as well as
the proliferation of cancer cells. Nexavar inhibits the
signaling of
VEGFR-1,
VEGFR-2,
VEGFR-3 and
PDGFR-ß,
key receptors of Vascular Endothelial Growth Factor, or VEGF,
and Platelet-Derived Growth Factor, or PDGF. Both receptors play
a role in angiogenesis, which is the formation of blood vessels
required to support tumor growth. In addition, Nexavar also
inhibits RAF kinase, an enzyme in the RAS signaling pathway that
has been shown in preclinical models to be important in cell
proliferation. In normal cell proliferation, when the RAS
signaling pathway is activated, or turned on, it
sends a signal telling the cell to grow and divide. When a gene
in the RAS signaling pathway is mutated, the signal may not turn
off as it should, causing the cell to continuously
reproduce itself. The RAS signaling pathway plays an integral
role in the growth of some tumor types such as liver cancer,
melanoma and lung cancer, and we believe that inhibiting this
pathway could have an effect on tumor growth. Nexavar also
inhibits other kinases involved in cancer, such as KIT, FLT-3
and RET.
Commercialization
Status
In December 2005, we and Bayer announced that the FDA had
approved Nexavar for the treatment of patients with advanced
kidney cancer, and by December 2006 we estimated that
approximately 10,000 patients in the U.S. had been
treated with Nexavar. In July 2006, Nexavar was approved by the
European Commission for the treatment of patients with advanced
renal cell carcinoma who have failed prior therapy or are
considered unsuitable for such therapy. At the end of 2006,
Nexavar had been approved in approximately 50 territories
worldwide.
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Development
Strategy
With Bayer, we have a two-part development strategy for Nexavar.
We successfully achieved the first part of that strategy by
commercializing Nexavar in its first tumor type
advanced kidney cancer. This approval allowed us to establish
the Nexavar brand and a commercial oncology presence. The liver
cancer and metastatic melanoma trials further expand on this
part of our strategy to evaluate Nexavar for the treatment of
cancers for which there are significant unmet medical needs. The
next phase of our strategy is to establish Nexavars
efficacy in the most prevalent tumor types in combination with
already approved anti-cancer therapies such as lung cancer and
breast cancer. We believe Nexavars unique features,
including its oral availability and combinability profile, may
be important attributes that could differentiate it from other
anti-cancer agents and enable it to be used broadly in the
treatment of cancer. As we move forward, in addition to
company-sponsored studies, we plan to expand our collaborations
with government agencies, cooperative groups, and individual
investigators. Our goal is to maximize Nexavars commercial
and clinical prospects by simultaneously running multiple
studies to produce the clinical evidence necessary to
demonstrate Nexavar can benefit patients with many different
types of cancers.
Clinical
Trials
Under our collaboration agreement with Bayer, we are conducting
multiple clinical trials of Nexavar. In addition, we and Bayer
are jointly developing and intend to commercialize Nexavar
internationally, with the exception of Japan. In Japan, Bayer is
responsible for funding and conducting all product development
activities and will pay us a royalty on any sales.
Kidney
Cancer Program
Phase 3 Trial. In October 2003, we and Bayer
announced the initiation of an international,
placebo-controlled, multicenter Phase 3 clinical trial to
evaluate the safety and efficacy of Nexavar in the treatment of
advanced kidney cancer. More than 900 people participated
in the Phase 3 study at sites worldwide. Enrollment was
completed in March 2005. In the first quarter of 2005, we and
Bayer announced that an independent Data Monitoring Committee,
or DMC, had reviewed the safety and efficacy data from the
trial. The DMC concluded that Nexavar significantly prolonged
progression-free survival. This result was discussed with
medical experts, patient advocacy groups, and health
authorities. It was concluded that the results reflected a
clinically meaningful benefit for patients. Subsequently, we and
Bayer allowed all patients in the Phase 3 kidney cancer
trial to be offered access to Nexavar, enabling them to
crossover to Nexavar treatment. Results from the
Phase 3 trial were presented at the 2005 annual meeting of
the American Society of Clinical Oncology, or ASCO, in May 2005.
It was reported that progression-free survival or PFS was
significantly prolonged by Nexavar. As assessed by independent
radiologic review, PFS survival doubled to a median value of
24 weeks (167 days) in patients receiving Nexavar as
compared to 12 weeks (84 days) for patients receiving
placebo (p-value< 0.000001). P-values are used to indicate
the probability that results observed in two different samples
are different due to chance alone, as opposed to a benefit due
to the intervention, such as treatment with Nexavar. For
example, the p-value listed above (p-value<0.000001)
indicates that there is less than one chance in a million that
the difference in PFS obtained with Nexavar compared to placebo
was the result of chance rather than due to Nexavar.
In addition, an interim analysis of overall survival of patients
in the Phase 3 trial was presented at ASCO in June 2006.
This analysis, conducted six months following crossover, showed
a continued improvement in overall survival of 19.3 months
for Nexavar patients versus 15.9 months for placebo
patients (p-value=0.015) despite the fact that 48 percent
of placebo patients crossed over to Nexavar. Overall survival of
19.3 months for Nexavar as compared to 14.3 months for
placebo (p-value=0.010) after censoring the placebo patients was
also reported. These data, while not reaching the pre-specified
result required to stop the study early, suggest a favorable
survival trend for patients who received Nexavar. The final
analysis of overall survival is expected to be presented in 2007.
Based on the current approved U.S. package insert for the
treatment of patients with advanced kidney cancer, hypertension
may occur early in the course of therapy and blood pressure
should be monitored weekly during the first six weeks of therapy
and treated as needed. The incidence of bleeding regardless of
causality was 15 percent for Nexavar versus 8 percent
for placebo, and the incidence of treatment-emergent cardiac
ischemia/infarction was 2.9 percent for Nexavar versus
0.4 percent for placebo. Gastrointestinal perforation was
an uncommon event and
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has been reported in less than 1 percent of patients taking
Nexavar. The most common treatment-emergent adverse events with
Nexavar were diarrhea, rash/desquamation, fatigue, hand-foot
skin reaction, alopecia, and nausea. Grade 3/4 adverse events
were 38 percent for Nexavar versus 28 percent for
placebo. Women of child-bearing potential should be advised to
avoid becoming pregnant and advised against breast-feeding. In
cases of any severe or persistent side effects, temporary
treatment interruption, dose modification or permanent
discontinuation should be considered.
We and Bayer have previously announced that Nexavar has been
granted orphan drug status for the treatment of kidney cancer by
the Committee for Orphan Medicinal Products, or COMP, of the
EMEA in August 2004, and in October 2004 by the FDA. Orphan Drug
designation provides incentives to companies that develop drugs
for diseases affecting small numbers of patients.
Phase 2 Trial. In December 2006, we announced
the results of the Phase 2 clinical trial that compares
Nexavar to Interferon (IFN), which is commonly used as a
first-line therapy in patients with advanced kidney cancer.
Progression-free survival was comparable for patients who
received either Nexavar or IFN. Based on 121 progression events,
median progression-free survival was 5.6 months and
5.7 months, respectively, for IFN- and Nexavar-treated
patients. Products that have shown efficacy as compared to IFN
or interleukin-2, or IL-2, or in treatment naïve-patients
may be preferred by the medical community.
Liver
Cancer Program
Phase 3 Trial. In March 2005, we and
Bayer initiated a randomized, double-blind, placebo-controlled
Phase 3 clinical trial of Nexavar administered as a single
agent in patients with advanced hepatocellular carcinoma, also
known as liver cancer. The Phase 3 study was designed to
measure differences in overall survival, time to symptom
progression, and time to tumor progression of Nexavar versus
placebo in patients with advanced liver cancer. Over
600 patients with advanced liver cancer, who had not
received previous systemic treatment for their disease, were
randomized to receive Nexavar or matching placebo. This study
enrolled patients in the Americas, Europe, Australia and New
Zealand and enrollment in this study was completed in 2006. In
February 2007, we and Bayer announced that an independent DMC
had reviewed the safety and efficacy data from the trial and
concluded that the trial met its primary endpoint resulting in
superior overall survival in those patients receiving Nexavar.
The DMC also noted no demonstrated difference in the serious
adverse event rates between Nexavar and placebo. Subsequently,
we and Bayer made the decision to stop the trial early and
allowed all patients in the Phase 3 liver cancer trial to
be offered access to Nexavar, enabling them to
crossover to Nexavar treatment.
Phase 2 Trial. The decision to begin the
Phase 3 liver cancer trial was based upon data from a
Phase 2 clinical trial. In September 2004, the data from
this Phase 2 trial were presented at the 16th American
Association for Cancer Research-National Cancer
Institute-European Organization for Research and Treatment of
Cancer, or AACR-NCI-EORTC, meeting in Geneva, Switzerland. Of
137 patients enrolled in the trial, investigators reported
median overall survival for all patients was 9.2 months and
median
time-to-tumor
progression was 4.2 months (or 5.7 months in patients
with good hepatic function). In the trial, safety data generated
showed that Nexavars side effect profile was generally
well tolerated and predictable. The most common grade 3/4
drug-related toxicities, all less than ten percent, were
fatigue, diarrhea and hand-foot skin reaction. In 2005, we and
Bayer announced a randomized Phase 2 trial evaluating
Nexavar in this disease in combination with doxorubicin, a
chemotherapeutic agent commonly used to treat liver cancer.
Metastatic
Melanoma Program
Phase 3 Trials. In May 2005, we and Bayer
commenced a randomized, double-blind Phase 3 trial
administering Nexavar in combination with the chemotherapeutic
agents carboplatin and paclitaxel in patients with advanced
metastatic melanoma who had failed one prior treatment. The
trial, which enrolled 270 patients, had progression-free
survival as its primary endpoint. Participating patients failed
one previous systemic chemotherapeutic treatment with either
dacarbazine, also known as DTIC, or temozolomide. Patients were
randomized to receive Nexavar or matching placebo, in addition
to a standard dosing schedule of carboplatin and paclitaxel. In
December 2006, Bayer and Onyx announced that this study did not
meet its primary endpoint of improving PFS,
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noting that the treatment effect was comparable in each arm.
Data from the study is expected to be presented at an upcoming
scientific congress in 2007.
In 2005, a second Phase 3 study administering Nexavar in
combination with carboplatin and paclitaxel was initiated under
the sponsorship of the Eastern Cooperative Oncology Group, or
ECOG. Patients are being randomized to receive Nexavar plus the
chemotherapeutic agents paclitaxel and carboplatin, or placebo
in addition to the chemotherapeutic agents at the doses
described above. This trial has overall survival as its primary
endpoint, and is expected to enroll approximately
800 patients with advanced metastatic melanoma.
Participants in this study may not have had prior systemic
chemotherapy. This study is continuing to enroll patients.
Phase 2 Trial. In addition, we are
conducting a randomized, double-blind, placebo-controlled,
multicenter, Phase 2 study underway administering Nexavar
in combination with DTIC with PFS as its primary endpoint.
Approximately 100 patients with advanced melanoma who had
not received prior chemotherapy were randomized to receive
Nexavar in combination with DTIC or placebo in combination with
DTIC. In December 2006, we reported that there was a trend
toward improved PFS in patients in the Nexavar arm versus
patients in the placebo arm. Based on 80 progression events,
median PFS was 21.1 weeks and 11.7 weeks respectively
for Nexavar in combination with DTIC as compared to DTIC plus
placebo (Hazard Ratio=0.67). We are continuing to analyze data
from this trial as it becomes available and will use this data
to determine what potential additional clinical studies we may
undertake, if any.
Phase 1/2 Trial. The decision to conduct
the above Phase 3 trials in patients with metastatic
melanoma was based upon single-arm data from a Phase 1b
combination trial evaluating Nexavar in combination with these
agents. By the fall of 2006, investigators had reported on a
total of 105 melanoma patients enrolled in the trial at two
different sites. At the time of the report, PFS was more than
eight months in the majority of patients, and these patients had
the most advanced form of melanoma, the disease having spread to
their internal organs. It was also reported that Nexavar was
generally well tolerated when combined with full dose paclitaxel
and carboplatin. In addition to side effects normally expected
with paclitaxel and carboplatin, toxicities believed to be
attributable to Nexavar, including skin rash and hand-foot
syndrome, resolved themselves when treatment was halted or
Nexavar dosages were reduced. As this investigator-initiated
analysis was not reviewed by the sponsors, the results are
subject to change until the database is finalized. Since only a
limited number of studies have been conducted using paclitaxel
and/or
carboplatin in melanoma patients, and at doses and
administration regimes different from ours, the randomized
studies described above are being conducted to assess the
efficacy of the combination with Nexavar.
Lung
Cancer Program
Phase 3 Trial. In February 2006, we and
Bayer initiated a randomized, double-blind, placebo-controlled
pivotal clinical trial studying Nexavar administered in
combination with the chemotherapeutic agents carboplatin and
paclitaxel in patients with non-small cell lung cancer, or
NSCLC. The multicenter study is comparing Nexavar when
co-administered with the two agents versus carboplatin and
paclitaxel alone. The study, which is expected to enroll
approximately 900 patients, will assess overall survival as
the primary endpoint. Secondary endpoints include PFS, tumor
response and safety. Participating patients may not have
received prior systemic anticancer treatment. Additionally, the
study is open to patients with all histologies, or types, of
NSCLC. Patients will be randomized to receive 400 mg of
oral Nexavar twice daily or matching placebo, in addition to
carboplatin and paclitaxel for six cycles. Subsequently,
patients will continue in a maintenance phase where Nexavar or
placebo will be administered as a single agent. The study is
being conducted at over 100 sites in North America, South
America, Europe and the Asia Pacific region. We expect to
complete accrual in 2007. A data monitoring committee is
overseeing the conduct of the trial.
Phase 1/Phase 2 Trials. We and Bayer
generated lung cancer data in several additional studies. We and
Bayer conducted a 54 patient, single-agent Nexavar trial in
second or third-line NSCLC patients. The median PFS in this
refractory population was approximately three months. We and
Bayer also obtained additional data from a subset of 14
evaluable NSCLC first-line patients enrolled in a single-arm
Phase 1 study administering the combination of carboplatin,
paclitaxel and Nexavar. For the lung cancer patients on the
combination therapy, the investigator reported an overall median
PFS of approximately 245 days, or approximately eight
months. As this
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investigator-initiated analysis was not reviewed by the
sponsors, the results are subject to change until the database
is finalized.
Breast
Cancer Program
With Bayer, we have identified advanced breast cancer as the
next major development initiative for Nexavar. In 2007, Onyx and
Bayer intend to launch a broad, multinational Phase 2
program in advanced breast cancer. The program is being designed
and led by an international group of experts in the field of
breast cancer and includes multiple randomized Phase 2
trials. These Phase 2 trials are screening studies intended
to provide information that will be used to design a
Phase 3 program. The program involves a number of different
drug combinations with Nexavar and encompasses various treatment
settings. The advisors are particularly interested in studying
Nexavar in breast cancer where the products features, such
as its oral administration and favorable hematologic toxicity
profile, may translate into benefits for patients over other
existing and experimental treatments. We expect to begin
enrolling patients in these planned breast cancer studies in
2007.
Earlier
Stage Clinical Development
Phase 2 in Multiple Tumor Types. With
Bayer we have multiple ongoing Phase 2 studies evaluating
Nexavar as a single agent in tumors such as prostatic, ovarian
and other cancers. As these studies are completed, we intend to
present data at scientific meetings. In addition, based on the
results of these ongoing trials, we plan to identify additional
potential registration paths for Nexavar.
Phase 1b in Combination with Anticancer Agents in
Multiple Tumor Types. Together with Bayer, we are
conducting multiple Phase 1b clinical trials evaluating
Nexavar in combination with a range of standard chemotherapies,
as well as with other anticancer agents. To date, results have
been reported from more than ten of these trials, specifically
for the use of Nexavar in combination with
paclitaxel/carboplatin, gemcitabine, oxaliplatin, doxorubicin,
irinotecan, 5- FU/leucovorin, capecitabine, DTIC, taxotere,
Iressa, interferon and Avastin. Additional combination trials
are planned and decisions about future randomized Phase 2
trials are pending.
Cell
Cycle Program
In collaboration with Warner-Lambert, we identified a number of
lead compounds that modulate the activity of key enzymes that
regulate the process whereby a single cell replicates itself and
divides into two identical new cells, a process known as the
cell cycle. Mutations in genes that regulate the cell cycle are
present in a majority of human cancers. Our small molecule
discovery collaboration with Warner-Lambert ended in August
2001. However, Warner-Lambert, now a subsidiary of Pfizer, is
currently advancing a lead candidate from that collaboration, PD
332991, a small molecule cell cycle inhibitor targeting
cyclin-dependent kinase 4. Pfizer entered Phase 1 clinical
testing with this candidate in 2004.
Virus
Platform
Prior to June 2003, in addition to our small molecule program,
we were developing therapeutic viruses that selectively
replicate in cells with cancer-causing genetic mutations. In
June 2003, we announced that we were discontinuing this program
as part of a business realignment that placed an increased
priority on the development of Nexavar. Effective January 2005,
Onyx licensed exclusive rights to our p53-selective virus,
ONYX-015, to Shanghai Sunway Biotech Co. Ltd. headquartered in
Shanghai, Peoples Republic of China. Under this agreement,
Shanghai Sunway is responsible for the research, development,
manufacture and commercialization of ONYX-015 worldwide. Onyx
received a payment of $1.0 million in 2005 and may receive
additional milestone payments upon the achievement of clinical,
regulatory and commercial events. We are entitled to receive
royalties on net sales of ONYX-015 in the U.S., Europe and
certain other foreign countries, but excluding China.
7
Collaborations
Bayer
Effective February 1994, we established a research and
development collaboration agreement with Bayer to discover,
develop and market compounds that inhibit the function, or
modulate the activity, of the RAS signaling pathway to treat
cancer and other diseases. Together with Bayer, we concluded
collaborative research under this agreement in 1999, and based
on this research, a product development candidate, Nexavar, was
identified.
Bayer paid all the costs of research and preclinical development
of Nexavar until the Investigational New Drug application, or
IND, was filed in May 2000. Under our agreement with Bayer, we
are currently funding 50 percent of mutually agreed
development costs worldwide, excluding Japan. Bayer is funding
100 percent of development costs in Japan and will pay us a
royalty on any sales in Japan. We are co-promoting Nexavar in
the United States and, if we continue to co-fund development and
co-promote in the United States, we will share equally in
profits or losses, if any, in the United States. If we continue
to co-fund but do not co-promote in the United States, Bayer
would first receive a portion of the product revenues to repay
Bayer for its commercialization infrastructure, before
determining our share of profits and losses. We also share
profits and losses with Bayer in the rest of the world (outside
of Japan), but as we do not have the right to co-promote Nexavar
outside the United States, Bayer would also receive this
preferential distribution in all other parts of the world,
except Japan where we would receive a royalty on any sales.
In March 2006, we and Bayer entered into a Co-Promotion
Agreement to co-promote Nexavar in the United States. This
agreement supersedes those provisions of the original 1994
Collaboration Agreement that relate to the co-promotion of
Nexavar in the United States between Bayer and us. Outside of
the United States, the terms of the Collaboration Agreement
continue to govern. Under the terms of the Co-Promotion
Agreement and consistent with the Collaboration Agreement, we
will share equally in the profits or losses of Nexavar, if any,
in the United States, subject only to our continued co-funding
of the development costs of Nexavar worldwide, excluding Japan.
At any time during product development, either company may
terminate its participation in development costs, in which case
the terminating party would retain rights to the product on a
royalty-bearing basis. If we do not continue to bear
50 percent of product development costs, Bayer would retain
exclusive, worldwide rights to this product candidate and would
pay royalties to us based on net sales.
Our collaboration agreement with Bayer calls for creditable
milestone-based payments. These amounts are interest-free and
will be repayable to Bayer from a portion of any of our future
profits and royalties. We received $5.0 million in the
third quarter of 2002 upon initiation of Phase 2 clinical
studies and $15.0 million in the fourth quarter of 2003
based upon the initiation of a Phase 3 study. Based on the
July 2005 NDA filing, we received the third milestone advance
for $10.0 million in the third quarter of 2005. In
addition, in January 2006, we received the final
$10.0 million milestone advance as a result of the
U.S. approval in December 2005.
Warner-Lambert
In May 1995, we entered into a research and development
collaboration agreement with Warner-Lambert, now a subsidiary of
Pfizer, to discover and commercialize small molecule drugs that
restore control of, or otherwise intervene in, the misregulated
cell cycle in tumor cells. Under this agreement, we developed
screening tests, or assays, for jointly selected targets, and
transferred these assays to Warner-Lambert for screening of
their compound library to identify active compounds. The
discovery research term under the agreement ended in August
2001. Warner-Lambert is responsible for subsequent medicinal
chemistry and preclinical investigations on the active
compounds. In addition, Warner-Lambert is obligated to conduct
and fund all clinical development, make regulatory filings and
manufacture for sale any approved collaboration compounds. We
will receive milestone payments on clinical development and
registration of any resulting products and would receive
royalties on worldwide sales of the products. Warner- Lambert
has identified a small molecule lead compound, PD 332991, an
inhibitor of cyclin-dependent kinase 4, and began clinical
testing with this drug candidate in 2004. As a result of this,
we received a $500,000 milestone payment from
Warner-Lambert, which we recorded as revenue in 2004.
8
Research
and Development
The majority of our operating expenses to date have been related
to research and development, or R&D. In 2006, R&D
expenses consisted of costs associated with collaborative
R&D as we do not have internal research capabilities and
have only a limited development staff. We anticipate that a
significant percentage of our operating expenses will continue
to be related to R&D in 2007, specifically the clinical
development of Nexavar as both we and Bayer have agreed to
continued substantial investment in this drug.
Marketing
and Sales
Since our first product, Nexavar, has been approved by the FDA,
and because we have retained U.S. co-promotion rights, in
2005 we added sales, marketing and medical affairs capabilities
with particular expertise in commercializing oncology products.
We and Bayer are each providing one-half of the field-based
staffing in the U.S. to satisfy commercial demand for this
product and to provide medical affairs support for Nexavar. All
the individuals hired into this organization have significant
experience relevant to the field of pharmaceuticals in general
and to the specialty of oncology in particular. We and Bayer
have also established comprehensive patient support services to
maximize access to Nexavar. This includes REACH, an acronym for
Resources for Expert Assistance and Care Hotline, which provides
a single
point-of-contact
for most patients. In addition, REACH helps link patients to
specialty pharmacies for direct product distribution. Bayer
currently has multiple specialty pharmacies under contract that
are shipping drug directly to patients homes.
Manufacturing
Under our collaboration agreement with Bayer, Bayer has the
manufacturing responsibility to supply Nexavar for commercial
requirements and to support any clinical trials. To date, Bayer
has manufactured sufficient drug supply to support the current
needs of commercial activity and clinical trials in progress. We
believe that Bayer has the capability to meet all future drug
supply needs and meet the FDA and other regulatory agency
requirements. However, Bayer may, for reasons beyond our
control, become unable or unwilling to provide sufficient future
drug supply or to meet these requirements. If this were to
happen, we would be forced to incur additional expenses to pay
for the manufacture of Nexavar or to develop our own
manufacturing capabilities. Under our license agreement with
Warner-Lambert, Warner-Lambert is obligated to manufacture all
small molecule drugs for clinical development and
commercialization.
At this time, we do not have any internal manufacturing
capability. To manufacture our product candidates for clinical
trials or on a commercial scale, if we are required to or choose
to do so, we would have to build or gain access to a
manufacturing facility, which will require significant funds.
Patents
and Proprietary Rights
We believe that patent and trade secret protection is crucial to
our business and that our future will depend in part on our
ability to obtain patents, maintain trade secret protection and
operate without infringing the proprietary rights of others,
both in the United States and other countries. The patent
applications covering Nexavar are owned by Bayer, but licensed
to us in conjunction with our collaboration agreement with
Bayer. We currently anticipate that, if issued, the United
States patent related to Nexavar will expire in 2022, subject to
possible patent-term extension, the entitlement to which and the
term of which cannot be presently calculated. Patent
applications for Nexavar are also pending throughout the world.
As of December 31, 2006, we owned or had licensed rights to
58 United States patents and 37 United States patent
applications, and generally, foreign counterparts of these
filings. Most of these patents or patent applications cover
protein targets used to identify product candidates during the
research phase of our collaborative agreements with
Warner-Lambert or Bayer, or aspects of our now discontinued
therapeutic virus program.
Generally, patent applications in the United States are
maintained in secrecy for a period of 18 months or more.
Since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, we are not
certain that we were the first to make the inventions covered by
each of our pending patent applications or that we were the
first to file those patent applications. The patent positions of
biotechnology and pharmaceutical companies are highly uncertain
and involve complex legal and factual questions. Therefore, we
cannot predict the breadth of
9
claims allowed in biotechnology and pharmaceutical patents, or
their enforceability. To date, there has been no consistent
policy regarding the breadth of claims allowed in biotechnology
patents. Third parties or competitors may challenge or
circumvent our patents or patent applications, if issued.
Because of the extensive time required for development, testing
and regulatory review of a potential product, it is possible
that before we commercialize any of our products, any related
patent may expire, or remain in existence for only a short
period following commercialization, thus reducing any advantage
of the patent.
If patents are issued to others containing preclusive or
conflicting claims and these claims are ultimately determined to
be valid, we may be required to obtain licenses to these patents
or to develop or obtain alternative technology. Our breach of an
existing license or failure to obtain a license to technology
required to commercialize our products may seriously harm our
business. We also may need to commence litigation to enforce any
patents issued to us or to determine the scope and validity of
third-party proprietary rights. Litigation would create
substantial costs. If our competitors prepare and file patent
applications in the United States that claim technology also
claimed by us, we may have to participate in interference
proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in
substantial cost, even if the eventual outcome is favorable to
us. An adverse outcome in litigation could subject us to
significant liabilities to third parties and require us to seek
licenses of the disputed rights from third parties or to cease
using the technology if such licenses are unavailable.
Together with our licensors, we also rely on trade secrets to
protect our combined technology especially where we do not
believe patent protection is appropriate or obtainable. However,
trade secrets are difficult to protect. We protect our
proprietary technology and processes, in part, by
confidentiality agreements with our employees, consultants and
collaborators. These parties may breach these agreements, and we
may not have adequate remedies for any breach. Our trade secrets
may otherwise become known or be independently discovered by
competitors. To the extent that we or our consultants or
collaborators use intellectual property owned by others in their
work for us, we may have disputes with them or other third
parties as to the rights in related or resulting know-how and
inventions.
Government
Regulation
Regulation by government authorities in the United States and
other countries will be a significant factor in the
manufacturing and marketing of any products that may be
developed by us. We must obtain the requisite regulatory
approvals by government agencies prior to commercialization of
any product. This is true internationally and for any additional
indications, if any. We anticipate that any product candidate
will be subject to rigorous preclinical and clinical testing and
premarket approval procedures by the FDA and similar health
authorities in foreign countries. Various federal statutes and
regulations also govern or influence the manufacturing, testing,
labeling, storage, record-keeping, marketing and promotion of
products and product candidates.
The steps ordinarily required before a drug or biological
product may be marketed in the United States include:
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preclinical studies;
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the submission to the FDA of an IND that must become effective
before human clinical trials may commence;
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adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product candidate;
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the submission of an NDA to the FDA; and
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FDA approval of the NDA, including inspection and approval of
the product manufacturing facility.
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Preclinical trials involve laboratory evaluation of product
candidate chemistry, formulation and stability, as well as
animal studies to assess the potential safety and efficacy of
each product candidate. Preclinical safety trials must be
conducted by laboratories that comply with FDA regulations
regarding Good Laboratory Practice. The results of the
preclinical trials are submitted to the FDA as part of an IND
and are reviewed by the FDA before the commencement of clinical
trials. Unless the FDA objects to an IND, the IND will become
effective 30 days
10
following its receipt by the FDA. Submission of an IND may not
result in FDA clearance to commence clinical trials, and the
FDAs failure to object to an IND does not guarantee FDA
approval of a marketing application.
Clinical trials involve the administration of the product
candidate to humans under the supervision of a qualified
principal investigator. In the United States, clinical trials
must be conducted in accordance with Good Clinical Practices
under protocols submitted to the FDA as part of the IND. In
addition, each clinical trial must be approved and conducted
under the auspices of an Institutional Review Board, or IRB, and
with the patients informed consent. The IRB will consider,
among other things, ethical factors, the safety of human
subjects and the possible liability of the institution
conducting the clinical trial. The United Kingdom and many other
European and Asian countries have similar regulations.
The goal of Phase 1 clinical trials is to establish initial
data about safety and tolerability of the product candidate in
humans. The goal of Phase 2 clinical trials is to provide
evidence about the desired therapeutic efficacy of the product
candidate in limited studies with small numbers of carefully
selected subjects. The investigators seek to evaluate the
effects of various dosages and to establish an optimal dosage
level and dosage schedule. Investigators also gather additional
safety data from these studies. Phase 3 clinical trials
consist of expanded, large-scale, multicenter studies in the
target patient population. This phase further tests the
products effectiveness, monitors side effects, and, in
some cases, compares the products effects to a standard
treatment, if one is already available.
We would need to submit all data obtained from this
comprehensive development program as an NDA to the FDA, and to
the corresponding agencies in other countries for review and
approval, before marketing product candidates. These regulations
define not only the form and content of the development of
safety and efficacy data regarding the proposed product, but
also impose specific requirements regarding:
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manufacture of the product;
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testing;
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quality assurance;
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packaging;
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storage;
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documentation;
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record-keeping;
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labeling;
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advertising; and
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marketing procedures.
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The process of obtaining FDA approval can be costly, time
consuming and subject to unanticipated delays. The FDA may
refuse to approve an application if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require
additional testing for safety and efficacy of the product
candidate. In some instances, regulatory approval may be granted
with the condition that confirmatory Phase 4 clinical
trials are carried out. If these Phase 4 clinical trials do
not confirm the results of previous studies, regulatory approval
for marketing may be withdrawn. Moreover, if regulatory approval
of a product is granted, the approval will be limited to
specific indications. Approvals of our proposed products,
processes, or facilities may not be granted on a timely basis,
if at all. Any failure to obtain, or delay in obtaining, such
approvals would seriously harm our business, financial condition
and results of operations. Facilities used to manufacture drugs
are subject to periodic inspection by the FDA and other
authorities where applicable, and must comply with the
FDAs current Good Manufacturing Practice, or cGMP,
regulations. Failure to comply with the statutory and regulatory
requirements subjects the manufacturer to possible legal action,
such as suspension of manufacturing, seizure of product or
voluntary recall of a product. Adverse experiences with the
product must be reported to the FDA and could result in the
imposition of market restrictions through labeling changes or in
product removal. Product approvals may be withdrawn if
compliance with regulatory
11
requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval. Failure to
comply with FDA and other applicable regulatory requirements may
result in, among other things:
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warning letters;
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civil penalties;
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criminal prosecution;
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injunctions;
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seizure or recall of products;
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total or partial suspension of production;
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refusal of the government to grant approval; or
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withdrawal of approval of products.
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Even though we have obtained FDA approval, approval of a product
candidate by comparable regulatory authorities will be necessary
in foreign countries prior to the commencement of marketing of
the product candidate in these countries. The approval procedure
varies among countries and can involve additional testing. The
time required to obtain approval may differ from that required
for FDA approval. Although there is now a centralized European
Union approval mechanism in place, each European country may
nonetheless impose its own procedures and requirements, many of
which are time consuming and expensive. Thus, there can be
substantial delays in obtaining required approvals from both the
FDA and foreign regulatory authorities after the relevant
applications are filed. We expect to rely on our collaborators
and licensees, along with our own expertise, to obtain
governmental approval in foreign countries of product candidates
discovered by us or arising from our programs.
We are subject to various federal and state laws pertaining to
healthcare fraud and abuse, including anti-kickback
and false claims laws. The federal Anti-Kickback Law makes it
illegal for any person, including a prescription drug
manufacturer, or a party acting on its behalf, to knowingly and
willfully solicit, offer, receive or pay any remuneration,
directly or indirectly, in exchange for, or to induce, the
referral of business, including the purchase, order or
prescription of a particular drug, for which payment may be made
under federal healthcare programs such as Medicare and Medicaid.
The federal government has issued regulations, commonly known as
safe harbors that set forth certain provisions which, if fully
met, will assure healthcare providers and other parties that
they will not be prosecuted under the federal Anti-Kickback Law.
Although full compliance with these provisions ensures against
prosecution under the federal Anti-Kickback Law, the failure of
a transaction or arrangement to fit within a specific safe
harbor does not necessarily mean that the transaction or
arrangement is illegal or that prosecution under the federal
Anti-Kickback Law will be pursued. Violations of the law are
punishable by up to five years in prison, criminal fines,
administrative civil money penalties and exclusion from
participation in federal healthcare programs. In addition, many
states have adopted laws similar to the federal Anti-Kickback
Law. Some of these state prohibitions apply to referral of
patients for healthcare services reimbursed by any source, not
only the Medicare and Medicaid programs. Due to the breadth of
these laws, and the potential for additional legal or regulatory
change addressing some of our practices, it is possible that our
sales and marketing practices or our relationships with
physicians might be challenged under anti-kickback laws, which
could harm us. We have developed a comprehensive compliance
program that will seek to establish internal controls to
facilitate adherence to the rules and program requirements to
which we may be or may become subject.
In the course of practicing medicine, physicians may legally
prescribe FDA approved drugs for an indication that has not been
approved by the FDA and which, therefore, is not described in
the products approved labeling a so-called
off-label use. The FDA does not regulate the
behavior of physicians in their choice of treatments. The FDA
and other governmental agencies do, however, restrict
communications on the subject of off-label use by a manufacturer
or those acting on behalf of a manufacturer. Companies may not
promote FDA-approved drugs for off-label uses. The FDA has
not approved the use of Nexavar for the treatment of any disease
other than advanced kidney cancer and neither we nor Bayer
market Nexavar for the treatment of any disease other than
advanced kidney cancer. The FDA and other governmental agencies
do permit a manufacturer (and those acting on its behalf) to
engage in some limited, non-misleading, non-promotional
exchanges of scientific information regarding
12
unapproved indications. We believe that our pre-approval
educational communications constitute lawful activities, and we
have policies and procedures in place to regulate them. In
addition, we periodically review and update these policies and
procedures to ensure that our pre-approval activities comply
with current applicable law. However, while we believe that we
are currently in compliance with the FDA guidelines which govern
medical education and the FDA regulations which prohibit
off-label promotion, the guidelines and regulations are subject
to varying interpretations, which are evolving, and the FDA may
disagree that all of our activities comply with applicable
restrictions on pre-approval promotion. Failure to comply with
these requirements in the past or with respect to future
activities can result in enforcement action, including civil and
criminal sanctions by the FDA and other federal and state
governmental bodies, such as the Department of Justice and the
Office of the Inspector General of the Department of Health and
Human Services, which would harm our business and could have a
material adverse effect on our business, financial condition and
profitability.
Competition
We are engaged in a rapidly changing and highly competitive
field. We are seeking to develop and market product candidates
that will compete with other products and therapies that
currently exist or are being developed. Many other companies are
actively seeking to develop products that have disease targets
similar to those we are pursuing. Some of these competitive
product candidates are in clinical trials, and others are
approved. Competitors that target the same tumor types as our
Nexavar program and that have commercial products or product
candidates in clinical development include Pfizer, Novartis
International AG, Amgen, AstraZeneca PLC, OSI Pharmaceuticals,
Inc., Wyeth, and Genentech, Inc., among others. A number of
companies have agents targeting Vascular Endothelial Growth
Factor, or VEGF; VEGF receptors; Epidermal Growth Factor, or
EGF; EGF receptors; and other enzymes. These agents include
antibodies and small molecules.
For example, Sutent, a multi-kinase inhibitor marketed by
Pfizer, was approved by the FDA and the European Union for
treating patients with kidney cancer and Gleevec-resistant
gastrointestinal stromal tumors, or GIST. In January 2007,
Pfizer reported that European regulators approved Sutent as an
initial, or first-line, treatment for advanced kidney cancer
patients and granted the product full marketing authorization.
Previously, Sutent only had conditional approval for second-line
use after the failure of alternative treatments. In June 2006,
results of a randomized Phase 3 trial comparing Sutent to
IFN in treatment-naive patients with advanced kidney cancer were
reported. The primary endpoint of the study was PFS with a
median PFS of 11 months for patients receiving Sutent
compared to five months for patients receiving IFN. Moreover,
Genentechs Avastin has been reported to have activity in
kidney cancer, and Genentech has indicated that Avastin is now
being used off-label for treatment of some kidney cancer
patients. In June 2006, results from a randomized Phase 2
trial comparing Avastin with or without erlotinib in
treatment-naive advanced renal cancer patients were reported.
The median PFS for the Avastin-treated patients was
8.5 months. A Phase 3 randomized trial in
treatment-naïve advanced kidney cancer patients is underway
comparing Avastin and IFN that may produce superior PFS or
overall survival data than Nexavar. In December, Genentech
announced that an interim analysis showed that a randomized
Phase 3 clinical study of Avastin in combination with IFN
in patients with first-line metastatic renal cell carcinoma
significantly improved PFS compared to IFN therapy alone.
In addition, Wyeth is conducting a Phase 3 study of
temsirolimus, an mTOR inhibitor, in poor-risk patients with
advanced kidney cancer. In June 2006, results of a randomized
Phase 3 trial comparing temsirolimus to interferon to both
agents combined in treatment-naïve, poor-risk advanced
kidney cancer patients were reported. The primary endpoint of
the study was overall survival. The reported median overall
survival was 10.9 months for temsirolimus alone as compared
to 7.3 months for interferon. Wyeth filed a new drug
application for this compound in October 2006.
Pfizer also has an earlier stage compound, AG-013736, a
multi-kinase inhibitor, which is in clinical development and
being evaluated in kidney cancer patients.
OSI Pharmaceuticals with
Tarcevatm
a small molecule inhibitor of the EGF receptor has been approved
in the U.S. for treatment of NSCLC and pancreatic cancer in
combination with gemcitabine. Companies working on developing
antibody approaches include Amgen and ImClone Systems, Inc.
Imclone has developed Erbitux, which is an antibody targeting
the EGF receptor. Erbitux has been approved in the U.S. and the
European Union for
13
treatment of colorectal cancer, as well as in the U.S. for
the treatment of most types of head and neck cancer. Genentech
has
Avastintm,
an antibody targeting VEGF, which has received approvals in the
U.S. and the European Union for treatment of colorectal cancer
and non-small cell lung cancer and is in clinical development
for kidney cancer, among other indications. In addition, many
other pharmaceutical companies are developing novel cancer
therapies that, if successful, would also provide competition
for Nexavar.
We compete with alternative therapies based on a variety of
factors, including:
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product efficacy and safety;
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availability of patients for clinical trials;
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the timing and scope of regulatory approvals;
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availability of supply;
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marketing and sales capability;
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reimbursement coverage;
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price; and
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patent position.
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Employees
As of December 31, 2006, we had 125 full-time
employees of whom 16 hold Ph.D., M.D. or Pharm.D. degrees.
Of our employees, 18 are in research and development, 74 are in
sales and marketing and 33 are in corporate development, finance
and administration. No employee of ours is represented by a
labor union.
Company
Information
We were incorporated in California in February 1992 and
reincorporated in Delaware in May 1996. Our principal office is
located at 2100 Powell Street, Emeryville, California 94608 and
our telephone number is
(510) 597-6500.
Our website is located at http://www.onyx-pharm.com.
Available
Information
We file electronically with the Securities and Exchange
Commission, or SEC, our annual reports on
Form 10-K,
quarterly interim reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. We maintain a
site on the worldwide web at http://www.onyx-pharm.com; however,
information found on our website is not incorporated by
reference into this report. We make our SEC filings available
free of charge on or through our website, including our annual
report on
Form 10-K,
quarterly interim reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Further, a copy of
this Annual Report on
Form 10-K
is located at the Securities and Exchange Commissions
Public Reference Rooms at 100 F Street, N.E., Washington, D. C.
20549. Information on the operation of the Public Reference Room
can be obtained by calling the Securities and Exchange
Commission at
1-800-SEC-0330.
The Securities and Exchange Commission maintains a website that
contains reports, proxy and information statements and other
information regarding our filings at http://www.sec.gov.
Code of
Ethics
In 2003, we adopted a code of ethics that applies to our
principal officers, directors and employees. We have posted the
text of our code of ethics on our website at
http://www.onyx-pharm.com in connection with
Investors materials. In addition, we intend to
promptly disclose (1) the nature of any amendment to our
code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, or
persons performing similar functions and (2) the nature of
any waiver, including an implicit waiver, from a provision of
our code of ethics that is granted to one of these specified
officers, the name of such person who is granted the waiver and
the date of the waiver on our website in the future.
14
You should carefully consider the risks described below,
together with all of the other information included in this
report, in considering our business and prospects. The risks and
uncertainties described below contain forward-looking
statements, and our actual results may differ materially from
those discussed here. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also
may impair our business operations. Each of these risk factors
could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an
investment in our common stock
and/or
contingent value rights.
Risks
Related to Our Business
Nexavar®
(sorafenib) tablets is our only product, and we do not have any
other product candidates in Phase 2 or Phase 3
clinical development. If Nexavar is not commercially successful,
we may be unable to identify and promote alternative product
candidates and our business would fail.
Nexavar is our only product. In June 2003, following an
unsuccessful search for new collaboration partners for our
therapeutic virus product candidates, including ONYX-015 and
ONYX-411, we announced that we were discontinuing the
development of all therapeutic virus product candidates,
eliminating all employee positions related to these candidates
and terminating all related research and manufacturing
capabilities. As a result, we do not have internal research and
preclinical development capabilities. Our scientific and
administrative employees are dedicated to the development and
commercialization of Nexavar and managing our relationship with
Bayer, but are not actively discovering or developing new
product candidates. As a result of the termination of our
therapeutic virus program and drug discovery programs, we do not
have a clinical development pipeline beyond Nexavar. If Nexavar
is not commercially successful, we may be unable to identify and
promote alternative product candidates to later stage clinical
development, which would cause our business to fail.
If our
clinical trials fail to demonstrate that Nexavar is safe and
effective for cancer types other than kidney cancer, we will be
unable to broadly commercialize Nexavar as a treatment for
cancer, and our business may fail
In collaboration with Bayer, we are conducting multiple clinical
trials of Nexavar. We have completed Phase 1 single-agent
clinical trials of Nexavar. We are currently conducting a number
of Phase 1b clinical trials of Nexavar in combination with
other anticancer agents. Phase 1 trials are not designed to
test the efficacy of a drug candidate but rather to test safety;
to study pharmacokinetics, or how drug concentrations in the
body change over time; to study pharmacodynamics, or how the
drug candidate acts on the body over a period of time; and to
understand the drug candidates side effects at various
doses and schedules.
With Bayer, we have completed Phase 2 clinical trials of
Nexavar in kidney and liver cancer and are conducting
Phase 2 clinical trials in non-small cell lung, melanoma
and other cancers. Phase 2 trials are designed to explore
the efficacy of a product candidate in several different types
of cancers and may be randomized and double-blinded to ensure
that the results are due to the effects of the drug.
In addition, we and Bayer are conducting a number of
Phase 3 trials of Nexavar. Phase 3 trials are designed
to more rigorously test the efficacy of a product candidate and
are normally randomized and double-blinded. In February 2006, we
and Bayer initiated a Phase 3 clinical trial of Nexavar in
combination with carboplatin and paclitaxel in patients with
non-small cell lung cancer, or NSCLC. In May 2006, we and Bayer
completed enrollment of both a Phase 3 clinical trial of
Nexavar in patients with liver cancer and a separate
Phase 3 clinical trial of Nexavar in combination with the
chemotherapeutic agents carboplatin and paclitaxel in patients
with malignant melanoma. In December 2006, we and Bayer
announced that a Phase III trial administering
Nexavar®
(sorafenib) or placebo tablets in combination with the
chemotherapeutic agents carboplatin and paclitaxel in patients
with advanced melanoma did not meet its primary endpoint of
improving progression-free survival (PFS). The treatment effect
was comparable in each arm.
Although we have received approvals for the use of Nexavar in
the treatment of patients with advanced kidney cancer, the
efficacy of Nexavar has not been proven in other types of
cancer. While we and Bayer have stopped the Phase 3 liver
cancer trial based on the recommendation of the DMC, the data
has not yet been filed or reviewed by
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regulatory authorities, and may not result in marketing approval
in this indication. Historically, many companies have failed to
demonstrate the effectiveness of pharmaceutical product
candidates in Phase 3 clinical trials notwithstanding
favorable results in Phase 1 or Phase 2 clinical
trials. Even though we have obtained fast track designation for
Nexavar in metastatic liver and skin cancer, we and Bayer may
not obtain marketing approval for the use of Nexavar in these
indications from the FDA or other regulatory authorities. In
addition, if previously unforeseen and unacceptable side effects
are observed, we may not proceed with further clinical trials of
Nexavar. In our clinical trials, we treat patients who have
failed conventional treatments and who are in advanced stages of
cancer. During the course of treatment, these patients may die
or suffer adverse medical effects for reasons unrelated to
Nexavar. These adverse effects may impact the interpretation of
clinical trial results, which could lead to an erroneous
conclusion regarding the toxicity or efficacy of Nexavar.
Our clinical trials may fail to demonstrate that Nexavar is safe
and effective as a treatment for types of cancer other than
kidney cancer, which would prevent us from marketing Nexavar as
a treatment for those other types of cancer, limiting the
potential market for the product, which may cause our business
to fail.
Even
though we have stopped the Phase 3 liver cancer trial, Nexavar
may never be approved for use in this indication, or its
approval may be significantly delayed.
In February 2007, we and Bayer announced that an independent DMC
had reviewed the safety and efficacy data from our Phase 3
clinical trial of Nexavar administered as a single agent in
patients with advanced liver cancer. The DMC concluded that the
trial met its primary endpoint resulting in superior overall
survival in those patients receiving Nexavar. Subsequently, we
and Bayer made the decision to stop the Phase 3 liver cancer
trial early and offer all patients in the trial access to
Nexavar, enabling them to crossover to Nexavar
treatment. While we and Bayer have stopped the Phase 3 liver
cancer trial based on the recommendation of the DMC, the data
has not yet been filed with or reviewed by regulatory
authorities, and may not result in marketing approval in this
indication.
Based on the results of this trial, and together with Bayer, we
intend to file an application with the FDA and foreign
regulatory authorities for marketing approval of Nexavar for use
in patients with advanced liver cancer. The regulatory
authorities may be unsatisfied with the safety and efficacy data
submitted in support of these applications, which could result
in either non-approval or a requirement of additional clinical
trials or further analysis of existing data. In addition to the
question of whether Nexavar has demonstrated sufficient efficacy
in the treatment of liver cancer, the FDA may have questions
about the safety of the drug. For these or other reasons, there
is no assurance that Nexavar will be approved for the treatment
of advanced liver cancer, or that any such approval, if granted,
will occur quickly.
There
are competing therapies approved for the treatment of advanced
kidney cancer, and we expect the number of approved therapies to
rapidly increase, which could harm the prospects for Nexavar in
this indication.
Many companies are marketing and developing products to treat
patients with advanced kidney cancer. The market is highly
competitive and we expect the competition to increase as
additional products are approved to treat advanced kidney cancer.
For example, Sutent, a multi-kinase inhibitor marketed by
Pfizer, is available in the U.S. and the European Union for
treating patients with kidney cancer and Gleevec-resistant
gastrointestinal stromal tumors, or GIST. In January 2007,
Pfizer reported that European regulators approved Sutent as an
initial, or first-line, treatment for advanced kidney cancer
patients and granted the product full marketing authorization.
Prior to this approval, Sutent had only conditional approval for
second-line use after the failure of alternative treatments. In
June 2006, results of a randomized Phase 3 trial comparing
Sutent to IFN in treatment-naive patients with advanced kidney
cancer were reported. The primary endpoint of the study was
progression-free survival with a median progression-free
survival of 11 months for patients receiving Sutent
compared to five months for patients receiving IFN. Moreover,
Genentechs Avastin has been reported to have activity in
kidney cancer, and Genentech has indicated that Avastin is now
being used off-label for treatment of some kidney cancer
patients A Phase 3 randomized trial in treatment-naïve
advanced kidney cancer patients is underway comparing Avastin
and IFN that may produce superior progression-free survival or
overall survival data than Nexavar. In December, Genentech
announced that an interim
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analysis showed that a randomized Phase 3 clinical study of
Avastin in combination with IFN in patients with first-line
metastatic renal cell carcinoma significantly improved PFS
compared to IFN therapy alone.
In addition, Wyeth is conducting a Phase 3 study of
temsirolimus (CCI-779), an mTOR inhibitor, in patients with
advanced kidney cancer. In June 2006, results of a randomized
Phase 3 trial comparing temsirolimus to interferon to both
agents combined in treatment-naïve, poor-risk advanced
kidney cancer patients were reported. The primary endpoint of
the study was overall survival. The reported median overall
survival was 10.9 months for temsirolimus alone as compared
to 7.3 months for interferon. Wyeth filed a new drug
application with the FDA for this compound in October 2006.
Pfizer also has an earlier stage compound, AG-013736, a
multi-kinase inhibitor, which is in clinical development and
being evaluated in kidney cancer patients.
In April 2005, as a result of a recommendation by us and Bayer,
all patients in our ongoing randomized Phase 3 kidney
cancer trial who were previously administered placebo in the
trial were given the opportunity to receive Nexavar. This action
reduced the number of patients in the trial receiving placebo.
In November 2005 and June 2006, investigators presented interim
analyses on overall survival of patients in this Phase 3
kidney cancer trial. In both cases, the data presented were not
sufficient to be considered statistically significant according
to the predefined specifications for the interim analyses. The
final analysis of overall survival is expected to be presented
in 2007. Crossover of patients from placebo to Nexavar is likely
to negatively impact our ability to obtain statistically
significant overall survival data. Competitors with
statistically significant overall survival data could be
preferred in the marketplace, impairing our ability to
successfully market Nexavar.
In December 2006, we announced the results of the Phase 2
clinical trial that compares Nexavar to Interferon (IFN), which
is commonly used as a first-line therapy in patients with
advanced kidney cancer. Progression-free survival was comparable
for patients who received either Nexavar or IFN. Based on 121
progression events, median progression-free survival was
5.6 months and 5.7 months, respectively, for IFN- and
Nexavar-treated patients. Products that have shown efficacy as
compared to IFN or interleukin-2, or IL-2, or in treatment
naïve-patients may be preferred by the medical community.
Further, survival may become the single most important element
in determining standard of care. We expect that our ability to
obtain statistically significant overall survival data has been
impaired by the cross over of patients from placebo to Nexavar
beginning in April 2005, and we have not demonstrated a
measurable difference in Nexavars efficacy as compared to
IFN or IL-2. The use of any particular therapy may limit the use
of a competing therapy with a similar mechanism of action. The
FDA approval of Nexavar permits Nexavar to be used as an
initial, or first-line, therapy for the treatment of advanced
kidney cancer, but some other approvals do not. For example, the
European Union approval indicates Nexavar only for advanced
kidney cancer patients that have failed prior therapy or whose
physicians deem alternate therapies inappropriate. The
successful introduction of other new therapies could
significantly reduce the potential market for Nexavar in this
indication. Decreased demand or price for Nexavar would harm our
ability to realize revenue and profits from Nexavar which could
cause our stock price to fall.
We are
dependent upon our collaborative relationship with Bayer to
manufacture and to further develop and commercialize Nexavar.
There may be circumstances that delay or prevent the development
and commercialization of Nexavar.
Our strategy for manufacturing and further developing and
commercializing Nexavar depends in large part upon our
relationship with Bayer. If we are unable to maintain our
collaborative relationship with Bayer, we would need to
undertake development, manufacturing and marketing activities at
our own expense, which would significantly increase our capital
requirements and limit the indications we are able to pursue and
could prevent us from further commercializing Nexavar.
Under the terms of the collaboration agreement, we and Bayer are
conducting multiple clinical trials of Nexavar. We and Bayer
must agree on the development plan for Nexavar. If we and Bayer
cannot agree, clinical trial progress could be significantly
delayed or halted.
Under our agreement with Bayer, we have the opportunity to
fund 50 percent of clinical development costs
worldwide except in Japan, where Bayer will fund
100 percent of development costs and pay us a royalty on
net
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sales. We are currently funding 50 percent of development
costs for Nexavar and depend on Bayer to fund the balance of
these costs. Our collaboration agreement with Bayer does not,
however, create an obligation for either us or Bayer to fund
additional development of Nexavar, or any other product
candidate. If a party declines to fund development or ceases to
fund development of a product candidate under the collaboration
agreement, then that party will be entitled to receive a royalty
on any product that is ultimately commercialized, but not to
share in profits. Bayer could, upon 60 days notice, elect
at any time to terminate its co-funding of the development of
Nexavar. If Bayer terminates its co-funding of Nexavar
development, we may be unable to fund the development costs on
our own and may be unable to find a new collaborator, which
could cause our business to fail.
Bayer has been the sponsor for all regulatory filings with the
FDA. As a result, we have been dependent on Bayers
experience in filing and pursuing applications necessary to gain
regulatory approvals. Bayer has limited experience in developing
drugs for the treatment of cancer.
Our collaboration agreement with Bayer provides for Bayer to
advance us creditable milestone-based payments. Bayer advanced
us a total of $40.0 million pursuant to this provision.
These funds are repayable out of a portion of our future profits
and royalties, if any, from any of our products.
Our collaboration agreement with Bayer terminates when patents
expire that were issued in connection with product candidates
discovered under that agreement, or upon the time when neither
we nor Bayer are entitled to profit sharing under that
agreement, whichever is later. Bayer holds the global patent
applications related to Nexavar. We currently anticipate that,
if issued, the United States patent related to Nexavar will
expire in 2022, subject to possible patent-term extension, the
entitlement to which and the term of which cannot presently be
calculated.
We are subject to a number of additional risks associated with
our dependence on our collaborative relationship with Bayer,
including:
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the amount and timing of resource expenditures can vary because
of decisions by Bayer;
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possible disagreements as to development plans, including
clinical trials or regulatory approval strategy;
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the right of Bayer to terminate its collaboration agreement with
us on limited notice and for reasons outside our control;
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loss of significant rights if we fail to meet our obligations
under the collaboration agreement;
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withdrawal of support by Bayer following the development or
acquisition by it of competing products; and
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possible disagreements with Bayer regarding the collaboration
agreement or ownership of proprietary rights.
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Due to these factors and other possible disagreements with
Bayer, we may be delayed or prevented from further developing or
commercializing Nexavar, or we may become involved in litigation
or arbitration, which would be time consuming and expensive.
Our
clinical trials could take longer to complete than we project or
may not be completed at all.
Although for planning purposes we project the commencement,
continuation and completion of ongoing clinical trials for
Nexavar, the actual timing of these events may be subject to
significant delays relating to various causes, including actions
by Bayer, scheduling conflicts with participating clinicians and
clinical institutions, difficulties in identifying and enrolling
patients who meet trial eligibility criteria and shortages of
available drug supply. We may not complete clinical trials
involving Nexavar as projected or at all.
We rely on Bayer, academic institutions, cooperative oncology
organizations and clinical research organizations to conduct,
supervise or monitor most clinical trials involving Nexavar. We
have less control over the timing and other aspects of these
clinical trials than if we conducted them entirely on our own.
We are directly supervising and monitoring on our own certain
Phase 2 and Phase 3 clinical trials of Nexavar for the
treatment of malignant melanoma. In 2007, Onyx and Bayer intend
to launch a broad, multinational Phase 2 program in
advanced breast cancer. The program is being designed and led by
an international group of experts in the field of breast cancer
and includes multiple randomized Phase 2 trials. Onyx has
not conducted a clinical trial that has led to an NDA filing.
Consequently, we may not have the necessary capabilities to
successfully execute and
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complete these planned clinical trials in a way that leads to
approval of Nexavar for the target indication. Failure to
commence or complete, or delays in our planned clinical trials
would prevent us from commercializing Nexavar in indications
other than kidney cancer, and thus seriously harm our business.
If
serious adverse side effects are associated with Nexavar,
approval for Nexavar could be revoked, sales of Nexavar could
decline, and we may be unable to develop Nexavar as a treatment
for other types of cancer.
The approved package insert for Nexavar for the treatment of
patients with advanced kidney cancer includes the following
warnings relating to observed adverse side effects:
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Hypertension may occur early in the course of therapy and blood
pressure should be monitored weekly during the first six weeks
of therapy and treated as needed.
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Gastrointestinal perforation has been reported in less than one
percent of patients taking Nexavar.
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Incidence of bleeding, regardless of causality, was
15 percent for Nexavar vs. 8 percent for placebo and
the incidence of treatment-emergent cardiac ischemia/infarction
was 2.9 percent for Nexavar vs. 0.4 percent for
placebo.
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Most common treatment-emergent adverse events with Nexavar were
diarrhea, rash/desquamation, fatigue, hand-foot skin reaction,
alopecia and nausea. Grade 3/4 adverse events were
38 percent for Nexavar vs. 28 percent for placebo.
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Women of child-bearing potential should be advised to avoid
becoming pregnant and advised against breast-feeding.
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In cases of any severe or persistent side effects, temporary
treatment interruption, dose modification or permanent
discontinuation should be considered.
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As Nexavar becomes more widely available worldwide, we and Bayer
anticipate we will routinely update side effects and adverse
events listed on the package insert to reflect current
information. For example, subsequent to FDA approval, we and
Bayer updated the package insert to include additional
information on types of internal bleeding observed and new
adverse events reported by physicians using Nexavar, including
gastrointestinal perforations, congestive heart failure,
keratoacanthomas/squamous cell cancer of the skin, which is a
form of a skin lesion, and reversible posterior
leukoencephalopathy syndrome, or RPLS, a rare but reversible
neurological phenomenon associated with severe hypertension. If
additional adverse side effects emerge, or a pattern of severe
or persistent previously observed side effects is observed in
the Nexavar patient population, the FDA or other international
regulatory agencies could modify or revoke approval of Nexavar
or we may choose to withdraw it from the market. If this were to
occur, we may be unable to obtain approval of Nexavar in
additional indications and foreign regulatory agencies may
decline to approve Nexavar for use in any indication. Any of
these outcomes would have a material adverse impact on our
business. In addition, if patients receiving Nexavar were to
suffer harm as a result of their use of Nexavar, these patients
or their representatives may bring claims against us. These
claims, or the mere threat of these claims, could have a
material adverse effect on our business and results of
operations.
Our
operating results are unpredictable and may fluctuate. If our
operating results are below the expectations of securities
analysts or investors, the trading price of our stock could
decline.
Our operating results will likely fluctuate from fiscal quarter
to fiscal quarter, and from year to year, and are difficult to
predict. Sales of Nexavar commenced in late December 2005. Due
to a highly competitive environment with existing and emerging
products, Nexavar sales will be difficult to predict from period
to period. Our operating expenses are largely independent of
Nexavar sales in any particular period. We believe that our
quarterly and annual results of operations may be negatively
affected by a variety of factors. These factors include, but are
not limited to, the level of patient demand for Nexavar, the
ability of Bayers distribution network to process and ship
product on a timely basis, fluctuations in foreign exchange
rates, investments in sales and marketing efforts to support the
sales of Nexavar, Bayer and our investments in the research and
development and commercialization of Nexavar, and expenditures
we may incur to acquire additional products.
In addition, as a result of our adoption of FAS 123(R), we
must measure compensation cost for stock-based awards made to
employees at the grant date of the award, based on the fair
value of the award, and recognize the cost
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as an expense over the employees requisite service period.
As the variables that we use as a basis for valuing these awards
change over time, the magnitude of the expense that we must
recognize may vary significantly. Any such variance from one
period to the next could cause a significant fluctuation in our
operating results.
It is, therefore, difficult for us to accurately forecast
profits or losses. As a result, it is possible that in some
quarters our operating results could be below the expectations
of securities analysts or investors, which could cause the
trading price of our common stock to decline, perhaps
substantially.
We
have a history of losses, and we expect to continue to incur
losses.
Our net loss for the year ended December 31, 2004 was
$46.8 million, for the year ended December 31, 2005
was $95.2 million and for the year ended December 31,
2006 was $92.7 million. As of December 31, 2006, we
had an accumulated deficit of approximately $438.5 million.
We have incurred these losses principally from costs incurred in
our research and development programs, from our general and
administrative costs and the development of our
commercialization infrastructure. It is not unusual for patients
to be offered access to investigational compounds in late-stage
clinical development. Such programs involve substantial costs.
We expect to incur significant and increasing operating losses
over the next several years as we continue our clinical trial
activities and, with Bayer, establish commercial infrastructure
in Europe and other parts of the world. We expect our operating
losses to increase with our co-funding of ongoing Nexavar
clinical and commercial activities under our collaboration
agreement with Bayer.
We and Bayer only began to generate revenues from the sale of
Nexavar in December 2005, and we must repay the milestone-based
advances we received from Bayer from any future profits and
royalties. We have made significant expenditures towards the
development and commercialization of Nexavar, and may never
realize sufficient product sales to offset these expenditures.
Our ability to achieve profitability depends upon success by us
and Bayer in completing development of Nexavar, obtaining
required regulatory approvals and manufacturing and marketing
the approved product.
We are
subject to extensive government regulation, which can be costly,
time consuming and subject us to unanticipated
delays.
Drug candidates under development are subject to extensive and
rigorous domestic and foreign regulation. We have received
regulatory approval only for the use of Nexavar in the treatment
of advanced kidney cancer in the United States and a number of
foreign markets.
We expect to rely on Bayer to manage communications with
regulatory agencies, including filing new drug applications and
generally directing the regulatory approval process for Nexavar.
We and Bayer may not obtain necessary additional approvals from
the FDA or other regulatory authorities. If we fail to obtain
required governmental approvals, we will experience delays in or
be precluded from marketing Nexavar in particular indications or
countries. The FDA or other regulatory authorities may approve
only limited label information for the product. The label
information describes the indications and methods of use for
which the product is authorized, and if overly restrictive, may
limit our and Bayers ability to successfully market any
approved product. If we have disagreements as to ownership of
clinical trial results or regulatory approvals, and the FDA
refuses to recognize us as holding, or having access to, the
regulatory approvals necessary to commercialize our product
candidates, we may experience delays in or be precluded from
marketing products.
The regulatory review and approval process takes many years,
requires the expenditure of substantial resources, involves
post-marketing surveillance and may involve ongoing requirements
for post-marketing studies. Additional or more rigorous
governmental regulations may be promulgated that could delay
regulatory approval of Nexavar. Delays in obtaining regulatory
approvals may:
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adversely affect the successful commercialization of Nexavar;
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impose costly procedures on us;
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diminish any competitive advantages that we may attain; and
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adversely affect our receipt of revenues or royalties.
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Even after Nexavar and any other products we may develop are
marketed, the products and their manufacturers are subject to
continual review. Later discovery of previously unknown problems
with Nexavar or manufacturing and production by Bayer or other
third parties may result in restrictions on Nexavar, including
withdrawal of Nexavar from the market. In addition, problems or
failures with the products of others, before or after regulatory
approval, including our competitors, could have an adverse
effect on our ability to obtain or maintain regulatory approval
for Nexavar. If we fail to comply with applicable regulatory
requirements, we could be subject to penalties, including fines,
suspensions of regulatory approval, product recall, seizure of
products and criminal prosecution.
While
Nexavar has received approvals for sale in several countries
outside of the United States, it has not received pricing
approval in all of these foreign countries, and may not receive
marketing approval in additional countries.
In July 2005, we and Bayer filed for approval of Nexavar based
on the progression-free survival data. The FDA granted full
approval in December 2005 for patients with advanced kidney
cancer. In March 2006, the Swiss Agency for Therapeutic Products
approved Nexavar as a treatment for patients with advanced
kidney cancer, after nepherectomy and prior palliative or
adjuvant therapy with cytokines. In April 2006 the Mexican
Ministry of Health granted approval of Nexavar as a treatment
for advanced kidney cancer. In July 2006, the European
Commission granted marketing authorization for Nexavar for the
treatment of patients with advanced kidney cancer who have
failed prior interferon-alpha or interleukin-2 based therapy or
are considered unsuitable for such therapy. Nexavar has also
received approvals in more than 50 territories worldwide. Other
foreign regulatory authorities may not, however, be satisfied
with the safety and efficacy data submitted in support of the
foreign applications, which could result in non-approval, a
requirement of additional clinical trials, further analysis of
existing data or a restricted use of Nexavar. Lack of marketing
approval in a particular country would prevent us from selling
Nexavar in that country, which could harm our business. In
addition, we and Bayer will be required to negotiate the price
of Nexavar with European governmental authorities in order for
Nexavar to be eligible for government reimbursement. In many
European countries, patients will not use prescription drugs
that are not reimbursable by their governments. European price
negotiations could delay commercialization in a particular
country by twelve months or more.
Nexavar was approved by the FDA for the treatment of advanced
kidney cancer on the basis of the progression-free survival
endpoint. The final analysis of overall survival is expected to
be presented later in the year. We expect that our ability to
obtain statistically significant overall survival data will be
negatively impacted by our April 2005 decision to allow patients
that had been receiving placebo to elect to receive Nexavar.
Regulatory authorities may have concerns or require further
analysis of the manner in which tumor progression was
determined. It is possible that in the absence of statistically
significant overall survival data, Nexavar will not receive
marketing approval in some countries, or will receive more
limited approval than that granted by the FDA. For example,
neither the European Union nor the Swiss Agency for Therapeutic
Products approved Nexavar as an initial or first-line therapy,
and it is possible that other foreign regulatory agencies will
take a similar approach. In addition to the question of whether
Nexavar has demonstrated sufficient efficacy in the treatment of
kidney cancer, regulatory authorities may have questions about
the safety of the drug. For example, there were instances of
greater adverse events in the treatment arm relative to the
placebo arm of the Phase 3 trial, and physicians have
reported some incidents of additional adverse events in patients
receiving Nexavar. In addition, as an element of the foreign
approval process, the applicable regulatory authority must be
satisfied with the processes and facilities for drug
manufacture, which includes a physical inspection of those
facilities. Any conclusion that there are shortcomings in the
processes, facilities, or quality control procedures related to
manufacture of the drug could result in a significant delay in
foreign approval. For these or other reasons, there is no
assurance that Nexavar will receive any additional foreign
approvals on the basis of the current application without
amendment, if it is approved at all.
We
face intense competition and rapid technological change, and
many of our competitors have substantially greater resources
than we have.
We are engaged in a rapidly changing and highly competitive
field. We are seeking to develop and market Nexavar to compete
with other products and therapies that currently exist or are
being developed. Many other companies are actively seeking to
develop products that have disease targets similar to those we
are pursuing. Some of these competitive product candidates are
in clinical trials, and others are approved. Competitors that
target the
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same tumor types as our Nexavar program and that have commercial
products or product candidates at various stages of clinical
development include Pfizer, Wyeth, Novartis
International AG, Amgen, AstraZeneca PLC,
OSI Pharmaceuticals, Inc. and Genentech, Inc. among
others. A number of companies have agents targeting Vascular
Endothelial Growth Factor, or VEGF; VEGF receptors; Epidermal
Growth Factor, or EGF; EGF receptors; and other enzymes. These
agents include antibodies and small molecules. OSI
Pharmaceuticals with
Tarcevatm,
a small molecule inhibitor of the EGF receptor has been approved
in the United States for treatment of non-small cell lung
cancer, or NSCLC and pancreatic cancer in combination with
gemcitabine. Companies working on developing antibody approaches
include Amgen and ImClone Systems, Inc. ImClone has developed
Erbitux, which is an antibody targeting the EGF receptor.
Erbitux has been approved in the United States and the European
Union for treatment of colorectal cancer, as well as in the
United States for the treatment of most types of head and neck
cancer. Genentech has developed
Avastintm,
an antibody targeting VEGF, which has received approvals in the
United States and the European Union for treatment of colorectal
cancer and NSCLC and is in clinical development for kidney
cancer, among other indications. In addition, many other
pharmaceutical companies are developing novel cancer therapies
that, if successful, would also provide competition for Nexavar.
Many of our competitors, either alone or together with
collaborators, have substantially greater financial resources
and research and development staffs. In addition, many of these
competitors, either alone or together with their collaborators,
have significantly greater experience than we do in:
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developing products;
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undertaking preclinical testing and human clinical trials;
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obtaining FDA and other regulatory approvals of
products; and
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manufacturing and marketing products.
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Accordingly, our competitors may succeed in obtaining patent
protection, receiving FDA approval or commercializing product
candidates before we do. If we receive FDA approval and commence
commercial product sales, we will compete against companies with
greater marketing and manufacturing capabilities, areas in which
we have limited or no experience.
We also face, and will continue to face, competition from
academic institutions, government agencies and research
institutions. Further, we face numerous competitors working on
product candidates to treat each of the diseases for which we
are seeking to develop therapeutic products. In addition, our
product candidates, if approved, will compete with existing
therapies that have long histories of safe and effective use. We
may also face competition from other drug development
technologies and methods of preventing or reducing the incidence
of disease and other classes of therapeutic agents.
Developments by competitors may render our product candidates
obsolete or noncompetitive. We face and will continue to face
intense competition from other companies for collaborations with
pharmaceutical and biotechnology companies, for establishing
relationships with academic and research institutions, and for
licenses to proprietary technology. These competitors, either
alone or with collaborative parties, may succeed with
technologies or products that are more effective than ours.
We anticipate that we will face increased competition in the
future as new companies enter our markets and as scientific
developments surrounding other cancer therapies continue to
accelerate. We have made significant expenditures towards the
development of Nexavar and the establishment of a
commercialization infrastructure. If Nexavar cannot compete
effectively in the marketplace, we may be unable to realize
revenue from Nexavar sufficient to offset our expenditures
towards its development and commercialization, and our business
will suffer.
We
will need substantial additional funds, and our future access to
capital is uncertain.
We will require substantial additional funds to conduct the
costly and time-consuming clinical trials necessary to develop
Nexavar for additional indications, pursue regulatory approval
and commercialize this product in Europe and the rest of the
world. Our future capital requirements will depend upon a number
of factors, including:
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the size and complexity of our Nexavar program;
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decisions made by Bayer and Onyx to alter the size, scope and
schedule of clinical development;
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repayment of our of milestone-based advances;
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progress with clinical trials;
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the time and costs involved in obtaining regulatory approvals;
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the cost involved in enforcing patent claims against third
parties and defending claims by third parties (both of which are
shared with Bayer);
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the costs associated with acquisitions or licenses of additional
products;
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competing technological and market developments; and
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global product commercialization activities.
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We may not be able to raise additional capital on favorable
terms, or at all. If we are unable to obtain additional funds,
we may not be able to fund our share of commercialization
expenses and clinical trials. We may also have to curtail
operations or obtain funds through collaborative and licensing
arrangements that may require us to relinquish commercial rights
or potential markets or grant licenses that are unfavorable to
us.
In September 2006, in connection with our committed equity
financing facility, we entered into a stock purchase agreement
with Azimuth Opportunity Ltd., or Azimuth. The committed equity
financing facility entitles us to sell and obligates Azimuth to
purchase, from time to time over a period of two years, shares
of our common stock for cash consideration up to an aggregate of
$150.0 million, subject to certain conditions and
restrictions. Capital will not be available to us under the
committed equity financing facility if our stock price is below
$8.00 per share or if we are unable to meet other
conditions specified in the stock purchase agreement. In
addition, when we draw down under the committed equity financing
facility, we will sell shares to Azimuth at a discount of up to
5.05 percent from the volume weighted average price of our
common stock. If we draw down amounts under the committed equity
financing facility when our share price is decreasing, we will
need to issue more shares to raise the same amount than if our
share price was higher.
We believe that our existing capital resources and interest
thereon will be sufficient to fund our current development plans
into 2009. However, if we change our development plans or if
Nexavar is not broadly accepted in the marketplace, we may need
additional funds sooner than we expect. Moreover, once a
development program has been initiated, under our collaboration
with Bayer we may have limited ability to control the
expenditures made under that program, which we share equally
with Bayer. In addition, we anticipate that our co-development
costs for the Nexavar program may increase over the next several
years as we continue our share of funding the clinical
development program and prepare for the potential product
launches of Nexavar throughout the world. While these costs are
unknown at the current time, we expect that we will need to
raise substantial additional capital to continue the co-funding
of the Nexavar program in future periods through and beyond
2009. We may have to curtail our funding of Nexavar if we cannot
raise sufficient capital. If we do not continue to co-fund the
further development of Nexavar, we will receive a royalty on
future sales of products, instead of a share of profits.
We are
dependent on the efforts of Bayer to market and promote Nexavar
in countries outside the United States where Nexavar has
received approval.
Under our collaboration and co-promotion agreements with Bayer,
we and Bayer are co-promoting Nexavar in the United States. If
we continue to co-promote Nexavar, and continue to co-fund
development in the United States, we will share equally in
profits or losses, if any, in the United States.
We do not, however, have the right to co-promote Nexavar in any
country outside the United States, and will be dependent solely
on Bayer to promote Nexavar in foreign countries where Nexavar
is approved. In all foreign countries, except Japan, Bayer would
first receive a portion of the product revenues to repay Bayer
for its foreign commercialization infrastructure, before
determining our share of profits and losses. In Japan, we would
receive a royalty on any sales of Nexavar.
23
We have limited ability to direct Bayer in its promotion of
Nexavar in foreign countries where Nexavar is approved. Bayer
may not have sufficient experience to promote oncology products
in foreign countries and may fail to devote appropriate
resources to this task. If Bayer fails to adequately promote
Nexavar in foreign countries, we may be unable to obtain any
remedy against Bayer. If this were to happen, sales of Nexavar
in any foreign countries where Nexavar is approved may be
harmed, which would negatively impact our business.
Similarly, Bayer may establish a sales and marketing
infrastructure for Nexavar outside the United States that is too
large and expensive in view of the magnitude of the Nexavar
sales opportunity or establish this infrastructure too early in
view of the ultimate timing of regulatory approval. Since we
share in the profits and losses arising from sales of Nexavar
outside of the United States, rather than receiving a royalty
(except in Japan), we are at risk with respect to the success or
failure of Bayers commercial decisions related to Nexavar
as well as the extent to which Bayer succeeds in the execution
of its strategy.
If
Bayers business strategy changes, it may adversely affect
our collaborative relationship.
Bayer may change its business strategy. Bayer recently completed
a public takeover of Schering AG and the integration of the two
companies will consume management resources at Bayer that may
negatively impact our collaboration. Decisions by Bayer to
either reduce or eliminate its participation in the oncology
field, or to add competitive agents to its portfolio, could
reduce its financial incentive to promote Nexavar. A change in
Bayers business strategy may adversely affect activities
under its collaboration agreement with us, which could cause
significant delays and funding shortfalls impacting the
activities under the collaboration and seriously harming our
business.
We do
not have manufacturing expertise or capabilities and are
dependent on Bayer to fulfill our manufacturing needs, which
could result in lost sales and the delay of clinical trials or
regulatory approval.
Under our collaboration agreement with Bayer, Bayer has the
manufacturing responsibility to supply Nexavar for clinical
trials and to support our commercial requirements. However,
should Bayer give up its right to co-develop Nexavar, we would
have to manufacture Nexavar, or contract with another third
party to do so for us. We lack the resources, experience and
capabilities to manufacture Nexavar or any future product
candidates on our own and would require substantial funds to
establish these capabilities. Consequently, we are, and expect
to remain, dependent on third parties to manufacture our product
candidates and products. These parties may encounter
difficulties in production
scale-up,
including problems involving production yields, quality control
and quality assurance and shortage of qualified personnel. These
third parties may not perform as agreed or may not continue to
manufacture our products for the time required by us to
successfully market our products. These third parties may fail
to deliver the required quantities of our products or product
candidates on a timely basis and at commercially reasonable
prices. Failure by these third parties could impair our ability
to meet the market demand for Nexavar, and could delay our
ongoing clinical trials and our applications for regulatory
approval. If these third parties do not adequately perform, we
may be forced to incur additional expenses to pay for the
manufacture of products or to develop our own manufacturing
capabilities.
If the
specialty pharmacies and distributors that we and Bayer rely
upon to sell our products fail to perform, our business may be
adversely affected.
Our success depends on the continued customer support efforts of
our network of specialty pharmacies and distributors. A
specialty pharmacy is a pharmacy that specializes in the
dispensing of medications for complex or chronic conditions,
which often require a high level of patient education and
ongoing management. The use of specialty pharmacies and
distributors involves certain risks, including, but not limited
to, risks that these specialty pharmacies and distributors will:
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not provide us with accurate or timely information regarding
their inventories, the number of patients who are using Nexavar
or complaints about Nexavar;
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not effectively sell or support Nexavar;
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reduce their efforts or discontinue to sell or support Nexavar;
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not devote the resources necessary to sell Nexavar in the
volumes and within the time frames that we expect;
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be unable to satisfy financial obligations to us or
others; and
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cease operations.
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Any such failure may result in decreased product sales and
profits, which would harm our business.
If we
lose our key employees and consultants or are unable to attract
or retain qualified personnel, our business could
suffer.
Our future success will depend in large part on the continued
services of our management personnel, including Hollings C.
Renton, our Chairman, President and Chief Executive Officer,
Laura A. Brege, our Executive Vice President and Chief Business
Officer, Edward F. Kenney, our Executive Vice President and
Chief Commercial Officer and Henry J. Fuchs, our Executive Vice
President and Chief Medical Officer as well as each of our other
executive officers. The loss of the services of one or more of
these key employees could have an adverse impact on our
business. We do not maintain key person life insurance on any of
our officers, employees or consultants. Any of our key personnel
could terminate their employment with us at any time and without
notice. We depend on our continued ability to attract, retain
and motivate highly qualified personnel. We face competition for
qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and other research
institutions.
In 2003, we restructured our operations to reflect an increased
priority on the development of Nexavar and discontinued our
therapeutic virus program. As a result of the restructuring, we
eliminated our entire scientific team associated with the
therapeutic virus program. Our remaining scientific and
administrative employees are engaged in managing our
collaboration with Bayer to develop Nexavar, but are not
actively involved in new product candidate discovery. If we
resume our research and development of other product candidates,
we will need to hire individuals with the appropriate scientific
skills. If we cannot hire these individuals in a timely fashion,
we will be unable to engage in new product candidate discovery
activities.
The
market may not accept our products and pharmaceutical pricing
and reimbursement pressures may reduce
profitability.
Nexavar or any future product candidates that we may develop may
not gain market acceptance among physicians, patients,
healthcare payors and the medical community or the market may
not be as large as forecasted. One factor that may affect market
acceptance of Nexavar or any future products we may develop is
the availability of third-party reimbursement. Our commercial
success may depend, in part, on the availability of adequate
reimbursement for patients from third-party healthcare payors,
such as government and private health insurers and managed care
organizations. Third-party payors are increasingly challenging
the pricing of medical products and services and their
reimbursement practices may affect the price levels for Nexavar.
Changes in government legislation or regulation, such as the
Medicare Act, including Medicare Part D, or changes in
private third-party payers policies towards reimbursement
for our products may reduce reimbursement of our products costs
to physicians. In addition, the market for Nexavar may be
limited by third-party payors who establish lists of approved
products and do not provide reimbursement for products not
listed. If Nexavar is not on the approved lists, our sales may
suffer.
Nexavars success in Europe will also depend largely on
obtaining and maintaining government reimbursement because in
many European countries patients will not use prescription drugs
that are not reimbursed by their governments. In addition,
negotiating prices with governmental authorities can delay
commercialization by twelve months or more. Even if
reimbursement is available, reimbursement policies may adversely
affect our ability to sell our products on a profitable basis.
For example, in Europe as in many international markets,
governments control the prices of prescription pharmaceuticals
and expect prices of prescription pharmaceuticals to decline
over the life of the product or as volumes increase. We believe
that this will continue into the foreseeable future as
governments struggle with escalating health care spending.
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A number of additional factors may limit the market acceptance
of products including the following:
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rate of adoption by healthcare practitioners;
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types of cancer for which the product is approved;
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rate of a products acceptance by the target population;
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timing of market entry relative to competitive products;
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availability of alternative therapies;
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price of our product relative to alternative therapies;
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extent of marketing efforts by us and third-party distributors
or agents retained by us; and
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side effects or unfavorable publicity concerning our products or
similar products.
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If Nexavar or any future product candidates that we may develop
do not achieve market acceptance, we may not realize sufficient
revenues from product sales, which may cause our stock price to
decline.
We may
not be able to protect our intellectual property or operate our
business without infringing upon the intellectual property
rights of others.
We can protect our technology from unauthorized use by others
only to the extent that our technology is covered by valid and
enforceable patents or effectively maintained as trade secrets.
As a result, we depend in part on our ability to:
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obtain patents;
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license technology rights from others;
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protect trade secrets;
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operate without infringing upon the proprietary rights of
others; and
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prevent others from infringing on our proprietary rights.
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In the case of Nexavar, the global patent applications related
to this product candidate are held by Bayer, but licensed to us
in conjunction with our collaboration agreement with Bayer.
While an application is pending, a United States patent has not
been issued related to Nexavar. We currently anticipate that, if
issued, the United States patent related to Nexavar will expire
in 2022, subject to possible patent-term extension, the
entitlement to which and the term of which cannot presently be
calculated. Patent applications for Nexavar are also pending
throughout the world. As of December 31, 2006, we owned or
had licensed rights to 58 United States patents and 37 United
States patent applications and, generally, foreign counterparts
of these filings. Most of these patents or patent applications
cover protein targets used to identify product candidates during
the research phase of our collaborative agreements with
Warner-Lambert Company or Bayer, or aspects of our now
discontinued virus program. Additionally, we have corresponding
patents or patent applications pending or granted in certain
foreign jurisdictions.
The patent positions of biotechnology and pharmaceutical
companies are highly uncertain and involve complex legal and
factual questions. Our patents, or patents that we license from
others, may not provide us with proprietary protection or
competitive advantages against competitors with similar
technologies. Competitors may challenge or circumvent our
patents or patent applications. Courts may find our patents
invalid. Due to the extensive time required for development,
testing and regulatory review of our potential products, our
patents may expire or remain in existence for only a short
period following commercialization, which would reduce or
eliminate any advantage the patents may give us.
We may not have been the first to make the inventions covered by
each of our issued or pending patent applications, or we may not
have been the first to file patent applications for these
inventions. Competitors may have independently developed
technologies similar to ours. We may need to license the right
to use third-party patents and intellectual property to develop
and market our product candidates. We may not acquire required
licenses on acceptable terms, if at all. If we do not obtain
these required licenses, we may need to design around other
parties
26
patents, or we may not be able to proceed with the development,
manufacture or, if approved, sale of our product candidates. We
may face litigation to defend against claims of infringement,
assert claims of infringement, enforce our patents, protect our
trade secrets or know-how, or determine the scope and validity
of others proprietary rights. In addition, we may require
interference proceedings declared by the United States Patent
and Trademark Office to determine the priority of inventions
relating to our patent applications. These activities, and
especially patent litigation, are costly.
Bayer may have rights to publish data and information in which
we have rights. In addition, we sometimes engage individuals,
entities or consultants to conduct research that may be relevant
to our business. The ability of these individuals, entities or
consultants to publish or otherwise publicly disclose data and
other information generated during the course of their research
is subject to certain contractual limitations. The nature of the
limitations depends on various factors, including the type of
research being conducted, the ownership of the data and
information and the nature of the individual, entity or
consultant. In most cases, these individuals, entities or
consultants are, at the least, precluded from publicly
disclosing our confidential information and are only allowed to
disclose other data or information generated during the course
of the research after we have been afforded an opportunity to
consider whether patent
and/or other
proprietary protection should be sought. If we do not apply for
patent protection prior to publication or if we cannot otherwise
maintain the confidentiality of our technology and other
confidential information, then our ability to receive patent
protection or protect our proprietary information will be harmed.
We may
incur significant liability if it is determined that we are
promoting the off-label use of drugs or are
otherwise found in violation of federal and state regulations in
the United States or elsewhere.
Physicians may prescribe drug products for uses that are not
described in the products labeling and that differ from
those approved by the FDA or other applicable regulatory
agencies. Off-label uses are common across medical specialties.
Physicians may prescribe Nexavar for the treatment of cancers
other than advanced kidney cancer, although neither we nor Bayer
are permitted to promote Nexavar for the treatment of any
indication other than kidney cancer, and the FDA and other
regulatory agencies have not approved the use of Nexavar for any
other indication. Although the FDA and other regulatory agencies
do not regulate a physicians choice of treatments, the FDA
and other regulatory agencies do restrict communications on the
subject of off-label use. Companies may not promote drugs for
off-label uses. Accordingly, prior to approval of Nexavar for
use in any indications other than advanced kidney cancer, we may
not promote Nexavar for these indications. The FDA and other
regulatory agencies actively enforce regulations prohibiting
promotion of off-label uses and the promotion of products for
which marketing clearance has not been obtained. A company that
is found to have improperly promoted off-label uses may be
subject to significant liability, including civil and
administrative remedies as well as criminal sanctions.
Notwithstanding the regulatory restrictions on off-label
promotion, the FDA and other regulatory authorities allow
companies to engage in truthful, non-misleading, and
non-promotional speech concerning their products. We engage in
medical education activities and communicate with investigators
and potential investigators regarding our clinical trials.
Although we believe that all of our communications regarding
Nexavar are in compliance with the relevant regulatory
requirements, the FDA or another regulatory authority may
disagree, and we may be subject to significant liability,
including civil and administrative remedies as well as criminal
sanctions.
We
face product liability risks and may not be able to obtain
adequate insurance.
The sale of Nexavar and its ongoing use in clinical trials
exposes us to liability claims. Although we are not aware of any
historical or anticipated product liability claims against us,
if we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be
required to limit commercialization of Nexavar.
We believe that we have obtained reasonably adequate product
liability insurance coverage that includes the commercial sale
of Nexavar and our clinical trials. However, the cost of
insurance coverage is rising. We may not be able to maintain
insurance coverage at a reasonable cost. We may not be able to
obtain additional insurance
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coverage that will be adequate to cover product liability risks
that may arise should a future product candidate receive
marketing approval. Regardless of merit or eventual outcome,
product liability claims may result in:
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decreased demand for a product;
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injury to our reputation;
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withdrawal of clinical trial volunteers; and
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loss of revenues.
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Thus, whether or not we are insured, a product liability claim
or product recall may result in losses that could be material.
If we
do not receive timely and accurate financial and market
information from Bayer regarding the development and sale of
Nexavar, we may be unable to accurately report our results of
operations.
As a result of our arrangements with Bayer, we are highly
dependent on Bayer for timely and accurate information regarding
the costs incurred in developing and selling Nexavar, and any
revenues realized from its sale, in order to accurately report
our results of operations. If we do not receive timely and
accurate information, or underestimate activity levels
associated with the co-promotion and development of Nexavar at a
given point in time, we could record significant additional
expense in future periods, and may be required to restate our
results for prior periods. Such inaccuracies or restatements
could cause a loss of investor confidence in our financial
reporting or lead to claims against us, resulting in a decrease
in the trading price of shares of our common stock.
Our
stock price is volatile.
The market price of our common stock has been volatile and is
likely to continue to be volatile. For example, during the
period beginning January 1, 2003 and ending
December 31, 2006, the closing sales price for one share of
our common stock reached a high of $58.75 and a low of $4.65.
Factors affecting our stock price include:
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reported sales of Nexavar by Bayer;
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interim or final results of, or speculation about, clinical
trials from Nexavar;
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decisions by regulatory agencies;
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changes in the regulatory approval requirements;
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ability to accrue patients into clinical trials;
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success or failure in, or speculation about, obtaining
regulatory approval by us or our competitors;
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public concern as to the safety and efficacy of our product
candidates;
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developments in our relationship with Bayer;
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developments in patent or other proprietary rights;
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additions or departures of key personnel;
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announcements by us or our competitors of technological
innovations or new commercial therapeutic products;
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published reports by securities analysts;
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statements of governmental officials;
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changes in healthcare reimbursement policies;
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sales of our common stock by existing holders, or sales of
shares issuable upon exercise of outstanding options and
warrants; and
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sales by us of our common stock, including sales under our
committed equity financing facility arrangement with Azimuth.
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We are
at risk of securities class action litigation due to our
expected stock price volatility.
In the past, stockholders have often brought securities class
action litigation against a company following a decline in the
market price of its securities. This risk is especially acute
for us, because biotechnology companies have experienced greater
than average stock price volatility in recent years and, as a
result, have been subject to, on average, a greater number of
securities class action claims than companies in other
industries. Following our announcement in October 2004 of
Phase 2 clinical trial data in patients with advanced
kidney cancer, our stock price declined significantly. In
December 2006, following our announcement that a Phase 3
trial administering Nexavar or placebo tablets in combination
with the chemotherapeutic agents carboplatin and paclitaxel in
patients with advanced melanoma did not meet its primary
endpoint, our stock price declined significantly. We may in the
future be the target of securities class action litigation.
Securities litigation could result in substantial costs, could
divert managements attention and resources, and could
seriously harm our business, financial condition and results of
operations.
Existing
stockholders have significant influence over us.
Our executive officers, directors and five-percent stockholders
own, in the aggregate, approximately 25 percent of our
outstanding common stock. As a result, these stockholders will
be able to exercise substantial influence over all matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions.
This could have the effect of delaying or preventing a change in
control of our company and will make some transactions difficult
or impossible to accomplish without the support of these
stockholders.
Bayer, a collaborative party, has the right, which it is not
currently exercising, to have its nominee elected to our board
of directors as long as we continue to collaborate on the
development of a compound. Because of these rights, ownership
and voting arrangements, our officers, directors, principal
stockholders and collaborator may be able to effectively control
the election of all members of the board of directors and
determine all corporate actions.
Provisions
in our collaboration agreement with Bayer may prevent or delay a
change in control.
Our collaboration agreement with Bayer provides that if Onyx is
acquired by another entity by reason of merger, consolidation or
sale of all or substantially all of our assets, and Bayer does
not consent to the transaction, then for 60 days following
the transaction, Bayer may elect to terminate Onyxs
co-development and co-promotion rights under the collaboration
agreement. If Bayer were to exercise this right, Bayer would
gain exclusive development and marketing rights to the product
candidates developed under the collaboration agreement,
including Nexavar. If this happened, Onyx, or the successor to
Onyx, would receive a royalty based on any sales of Nexavar and
other collaboration products, rather than a share of any
profits. In this case, Onyx or its successor would be permitted
to continue co-funding development, and the royalty rate would
be adjusted to reflect this continued risk-sharing by Onyx or
its successor. These provisions of our collaboration agreement
with Bayer may have the effect of delaying or preventing a
change in control, or a sale of all or substantially all of our
assets, or may reduce the number of companies interested in
acquiring Onyx.
Provisions
in Delaware law, our charter and executive change of control
agreements we have entered into may prevent or delay a change of
control.
We are subject to the Delaware anti-takeover laws regulating
corporate takeovers. These anti-takeover laws prevent Delaware
corporations from engaging in a merger or sale of more than ten
percent of its assets with any stockholder, including all
affiliates and associates of the stockholder, who owns
15 percent or more of the corporations outstanding
voting stock, for three years following the date that the
stockholder acquired 15 percent or more of the
corporations stock unless:
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the board of directors approved the transaction where the
stockholder acquired 15 percent or more of the
corporations stock;
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after the transaction in which the stockholder acquired
15 percent or more of the corporations stock, the
stockholder owned at least 85 percent of the
corporations outstanding voting stock, excluding shares
owned by directors, officers and employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held under the plan will be
tendered in a tender or exchange offer; or
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on or after this date, the merger or sale is approved by the
board of directors and the holders of at least two-thirds of the
outstanding voting stock that is not owned by the stockholder.
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As such, these laws could prohibit or delay mergers or a change
of control of us and may discourage attempts by other companies
to acquire us.
Our certificate of incorporation and bylaws include a number of
provisions that may deter or impede hostile takeovers or changes
of control or management. These provisions include:
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our board is classified into three classes of directors as
nearly equal in size as possible with staggered three-year terms;
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the authority of our board to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights,
preferences and privileges of these shares, without stockholder
approval;
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all stockholder actions must be effected at a duly called
meeting of stockholders and not by written consent;
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special meetings of the stockholders may be called only by the
chairman of the board, the chief executive officer, the board or
ten percent or more of the stockholders entitled to vote at the
meeting; and
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|
|
no cumulative voting.
|
These provisions may have the effect of delaying or preventing a
change in control, even at stock prices higher than the then
current stock price.
We have entered into change in control severance agreements with
each of our executive officers. These agreements provide for the
payment of severance benefits and the acceleration of stock
option vesting if the executive officers employment is
terminated within 24 months of a change in control of Onyx.
These change in control severance agreements may have the effect
of preventing a change in control.
Accounting
pronouncements may affect our future financial position and
results of operations.
There may be new accounting pronouncements or regulatory
rulings, which may have an effect on our future financial
position and results of operations. In December 2004, the
Financial Accounting Standards Board, or FASB, issued a revision
of Statement of Financial Accounting Standards, or FAS,
No. 123, Accounting for Stock-Based
Compensation. The revision is referred to as
FAS 123(R) Share-Based Payment,
which supersedes Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, and requires companies to recognize
compensation expense, using a fair-value based method, for costs
related to share-based payments including stock options and
stock issued under our employee stock plans. We adopted
FAS 123(R) using the modified prospective basis on
January 1, 2006. The adoption of FAS 123(R) had a
material adverse impact on our results of operations and our net
loss per share. For example, as a result of our adoption of
FAS 123(R), for the year ended December 31, 2006, our
net loss increased by $14.0 million, or $0.33 per
share, as compared to the year ended December 31,
2005 net loss. We expect that our future results will
continue to be adversely affected by FAS 123(R) and that
the FASB could issue new accounting pronouncements that could
affect our future financial position and results of operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
30
We occupy 23,000 square feet of office space in our primary
facility in Emeryville, California, which we began occupying in
December 2004. In December 2006, we amended the existing lease
to occupy an additional 14,000 square feet of office space.
The lease expires in March 2013.
We also lease an additional 9,000 square feet of space in a
secondary facility in Richmond, California. The lease for this
facility expires in September 2010 with renewal options at the
end of the lease for two subsequent five-year terms. We are
currently subleasing this facility. Please refer to Note 6
of the accompanying financial statements for further information
regarding our lease obligations.
|
|
Item 3.
|
Legal
Proceedings
|
We are not a party to any material legal proceedings.
|
|
Item 4.
|
Submission
of Matters to a Vote of Securities Holders
|
No matters were submitted to a vote of the Companys
stockholders during the quarter ended December 31, 2006.
PART II.
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is traded on the Nasdaq National Market
(NASDAQ) under the symbol ONXX. We commenced trading
on NASDAQ on May 9, 1996. The following table presents the
high and low closing sales prices per share of our common stock
reported on NASDAQ.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
2006
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
29.10
|
|
|
$
|
25.82
|
|
|
$
|
33.77
|
|
|
$
|
25.30
|
|
Second Quarter
|
|
|
25.29
|
|
|
|
14.67
|
|
|
|
33.46
|
|
|
|
23.70
|
|
Third Quarter
|
|
|
17.29
|
|
|
|
12.87
|
|
|
|
27.66
|
|
|
|
19.30
|
|
Fourth Quarter
|
|
|
19.60
|
|
|
|
10.44
|
|
|
|
30.14
|
|
|
|
22.45
|
|
On February 28, 2007, the last reported sales price of our
common stock on NASDAQ was $26.25 per share.
31
Stock
Performance Graph
This performance graph is not soliciting material,
is not deemed filed with the SEC and is not to be incorporated
by reference in any filing by us under the Securities Act of
1933, as amended (the Securities Act), or the
Exchange Act, whether made before or after the date hereof and
irrespective of any general incorporation language in any such
filing. The stock price performance shown on the graph is not
necessarily indicative of future price performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among ONYX Pharmaceuticals, Inc., The NASDAQ Composite Index
And
The NASDAQ Pharmaceutical Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-01
|
|
|
Dec-02
|
|
|
Dec-03
|
|
|
Dec-04
|
|
|
Dec-05
|
|
|
Dec-06
|
l ONYX
PHARMACEUTICALS, INC.
|
|
|
$
|
100.00
|
|
|
|
$
|
113.48
|
|
|
|
$
|
551.37
|
|
|
|
$
|
632.62
|
|
|
|
$
|
562.50
|
|
|
|
$
|
206.64
|
|
n NASDAQ
STOCK MARKET (U.S.)
|
|
|
$
|
100.00
|
|
|
|
$
|
71.97
|
|
|
|
$
|
107.18
|
|
|
|
$
|
117.07
|
|
|
|
$
|
120.50
|
|
|
|
$
|
137.02
|
|
NASDAQ
PHARMACEUTICAL
|
|
|
$
|
100.00
|
|
|
|
$
|
64.40
|
|
|
|
$
|
92.31
|
|
|
|
$
|
100.78
|
|
|
|
$
|
113.36
|
|
|
|
$
|
115.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders
There were approximately 207 holders of record of our common
stock as of February 28, 2007.
Dividends
Onyx has not paid cash dividends on its common stock and does
not plan to pay any cash dividends in the foreseeable future.
32
Securities
Authorized for Issuance Under Equity Compensation Plans as of
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of securities
|
|
|
|
securities to be
|
|
|
|
|
|
remaining available for
|
|
|
|
issued upon exercise
|
|
|
Weighted-average
|
|
|
future issuance under
|
|
|
|
of outstanding
|
|
|
exercise price of
|
|
|
equity compensation plans
|
|
|
|
options, warrants
|
|
|
outstanding options,
|
|
|
(excluding securities
|
|
Plan Category (1)
|
|
and rights
|
|
|
warrants and rights
|
|
|
reflected in column a)
|
|
|
|
Column a
|
|
|
Column b
|
|
|
Column c
|
|
|
Equity compensation plans approved
by security holders
|
|
|
5,334,477
|
|
|
$
|
22.05
|
|
|
|
1,825,782
|
(2)
|
|
|
|
(1) |
|
We have no equity compensation plans not approved by security
holders. |
|
(2) |
|
Of these securities, 91,004 shares remain available for
purchase under our Employee Stock Purchase Plan. |
Recent
Sales of Unregistered Securities
None.
Issuer
Purchases of Equity Securities
We did not repurchase any of our equity securities during the
fiscal year ended December 31, 2006.
33
|
|
Item 6.
|
Selected
Financial Data
|
This section presents our selected historical financial data.
You should read carefully the financial statements and the notes
thereto included in this report and Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
The Statement of Operations data for the years ended
December 31, 2006, 2005, and 2004 and the Balance Sheet
data as of December 31, 2006 and 2005 has been derived from
our audited financial statements included elsewhere in this
report. The Statement of Operations data for the years ended
December 31, 2003 and 2002 and the Balance Sheet data as of
December 31, 2004, 2003 and 2002 has been derived from our
audited financial statements that are not included in this
report. Historical results are not necessarily indicative of
future results. See the Notes to Financial Statements for an
explanation of the method used to determine the number of shares
used in computing basic and diluted net loss per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
250
|
|
|
$
|
1,000
|
|
|
$
|
500
|
|
|
$
|
|
|
|
$
|
2,715
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expense from unconsolidated
joint business
|
|
|
23,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,980
|
|
|
|
63,120
|
|
|
|
35,846
|
|
|
|
32,059
|
|
|
|
43,604
|
|
Selling, general and administrative
|
|
|
50,019
|
|
|
|
39,671
|
|
|
|
14,316
|
|
|
|
7,939
|
|
|
|
6,192
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
5,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(104,664
|
)
|
|
|
(101,791
|
)
|
|
|
(49,920
|
)
|
|
|
(45,528
|
)
|
|
|
(47,081
|
)
|
Interest and other income and
expense, net
|
|
|
11,983
|
|
|
|
6,617
|
|
|
|
3,164
|
|
|
|
559
|
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(92,681
|
)
|
|
$
|
(95,174
|
)
|
|
$
|
(46,756
|
)
|
|
$
|
(44,969
|
)
|
|
$
|
(45,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(2.20
|
)
|
|
$
|
(2.64
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
(1.73
|
)
|
|
$
|
(2.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share
|
|
|
42,170
|
|
|
|
36,039
|
|
|
|
34,342
|
|
|
|
25,953
|
|
|
|
20,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and
marketable securities
|
|
$
|
271,403
|
|
|
$
|
284,680
|
|
|
$
|
209,624
|
|
|
$
|
105,400
|
|
|
$
|
39,833
|
|
Total assets
|
|
|
286,246
|
|
|
|
294,665
|
|
|
|
215,546
|
|
|
|
109,138
|
|
|
|
46,241
|
|
Working capital
|
|
|
256,432
|
|
|
|
241,678
|
|
|
|
197,873
|
|
|
|
92,826
|
|
|
|
28,727
|
|
Advance from collaboration partner
|
|
|
40,000
|
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
5,000
|
|
Accumulated deficit
|
|
|
(438,491
|
)
|
|
|
(345,810
|
)
|
|
|
(250,636
|
)
|
|
|
(203,880
|
)
|
|
|
(158,911
|
)
|
Total stockholders equity
|
|
|
222,780
|
|
|
|
223,240
|
|
|
|
179,988
|
|
|
|
73,519
|
|
|
|
28,784
|
|
34
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties.
We use words such as may, will,
expect, anticipate,
estimate, intend, plan,
predict, potential, believe,
should and similar expressions to identify
forward-looking statements. These statements appearing
throughout our
10-K are
statements regarding our intent, belief, or current
expectations, primarily regarding our operations. You should not
place undue reliance on these forward-looking statements, which
apply only as of the date of this Annual Report on
Form 10-K.
Our actual results could differ materially from those
anticipated in these forward-looking statements for many
reasons, including those set forth under Business
Item 1A Risk Factors and elsewhere in this
Annual Report on
Form 10-K.
Overview
We are a biopharmaceutical company dedicated to developing
innovative therapies that target the molecular mechanisms that
cause cancer. With our collaborators, we are developing small
molecule drugs with the goal of changing the way cancer is
treatedtm.
A common feature of cancer cells is the excessive activation of
signaling pathways that cause abnormal cell proliferation. In
addition, tumors require oxygen and nutrients from newly formed
blood vessels to support their growth. The formation of these
new blood vessels is a process called angiogenesis. We are
applying our expertise to develop oral anticancer therapies
designed to prevent cancer cell proliferation and angiogenesis
by inhibiting proteins that signal or support tumor growth. By
exploiting the genetic differences between cancer cells and
normal cells, we aim to create novel anticancer agents that
minimize damage to healthy tissue.
Our product,
Nexavar®
(sorafenib) tablets, developed with our collaborator, Bayer
Pharmaceuticals Corporation, or Bayer, was approved by the
U.S. Food and Drug Administration, or FDA, in December 2005
for the treatment of individuals with advanced kidney cancer.
This approval marked the first newly approved drug for patients
with this disease in over a decade. In July 2006, Nexavar
received approval to treat patients in the European Union with
advanced kidney cancer who have failed prior interferon-alpha or
interleukin-2 based therapy or are considered unsuitable for
such therapy. Nexavar has received approvals in other
territories worldwide. Nexavar is a novel, orally available
multi-kinase inhibitor and is one of a new class of anticancer
treatments that target growth signaling.
On March 6, 2006, we and Bayer entered into a Co-Promotion
Agreement to co-promote Nexavar in the United States. This
agreement amends the original 1994 Collaboration Agreement and
supersedes the provisions of that agreement that relate to the
co-promotion of Nexavar in the United States. Outside of the
United States, the terms of the Collaboration Agreement continue
to govern. Under the terms of the Co-Promotion Agreement and
consistent with the Collaboration Agreement, we will share
equally in the profits or losses of Nexavar, if any, in the
United States, subject only to our continued co-funding of the
development costs of Nexavar worldwide, excluding Japan. Please
refer to Note 2 of the Notes to Financial Statements
included in Item 8 of this
Form 10-K
for further information.
We have not been profitable since inception and expect to incur
substantial and potentially increasing losses for the
foreseeable future, due to expenses associated with the
continuing development and commercialization of Nexavar. Since
inception, we have relied on public and private financings,
combined with milestone payments from our collaborators to fund
our operations. In January 2006, we received the fourth and
final $10.0 million milestone advance from Bayer as a
result of the FDA approval of Nexavar. However, we expect that
our losses will continue and will fluctuate from quarter to
quarter and that such fluctuations may be substantial. As of
December 31, 2006, our accumulated deficit was
approximately $438.5 million.
Our business is subject to significant risks, including the
risks inherent in our development efforts, the results of the
Nexavar clinical trials, the marketing of Nexavar as a treatment
for patients with advanced kidney cancer, our dependence on
collaborative parties, uncertainties associated with obtaining
and enforcing patents, the lengthy and expensive regulatory
approval process and competition from other products. For a
discussion of these and some of the other risks and
uncertainties affecting our business, see Item 1A
Risk Factors of this Annual Report on
Form 10-K.
35
Critical
Accounting Policies and the Use of Estimates
The accompanying discussion and analysis of our financial
condition and results of operations are based upon our financial
statements and the related disclosures, which have been prepared
in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements
requires us to make estimates, assumptions and judgments that
affect the reported amounts in our financial statements and
accompanying notes. These estimates form the basis for making
judgments about the carrying values of assets and liabilities.
We consider certain accounting policies related to net expense
from unconsolidated joint business, stock-based compensation and
research and development to be critical policies. We base our
estimates and judgments on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances. Significant estimates used in 2006 included
assumptions used in the determination of stock-based
compensation related to stock options granted. Actual results
could differ materially from these estimates.
We believe the following policies to be the most critical to an
understanding of our financial condition and results of
operations, because they require us to make estimates,
assumptions and judgments about matters that are inherently
uncertain.
Net Expense from Unconsolidated Joint
Business: Net expense from unconsolidated
joint business relates to our collaboration with Bayer for the
development and marketing of Nexavar. It consists of our share
of the net collaboration loss generated from our Collaboration
Agreement with Bayer net of the reimbursement of our development
and marketing expenses related to Nexavar. Under the
collaboration, Bayer recognizes all revenue from the sale of
Nexavar. The net expense from the unconsolidated joint business
is, in effect, the net amount due to Bayer to balance the
companies economics under the Nexavar collaboration. Under
the terms of the collaboration, the companies share all research
and development, marketing, and
non-U.S. sales
expenses, excluding Japan. Some of the revenue and expenses
recorded to derive the net expense from unconsolidated joint
business during the period presented are estimates of both
parties and are subject to further adjustment based on each
partys final review should actual results differ
materially from these estimates. If the Company underestimates
activity levels associated with the collaboration of Nexavar at
a given point in time, the Company could record significant
additional expenses in future periods.
Stock Based-Compensation: Effective
January 1, 2006, we adopted the Statement of Financial
Accounting Standards, or FAS, No. 123(R), Share-Based
Payment, (FAS 123(R)), which requires the
measurement and recognition of compensation expense for all
stock-based payments made to our employees and directors
including employee stock option awards and employee stock
purchases made under our Employee Stock Purchase Plan, or ESPP,
based on estimated fair value. We previously applied the
provisions of Accounting Principles Board Opinion, or APB,
No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
Interpretations and provided the required pro forma disclosures
under FAS 123, Accounting for Stock-Based
Compensation, or FAS 123.
We adopted FAS 123(R) using the modified prospective
transition method beginning January 1, 2006. Accordingly,
during the year ended December 31, 2006, we recorded
stock-based compensation expense for awards granted prior to but
not yet vested as of January 1, 2006 as if the fair value
method required for pro forma disclosure under FAS 123 were
in effect for expense recognition purposes adjusted for
estimated forfeitures. For these awards, the Company has
continued to recognize compensation expense using the
accelerated amortization method under FASB Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans. For
stock-based awards granted after January 1, 2006, we
recognized compensation expense based on the estimated grant
date fair value method required under FAS 123(R). The
compensation expense for these awards was recognized using a
straight-line amortization method. The net loss for the year
ended December 31, 2006 includes stock-based compensation
expense of $14.0 million, or $0.33 per share for the
adoption of FAS 123(R). As of December 31, 2006, the
total unrecorded stock-based compensation balance for unvested
shares, net of expected forfeitures, was $23.1 million,
which is expected to be amortized over a weighted-average period
of 23 months.
On November 10, 2005, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position
No. FAS 123(R)-3,
Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards. We have elected to adopt
the alternative transition method provided in the FASB Staff
Position for calculating the tax effects (if any) of stock-based
compensation expense pursuant to SFAS 123R. The alternative
transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool (APIC
pool)
36
related to the tax effects of employee stock-based compensation,
and to determine the subsequent impact to the APIC pool and the
consolidated statements of operations and cash flows of the tax
effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123R.
While fair value may be readily determinable for awards of
stock, market quotes are not available for long-term,
nontransferable stock options because these instruments are not
traded. We currently use the Black-Scholes option-pricing model
to estimate the fair value of stock options. Option valuation
models require the input of highly subjective assumptions,
including but not limited to stock price volatility and stock
option exercise behavior. We expect to continue to use the
Black-Scholes model for valuing our stock-based compensation
expense. However, our estimate of future stock-based
compensation expense will be affected by a number of items
including our stock price, the number of stock options our board
of directors may grant in future periods, as well as a number of
complex and subjective valuation adjustments and the related tax
effect. These valuation assumptions include, but are not limited
to, the volatility of our stock price, expected life and stock
option exercise behaviors. Actual results could differ
materially from these estimates.
Research and Development Expense: In
accordance with Financial Accounting Standards Board, or FASB,
Statement of Financial Accounting Standards, or FAS, No. 2,
Accounting for Research and Development Costs,
research and development costs are charged to expense when
incurred. The major components of research and development costs
include clinical manufacturing costs, clinical trial expenses,
consulting and other third-party costs, salaries and employee
benefits, stock-based compensation expense, supplies and
materials, and allocations of various overhead and occupancy
costs. Not all research and development costs are incurred by
us. A significant portion of our research and development
expenses, approximately 83 percent in 2005 and
93 percent in 2004, relates to our cost sharing arrangement
with Bayer and represents our share of the research and
development costs incurred by Bayer. Such amounts were recorded
based on invoices and other information we receive from Bayer.
When such invoices have not been received, we must estimate the
amounts owed to Bayer based on discussions with Bayer. In
addition, research and development costs incurred by us and
reimbursed by Bayer are recorded as a reduction to research and
development expense. In 2006, consistent with the terms of our
collaboration agreement, our share of Bayers Nexavar
product development expenses are included in Net Expense from
Unconsolidated Joint Business. Thus, in 2006, only our direct
research and development expenses are included in the research
and development line item.
In instances where we enter into agreements with third parties
for clinical trials and other consulting activities, costs are
expensed upon the earlier of when non-refundable amounts are due
or as services are performed. Amounts due under such
arrangements may be either fixed fee or fee for service, and may
include upfront payments, monthly payments, and payments upon
the completion of milestones or receipt of deliverables.
Our cost accruals for clinical trials are based on estimates of
the services received and efforts expended pursuant to contracts
with numerous clinical trial sites and clinical research
organizations. In the normal course of business we contract with
third parties to perform various clinical trial activities in
the on-going development of potential products. The financial
terms of these agreements are subject to negotiation and
variation from contract to contract and may result in uneven
payment flows. Payments under the contracts depend on factors
such as the achievement of certain events, the successful
enrollment of patients, and the completion of portions of the
clinical trial or similar conditions. The objective of our
accrual policy is to match the recording of expenses in our
financial statements to the actual services received and efforts
expended. As such, expense accruals related to clinical trials
are recognized based on our estimate of the degree of completion
of the event or events specified in the specific clinical study
or trial contract. We monitor service provider activities to the
extent possible; however, if we underestimate activity levels
associated with various studies at a given point in time, we
could record significant research and development expenses in
future periods.
Results
of Operations
Years
Ended December 31, 2006, 2005 and 2004
Revenue. Nexavar, our only marketed product,
was approved in the U.S. in December 2005. In accordance
with our collaboration agreement with Bayer, Bayer recognizes
all revenue from the sale of Nexavar. As such, for the year
ended December 31, 2006, we reported no revenue related to
Nexavar. For the year ended December 31,
37
2006, Nexavar net sales recorded by Bayer were
$165.0 million, primarily in the United States and the
European Union.
Total revenue was $250,000 in 2006, $1.0 million in 2005
and $500,000 in 2004. Total revenue in 2006 represents $100,000
recognized for selling the rights to certain viruses from our
now discontinued therapeutic virus program to Shanghai Sunway
Biotech Co. Ltd and $150,000 recognized for licensing rights to
certain cytopathic viruses for therapy and prophylaxis of
neoplasia to DNAtriX. Total revenue in 2005 represented a
payment from Shanghai Sunway Biotech Co. Ltd. in exchange for
the transfer to Shanghai Sunway of the intellectual property and
know-how related to ONYX-015. We have no ongoing performance
obligations under any of these agreements. Total revenue in 2004
of $500,000 represented a milestone payment from Warner-Lambert,
now a subsidiary of Pfizer Inc, when they initiated Phase 1
clinical testing advancing a lead candidate from our previous
cell cycle kinase discovery collaboration.
Net Expense from Unconsolidated Joint
Business. Nexavar is currently marketed and sold
in the United States, several countries in the European Union
and other countries worldwide for the treatment of advanced
kidney cancer. We co-promote Nexavar in the United States with
Bayer under a collaboration agreement. Under the terms of the
collaboration agreement, we share equally in the profits or
losses of Nexavar, if any, in the United States, subject only to
our continued co-funding of the development costs of Nexavar
outside of Japan and its continued promotion of Nexavar in the
United States. The collaboration was created through a
contractual arrangement, not through a joint venture or other
legal entity.
Bayer provides all product distribution and all marketing
support services for Nexavar in the United States, including
managed care, customer service, order entry and billing. Bayer
is compensated for distribution expenses based on a fixed
percent of gross sales of Nexavar in the United States. Bayer is
reimbursed for half of its expenses for marketing services
provided by Bayer for the sale of Nexavar in the United States.
We and Bayer share equally in any other
out-of-pocket
marketing expenses (other than expenses for sales force and
medical science liaisons) that we and Bayer incur in connection
with the marketing and promotion of Nexavar in the United
States. Bayer manufactures all Nexavar sold in the United States
and is reimbursed at an agreed transfer price per unit for the
cost of goods sold.
In the United States, we contribute half of the overall number
of sales force personnel required to market and promote Nexavar
and half of the medical science liaisons to support Nexavar.
Onyx and Bayer each bears its own sales force and medical
science liaison expenses. These expenses are not included in the
calculation of the profits or losses of the collaboration.
Outside of the United States, except in Japan, Bayer incurs all
of the sales and marketing expenditures, and we share equally in
those expenditures. In addition, upon approval of Nexavar in
countries outside the United States, except Japan, we will
reimburse Bayer a fixed percentage of sales to reimburse them
for their marketing infrastructure. Research and development
expenditures on a worldwide basis, except in Japan, are equally
shared by both companies regardless of whether we or Bayer
incurs the expense. In Japan, Bayer is responsible for all
development and marketing costs and we will receive a royalty on
net sales of Nexavar.
Net expense from unconsolidated joint business consists of our
share of the pretax collaboration loss generated from our
collaboration with Bayer net of the reimbursement of our
marketing and research and development costs related to Nexavar.
Under the collaboration, Bayer recognizes all sales of Nexavar
worldwide. We record our share of the collaboration pre-tax loss
on a quarterly basis. Collaboration loss is derived by
calculating net sales of Nexavar to third-party customers and
deducting the cost of goods sold, distribution costs, marketing
costs (including without limitation, advertising and education
expenses, selling and promotion expenses, marketing personnel
expenses, and Bayer marketing services expenses), Phase 4
clinical trial costs, allocable overhead costs and research and
development costs. The net expense from the unconsolidated joint
business is, in effect, the net amount due to Bayer to balance
the companies economics under the Nexavar collaboration.
As noted above, United States sales force and medical science
liaison expenditures incurred by both companies are borne by
each company separately and are not included in the calculation.
Some of the revenue and expenses recorded to derive the net
expense from unconsolidated joint business during the period
presented are estimates of both parties and are subject to
further adjustment based on each partys final review
should actual results differ from these estimates. If
38
we underestimate activity levels associated with the
co-promotion and collaboration of Nexavar at a given point in
time, we could record significant additional expense in future
periods.
Net expense from unconsolidated joint business decreases with
increased Nexavar net revenue and as the differential between
Bayers and our shared Nexavar expenses declines. If
Nexavar net revenue is greater than the differential between
Bayers and our shared Nexavar expenses, we will report a
net profit from unconsolidated joint business. Conversely, if
Nexavar net revenue declines or if the differential between
Bayers and our shared Nexavar expenses increases, net
expense from unconsolidated joint business will increase. Due to
the uncertainty in Bayers revenue from the sale of Nexavar
and the relative expenses of Bayers and our shared Nexavar
expenses, it is not possible to predict our net expense from
unconsolidated joint business for future periods. We expect
Bayers and our shared Nexavar research and development
expenses to increase in future periods as the companies develop
Nexavar for indications beyond advanced kidney cancer. We also
expect Bayers and our shared cost of goods sold,
distribution, selling and general administrative expense to
increase as Bayer continues to expand Nexavar marketing and
sales activities outside of the United States.
For the year ended December 31, 2006, net expense from
unconsolidated joint business was $23.9 million calculated
as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Product revenue, net
|
|
$
|
164,994
|
|
Combined cost of goods sold,
distribution, selling, general and administrative
|
|
|
123,004
|
|
Combined research and development
|
|
|
161,180
|
|
|
|
|
|
|
Combined collaboration loss
|
|
$
|
(119,190
|
)
|
|
|
|
|
|
Onyxs share of collaboration
loss
|
|
$
|
(59,595
|
)
|
Reimbursement of Onyxs
direct development and marketing expenses
|
|
|
35,680
|
|
|
|
|
|
|
Onyxs net expense from
unconsolidated joint business
|
|
$
|
(23,915
|
)
|
|
|
|
|
|
Research and Development Expenses. Research
and development expenses were $31.0 million, including
stock-based compensation expense of $2.5 million in 2006, a
net decrease of $32.1 million, or 51 percent, from
$63.1 million in 2005. We did not expense employee
stock-based compensation prior to our adoption of
FAS 123(R) on January 1, 2006. The decrease was
primarily due to the change in presentation of our Statement of
Operations to reflect the co-promotion agreement by including
the net expense from unconsolidated joint business line item.
Our share of Bayers Nexavar product development expenses
is included in net expense from unconsolidated joint business
for the year ended December 31, 2006. In years prior to
2006, Bayers Nexavar product development expense was
included in research and development expense. In the new
presentation beginning in 2006, only our direct research and
development expenses are included in the research and
development line item. Onyx and Bayer are continuing to expand
their investment in the development of Nexavar for additional
indications including Phase 3 trials for Nexavar in
melanoma, liver cancer and lung cancer.
Research and development expenses were $63.1 million in
2005, a net increase of $27.3 million, or 76 percent,
from 2004. In 2005, the increase in research and development
expenses were primarily driven by a $28.7 million increase
in Onyxs share of co-development costs for the Nexavar
program, principally for the clinical trial program which
included the expanded access program in the Phase 3 kidney
cancer trial initiated in the second quarter of 2005. In
addition, 2005 Nexavar development costs reflect the ongoing
pivotal Phase 3 kidney cancer trial, a Phase 3 trial
in liver cancer initiated in the first quarter of 2005 and a
Phase 3 trial in metastatic melanoma initiated in May 2005,
as well as several Phase 1b and 2 clinical trials. This
increase was partially offset by a decrease of $1.4 million
from the therapeutic virus program, which was terminated in 2003.
The major components of research and development costs include
clinical manufacturing costs, clinical trial expenses,
consulting and other third-party costs, salaries and employee
benefits, stock-based compensation expense, supplies and
materials, and allocations of various overhead and occupancy
costs. The scope and magnitude of future research and
development expenses are difficult to predict at this time given
the number of studies that will
39
need to be conducted for any of our potential product
candidates. In general, biopharmaceutical development involves a
series of steps beginning with identification of a potential
target and includes proof of concept in animals and
Phase 1, 2 and 3 clinical studies in humans, each of which
is typically more expensive than the previous step.
The following table summarizes our principal product development
initiatives, including the related stages of development for
each product in development and the research and development
expenses recognized in connection with each product. The
information in the column labeled Phase of Development -
Estimated Completion is only our estimate of the timing of
completion of the current in-process development phases based on
current information. The actual timing of completion of those
phases could differ materially from the estimates provided in
the table. We cannot reasonably estimate the timing of
completion of each clinical phase of our development programs
due to the risks and uncertainties associated with developing
pharmaceutical product candidates. The clinical development
portion of these programs may span as many as seven to ten
years, and estimation of completion dates or costs to complete
would be highly speculative and subjective due to the numerous
risks and uncertainties associated with developing
biopharmaceutical products, including significant and changing
government regulation, the uncertainty of future preclinical and
clinical study results and uncertainties associated with process
development and manufacturing as well as marketing. For a
discussion of the risks and uncertainties associated with the
timing and cost of completing a product development phase, see
Item 1A Risk Factors of this Annual Report on
Form 10-K.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
|
|
|
|
|
|
|
|
|
|
Development Expenses
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
Collabo-
|
|
Phase of Development
|
|
December 31,
|
|
Product
|
|
Description
|
|
rator
|
|
Estimated Completion
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Nexavar (sorafenib)
Tablets (1)
|
|
Small molecule inhibitor of tumor
cell proliferation and angiogenesis, targeting RAF, VEGFR-2,
PDGFR- ß,
KIT, FLT-3, and RET.
|
|
Bayer
|
|
Phase 1 2004 Phase 2 Unknown Phase 3 Unknown
|
|
$
|
84.2
|
(2)
|
|
$
|
62.1
|
|
|
$
|
33.4
|
|
Therapeutic Virus
Programs (3)
|
|
Programs discontinued during the
second quarter of 2003.
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Research and Development
Expenses
|
|
$
|
84.2
|
|
|
$
|
63.1
|
|
|
$
|
35.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Aggregate research and development
costs-to-date
through December 31, 2006 incurred by Onyx since fiscal
year 2000 for the Nexavar project is $219.0 million. |
|
(2) |
|
Costs reflected in this table represent our share of
Bayers product development costs included in net expenses
from unconsolidated joint business and our direct research and
development costs. |
|
(3) |
|
Costs in 2005 were comprised of: |
a. stock-based compensation for consultants;
b. consulting fees for consultants retained in connection
with the orderly wind-down of the virus programs and
preservation of related assets for potential future divestiture
or commercialization;
c. outside services related to stability testing and
storage of virus product related to the programs.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses were $50.0 million, including stock-based
compensation expense of $11.5 million, in 2006, a net
increase of $10.3 million, or 26 percent, from
$39.7 million in 2005. We did not expense employee
stock-based compensation prior to our adoption of
FAS 123(R) on January 1, 2006. In addition to the
stock-based compensation expense, the increase was primarily due
to the establishment of our U.S. Nexavar sales force in the
second half of 2005 and our marketing expenses relating to the
Nexavar launch. Offsetting this increase is a change in
accounting presentation of our Statement of Operations to
reflect the co-promotion agreement by including the net expense
from unconsolidated joint business line item. Our share of
Bayers Nexavar-related marketing expenses is included in
the net expense
40
from unconsolidated joint business line item. In years prior to
2006, our share of Nexavar-related marketing expenses was
included in the Companys selling, general and
administrative line item. Under the new presentation only our
direct selling, general and administrative expenses are included
in the selling, general and administrative expenses line item.
Our direct selling, general and administrative expenses
increased in 2006 due to the adoption of FAS 123(R), as
well as the payroll-related costs of our sales force and medical
science liaisons who were hired in the second half of 2005.
Additionally, general and administrative costs, excluding
stock-based compensation, increased $3.2 million primarily
due to employee-related costs as a result of headcount increases
to support commercialization of Nexavar.
Selling, general and administrative expenses were
$39.7 million in 2005, an increase of $25.4 million,
or 177 percent, from 2004. The increase primarily related
to increased selling and marketing costs of $24.1 million
due to employee related costs for hiring our sales and marketing
personnel as we established our commercial infrastructure, as
well as third-party costs incurred by Onyx and Bayer to support
our product launch of Nexavar in the U.S. Additionally,
general and administrative costs increased $1.3 million
primarily due to employee-related costs as a result of headcount
increases to support our planned commercialization of Nexavar.
Selling, general and administrative expenses consist primarily
of salaries, employee benefits, consulting, other third party
costs, corporate functional expenses and allocations for
overhead and occupancy costs.
Restructuring. In 2004, we recorded a
restructuring charge of $258,000 due to a change in estimate
related to the discontinued use and inability to sublet a
portion of our leased facility in Richmond, California. As of
December 31, 2005, all restructuring costs had been fully
paid.
Interest Income, Net. We had net interest
income of $12.0 million in 2006, an increase of
$5.7 million from 2005, primarily due to higher interest
rates in 2006 compared to 2005. In addition, our average cash
balances in 2006 benefited from our October and November 2006
sale of equity securities from which we received approximately
$74.3 million in net cash proceeds. We had net interest
income of $6.2 million in 2005, an increase of
$3.1 million from 2004, primarily due to higher interest
rates in 2005 as compared to 2004. In addition, our average cash
balances in 2005 benefited from our November 2005 sale of equity
securities from which we received approximately
$136.2 million in net cash proceeds. Interest expense was
immaterial for the periods presented.
Other Income. In April 2005, we redeemed our
investment in Syrrx, Inc. as a result of the acquisition of
Syrrx by Takeda Pharmaceutical Company Limited. We received cash
of $750,000 as a result of the redemption, which resulted in a
gain of $375,000. This amount was recorded as Other
income. No similar items were recorded in other fiscal
years presented.
Income
Taxes
Since our inception, we have incurred operating losses and
accordingly have not recorded a provision for income taxes for
any of the periods presented and since inception. As of
December 31, 2006, our net operating loss carryforwards for
federal income tax purposes were approximately
$385.9 million and for state income tax purposes were
approximately $321.2 million. We also had federal research
and development tax credit carryforwards of approximately
$22.3 million and state research and development tax credit
carryforwards of approximately $10.5 million. Realization
of these deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. If not utilized, the net operating
loss and credit carryforwards will expire at various dates
beginning in 2007. Utilization of net operating losses and
credits may be subject to substantial annual limitations due to
ownership change limitations provided by the Internal Revenue
Code of 1986. The annual limitation may result in the expiration
of our net operating loss and credit carryforwards before they
can be used. Please read Note 13 of the Notes to Financial
Statements included in Item 8 of this
Form 10-K
for further information.
Related
Party Transactions
The Company has a loan receivable from a non-officer employee of
which approximately $228,000 is outstanding at December 31,
2006. This loan bears interest at 4.82% per annum and is
due in three annual payments, beginning in 2007.
41
We had a loan with a former employee of which approximately
$275,000 was outstanding at December 31, 2003. This loan
bore interest at 5.98% per annum; however, we had forgiven
$82,000 of interest over the term of the loan through August
2004. This loan was repaid in August 2004 in accordance with the
terms of the loan agreement.
Liquidity
and Capital Resources
Since our inception, we have incurred losses, and we have relied
primarily on public and private financing, combined with
milestone payments we have received from our collaborators to
fund our operations
At December 31, 2006, we had cash, cash equivalents, and
short and long-term marketable securities of
$271.4 million, compared to $284.7 million at
December 31, 2005 and $209.6 million at
December 31, 2004. The decrease in cash, cash equivalents,
and marketable securities in 2006 of $13.3 million is
primarily due to net cash used in operating activities of
$100.2 million. This use of cash was partially offset by
net cash proceeds of $74.3 from our October and November sales
of equity securities under our committed equity financing,
$2.5 million from stock option exercises and the
$10.0 million milestone-based advance received from Bayer
in January 2006. This $10.0 million payment, in addition to
$30.0 million of milestones received in previous years,
will be repayable to Bayer from a portion of any of Onyxs
future profits and royalties. If Onyx does not receive any
profits or royalties on any products, Onyx will not have to
repay Bayer any creditable milestone-based payments.
The increase in cash, cash equivalents, and marketable
securities in 2005 of $75.1 million was attributable to our
public offering completed in November 2005, which raised
aggregate net cash proceeds of $136.2 million, as well as
$1.4 million received from the exercise of stock options
and warrants and $750,000 received from the redemption of our
investment in Syrxx. These sources of cash were partially offset
by net cash used in operating activities of $72.6 million
and capital expenditures of $624,000.
Our cash used in operations was $100.2 million in 2006,
$72.6 million in 2005 and $46.9 million in 2004. In
2006, the cash used primarily related to the net loss and
payments of the 2005 year-end and 2006 first, second and
third quarter payables to Bayer, our collaboration partner. In
2005, the cash was used primarily for co-funding clinical
development programs for Nexavar, establishing sales and
marketing infrastructure at Onyx and Bayer to prepare for the
commercial launch of Nexavar in the U.S., and for third-party
pre-commercial marketing activities. In 2004, the cash was used
primarily for co-funding the clinical development program with
Bayer for Nexavar. Expenditures for capital equipment amounted
to $619,000 in 2006, $624,000 in 2005 and $1.6 million in
2004. Capital expenditures in 2006 and 2005 were primarily for
equipment to accommodate our employee growth. Capital
expenditures in 2004 were primarily for upgrades to our
information technology equipment and leasehold improvements and
furniture related to our move in December 2004 into our new
corporate headquarters. We currently expect to make expenditures
for capital equipment and leasehold improvements of up to
$2.7 million in 2007 primarily for leasehold improvements,
furniture and equipment and information technology software.
In September 2006, we secured a commitment for up to
$150 million in a common stock purchase agreement with
Azimuth Opportunity Ltd. or Azimuth. During the two-year term of
the commitment, Onyx may sell at its discretion registered
shares of its common stock to Azimuth at a discount to the
market price ranging from 3.30% to 5.05%. Onyx will determine,
at its sole discretion, the timing and amount of any sales of
stock, subject to certain conditions. In October and November
2006, Azimuth purchased an aggregate of 4,326,098 shares of
our common stock under the purchase agreement for an aggregate
purchase price of $75.0 million. We received
$74.4 million in net proceeds from the sale of these shares
after deducting our offering expenses.
We believe that our existing capital resources and interest
thereon will be sufficient to fund our current and planned
operations into 2009. However, if we change our development
plans, we may need additional funds sooner than we expect. In
addition, we anticipate that our co-development costs for the
Nexavar program may increase over the next several years as we
continue our share of funding the clinical development program
and prepare for the potential product launches throughout the
world. While these costs are unknown at the current time, we may
need to raise additional capital to continue the co-funding of
the program in future periods through and beyond 2009. We intend
to seek any required additional funding through collaborations,
public and private equity or debt financings, capital lease
transactions or other available financing sources. Additional
financing may not be available on acceptable terms, if at all.
If additional funds are raised by issuing equity securities,
substantial dilution to existing stockholders may result. If
adequate funds are not available, we may be required to delay,
reduce the scope of or
42
eliminate one or more of our development programs or to obtain
funds through collaborations with others that are on unfavorable
terms or that may require us to relinquish rights to certain of
our technologies, product candidates or products that we would
otherwise seek to develop on our own.
Contractual
Obligations and Commitments
Our contractual obligations for the next five years and
thereafter are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
Contractual Obligations(1)
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating leases, net of sublease
income
|
|
$
|
6,520
|
|
|
$
|
1,036
|
|
|
$
|
3,130
|
|
|
$
|
2,092
|
|
|
$
|
262
|
|
|
|
(1) |
This table does not include any payments under research and
development collaborations, as the amount and timing of such
payments are not known. This table also does not include the
obligation to repay the $40.0 million creditable
milestone-based payments that we received from Bayer as of
December 31, 2006 because the repayment of this amount is
contingent upon Onyx generating profits or royalties on any
products. Whether Onyx will ever generate any profits or
royalties is not known at this time.
|
In 2006, we amended our existing operating lease to occupy
14,000 square feet of office space in addition to the
23,000 square feet already occupied in Emeryville,
California, which serves as our corporate headquarters. The
lease expires on March 31, 2013. When we moved into this
new facility in December 2004, we vacated our 50,000 square
foot facility in Richmond, California. The lease for this
facility expired in April 2005, and we did not renew this lease.
We also have a lease for 9,000 square feet of space in a
secondary facility in Richmond, California which we are
currently subleasing through September 2010.
Recently
Issued Accounting Standards
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the
financial statements as more-likely-than-not to be
sustained by the taxing authority and provides guidance on the
derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for
income tax uncertainties in interim periods and increases the
level of disclosures associated with any recorded income tax
uncertainties. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The differences between
the amounts recognized in the statements of financial position
prior to the adoption of FIN 48 and the amounts reported
after adoption will be accounted for as a cumulative-effect
adjustment recorded to the beginning balance of retained
earnings. We are currently evaluating the impact of FIN 48
on our financial statements.
43
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Risk
The primary objective of our investment activities is to
preserve principal while at the same time maximize the income we
receive from our investments without significantly increasing
risk. Our exposure to market rate risk for changes in interest
rates relates primarily to our investment portfolio. This means
that a change in prevailing interest rates may cause the
principal amount of the investments to fluctuate. By policy, we
minimize risk by placing our investments with high quality debt
security issuers, limit the amount of credit exposure to any one
issuer, limit duration by restricting the term, and hold
investments to maturity except under rare circumstances. We
maintain our portfolio of cash equivalents and marketable
securities in a variety of securities, including commercial
paper, money market funds, and investment grade government and
non-government debt securities. Through our money managers, we
maintain risk management control systems to monitor interest
rate risk. The risk management control systems use analytical
techniques, including sensitivity analysis. If market interest
rates were to increase by 100 basis points, or 1%, as of
December 31, 2006, the fair value of our portfolio would
decline by approximately $716,000.
The table below presents the amounts and related weighted
interest rates of our cash equivalents and marketable securities
at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
Interest
|
|
|
|
|
|
Fair Value
|
|
|
Interest
|
|
|
|
Maturity
|
|
|
($ in millions)
|
|
|
Rate
|
|
|
Maturity
|
|
|
($ in millions)
|
|
|
Rate
|
|
|
Cash equivalents, fixed rate
|
|
|
0 2 months
|
|
|
$
|
94.1
|
|
|
|
5.34
|
%
|
|
|
0 2 months
|
|
|
$
|
45.4
|
|
|
|
3.97
|
%
|
Marketable securities, fixed rate
|
|
|
0 13 months
|
|
|
$
|
177.0
|
|
|
|
4.91
|
%
|
|
|
0 23 months
|
|
|
$
|
238.6
|
|
|
|
4.66
|
%
|
We did not hold any derivative instruments as of
December 31, 2006, and we have not held derivative
instruments in the past. However, our investment policy does
allow us to use derivative financial instruments for the
purposes of hedging foreign currency denominated obligations.
Our cash flows are denominated in U.S. dollars.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our Financial Statements and notes thereto appear on
pages 52 to 75 of this Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures: The Companys chief executive
officer and principal financial officer reviewed and evaluated
the Companys disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended). Based on
that evaluation, the Companys chief executive officer and
principal financial officer concluded that the Companys
disclosure controls and procedures were effective as of
December 31, 2006 to ensure the information required to be
disclosed by the Company in this Annual Report on
Form 10-K
is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange
Commissions rules and forms.
Managements Report on Internal Control over Financial
Reporting: The Companys management is
responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Under
the supervision and with the participation of the Companys
management, including the chief executive officer and principal
financial officer, the Company conducted an evaluation of the
effectiveness of internal control over financial reporting as of
December 31, 2006. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. The
44
Companys management has concluded that, as of
December 31, 2006, the Companys internal control over
financial reporting is effective based on these criteria.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included elsewhere herein.
Changes in Internal Control over Financial
Reporting: There were no changes in the
Companys internal control over financial reporting during
the quarter ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect the
Companys internal control over financial reporting.
Inherent Limitations on Effectiveness of
Controls: Internal control over financial
reporting may not prevent or detect all errors and all fraud.
Also, projections of any evaluation of effectiveness of internal
control to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Onyx Pharmaceuticals, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that Onyx Pharmaceuticals, Inc.
maintained effective internal control over financial reporting
as of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Onyx Pharmaceuticals, Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Onyx
Pharmaceuticals, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Onyx Pharmaceuticals, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
balance sheets of Onyx Pharmaceuticals, Inc. as of
December 31, 2006 and 2005, and the related statements of
operations, stockholders equity and cash flows for each of
the three years in the period ended December 31, 2006 of
Onyx Pharmaceuticals, Inc. and our report dated
February 28, 2007 expressed an unqualified opinion thereon.
Palo Alto, California
February 28, 2007
46
|
|
Item 9B.
|
Other
information
|
On November 3, 2006, we entered into a First Amendment to
Sublease, dated August 5, 2004, with Oracle USA, Inc.
(successor in interest to Siebel Systems, Inc.), with respect to
our office space located at 2100 Powell Street, Emeryville,
California. The amendment increased the leased space from
approximately 23,000 square feet to approximately 37,000 square
feet and extended the lease by approximately three years. Rent
for the additional space will be $33,722.80 per month for the
first year and will increase annually thereafter by a
predetermined amount until the new term of the sublease expires
on March 31, 2013.
PART III.
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this item concerning our directors
and executive officers is incorporated by reference from our
2007 Definitive Proxy Statement filed not later than
120 days following the close of the fiscal year ended
December 31, 2006.
|
|
Item 11.
|
Executive
Compensation
|
The information required under this item is hereby incorporated
by reference from our 2007 Definitive Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required under this item is hereby incorporated
by reference from our 2007 Definitive Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required under this item is hereby incorporated
by reference from our 2007 Definitive Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required under this item is hereby incorporated
by reference from our 2007 Definitive Proxy Statement.
Consistent with Section 10A (i) (2) of the
Securities Exchange Act of 1934, as added by Section 202 of
the Sarbanes-Oxley Act of 2002, we are responsible for listing
the non-audit services approved by our Audit Committee to be
performed by Ernst & Young LLP, our external auditor.
Non-audit services are defined as services other than those
provided in connection with an audit or a review of our
financial statements. The Audit Committee has approved
Ernst & Young LLP for non-audit services related to the
preparation of federal and state income tax returns, and tax
advice in preparing for and in connection with such filings.
PART IV.
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) (1) Index to Financial Statements
The Financial Statements required by this item are submitted in
a separate section beginning on page 52 of this Report.
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
47
Statement of Stockholders Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules
Financial statement schedules have been omitted because the
information required to be set forth therein is not applicable.
(3) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1(1)
|
|
Restated Certificate of
Incorporation of the Company.
|
|
3
|
.2(1)
|
|
Bylaws of the Company.
|
|
3
|
.3(3)
|
|
Certificate of Amendment to
Amended and Restated Certificate of Incorporation.
|
|
3
|
.4(18)
|
|
Certificate of Amendment to
Amended and Restated Certificate of Incorporation.
|
|
4
|
.1(1)
|
|
Reference is made to
Exhibits 3.1, 3.2, 3.3 and 3.4.
|
|
4
|
.2(1)
|
|
Specimen Stock Certificate.
|
|
10
|
.1(15)*
|
|
Collaboration Agreement between
Bayer Corporation (formerly Miles, Inc.) and the Company dated
April 22, 1994.
|
|
10
|
.1(i)(15)*
|
|
Amendment to Collaboration
Agreement between Bayer Corporation and the Company dated
April 24, 1996.
|
|
10
|
.1(ii)(15)*
|
|
Amendment to Collaboration
Agreement between Bayer Corporation and the Company dated
February 1, 1999.
|
|
10
|
.2(8)*
|
|
Amended and restated Research,
Development and Marketing Collaboration Agreement dated
May 2, 1995 between the Company and
Warner-Lambert
Company.
|
|
10
|
.2(i)(8)*
|
|
Research, Development and
Marketing Collaboration Agreement dated July 31, 1997
between the Company and
Warner-Lambert
Company.
|
|
10
|
.2(ii)(8)*
|
|
Amendment to the Amended and
Restated Research, Development and Marketing Collaboration
Agreement, dated December 15, 1997, between the Company and
Warner-Lambert
Company.
|
|
10
|
.2(iii)(8)*
|
|
Second Amendment to the Amended
and Restated Research, Development and Marketing Agreement
between
Warner-Lambert
and the Company dated May 2, 1995.
|
|
10
|
.2(iv)(8)*
|
|
Second Amendment to Research,
Development and Marketing Collaboration Agreement between
Warner-Lambert
and the Company dated July 31, 1997.
|
|
10
|
.2(v)(23)*
|
|
Amendment #3 to the Research,
Development and Marketing Collaboration Agreement between the
Company and
Warner-Lambert
dated August 6, 2001.
|
|
10
|
.2(vi)(4)*
|
|
Amendment #3 to the Amended
and Restated Research, Development and Marketing Collaboration
Agreement between the Company and Warner-Lambert dated
August 6, 2001.
|
|
10
|
.3(5)*
|
|
Technology Transfer Agreement
dated April 24, 1992 between Chiron Corporation and the
Company, as amended in the Chiron Onyx HPV Addendum dated
December 2, 1992, in the Amendment dated February 1,
1994, in the Letter Agreement dated May 20, 1994 and in the
Letter Agreement dated March 29, 1996.
|
|
10
|
.4(1)+
|
|
Letter Agreement between
Dr. Gregory Giotta and the Company dated May 26, 1995.
|
|
10
|
.5(1)+
|
|
1996 Equity Incentive Plan.
|
|
10
|
.6(1)+
|
|
1996 Non-Employee Directors
Stock Option Plan.
|
|
10
|
.7(1)+
|
|
1996 Employee Stock Purchase Plan.
|
|
10
|
.8(1)+
|
|
Form of Indemnity Agreement to be
signed by executive officers and directors of the Company.
|
|
10
|
.9(11)+
|
|
Form of Executive Change in
Control Severance Benefits Agreement.
|
|
10
|
.10(2)*
|
|
Collaboration Agreement between
the Company and
Warner-Lambert
Company dated October 13, 1999.
|
48
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.10(i)(4)*
|
|
Amendment #1 to the
Collaboration Agreement between the Company and
Warner-Lambert
dated August 6, 2001.
|
|
10
|
.10(ii)(7)*
|
|
Second Amendment to the
Collaboration Agreement between the Company and
Warner-Lambert
Company dated September 16, 2002.
|
|
10
|
.11(6)
|
|
Stock and Warrant Purchase
Agreement between the Company and the investors dated
May 6, 2002.
|
|
10
|
.12(9)
|
|
Sublease between the Company and
Siebel Systems dated August 5, 2004.
|
|
10
|
.12(i)
|
|
First Amendment to Sublease
between the Company and Oracle USA Inc., dated November 3,
2006.
|
|
10
|
.13(10)+
|
|
Onyx Pharmaceuticals, Inc. 2005
Equity Incentive Plan.
|
|
10
|
.13(i)+
|
|
Form of Stock Option Agreement
pursuant to the 2005 Equity Incentive Plan.
|
|
10
|
.13(ii)+
|
|
Form of Stock Option Agreement
pursuant to the 2005 Equity Incentive Plan and the
Non-Discretionary Grant Program for Directors.
|
|
10
|
.14(12)+
|
|
Separation Agreement between Onyx
Pharmaceuticals, Inc. and Leonard E. Post, Ph.D., dated
December 5, 2005.
|
|
10
|
.15(13)+
|
|
2006 Base Salaries and Bonuses for
Fiscal Year 2005 for Named Executive Officers.
|
|
10
|
.16(14)**
|
|
U.S. Co-Promotion Agreement
by and between the Company and Bayer Pharmaceuticals
Corporation, dated March 6, 2006.
|
|
10
|
.17(16)+
|
|
Letter Agreement between Gregory
W. Schafer and the Company, dated April 12, 2006.
|
|
10
|
.18(17)+
|
|
Separation Agreement between the
Company and Scott M. Freeman, M.D., dated May 3, 2006.
|
|
10
|
.19(19)+
|
|
Letter Agreement between Laura A.
Brege and the Company, dated May 19, 2006.
|
|
10
|
.20(20)+
|
|
Letter Agreement between Gregory
W. Schafer and the Company, dated July 7, 2006.
|
|
10
|
.21(20)+
|
|
Form of Stock Bonus Award Grant
Notice and Agreement between the Company and certain award
recipients.
|
|
10
|
.22(21) +
|
|
Separation Agreement between Fabio
M. Benedetti, M.D. and the Company, dated September 6,
2006.
|
|
10
|
.23(22)
|
|
Common Stock Purchase Agreement
between Onyx Pharmaceuticals, Inc. and Azimuth Opportunity Ltd.,
dated September 29, 2006.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney. Reference is
made to the signature page.
|
|
31
|
.1
|
|
Certification required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
32
|
.1
|
|
Certifications required by
Rule 13a-14(b)
or
Rule 15d-14(b)and
Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350).
|
|
|
|
* |
|
Confidential treatment has been received for portions of this
document. |
|
** |
|
Confidential treatment has been requested for portions of this
document. |
|
+ |
|
Indicates management contract or compensatory plan or
arrangement. |
|
(1) |
|
Filed as an exhibit to Onyxs Registration Statement on
Form SB-2
(No.
333-3176-LA). |
|
(2) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on March 1, 2000. |
|
(3) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2000. |
|
(4) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2001. |
|
(5) |
|
Filed as an exhibit to Onyxs Annual Report on
Form 10-K
for the year ended December 31, 2001. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |
|
(6) |
|
Filed as an exhibit to Onyxs Registration Statement on
Form S-3
filed on June 5, 2002
(No. 333-89850). |
|
(7) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2002. |
49
|
|
|
(8) |
|
Filed as an exhibit to Onyxs Annual Report on
Form 10-K
for the year ended December 31, 2002. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |
|
(9) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004. |
|
(10) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on June 7, 2005. |
|
(11) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005. |
|
(12) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on December 9, 2005. |
|
(13) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on March 7, 2006. |
|
(14) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006. |
|
(15) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |
|
(16) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on April 18, 2006. |
|
(17) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on May 12, 2006. |
|
(18) |
|
Filed as an exhibit to Onyxs Registration Statement on
Form S-3
(No.
333-134565)
filed on May 30, 2006. |
|
(19) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on June 12, 2006. |
|
(20) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on July 12, 2006. |
|
(21) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on September 7, 2006. |
|
(22) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on September 29, 2006. |
|
(23) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, as amended, the Registrant has duly
caused this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Emeryville, County of Alameda, State
of California, on the 5th day of March, 2007.
Onyx Pharmaceuticals, Inc.
|
|
|
|
By:
|
/s/ Hollings
C. Renton
|
Hollings C. Renton
Chairman of the Board,
President and Chief Executive Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Hollings C.
Renton and Gregory W. Schafer or either of them, his or her
attorney-in-fact,
each with the power of substitution, for him or her in any and
all capacities, to sign any amendments to this Annual Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said
attorneys-in-fact,
or his or her substitute or substitutes, may do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the
dates stated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Hollings
C. Renton
Hollings
C. Renton
|
|
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
|
|
March 5, 2007
|
|
|
|
|
|
/s/ Gregory
W. Schafer
Gregory
W. Schafer
|
|
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
|
|
March 5, 2007
|
|
|
|
|
|
/s/ Paul
Goddard
Paul
Goddard, Ph.D.
|
|
Director
|
|
March 5, 2007
|
|
|
|
|
|
/s/ Antonio
Grillo-López
Antonio
Grillo-López, M.D.
|
|
Director
|
|
March 5, 2007
|
|
|
|
|
|
/s/ Magnus
Lundberg
Magnus
Lundberg
|
|
Director
|
|
March 5, 2007
|
|
|
|
|
|
/s/ Corinne
Lyle
Corinne
Lyle
|
|
Director
|
|
March 5, 2007
|
|
|
|
|
|
/s/ Wendell
Wierenga
Wendell
Wierenga, Ph.D.
|
|
Director
|
|
March 5, 2007
|
|
|
|
|
|
/s/ Thomas
G. Wiggans
Thomas
G. Wiggans
|
|
Director
|
|
March 5, 2007
|
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Onyx Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Onyx
Pharmaceuticals, Inc. as of December 31, 2006 and 2005, and
the related statements of operations, stockholders equity
and cash flows for each of the three years in the period ended
December 31, 2006. These financial statements are the
responsibility of Onyx Pharmaceuticals management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Onyx Pharmaceuticals, Inc. at December 31, 2006 and
2005, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 2006
Onyx Pharmaceuticals, Inc. changed its method of accounting for
stock-based compensation in accordance with guidance provided in
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Onyx Pharmaceuticals, Inc.s internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 28, 2007 expressed an unqualified opinion
thereon.
Palo Alto, California
February 28, 2007
52
ONYX
PHARMACEUTICALS, INC.
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94,413
|
|
|
$
|
46,064
|
|
Short-term marketable securities
|
|
|
172,545
|
|
|
|
228,754
|
|
Receivable from collaboration
partner
|
|
|
9,281
|
|
|
|
4,350
|
|
Other current assets
|
|
|
3,659
|
|
|
|
3,935
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
279,898
|
|
|
|
283,103
|
|
Long-term marketable securities
|
|
|
4,445
|
|
|
|
9,862
|
|
Property and equipment, net
|
|
|
1,478
|
|
|
|
1,617
|
|
Other assets
|
|
|
425
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
286,246
|
|
|
$
|
294,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
297
|
|
|
$
|
581
|
|
Payable to collaboration partner
|
|
|
8,391
|
|
|
|
30,823
|
|
Accrued liabilities
|
|
|
3,194
|
|
|
|
1,343
|
|
Accrued clinical trials and
related expenses
|
|
|
8,263
|
|
|
|
5,567
|
|
Accrued compensation
|
|
|
3,321
|
|
|
|
3,111
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,466
|
|
|
|
41,425
|
|
Advance from collaboration partner
|
|
|
40,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value; 5,000,000 shares authorized; none issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value; 50,000,000 shares authorized; 45,913,370 and
41,210,734 shares issued and outstanding as of December 31,
2006 and 2005, respectively
|
|
|
46
|
|
|
|
41
|
|
Additional paid-in capital
|
|
|
661,402
|
|
|
|
569,800
|
|
Receivable from stock option
exercises
|
|
|
|
|
|
|
(24
|
)
|
Accumulated other comprehensive
loss
|
|
|
(177
|
)
|
|
|
(767
|
)
|
Accumulated deficit
|
|
|
(438,491
|
)
|
|
|
(345,810
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
222,780
|
|
|
|
223,240
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
286,246
|
|
|
$
|
294,665
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
53
ONYX
PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
( In thousands, except per share amounts )
|
|
|
License fee revenue
|
|
$
|
250
|
|
|
$
|
1,000
|
|
|
$
|
500
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expense from unconsolidated
joint business
|
|
|
23,915
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,980
|
|
|
|
63,120
|
|
|
|
35,846
|
|
Selling, general and administrative
|
|
|
50,019
|
|
|
|
39,671
|
|
|
|
14,316
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
104,914
|
|
|
|
102,791
|
|
|
|
50,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(104,664
|
)
|
|
|
(101,791
|
)
|
|
|
(49,920
|
)
|
Interest income, net
|
|
|
11,983
|
|
|
|
6,242
|
|
|
|
3,164
|
|
Other income
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(92,681
|
)
|
|
$
|
(95,174
|
)
|
|
$
|
(46,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(2.20
|
)
|
|
$
|
(2.64
|
)
|
|
$
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share
|
|
|
42,170
|
|
|
|
36,039
|
|
|
|
34,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
54
ONYX
PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Option
|
|
|
Income
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Exercises
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Balances at December 31, 2003
|
|
|
29,586,022
|
|
|
$
|
30
|
|
|
$
|
277,577
|
|
|
$
|
(235
|
)
|
|
$
|
27
|
|
|
$
|
(203,880
|
)
|
|
$
|
73,519
|
|
Exercise of stock options at prices
ranging from $1.07 to $38.08 per share
|
|
|
424,265
|
|
|
|
|
|
|
|
3,275
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
3,510
|
|
Issuance of common stock in
connection with follow-on public offering, net of issuance costs
of $9,837
|
|
|
4,685,693
|
|
|
|
5
|
|
|
|
148,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,306
|
|
Stock-based compensation, related
to non-employee stock option grants
|
|
|
|
|
|
|
|
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,353
|
|
Issuance of common stock pursuant
to employee stock purchase plan
|
|
|
16,852
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
Exercise of warrants
|
|
|
553,835
|
|
|
|
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(404
|
)
|
|
|
|
|
|
|
(404
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,756
|
)
|
|
|
(46,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
35,266,667
|
|
|
|
35
|
|
|
|
430,966
|
|
|
|
|
|
|
|
(377
|
)
|
|
|
(250,636
|
)
|
|
|
179,988
|
|
Exercise of stock options at prices
ranging from $4.00 to $27.34 per share
|
|
|
152,093
|
|
|
|
|
|
|
|
1,177
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
Issuance of common stock in
connection with follow-on public offering, net of issuance costs
of $8,953
|
|
|
5,750,000
|
|
|
|
6
|
|
|
|
136,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,234
|
|
Stock-based compensation, related
to non-employee stock option grants
|
|
|
|
|
|
|
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
906
|
|
Issuance of common stock pursuant
to employee stock purchase plan
|
|
|
12,424
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
Exercise of warrants
|
|
|
29,550
|
|
|
|
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
(390
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,174
|
)
|
|
|
(95,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
41,210,734
|
|
|
|
41
|
|
|
|
569,800
|
|
|
|
(24
|
)
|
|
|
(767
|
)
|
|
|
(345,810
|
)
|
|
|
223,240
|
|
Exercise of stock options at prices
ranging from $4.00 to $25.30 per share
|
|
|
347,287
|
|
|
|
|
|
|
|
2,520
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
2,544
|
|
Issuance of common stock in
connection with Azimuth common stock purchase agreement
|
|
|
4,326,098
|
|
|
|
5
|
|
|
|
74,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,358
|
|
Stock-based compensation, related
to stock option grants
|
|
|
|
|
|
|
|
|
|
|
13,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,957
|
|
Issuance of common stock pursuant
to employee stock purchase plan
|
|
|
22,584
|
|
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
Issuance of restricted stock awards
|
|
|
6,667
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590
|
|
|
|
|
|
|
|
590
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,681
|
)
|
|
|
(92,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
45,913,370
|
|
|
$
|
46
|
|
|
$
|
661,402
|
|
|
$
|
|
|
|
$
|
(177
|
)
|
|
$
|
(438,491
|
)
|
|
$
|
222,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
55
ONYX
PHARMACEUTICALS, INC.
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(92,681
|
)
|
|
$
|
(95,174
|
)
|
|
$
|
(46,756
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
758
|
|
|
|
630
|
|
|
|
194
|
|
Gain on investment
|
|
|
|
|
|
|
(375
|
)
|
|
|
|
|
Noncash restructuring charges
|
|
|
|
|
|
|
|
|
|
|
280
|
|
Gain on sale of fixed assets
|
|
|
|
|
|
|
(7
|
)
|
|
|
(18
|
)
|
Forgiveness of note receivable
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Stock-based compensation
|
|
|
14,406
|
|
|
|
906
|
|
|
|
1,353
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from collaboration
partner
|
|
|
(4,931
|
)
|
|
|
(3,321
|
)
|
|
|
(445
|
)
|
Prepaid expenses and other current
assets
|
|
|
352
|
|
|
|
(1,157
|
)
|
|
|
(1,139
|
)
|
Other assets
|
|
|
(190
|
)
|
|
|
34
|
|
|
|
(84
|
)
|
Accounts payable
|
|
|
(284
|
)
|
|
|
(457
|
)
|
|
|
739
|
|
Accrued liabilities
|
|
|
1,851
|
|
|
|
(552
|
)
|
|
|
1,121
|
|
Accrued clinical trials and
related expenses
|
|
|
2,696
|
|
|
|
5,567
|
|
|
|
(147
|
)
|
Payable to collaboration partner
|
|
|
(22,432
|
)
|
|
|
19,303
|
|
|
|
(2,112
|
)
|
Accrued compensation
|
|
|
210
|
|
|
|
2,201
|
|
|
|
188
|
|
Accrued restructuring
|
|
|
|
|
|
|
(195
|
)
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(100,245
|
)
|
|
|
(72,597
|
)
|
|
|
(46,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(360,272
|
)
|
|
|
(336,645
|
)
|
|
|
(201,304
|
)
|
Maturities of marketable securities
|
|
|
422,488
|
|
|
|
233,020
|
|
|
|
115,607
|
|
Proceeds from sale of Syrxx
Investment
|
|
|
|
|
|
|
750
|
|
|
|
|
|
Capital expenditures
|
|
|
(619
|
)
|
|
|
(624
|
)
|
|
|
(1,573
|
)
|
Notes receivable from related
parties
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
7
|
|
|
|
595
|
|
Proceeds from repayment of note
receivable
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
61,369
|
|
|
|
(103,492
|
)
|
|
|
(86,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance from collaboration partner
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
Net proceeds from issuances of
common stock
|
|
|
77,225
|
|
|
|
137,910
|
|
|
|
152,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
87,225
|
|
|
|
147,910
|
|
|
|
152,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
48,349
|
|
|
|
(28,179
|
)
|
|
|
18,931
|
|
Cash and cash equivalents at
beginning of period
|
|
|
46,064
|
|
|
|
74,243
|
|
|
|
55,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
94,413
|
|
|
$
|
46,064
|
|
|
$
|
74,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
56
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS
December 31,
2006
|
|
Note 1.
|
Summary
of Significant Accounting Policies
|
The
Company
Onyx Pharmaceuticals, Inc. (Onyx or the
Company) was incorporated in California in February 1992
and reincorporated in Delaware in May 1996. Onyx is a
biopharmaceutical company building an oncology business by
developing innovative therapies that target the molecular
mechanisms implicated in cancer. With the Companys
collaborators, the Company is developing small molecule drugs
with the goal of changing the way cancer is
treatedtm.
The Company is applying expertise to develop oral anticancer
therapies designed to prevent cancer cell proliferation and
angiogenesis by inhibiting proteins that signal or support tumor
growth. By exploiting the genetic differences between cancer
cells and normal cells, the Company aims to create novel
anticancer agents that minimize damage to healthy tissue.
The Companys lead product,
Nexavar®
(sorafenib) tablets, being developed in collaboration with Bayer
Pharmaceuticals Corporation (Bayer) was approved by the
U.S. Food and Drug Administration (FDA) in December 2005
for the treatment of individuals with advanced kidney cancer.
Nexavar is a novel, orally available multi-kinase inhibitor and
is one of a new class of anticancer treatments that target
growth signaling.
Revenue
Recognition
Revenue is recognized when the related costs are incurred and
the four basic criteria of revenue recognition are met:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on managements
judgments regarding the nature of the fee charged for products
or services delivered and the collectibility of those fees.
Contract Revenue from Collaborations. Revenue
from nonrefundable, up-front license or technology access
payments under license and collaboration agreements that are not
dependent on any future performance by the Company under the
arrangements is recognized when such amounts are received. If
the Company has continuing obligations to perform, such fees are
recognized over the period of continuing performance obligation.
Creditable milestone-based payments that Onyx receives from the
Companys collaboration with Bayer are not recorded as
revenue. These amounts are interest-free and will be repayable
to Bayer from a portion of any of Onyxs future profits and
royalties and are shown in the caption Advance from
collaboration partner on the Companys balance sheet.
Use of
Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Net
Expense from Unconsolidated Joint Business
Net expense from unconsolidated joint business relates to our
collaboration with Bayer for the development and marketing of
Nexavar. It consists of our share of the net collaboration loss
generated from our Collaboration Agreement with Bayer net of the
reimbursement of our development and marketing expenses related
to Nexavar. Under the collaboration, Bayer recognizes all
revenue from the sale of Nexavar. The net expense from the
unconsolidated joint business is, in effect, the net amount due
to Bayer to balance the companies economics under the
Nexavar collaboration. Under the terms of the collaboration, the
companies share all research and development, marketing, and
non-U.S. sales
expenses, excluding Japan. Some of the revenue and expenses
recorded to derive the net expense from unconsolidated joint
business during the period presented are estimates of both
parties and are
57
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
subject to further adjustment based on each partys final
review should actual results differ materially from these
estimates. If the Company underestimates activity levels
associated with the collaboration of Nexavar at a given point in
time, the Company could record significant additional expenses
in future periods.
Research
and Development
Research and development costs are charged to expense when
incurred. The major components of research and development costs
include clinical manufacturing costs, clinical trial expenses,
consulting and other third-party costs, salaries and employee
benefits, stock-based compensation expense, supplies and
materials, and allocations of various overhead and occupancy
costs. Not all research and development costs are incurred by
us. A significant portion of our research and development
expenses, approximately 83 percent in 2005 and
93 percent in 2004, relates to our cost sharing arrangement
with Bayer and represents our share of the research and
development costs incurred by Bayer. Such amounts are recorded
based on invoices and other information we receive from Bayer.
When such invoices have not been received, we must estimate the
amounts owed to Bayer based on discussions with Bayer. In
addition, research and development costs incurred by us and
reimbursed by Bayer are recorded as a reduction to research and
development expense. In 2006, consistent with the terms of our
collaboration agreement, our share of Bayers Nexavar
product development expenses are included in Net Expense from
Unconsolidated Joint Business. Thus, in 2006, only our direct
research and development expenses are included in the research
and development line item in the accompanying statement of
operations.
In instances where we enter into agreements with third parties
for clinical trials and other consulting activities, costs are
expensed upon the earlier of when non-refundable amounts are due
or as services are performed. Amounts due under such
arrangements may be either fixed fee or fee for service, and may
include upfront payments, monthly payments, and payments upon
the completion of milestones or receipt of deliverables.
The Companys cost accruals for clinical trials are based
on estimates of the services received and efforts expended
pursuant to contracts with numerous clinical trial sites and
clinical research organizations. In the normal course of
business we contract with third parties to perform various
clinical trial activities in the on-going development of
potential products. The financial terms of these agreements are
subject to negotiation and variation from contract to contract
and may result in uneven payment flows. Payments under the
contracts depend on factors such as the achievement of certain
events, the successful enrollment of patients, and the
completion of portions of the clinical trial or similar
conditions. The objective of our accrual policy is to match the
recording of expenses in our consolidated financial statements
to the actual services received and efforts expended. As such,
expense accruals related to clinical trials are recognized based
on our estimate of the degree of completion of the event or
events specified in the specific clinical study or trial
contract. We monitor service provider activities to the extent
possible; however, if we underestimated activity levels
associated with various studies at a given point in time, we
could record significant research and development expenses in
future periods.
Cash
Equivalents and Marketable Securities
The Company considers all highly liquid investments with a
maturity from the date of purchase of three months or less to be
cash equivalents. All other liquid investments are classified as
marketable securities. These instruments consist primarily of
corporate debt securities, corporate commercial paper, debt
securities of U.S. government agencies and money market
funds. Concentration of risk is limited by diversifying
investments among a variety of industries and issuers.
Management determines the appropriate classification of
securities at the time of purchase. At December 31, 2006
and 2005, all securities were designated as
available-for-sale.
Available-for-sale
securities are carried at fair value based on quoted market
prices, with any unrealized gains and losses reported in
accumulated other comprehensive income (loss). The amortized
cost of securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such
amortization is included in interest income, net. The cost of
securities sold or the amount reclassified out of accumulated
other comprehensive income into earnings is based on
58
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
the specific identification method. The estimated fair values
have been determined by the Company using available market
information. Realized gains and losses and declines in value
judged to be other than temporary are included in the statements
of operations. There were no realized gains or losses in each of
the years ended December 31, 2006, 2005 and 2004. Interest
and dividends on securities classified as
available-for-sale
are included in interest income, net.
Property
and Equipment
Property and equipment are stated on the basis of cost.
Depreciation is calculated using the straight-line method over
the estimated useful lives of the respective assets, generally
two to five years. Leasehold improvements are amortized over the
lesser of the lease term or the estimated useful lives of the
related assets, generally five to six years.
Impairment
of Long-Lived Assets
Impairment of long-lived assets is measured or assessed when
events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
the assets are written down to their estimated fair values.
Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell. There were no
write-downs in 2006 and 2005 and $40,000 in 2004. The write-down
in 2004 was related to property and equipment abandoned as a
result of the Companys facility move. See Note 5 for
additional discussion.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards, or FAS, No. 123(R),
Share-Based Payment,
(FAS 123(R)), which requires the
measurement and recognition of compensation expense for all
stock-based payments made to employees and directors including
employee stock option awards and employee stock purchases made
under the Employee Stock Purchase Plan, or ESPP, based on
estimated fair value. The Company previously applied the
provisions of Accounting Principles Board Opinion, or APB,
No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
Interpretations and provided the required pro forma disclosures
under FAS 123, Accounting for Stock-Based
Compensation, or FAS 123.
We adopted FAS 123(R) using the modified prospective
transition method beginning January 1, 2006. Accordingly,
during the year ended December 31, 2006, we recorded
stock-based compensation expense for awards granted prior to but
not yet vested as of January 1, 2006 as if the fair value
method required for pro forma disclosure under FAS 123 were
in effect for expense recognition purposes adjusted for
estimated forfeitures. For stock-based awards granted after
January 1, 2006, we recognized compensation expense based
on the estimated grant date fair value method required under
FAS 123(R). The compensation expense for these awards was
recognized using a straight-line amortization method. The net
loss for the year ended December 31, 2006 includes
stock-based compensation expense of $14.0 million, or
$0.33 per share for the adoption of FAS 123(R). As of
December 31, 2006, the total unrecorded stock-based
compensation balance for unvested shares, net of expected
forfeitures, was $23.1 million, which is expected to be
amortized over a weighted-average period of 23 months.
On November 10, 2005, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position
No. FAS 123(R)-3,
Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards. We have elected to adopt
the alternative transition method provided in the FASB Staff
Position for calculating the tax effects (if any) of stock-based
compensation expense pursuant to SFAS 123R. The alternative
transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool (APIC
pool) related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact to the
59
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
APIC pool and the consolidated statements of operations and cash
flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of SFAS 123R.
All stock option awards to non-employees are accounted for at
the fair value of the consideration received or the fair value
of the equity instrument issued, as calculated using the
Black-Scholes model, in accordance with FAS 123 and
Emerging Issues Task Force Consensus
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. The option arrangements are subject to
periodic remeasurement over their vesting terms. The Company
recorded compensation expense related to option grants to
non-employees of $365,000, $906,000 and $1.4 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
The pro forma information regarding net loss and loss per share
prepared in accordance with FAS 123, as amended, has been
determined as if the Company had accounted for its employee
stock options and employee stock purchase plan under the fair
value method prescribed by FAS 123 for the years ended
December 31, 2005 and 2004. The fair value of options was
estimated at the date of grant using the Black-Scholes
option-valuation model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
3.80
|
%
|
|
|
2.92
|
%
|
Expected life
|
|
|
3.8 years
|
|
|
|
3.7 years
|
|
Expected volatility
|
|
|
0.74
|
|
|
|
0.85
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
Weighted average fair value of
options at date of grant
|
|
$
|
13.55
|
|
|
$
|
22.93
|
|
For purposes of pro forma disclosures pursuant to FAS 123,
the estimated fair value of employee stock options is amortized
to expense over the options vesting period. The following
table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of
FAS 123 to stock-based employee compensation:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net loss as reported
|
|
$
|
(95,174
|
)
|
|
$
|
(46,756
|
)
|
Deduct: Total stock-based employee
compensation determined under the fair value based method for
all awards, net of related tax effects
|
|
|
(13,333
|
)
|
|
|
(6,071
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(108,507
|
)
|
|
$
|
(52,827
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share as reported
|
|
$
|
(2.64
|
)
|
|
$
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share pro forma
|
|
$
|
(3.01
|
)
|
|
$
|
(1.54
|
)
|
|
|
|
|
|
|
|
|
|
No options were granted at other than fair value for the years
ended December 31, 2005 and 2004.
Net
Loss Per Share
Basic and diluted net loss per share are presented in conformity
with FAS No. 128, Earnings Per Share.
Basic and diluted net loss per share have been computed using
the weighted-average number of shares of common stock
60
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
outstanding during each period. The following potentially
dilutive outstanding securities were not considered in the
computation of diluted net loss per share because such
securities would be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Stock options
|
|
|
5,335
|
|
|
|
3,806
|
|
|
|
2,296
|
|
Stock warrants
|
|
|
9
|
|
|
|
9
|
|
|
|
40
|
|
Restricted stock awards
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,377
|
|
|
|
3,815
|
|
|
|
2,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
Comprehensive loss is comprised of net loss and other
comprehensive loss. Other comprehensive loss includes certain
changes in stockholders equity that are excluded from net
loss. Other comprehensive loss for all periods presented is
comprised of unrealized holding gains and losses on the
Companys
available-for-sale
securities, which were reported separately in stockholders
equity.
Concentration
of Credit Risk and Significant Research and Development
Collaborators
Financial instruments that potentially subject Onyx to
concentration of credit risk consist principally of cash
equivalents and marketable securities. Onyx invests cash that is
not required for immediate operating needs principally in money
market funds and corporate securities.
Onyxs research and development collaborators are currently
concentrated in the United States and Germany.
Income
Taxes
The Company uses the liability method to account for income
taxes as required by FAS No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities.
Deferred tax assets and liabilities are measured using enacted
tax rates and laws that will be in effect when the differences
are expected to reverse.
Segment
Reporting
The Company operates in only one segment the
discovery and development of novel cancer therapies.
Recently
Issued Accounting Standards
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the
financial statements as more-likely-than-not to be
sustained by the taxing authority and provides guidance on the
derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for
income tax uncertainties in interim periods and increases the
level of disclosures associated with any recorded income tax
uncertainties. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The differences between
the amounts recognized in the statements of financial position
prior to the adoption of FIN 48 and the amounts reported
after adoption will be accounted for as a cumulative-effect
adjustment recorded to the beginning balance of retained
earnings. We are currently evaluating the impact of FIN 48
on our financial statements.
61
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
Note 2.
|
Collaboration
Agreements
|
Bayer
Pharmaceuticals Corporation
Effective February 1994, the Company established a collaboration
agreement with Bayer, to discover, develop, and market compounds
that inhibit the function, or modulate the activity, of the RAS
signaling pathway to treat cancer and other diseases. The
Company and Bayer concluded collaborative research under this
agreement in 1999, and based on this research, a product
development candidate, Nexavar, was identified.
Bayer paid all the costs of research and preclinical development
of Nexavar until the Investigational New Drug application, or
IND, was filed in May 2000. Under the agreement with Bayer, the
Company is currently funding 50 percent of mutually agreed
development costs worldwide, excluding Japan. Bayer is funding
100 percent of development costs in Japan and will pay the
Company a royalty on any product sales in Japan. The Company is
co-promoting Nexavar in the United States and, if the Company
continues to co-fund development and co-promote in the United
States, profits or losses, if any, will be shared equally in the
United States. If Onyx continues to co-fund but does not
co-promote in the United States, Bayer would first receive a
portion of the product revenues to repay Bayer for its
commercialization infrastructure, before determining the
Companys share of profits and losses. As Onyx does not
have the right to co-promote Nexavar outside the United States,
Bayer would also receive this preferential distribution in all
other parts of the world, except Japan where Onyx would receive
a royalty on any product sales.
The Companys agreement with Bayer calls for creditable
milestone-based payments. These amounts are interest-free and
will be repayable to Bayer from a portion of any of Onyxs
future profits or royalties. The Company received
$5.0 million in 2002 upon initiation of Phase 2
clinical studies and $15.0 million in 2003 based upon the
initiation of a Phase 3 study. Based on the July 2005 New
Drug Application, or NDA, filing, the Company received the third
milestone payment of $10.0 million in 2005. In January
2006, the Company received the final $10.0 million
milestone payment as a result of the United States approval of
Nexavar in December 2005. These payments are shown in the
caption Advance from collaboration partner on the
Companys balance sheet. At any time during product
development, either company may terminate its participation in
co-funding of development costs, in which case the terminating
party would retain rights to receive royalties based on any
sales of the product. If Onyx does not continue to bear
50 percent of product development costs, Bayer would retain
exclusive, worldwide rights to Nexavar and would pay royalties
to Onyx based on net sales.
In March 2006, Onyx and Bayer entered into a Co-Promotion
Agreement to co-promote Onyxs lead product Nexavar in the
United States. This agreement supersedes those provisions of the
original 1994 Collaboration Agreement that relate to the
co-promotion of Nexavar in the United States between Bayer and
Onyx.
Under the terms of the Co-Promotion Agreement and consistent
with the terms of the Collaboration Agreement, Onyx will share
equally in the profits or losses of Nexavar, if any, in the
United States, subject only to Onyxs continued co-funding
of the development costs of Nexavar worldwide, excluding Japan.
Outside of the United States, the terms of the Collaboration
Agreement will continue to govern.
Warner-Lambert
Company
In May 1995, the Company entered into a research and development
collaboration agreement with Warner-Lambert, now a subsidiary of
Pfizer, Inc., to discover and commercialize small molecule drugs
that restore control of, or otherwise intervene in, the
misregulated cell cycle in tumor cells. Under this agreement,
the Company developed screening tests, or assays, for jointly
selected targets and transferred these assays to Warner-Lambert
for screening of their compound library to identify active
compounds. The research term under the agreement ended in August
2001. Warner-Lambert is responsible for subsequent medicinal
chemistry and preclinical investigations on the active
compounds. In addition, Warner-Lambert is obligated to conduct
and fund all clinical development, make regulatory filings and
manufacture for sale any approved collaboration compounds. The
Company will receive milestone payments upon the achievement of
clinical development and registration of any resulting products
and is
62
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
entitled to receive royalties on worldwide sales of the
products. Warner-Lambert identified PD 332991, a small molecule
lead compound that inhibits cyclin-dependent kinase 4 and began
Phase 1 clinical trials with this drug candidate in
September 2004. The initiation of clinical trials triggered a
$500,000 milestone payment to the Company, which Onyx
received from Warner-Lambert and recognized as revenue in 2004.
|
|
Note 3.
|
Net
Expense from Unconsolidated Joint Business
|
Nexavar is currently marketed and sold primarily in the United
States and the European Union for the treatment of advanced
kidney cancer. Nexavar also has regulatory applications pending
in other territories internationally. Onyx co-promotes Nexavar
in the United States with Bayer Pharmaceuticals Corporation,
(Bayer) under collaboration and co-promotion agreements. In
March 2006, Onyx and Bayer entered into a Co-Promotion Agreement
to co-promote Nexavar in the United States. This agreement
amends the original 1994 Collaboration Agreement and supersedes
the provisions of that agreement that relate to the co-promotion
of Nexavar in the United States. Outside of the United States,
the terms of the Collaboration Agreement continue to govern.
Under the terms of the Co-Promotion Agreement and consistent
with the Collaboration Agreement, Onyx and Bayer will share
equally in the profits or losses of Nexavar, if any, in the
United States, subject only to the Companys continued
co-funding of the development costs of Nexavar worldwide,
excluding Japan. The collaboration was created through a
contractual arrangement, not through a joint venture or other
legal entity.
Bayer provides all product distribution and all marketing
support services, including managed care, customer service,
order entry and billing, for Nexavar sales in the United States.
Bayer is compensated for distribution expenses based on a fixed
percent of gross sales of Nexavar in the United States. Bayer is
reimbursed for half of its expenses for marketing services
provided by Bayer for the sale of Nexavar in the United States.
The parties share equally in any other
out-of-pocket
marketing expenses (other than expenses for sales force and
medical science liaisons) that Onyx and Bayer incur in
connection with the marketing and promotion of Nexavar in the
United States. Bayer manufactures all Nexavar sold in the United
States and is reimbursed at an agreed transfer price per unit
for the cost of goods sold.
In the United States, Onyx contributes half of the overall
number of sales force personnel required to market and promote
Nexavar and half of the medical science liaisons to support
Nexavar. Each of Onyx and Bayer bears its own sales force and
medical science liaison expenses. These expenses are not
included in the calculation of the profits or losses of the
collaboration.
Outside of the United States, except in Japan, Bayer incurs all
of the sales and marketing expenditures, and Onyx reimburses
Bayer for half of those expenditures. In addition, upon approval
of Nexavar in countries other than the United States, except
Japan, Onyx will reimburse Bayer a fixed percentage of net sales
for their marketing infrastructure. Research and development
expenditures on a worldwide basis, except in Japan, are equally
shared by both companies regardless of whether Onyx or Bayer
incurs the expense. In Japan, Bayer is responsible for all
development and marketing costs, and Onyx will receive a royalty
on any net sales of Nexavar.
Net expense from the unconsolidated joint business consists of
Onyxs share of the pretax collaboration loss generated
from its collaboration with Bayer net of the reimbursement of
Onyxs marketing and research and development costs related
to Nexavar. Under the collaboration, Bayer recognizes net
product revenue of Nexavar worldwide. Onyx records its share of
the collaboration pre-tax loss on a quarterly basis.
Collaboration loss is derived by calculating sales of Nexavar to
third-party customers and deducting the cost of goods sold,
distribution costs, marketing costs (including without
limitation, advertising and education expenses, selling and
promotion expenses, marketing personnel expenses, and Bayer
marketing services expenses), Phase 4 clinical trial costs,
allocable overhead costs and research and development costs. As
noted above, United States sales force and medical science
liaison expenditures incurred by both companies are borne by
each company separately and are not included in the calculation.
Some of the revenue and expenses recorded to derive the net
expense from unconsolidated joint business during the period
presented are estimates of both parties and are subject to
further adjustment based on each partys final review
should actual results differ from these estimates.
63
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
For the year ended December 31, 2006, net expense from
unconsolidated joint business was $23.9 million, calculated
as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Onyxs share of collaboration
loss
|
|
$
|
(59,595
|
)
|
Reimbursement of Onyxs
direct development and marketing expenses
|
|
|
35,680
|
|
|
|
|
|
|
Onyxs net expense from
unconsolidated joint business
|
|
$
|
(23,915
|
)
|
|
|
|
|
|
As of December 31, 2006, we have invested
$219.0 million in the development of Nexavar, representing
our share of the costs incurred to date under the collaboration.
|
|
Note 4.
|
Marketable
Securities
|
Investments that are subject to concentration of credit risk are
marketable securities. To mitigate this risk, the Company
invests in marketable debt securities, primarily United States
government securities, agency bonds and corporate bonds and
notes, with investment grade ratings. The Company limits the
amount of investment exposure as to institution, maturity, and
investment type. The weighted average maturity of the
Companys marketable securities as of December 31,
2006 was five months. Realized gains (losses) on these sales
were immaterial for each of the years ended December 31,
2006, 2005 and 2004.
Available-for-sale
marketable securities consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. government investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within 1 year
|
|
$
|
15,195
|
|
|
$
|
|
|
|
$
|
(57
|
)
|
|
$
|
15,138
|
|
Maturing between 1 and 2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total government investments
|
|
|
15,195
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
15,138
|
|
Agency bond investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within 1 year
|
|
|
41,663
|
|
|
|
1
|
|
|
|
(22
|
)
|
|
|
41,642
|
|
Maturing between 1 and 2 years
|
|
|
9,996
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
9,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency bond investments
|
|
|
51,659
|
|
|
|
1
|
|
|
|
(30
|
)
|
|
|
51,630
|
|
Corporate debt investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within 1 year
|
|
|
105,853
|
|
|
|
1
|
|
|
|
(77
|
)
|
|
|
105,777
|
|
Maturing between 1 and 2 years
|
|
|
4,460
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
4,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate investments
|
|
|
110,313
|
|
|
|
1
|
|
|
|
(92
|
)
|
|
|
110,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
marketable securities
|
|
$
|
177,167
|
|
|
$
|
2
|
|
|
$
|
(179
|
)
|
|
$
|
176,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. government investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within 1 year
|
|
$
|
7,488
|
|
|
$
|
|
|
|
$
|
(44
|
)
|
|
$
|
7,444
|
|
Maturing between 1 and 2 years
|
|
|
15,182
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
15,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total government investments
|
|
|
22,670
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
22,519
|
|
Agency bond investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within 1 year
|
|
|
12,936
|
|
|
|
1
|
|
|
|
(21
|
)
|
|
|
12,916
|
|
Maturing between 1 and 2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency bond investments
|
|
|
12,936
|
|
|
|
1
|
|
|
|
(21
|
)
|
|
|
12,916
|
|
Corporate debt investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within 1 year
|
|
|
173,460
|
|
|
|
156
|
|
|
|
(654
|
)
|
|
|
172,962
|
|
Maturing between 1 and 2 years
|
|
|
30,317
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
30,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate investments
|
|
|
203,777
|
|
|
|
156
|
|
|
|
(752
|
)
|
|
|
203,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
marketable securities
|
|
$
|
239,383
|
|
|
$
|
157
|
|
|
$
|
(924
|
)
|
|
$
|
238,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in 2006 and 2005 on the Companys
investments in United States government investments, agency bond
investments and corporate debt instruments were caused by
interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at
a price less than the amortized cost of the investment. No
significant facts or circumstances have arisen to indicate that
there has been any deterioration in the creditworthiness of the
issuers of the Companys securities. Approximately
$60.0 million of marketable securities, representing
33.9 percent of our total portfolio at December 31,
2006, has been in an unrealized loss position for greater than
nine months. It is our intention and within our ability to hold
these securities in an unrealized loss position for a period of
time sufficient to allow for an anticipated recovery of fair
value up to (or greater than) the cost of the securities and
therefore the impairments noted are not
other-than-temporary.
In 2006 and 2005, we classified $4.4 million and
$9.9 million of marketable securities balances as long-term
because these securities carry maturity dates greater than
twelve months from the balance sheet date.
|
|
Note 5.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Computers, machinery and equipment
|
|
$
|
2,279
|
|
|
$
|
1,708
|
|
Furniture and fixtures
|
|
|
446
|
|
|
|
413
|
|
Leasehold improvements
|
|
|
734
|
|
|
|
734
|
|
Construction in progress
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,474
|
|
|
|
2,855
|
|
Less accumulated depreciation and
amortization
|
|
|
(1,996
|
)
|
|
|
(1,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,478
|
|
|
$
|
1,617
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $758,000, $630,000 and $194,000 for the
years ended December 31, 2006, 2005 and 2004, respectively.
65
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
In December 2004, the Company vacated its Richmond, California
headquarters and relocated to Emeryville, California. The
Company recorded an impairment charge of $40,000 related to
leasehold improvements, equipment and furniture and fixtures
that were abandoned as a result of the facility move.
|
|
Note 6.
|
Long-Term
Obligations
|
In January 2006, the Company received the fourth and final
development payment from Bayer for $10.0 million under its
collaboration agreement in connection with the approval of
Nexavar by the FDA. In July 2005, the Company received a
$10.0 million development payment from Bayer as a result of
the NDA filing for Nexavar. In December 2003, the Company
received a $15.0 million development payment from Bayer for
the initiation of Phase 3 clinical trials of Nexavar. In
August 2002, the Company received a $5.0 million
development payment from Bayer for the initiation of
Phase 2 clinical trials of Nexavar. Pursuant to its
collaboration agreement, these amounts are repayable to Bayer
from a portion of any of Onyxs future profits or
royalties. These development payments contain no provision for
interest. The balances received as of December 31, 2006 and
2005 of $40.0 million and $30.0 million, respectively,
are included in the caption Advance from collaboration
partner in the accompanying balance sheets.
In 2004, the Company entered into an operating lease for
23,000 square feet of office space in Emeryville,
California, which serves as the Companys corporate
headquarters. When the Company moved into this new facility in
December 2004, the Company vacated its 50,000 square foot
facility in Richmond, California. The lease for this facility
expired in April 2005, and the Company did not renew the lease.
In 2006, the Company amended its existing operating lease to
occupy an additional 14,000 square feet of office space in
addition to the 23,000 square feet already occupied in
Emeryville, California. The lease expires on March 31,
2013. The lease provides for fixed increases in minimum annual
rental payments, as well as rent free periods. The total amount
of rental payments due over the lease term is being charged to
rent expense on the straight-line method over the term of the
lease. The difference between rent expense recorded and the
amount paid is credited or charged to deferred rent
obligations, which is included in the accompanying balance
sheets.
The Company also has a lease for 9,000 square feet of space
in a secondary facility in Richmond, California. The Company
determined that it no longer required this facility due to a
reduction in force in December 2001. The lease for this facility
expires in September 2010 with renewal options at the end of the
lease for two subsequent five-year terms. In September 2002, the
Company entered into a sublease agreement for this space through
September 2010.
Minimum annual rental commitments, net of sublease income, under
all operating leases at December 31, 2006 are as follows
(in thousands):
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2007
|
|
$
|
1,036
|
|
2008
|
|
|
1,023
|
|
2009
|
|
|
1,049
|
|
2010
|
|
|
1,058
|
|
2011
|
|
|
1,046
|
|
Thereafter
|
|
|
1,308
|
|
|
|
|
|
|
|
|
$
|
6,520
|
|
|
|
|
|
|
66
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Rent expense, net of sublease income and restructuring, for the
years ended December 31, 2006, 2005 and 2004 was
approximately $587,000, $490,000 and $343,000, respectively.
Sublease income was $62,000, $102,000 and $99,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.
|
|
Note 8.
|
Related
Party Transactions
|
The Company has a loan receivable from a non-officer employee of
which approximately $228,000 is outstanding at December 31,
2006. This loan bears interest at 4.82% per annum and is
due in three annual payments, beginning in 2007. The payment due
in 2007 is recorded in current assets at December 31, 2006.
The noncurrent portion of the loan receivable is recorded in
other assets at December 31, 2006.
The Company has a 401(k) Plan that covers substantially all of
its employees. Under the 401(k) Plan, eligible employees may
contribute up to 15 percent of their eligible compensation,
subject to certain Internal Revenue Service restrictions. The
Company does not match employee contributions in the 401(k) Plan.
|
|
Note 10.
|
Stockholders
Equity
|
Stock
Options and Employee Stock Purchase Plan
The Company has one stock option plan from which it is able to
grant new awards, the 2005 Equity Incentive Plan. Prior to
adoption of the 2005 Equity Incentive Plan, the Company had two
stock option plans, the 1996 Equity Incentive Plan and the 1996
Non-Employee Directors Stock Option Plan. Following is a
brief description of the plans:
1) The 1996 Equity Incentive Plan which amended and
restated the 1992 Incentive Stock Plan in March 1996. The Board
reserved 1,725,000 shares of common stock for issuance
under the Incentive Plan. At the Companys annual meetings
of stockholders in subsequent years, stockholders approved
reserving an additional 4,100,000 shares of common stock
for issuance under the Incentive Plan. The Incentive Plan
provides for grants to employees of either nonqualified or
incentive options and provides for the grant to consultants of
the Company of nonqualified options.
2) The 1996 Non-Employee Directors Stock Option Plan
(the Directors Plan) which was approved in
March 1996 and reserved 175,000 shares for issuance to
provide for the automatic grant of nonqualified options to
purchase shares of common stock to non-employee Directors of the
Company. At the Companys annual meetings of stockholders
in subsequent years, stockholders approved reserving an
additional 250,000 shares of common stock for issuance
under the Directors Plan.
The 2005 Equity Incentive Plan was approved at the
Companys annual meeting of stockholders to supersede and
replace both prior plans and reserved 7,560,045 shares of
common stock for issuance under the Plan, consisting of
(a) the number of shares remaining available for grant
under the Incentive Plan and the Directors Plan, including
shares subject to outstanding stock awards under those plans,
and (b) an additional 3,990,000 shares. Any shares
subject to outstanding stock awards under the 1996 Equity
Incentive Plan and the Directors Plan that expire or
terminate for any reason prior to exercise or settlement are
added to the share reserve under the 2005 Equity Incentive Plan.
All outstanding stock awards granted under the two prior plans
remain subject to the terms of those plans.
In March 1996, the Board of Directors adopted the Employee Stock
Purchase Plan (ESPP). The number of shares available for
issuance over the term of the ESPP is limited to
400,000 shares. The ESPP is designed to allow eligible
employees of the Company to purchase shares of common stock
through periodic payroll deductions. The price of common stock
purchased under the ESPP will be equal to 85 percent of the
lower of the fair market value of the common stock on the
commencement date of each offering period or the specified
purchase date. Purchases of
67
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
common stock shares made under the ESPP were 22,584 shares
in 2006, 12,424 shares in 2005 and 16,852 shares in
2004. Since inception, a total of 308,996 shares have been
issued under the ESPP, leaving a total of 91,004 shares
available for issuance.
In December 2005, stock options were exercised that were not
settled prior to December 31, 2005. The Company recorded a
receivable from stock option exercises of $24,000 as of
December 31, 2005 related to these stock options. This is
included in the caption Receivable from stock option
exercises in the accompanying balance sheet and Statement
of Stockholders Equity as of December 31, 2005. There
were no such amounts as of December 31, 2006 nor
December 31, 2004.
Preferred
Stock
The Companys amended and restated certificate of
incorporation provides that the Companys Board of
Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption,
liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such
series, without further vote or action by the stockholders. As
of December 31, 2006, the Company had 5,000,000 shares
of preferred stock authorized at $0.001 par value, and no
shares were issued or outstanding.
Warrants
A total of 743,229 warrants for the purchase of common stock
were issued in connection with a private placement financing in
May 2002. The exercise price of these warrants is $9.59 per
share. The $4.4 million fair value of the warrants was
estimated on the date of grant using the Black-Scholes option
valuation model with the following assumptions: a
weighted-average risk-free interest rate of 4.29%, a contractual
life of seven years, a volatility of 0.94 and no dividend yield,
and accounted for as a stock issuance cost. Any of the
outstanding warrants may be exercised by applying the value of a
portion of the warrant, which is equal to the number of shares
issuable under the warrant being exercised multiplied by the
fair market value of the security receivable upon the exercise
of the warrant, less the per share price, in lieu of payment of
the exercise price per share. In 2004, the Company issued
553,835 shares of the Companys common stock upon the
exercise of 703,689 warrants, on both a cash and net exercise
basis. The Company received approximately $355,000 in net cash
proceeds from the exercise of warrants in 2004. In 2005, the
Company issued 29,550 shares of the Companys common
stock upon the exercise of 30,277 warrants, on both a cash and
net exercise basis. The Company received approximately $266,000
in net cash proceeds from the exercise of warrants in 2005.
There were no warrants issued nor exercised in 2006.
As of December 31, 2006 there are outstanding warrants to
purchase an aggregate of 9,263 shares of the Companys
common stock, which will expire in May 2009, unless earlier
exercised. The Company has reserved 9,263 common shares for
future issuance for these warrants.
|
|
Note 11.
|
Stock-Based
Compensation
|
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards, or FAS, No. 123(R),
Share-Based Payment,
(FAS 123(R)), which requires the
measurement and recognition of compensation expense for all
stock-based payments made to employees and directors including
employee stock option awards and employee stock purchases made
under the Employee Stock Purchase Plan, or ESPP, based on
estimated fair value. The Company previously applied the
provisions of Accounting Principles Board Opinion, or APB,
No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
Interpretations and provided the required pro forma disclosures
under FAS 123, Accounting for Stock-Based
Compensation, or FAS 123.
All stock option awards to non-employees are accounted for at
the fair value of the consideration received or the fair value
of the equity instrument issued, as calculated using the
Black-Scholes model, in accordance with
68
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
FAS 123(R) and Emerging Issues Task Force Consensus
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. The option arrangements are subject to
periodic remeasurement over their vesting terms.
Pro forma
Information for Periods prior to the Adoption of
FAS 123(R)
Prior to the adoption of FAS 123(R), the Company elected to
follow APB 25 to account for employee stock options and
complied with the disclosure provisions of FAS 123 and
FAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. No employee
stock-based compensation expense was reflected in the
Companys results of operations for the year ended
December 31, 2005, for employee stock option awards as all
options were granted with an exercise price equal to the market
value of the underlying common stock on the date of grant. Our
ESPP was deemed non-compensatory under the provisions of
APB 25. Previously reported amounts have not been restated.
The pro forma information for the years ended December 31,
2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except per share data)
|
|
|
Net loss, as reported
|
|
$
|
(95,174
|
)
|
|
$
|
(46,756
|
)
|
Deduct: Total stock-based employee
compensation determined under the fair value based method for
all awards, net of related tax effects
|
|
|
(13,333
|
)
|
|
|
(6,071
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(108,507
|
)
|
|
$
|
(52,827
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share as reported
|
|
$
|
(2.64
|
)
|
|
$
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share pro forma
|
|
$
|
(3.01
|
)
|
|
$
|
(1.54
|
)
|
|
|
|
|
|
|
|
|
|
Impact of
the Adoption of FAS 123(R)
The Company adopted FAS 123(R) using the modified
prospective transition method beginning January 1, 2006.
Accordingly, during the year ended December 31, 2006, the
Company recorded stock-based compensation expense for awards
granted prior to but not yet vested as of January 1, 2006,
as if the fair value method required for pro forma disclosure
under FAS 123 has been followed for expense recognition
purposes adjusted for estimated forfeitures. For these awards,
the Company has continued to recognize compensation expense
using the accelerated amortization method under FASB
Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans. For stock-based awards granted after
January 1, 2006, the Company recognized compensation
expense based on the estimated grant date fair value method
required under FAS 123(R). The compensation expense for
these awards was recognized using a straight-line amortization
method. As FAS 123(R) requires that stock-based
compensation expense be based on awards that are ultimately
expected to vest, estimated stock-based compensation for the
year ended December 31, 2006, has been reduced for
estimated forfeitures. Compensation expense for stock bonus
awards is based on the market price of our stock on the date of
grant. In the Companys pro forma information required
under FAS 123 for periods prior to January 1, 2006,
the Company accounted for forfeitures as they occurred.
FAS 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The impact on
69
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
the results of operations of recording stock-based compensation
for the year ended December 31, 2006, was as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands except
|
|
|
|
per share data)
|
|
|
Research and development
|
|
$
|
2,545
|
|
Selling, general and administrative
|
|
|
11,496
|
|
|
|
|
|
|
Total share-based compensation
expense
|
|
$
|
14,041
|
|
|
|
|
|
|
Impact on basic and diluted net
loss per share
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
All stock option awards to non-employees are accounted for at
the fair value of the consideration received or the fair value
of the equity instrument issued, as calculated using the
Black-Scholes model, in accordance with FAS 123 and
Emerging Issues Task Force Consensus
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. The option arrangements are subject to
periodic remeasurement over their vesting terms. The Company
recorded compensation expense related to option grants to
non-employees of $365,000 , $906,000 and $1.4 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Stock option plans:
|
|
|
|
|
Weighted average grant date fair
value
|
|
$
|
13.83
|
|
Total fair value vested (in
thousands)
|
|
$
|
14,460
|
|
|
|
|
|
|
Stock bonus awards:
|
|
|
|
|
Weighted average grant date fair
value
|
|
$
|
21.04
|
|
Total fair value vested (in
thousands)
|
|
$
|
140
|
|
As of December 31, 2006, the total unrecorded stock-based
compensation balance for unvested stock options shares, net of
expected forfeitures, was $23.1 million which is expected
to be amortized over a weighted-average period of
23 months. As of December 31, 2006, the total
unrecorded stock-based compensation balance for unvested stock
bonus awards, net of expected forfeitures, was $633,000 which is
expected to be amortized over a weighted-average period of
2.4 years. Cash received during the year ended
December 31, 2006, for stock options exercised under all
stock-based compensation arrangements was $2.5 million.
70
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Valuation
Assumptions
As of December 31, 2006 and 2005, the fair value of
stock-based awards for employee stock option awards, stock bonus
awards and employee stock purchases made under the ESPP was
estimated using the Black-Scholes option pricing model. The
following weighted average assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Stock Option Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
4.68
|
%
|
|
|
3.80
|
%
|
|
|
2.92
|
%
|
Expected life
|
|
|
4.2 years
|
|
|
|
3.8 years
|
|
|
|
3.7 years
|
|
Expected volatility
|
|
|
59
|
%
|
|
|
74
|
%
|
|
|
85
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Weighted average option fair value
|
|
$
|
11.00
|
|
|
$
|
13.55
|
|
|
$
|
22.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock bonus awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life
|
|
|
3 years
|
|
|
|
|
|
|
|
|
|
Expected dividends
|
|
|
None
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per
share
|
|
$
|
21.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
4.33
|
%
|
|
|
3.14
|
%
|
|
|
2.52
|
%
|
Expected life
|
|
|
6 months
|
|
|
|
6 months
|
|
|
|
2 years
|
|
Expected volatility
|
|
|
59
|
%
|
|
|
74
|
%
|
|
|
88
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Weighted average fair value per
share
|
|
$
|
8.65
|
|
|
$
|
10.79
|
|
|
$
|
23.30
|
|
The Black-Scholes fair value model requires the use of highly
subjective and complex assumptions, including the options
expected life and the price volatility of the underlying stock.
Beginning January 1, 2006, the expected stock price
volatility assumption was determined using a combination of
historical and implied volatility for our stock. Prior to the
adoption of FAS 123(R), we used the historical volatility
in deriving our expected volatility assumption. We have
determined that the combined method of determining volatility is
more reflective of market conditions and a better indicator of
expected volatility than historical volatility. We consider
several factors in estimating the expected life of our options
granted, including the expected lives used be a peer group of
companies and the historical option exercise behavior of our
employees, which we believe are representative of future
behavior.
71
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Stock-Based
Payment Award Activity
The following table summarizes stock option and award activity
under all option plans for the years ended December 31,
2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Number
|
|
|
Average
|
|
|
|
Available
|
|
|
of Shares
|
|
|
Exercise
|
|
Employee Stock Options:
|
|
for Grant
|
|
|
Outstanding
|
|
|
Price
|
|
|
Balance at December 31, 2003
|
|
|
1,419,216
|
|
|
|
1,983,684
|
|
|
$
|
7.65
|
|
Shares authorized
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(802,925
|
)
|
|
|
802,925
|
|
|
$
|
38.27
|
|
Exercised
|
|
|
|
|
|
|
(424,265
|
)
|
|
$
|
7.72
|
|
Cancelled/expired/forfeited
|
|
|
65,902
|
|
|
|
(65,902
|
)
|
|
$
|
19.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,282,193
|
|
|
|
2,296,442
|
|
|
$
|
17.99
|
|
Shares authorized
|
|
|
3,990,000
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,718,000
|
)
|
|
|
1,718,000
|
|
|
$
|
24.52
|
|
Exercised
|
|
|
|
|
|
|
(152,093
|
)
|
|
$
|
7.73
|
|
Expired/forfeited
|
|
|
56,268
|
|
|
|
(56,268
|
)
|
|
$
|
29.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
3,610,461
|
|
|
|
3,806,081
|
|
|
$
|
21.17
|
|
Granted
|
|
|
(1,987,950
|
)
|
|
|
1,987,950
|
|
|
$
|
21.60
|
|
Exercised
|
|
|
|
|
|
|
(347,287
|
)
|
|
$
|
7.26
|
|
Expired
|
|
|
19,058
|
|
|
|
(19,058
|
)
|
|
$
|
37.83
|
|
Forfeited
|
|
|
93,209
|
|
|
|
(93,209
|
)
|
|
$
|
28.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,734,778
|
|
|
|
5,334,477
|
|
|
$
|
22.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
Stock Bonus Awards:
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
$
|
21.04
|
|
Vested
|
|
|
(6,667
|
)
|
|
$
|
21.04
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
33,333
|
|
|
$
|
21.04
|
|
|
|
|
|
|
|
|
|
|
72
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
The options outstanding and exercisable for stock-based payment
awards as of December 31, 2006 were in the following
exercise price ranges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Life
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
Number
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
( In years)
|
|
|
Price
|
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
$ 3.82 - $15.29
|
|
|
1,101,389
|
|
|
|
5.1
|
|
|
$
|
7.87
|
|
|
|
|
927,222
|
|
|
$
|
7.20
|
|
$15.36 - $20.29
|
|
|
1,111,271
|
|
|
|
9.1
|
|
|
$
|
16.76
|
|
|
|
|
121,338
|
|
|
$
|
17.98
|
|
$20.40 - $25.30
|
|
|
1,150,555
|
|
|
|
8.4
|
|
|
$
|
23.43
|
|
|
|
|
436,959
|
|
|
$
|
23.69
|
|
$25.44 - $29.04
|
|
|
1,113,330
|
|
|
|
9.0
|
|
|
$
|
28.43
|
|
|
|
|
257,816
|
|
|
$
|
28.49
|
|
$29.39 - $48.19
|
|
|
857,932
|
|
|
|
7.6
|
|
|
$
|
36.95
|
|
|
|
|
532,794
|
|
|
$
|
37.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,334,477
|
|
|
|
7.9
|
|
|
$
|
22.05
|
|
|
|
|
2,276,129
|
|
|
$
|
20.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, 1,597,054 shares outstanding
options were exercisable, at a weighted average price of $14.74.
As of December 31, 2004, 1,167,759 shares outstanding
options were exercisable, at a weighted average price of $9.86.
As of December 31, 2006, weighted average contractual life
remaining for exercisable shares is 6.4 years. The total
number of
in-the-money
awards exercisable as of December 31, 2006, was
approximately 801,995 shares. The aggregate intrinsic
values of awards exercised were $5.5 million and
$3.1 million for the years ended December 31, 2006 and
2005, respectively. The aggregate intrinsic values of
in-the-money
outstanding and exercisable awards were $3.4 million and
$3.3 million, respectively as of December 31, 2006.
The aggregate intrinsic value of options represents the total
pretax intrinsic value, based on the Companys closing
stock price of $10.58 at December 31, 2006, which would
have been received by award holders had all award holders
exercised their awards that were
in-the-money
as of that date.
In 2004, the Company recorded a restructuring charge of $258,000
due to a change in estimate related to the discontinued use and
inability to sublet a portion of the Companys lease
facility in Richmond, California. As of December 31, 2005,
all restructuring costs had been fully paid.
There is no provision for income taxes, because the Company has
incurred operating losses since inception.
73
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Significant components of the Companys deferred tax assets
are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net operating loss carryforwards
|
|
$
|
149,955
|
|
|
$
|
122,854
|
|
Tax credit carryforwards
|
|
|
33,046
|
|
|
|
23,952
|
|
Capitalized research and
development
|
|
|
3,216
|
|
|
|
4,115
|
|
Deferred revenue
|
|
|
15,934
|
|
|
|
11,950
|
|
Other
|
|
|
5,022
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
207,173
|
|
|
|
163,270
|
|
Valuation allowance
|
|
|
(207,173
|
)
|
|
|
(163,270
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. The valuation allowance increased by
$43.9 million, $53.4 million and $28.2 million in
2006, 2005 and 2004, respectively.
The 2005 deferred tax assets have been revised to reflect the
gross amounts of tax credit carryforwards with the corresponding
increase in the valuation allowance.
At December 31, 2006, the Company has net operating loss
carryforwards for federal and state income tax purposes of
approximately $385.9 million and $321.2 million,
respectively, which expire beginning in 2007 if not utilized.
Approximately $33 million of the federal and $563,000 of
the state valuation allowance for deferred tax assets related to
net operating loss carry forwards represent the stock option
deduction arising from activity under the Companys stock
option plan, the benefit of which will increase additional paid
in capital when realized. At December 31, 2006, the Company
has research and development credit carryforwards for federal
income tax purposes of approximately $22.3 million, which
expire beginning in 2008 if not utilized. At December 31,
2006, the Company has research and development credit
carryforwards for state income tax purposes of approximately
$10.5 million, which do not expire.
Utilization of the net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net
operating loss and tax credit carryforwards before utilization.
|
|
Note 14.
|
Guarantees,
Indemnifications and Contingencies
|
Guarantees
and Indemnifications
The Company has entered into indemnity agreements with certain
of its officers and directors, which provide for indemnification
to the fullest extent authorized and permitted by Delaware law
and the Companys Bylaws. The agreements also provide that
the Company will indemnify, subject to certain limitations, the
officer or director for expenses, damages, judgments, fines and
settlements he or she may be required to pay in actions or
proceedings to which he or she is or may be a party because such
person is or was a director, officer or other agent of the
Company. The term of the indemnification is for so long as the
officer or director is subject to any possible claim, or
threatened, pending or completed action or proceeding, by reason
of the fact that such officer or director was serving the
Company as a director, officer or other agent. The rights
conferred on the officer or director shall continue after such
person has ceased to be an officer or director as provided in
the indemnity agreement. The maximum amount of potential future
indemnification is unlimited; however, the Company has a
director and officer insurance policy that
74
ONYX
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
limits its exposure and may enable it to recover a portion of
any future amounts paid under the indemnity agreements. The
Company has not recorded any amounts as liabilities as of
December 31, 2006 as the value of the indemnification
obligations, if any, is not estimable.
Contingencies
From time to time, the Company may become involved in claims and
other legal matters arising in the ordinary course of business.
Management is not currently aware of any matters that could have
a material adverse affect on the financial position, results of
operations or cash flows of the Company.
|
|
Note 15.
|
Quarterly
Financial Data (Unaudited)
|
The following table presents unaudited quarterly financial data
of the Company. The Companys quarterly results of
operations for these periods are not necessarily indicative of
future results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
|
(In thousands, except per share data)
|
|
|
Total revenues
|
|
$
|
|
|
|
$
|
100
|
|
|
$
|
150
|
|
|
$
|
|
|
Net loss
|
|
|
(20,707
|
)
|
|
|
(20,148
|
)
|
|
|
(31,474
|
)
|
|
|
(20,352
|
)
|
Basic and diluted net loss per
share
|
|
|
(0.47
|
)
|
|
|
(0.49
|
)
|
|
|
(0.76
|
)
|
|
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Quarter Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
|
(In thousands, except per share data)
|
|
|
Total revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Net loss
|
|
|
(38,352
|
)
|
|
|
(22,581
|
)
|
|
|
(18,141
|
)
|
|
|
(16,100
|
)
|
Basic and diluted net loss per
share
|
|
|
(1.00
|
)
|
|
|
(0.64
|
)
|
|
|
(0.51
|
)
|
|
|
(0.46
|
)
|
75
EXHIBIT
INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1(1)
|
|
Restated Certificate of
Incorporation of the Company.
|
|
3
|
.2(1)
|
|
Bylaws of the Company.
|
|
3
|
.3(3)
|
|
Certificate of Amendment to
Amended and Restated Certificate of Incorporation.
|
|
3
|
.4(18)
|
|
Certificate of Amendment to
Amended and Restated Certificate of Incorporation.
|
|
4
|
.1(1)
|
|
Reference is made to
Exhibits 3.1, 3.2, 3.3 and 3.4.
|
|
4
|
.2(1)
|
|
Specimen Stock Certificate.
|
|
10
|
.1(15)*
|
|
Collaboration Agreement between
Bayer Corporation (formerly Miles, Inc.) and the Company dated
April 22, 1994.
|
|
10
|
.1(i)(15)*
|
|
Amendment to Collaboration
Agreement between Bayer Corporation and the Company dated
April 24, 1996.
|
|
10
|
.1(ii)(15)*
|
|
Amendment to Collaboration
Agreement between Bayer Corporation and the Company dated
February 1, 1999.
|
|
10
|
.2(8)*
|
|
Amended and restated Research,
Development and Marketing Collaboration Agreement dated
May 2, 1995 between the Company and Warner-Lambert Company.
|
|
10
|
.2(i)(8)*
|
|
Research, Development and
Marketing Collaboration Agreement dated July 31, 1997
between the Company and Warner-Lambert Company.
|
|
10
|
.2(ii)(8)*
|
|
Amendment to the Amended and
Restated Research, Development and Marketing Collaboration
Agreement, dated December 15, 1997, between the Company and
Warner-Lambert Company.
|
|
10
|
.2(iii)(8)*
|
|
Second Amendment to the Amended
and Restated Research, Development and Marketing Agreement
between Warner-Lambert and the Company dated May 2, 1995.
|
|
10
|
.2(iv)(8)*
|
|
Second Amendment to Research,
Development and Marketing Collaboration Agreement between
Warner-Lambert and the Company dated July 31, 1997.
|
|
10
|
.2(v)(23)*
|
|
Amendment #3 to the Research,
Development and Marketing Collaboration Agreement between the
Company and Warner-Lambert dated August 6, 2001.
|
|
10
|
.2(vi)(4)*
|
|
Amendment #3 to the Amended
and Restated Research, Development and Marketing Collaboration
Agreement between the Company and Warner-Lambert dated
August 6, 2001.
|
|
10
|
.3(5)*
|
|
Technology Transfer Agreement
dated April 24, 1992 between Chiron Corporation and the
Company, as amended in the Chiron Onyx HPV Addendum dated
December 2, 1992, in the Amendment dated February 1,
1994, in the Letter Agreement dated May 20, 1994 and in the
Letter Agreement dated March 29, 1996.
|
|
10
|
.4(1)+
|
|
Letter Agreement between
Dr. Gregory Giotta and the Company dated May 26, 1995.
|
|
10
|
.5(1)+
|
|
1996 Equity Incentive Plan.
|
|
10
|
.6(1)+
|
|
1996 Non-Employee Directors
Stock Option Plan.
|
|
10
|
.7(1)+
|
|
1996 Employee Stock Purchase Plan.
|
|
10
|
.8(1)+
|
|
Form of Indemnity Agreement to be
signed by executive officers and directors of the Company.
|
|
10
|
.9(11)+
|
|
Form of Executive Change in
Control Severance Benefits Agreement.
|
|
10
|
.10(2)*
|
|
Collaboration Agreement between
the Company and Warner-Lambert Company dated October 13,
1999.
|
|
10
|
.10(i)(4)*
|
|
Amendment #1 to the
Collaboration Agreement between the Company and Warner-Lambert
dated August 6, 2001.
|
|
10
|
.10(ii)(7)*
|
|
Second Amendment to the
Collaboration Agreement between the Company and Warner-Lambert
Company dated September 16, 2002.
|
|
10
|
.11(6)
|
|
Stock and Warrant Purchase
Agreement between the Company and the investors dated
May 6, 2002.
|
|
10
|
.12(9)
|
|
Sublease between the Company and
Siebel Systems dated August 5, 2004.
|
|
10
|
.12(i)
|
|
First Amendment to Sublease
between the Company and Oracle USA Inc., dated November 3,
2006.
|
|
10
|
.13(10)+
|
|
Onyx Pharmaceuticals, Inc. 2005
Equity Incentive Plan.
|
|
10
|
.13(i)+
|
|
Form of Stock Option Agreement
pursuant to the 2005 Equity Incentive Plan.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.13(ii)+
|
|
Form of Stock Option Agreement
pursuant to the 2005 Equity Incentive Plan and the
Non-Discretionary Grant Program for Directors.
|
|
10
|
.14(12)+
|
|
Separation Agreement between Onyx
Pharmaceuticals, Inc. and Leonard E. Post, Ph. D., dated
December 5, 2005.
|
|
10
|
.15(13)+
|
|
2006 Base Salaries and Bonuses for
Fiscal Year 2005 for Named Executive Officers.
|
|
10
|
.16(14)**
|
|
U.S. Co-Promotion Agreement
by and between the Company and Bayer Pharmaceuticals
Corporation, dated March 6, 2006.
|
|
10
|
.17(16)+
|
|
Letter Agreement between Gregory
W. Schafer and the Company, dated April 12, 2006.
|
|
10
|
.18(17)+
|
|
Separation Agreement between the
Company and Scott M. Freeman, M.D., dated May 3, 2006.
|
|
10
|
.19(19)+
|
|
Letter Agreement between Laura A.
Brege and the Company, dated May 19, 2006.
|
|
10
|
.20(20)+
|
|
Letter Agreement between Gregory
W. Schafer and the Company, dated July 7, 2006.
|
|
10
|
.21(20)+
|
|
Form of Stock Bonus Award Grant
Notice and Agreement between the Company and certain award
recipients.
|
|
10
|
.22(21)+
|
|
Separation Agreement between Fabio
M. Benedetti, M.D. and the Company, dated September 6,
2006.
|
|
10
|
.23(22)
|
|
Common Stock Purchase Agreement
between Onyx Pharmaceuticals, Inc. and Azimuth Opportunity Ltd.,
dated September 29, 2006.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney. Reference is
made to the signature page.
|
|
31
|
.1
|
|
Certification required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
32
|
.1
|
|
Certifications required by
Rule 13a-14(b)
or
Rule 15d-14(b)and
Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350).
|
|
|
|
* |
|
Confidential treatment has been received for portions of this
document. |
|
** |
|
Confidential treatment has been requested for portions of this
document. |
|
+ |
|
Indicates management contract or compensatory plan or
arrangement. |
|
(1) |
|
Filed as an exhibit to Onyxs Registration Statement on
Form SB-2
(No.
333-3176-LA). |
|
(2) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on March 1, 2000. |
|
(3) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2000. |
|
(4) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2001. |
|
(5) |
|
Filed as an exhibit to Onyxs Annual Report on
Form 10-K
for the year ended December 31, 2001. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |
|
(6) |
|
Filed as an exhibit to Onyxs Registration Statement on
Form S-3
filed on June 5, 2002
(No. 333-89850). |
|
(7) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2002. |
|
(8) |
|
Filed as an exhibit to Onyxs Annual Report on
Form 10-K
for the year ended December 31, 2002. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |
|
(9) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004. |
|
(10) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on June 7, 2005. |
|
(11) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005. |
|
(12) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on December 9, 2005. |
|
(13) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on March 7, 2006. |
|
(14) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006. |
|
|
|
(15) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |
|
(16) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on April 18, 2006. |
|
(17) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on May 12, 2006. |
|
(18) |
|
Filed as an exhibit to Onyxs Registration Statement on
Form S-3
(No.
333-134565)
filed on May 30, 2006. |
|
(19) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on June 12, 2006. |
|
(20) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on July 12, 2006. |
|
(21) |
|
Filed as an exhibit to the registrants Current Report on
Form 8-K
filed on September 7, 2006. |
|
(22) |
|
Filed as an exhibit to Onyxs Current Report on
Form 8-K
filed on September 29, 2006. |
|
(23) |
|
Filed as an exhibit to Onyxs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006. The redactions to
this agreement have been amended since its original filing in
accordance with a request for extension of confidential
treatment filed separately by the Company with the Securities
and Exchange Commission. |