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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File No. 0-28298

ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

3031 Research Drive
Richmond, California 94806
(510) 222-9700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

        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 ý    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 registrant's 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

        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 National Market on March 25, 2002 was approximately $71,383,000.

        The number of shares of common stock outstanding as of March 25, 2002 was 18,591,213.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of Onyx's Definitive Proxy Statement filed with the Commission pursuant to Regulation 14A in connection with the 2002 Annual Meeting are incorporated herein by reference into Part III of this report.

        Certain Exhibits filed with Onyx's Registration Statement on Form SB-2 (Registration No. 333-3176-LA), as amended, Onyx's Annual Report on Form 10-K (Commission File No. 0-28298) for the years ended December 31, 1997 and December 31, 1999, Onyx's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1996, March 31, 1997, September 30, 1997, March 31, 1999, September 30, 1999, June 30, 2000, September 30, 2000, March 31, 2001 and September 30, 2001, Onyx's Current Report on Form 8-K filed on January 26, 1998, Onyx's Current Report on Form 8-K filed on March 1, 2000 and Onyx's Current Report on Form 8-K filed on February 23, 2001, are incorporated by reference into Part IV of this Report.

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 Act of 1934. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's 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 listed under "Additional Business Risks" and elsewhere in this Annual Report.

        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 to conform these statements to actual results, unless required by law.

Item 1. Business

Overview

        We are developing innovative products for the treatment of cancer utilizing two technology platforms, small molecules and therapeutic viruses. Utilizing our proprietary virus technology, we are developing ONYX-015, ONYX-411, which is an RB-selective virus, and Armed Therapeutic Viruses™. Together with Bayer Corporation, we are developing a novel small molecule compound, BAY 43-9006.

        ONYX-015 is a human virus genetically engineered to selectively replicate in and kill cancer cells based on the mutation or loss of function of a specific tumor suppressor gene, the p53 gene. We believe that the mutation or loss of function of the p53 gene is present in the majority of human cancers. In June 2000, we initiated a 360-patient, multi-center Phase III clinical trial of ONYX-015 administered by direct injection into tumors, or intratumoral injection, in patients with head and neck cancer that has progressed following initial treatment with surgery and/or radiation, or recurrent disease. Enrollment in this trial has proceeded very slowly. In the first quarter of 2002, we decided to modify our development plan for ONYX-015 in head and neck cancer prior to advancing ONYX-015 in the Food and Drug Administration, or FDA, registration process and, therefore, we are not accelerating the Phase III clinical trial until these development modifications are complete. In addition, we are in the process of initiating an open-label Phase II/III clinical trial that will evaluate ONYX-015 in patients with head and neck cancer that is resistant to all therapies, or refractory disease. We will treat approximately 30 patients in this study. Pending results in these patients and discussions with the FDA, we may expand this study to treat additional patients.

        In addition to head and neck cancer, we completed a Phase I/II clinical trial evaluating ONYX-015 administered through an artery leading to the liver, or intrahepatic artery infusion, in patients with colon cancer that has spread to the liver, or liver metastases of colorectal cancer. We intend to begin a Phase II clinical trial evaluating ONYX-015 in this indication in mid-2002. We are conducting a Phase I/II clinical trial evaluating ONYX-015 administered as a mouthwash in patients with premalignant growth in the oral cavity, or oral leukoplakia, and are currently enrolling additional patients.

        In addition to ONYX-015, we are developing products that resulted from our small molecule drug discovery efforts. Together with Bayer, we are conducting multiple clinical trials of BAY 43-9006 designed to block the inappropriate growth signals in tumor cells by inhibiting Raf kinase, an enzyme that is activated by ras to induce cancer cell growth. We have treated over 89 patients to date and

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together with Bayer, we are in the process of completing four Phase I clinical trials. In addition, we are conducting a Phase I clinical trial in Canada in patients with acute myelogenous leukemia, or AML, and myelodysplastic syndrome, or MDS. We also initiated the first Phase I clinical trial of BAY 43-9006 in combination with chemotherapy agents. We plan to initiate additional Phase I and multiple Phase II clinical trials of BAY 43-9006 in patients with various tumor types in 2002.

        Further, we are developing human viruses that selectively replicate in and kill cancer cells based on mutations or loss of function of the retinoblastoma, or RB, tumor suppressor gene. We have shown that our RB-selective therapeutic virus, ONYX-411, produces significant tumor shrinkage in animal models. In our armed virus program in collaboration with Warner-Lambert Company, a subsidiary of Pfizer, Inc., we are currently developing an armed ONYX-015 virus with a prodrug converting enzyme, Cytosine Deaminase, or CD. We are independently developing ONYX-411 and armed ONYX-411 with CD. We are conducting preclinical studies with ONYX-411 and Armed Therapeutic Viruses that are armed with CD. Pending the final results of these ongoing preclinical studies for all three products, we intend to select one product candidate by the end of 2002 for further development. Finally, Warner- Lambert continues to review possible clinical candidates arising from our recently concluded cell cycle and inflammation research programs.

Our Product Candidates

        We are developing the product candidates listed below:

ONYX-015

        Our lead product, ONYX-015, is a human virus that is genetically engineered so that it does not make E1B 55k, a viral protein that binds to a specific tumor suppressor protein, or p53, and blocks its function. As a result, ONYX-015 cannot inactivate p53 or its function and, therefore, cannot effectively replicate in normal cells. However, in most cancer cells, p53 has already lost its function through mutation of the p53 gene or other mutations in the p53 pathway. When ONYX-015 infects these cancer cells, the virus growth cycle proceeds and the cancer cells are killed. New viruses are then released and infect neighboring cancer cells, killing those cells and perpetuating the selective cancer killing cycle. This process continues, amplifying the therapeutic effect.

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Status of Collaboration

        In October 1999, we entered into a collaboration agreement with Warner-Lambert to develop and commercialize ONYX-015 as well as two additional product candidates. Pfizer subsequently acquired Warner-Lambert. In August 2001, we and Warner-Lambert amended this collaboration agreement. We regained full rights to develop and commercialize ONYX-015 in head and neck cancer and other cancers that are treated via intratumoral injections and other local and regional routes of administration. We will fund all costs associated with these efforts and will retain all profit derived from worldwide sales of ONYX-015 in these indications, subject to the potential re-establishment of the original collaboration agreement. Warner-Lambert will retain development rights for ONYX-015 for cancers where the drug is administered intravenously. We believe that the local and regional indications provide the highest probability of success in obtaining marketing approval on a timely basis, since these are the indications where ONYX-015 has demonstrated proof of concept.

Manufacturing Update

        To date, ONYX-015 development has experienced delays as a result of limited drug supply produced from a small-scale manufacturing process. Warner-Lambert had the exclusive right to commercially manufacture any products that result from our collaboration with them. As a result of the amended agreement on ONYX-015, in August 2001 we regained the manufacturing rights for ONYX-015. In January 2001, we entered into a process development and manufacturing agreement for ONYX-015 with XOMA (US) LLC. The agreement calls for XOMA to develop a large-scale production process for ONYX-015, produce clinical supplies, prepare the manufacturing facility for FDA review and provide commercial supplies to us. Together with XOMA, we are improving the existing manufacturing process to produce ONYX-015 on a large-scale basis. We will need to continue to develop the process and manufacture additional batches of ONYX-015 to demonstrate consistency and to support filing Chemistry, Manufacturing and Control, or the CMC, amendment with the FDA in order to utilize the supplies in clinical trials.

Status of Head & Neck Clinical Trials

        Together with Warner-Lambert, we initiated a Phase III clinical trial for the treatment of recurrent head and neck disease in June 2000. The trial compares intratumoral injection of ONYX-015 plus standard chemotherapy, 5-Fluorouracil and Cisplatin, versus standard chemotherapy alone. The primary objectives, or endpoints, of the trial are to establish improvements in patient survival without further growth of the treated tumor, also known as local/regional progression free survival. Secondary endpoints are to demonstrate higher quality of life and injected tumor shrinkage of greater than or equal to 50%.

        The Phase III clinical trial has experienced slow accrual due to:

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the limitation of the manufacturing scale and the inability to produce sufficient quantities of materials for multiple clinical trials including intravenous administration studies;



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the timing of the transfer of the Investigational New Drug application, or IND, from Warner-Lambert to us at the time of the amendment to the collaboration agreement in August 2001;



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the need to re-establish us as the clinical trial sponsor with the investigational sites; and



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the need to agree with the FDA on the Phase III protocol and other pivotal trial protocols to meet the regulatory and market needs.

        To date, we have currently reached less than 5% of our targeted enrollment for this Phase III study. We have enrolled patients in only five centers. In the first quarter of 2002, we decided to modify our development plan for ONYX-015 in head and neck cancer prior to advancing ONYX-015 in the

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FDA registration process and, therefore, we are not accelerating the Phase III clinical trial until these development modifications are complete.

        We are in the process of initiating an open-label Phase II/III clinical trial that will evaluate ONYX-015 in patients with refractory head and neck cancer. We expect that this trial will treat 30 patients with ONYX-015 in combination with chemotherapy for an interim evaluation of tumor response as the primary endpoint. If we observe significant tumor response rate, we may expand this study to treat additional patients. The expansion of the study will depend on agreement with the FDA that we could use a second head and neck clinical trial to support the results of our Phase III clinical trial to obtain regulatory approval.

Status of FDA discussions

        Subsequent to the transfer of the ONYX-015 IND from Warner-Lambert, we met with the FDA to discuss the Phase III clinical trial protocol for recurrent head and neck cancer. As a result, we modified and amended the protocol with the Institutional Review Boards at the clinical trial sites. In addition, we held discussions with the FDA regarding the specific requirements for a registration path to market approval in head and neck cancer. We are currently holding discussions with the FDA to determine:

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if the Phase III clinical trial in recurrent head and neck cancer alone can be used to obtain full approval;



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which quality of life endpoints would be a confirmatory measure of patient benefit;



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whether a single arm open-label Phase II/III clinical trial in refractory head and neck cancer can be used as a supportive study if a second study is required for full approval;



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what documentation is required to demonstrate that patients are refractory to standard chemotherapy in the single arm open-label Phase II/III clinical trial; and



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what data are required to demonstrate unmet medical needs in the refractory head and neck indication to support a potential accelerated approval path.

Status of Head and Neck Cancer Program

        Based on our discussions with the FDA and the status of the development of the large-scale manufacturing process, we decided in the first quarter of 2002 to modify our ONYX-015 development plan to increase the likelihood of success of commercializing ONYX-015 in head and neck cancer. Our decision was based in part on the significant investment required to support large pivotal clinical trials and the regulatory risks inherently associated with pharmaceutical development. We believe we must meet the following milestones for the ONYX-015 program in head and neck cancer to advance towards FDA approval:

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Successfully manufacture additional batches of ONYX-015 at XOMA on a consistent basis;



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Gain concurrence from the FDA of the CMC amendment for materials produced from XOMA; and



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Obtain full alignment with the FDA regarding requirements for an ONYX-015 registration path in head and neck cancer.

        As a result of our decision, we extended our timelines for the introduction of ONYX-015 to market. The extent of the delay will be dependent on our ongoing discussions with the FDA to gain concurrence on the CMC amendment and the time it will take to ensure all clinical trial design and protocols fully satisfy FDA requirements for registration. Once we have full agreement with the FDA and sufficient supply of ONYX-015, we expect to aggressively resume our pivotal clinical trials.

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Other Clinical Programs

        We completed a Phase I/II clinical trial evaluating ONYX-015 administered through intrahepatic artery infusion in patients with liver metastases of colorectal cancer. We intend to begin a Phase II clinical trial evaluating ONYX-015 in this indication in mid-2002. We are also conducting a Phase I/II clinical trial evaluating ONYX-015 administered as a mouthwash in patients with oral leukoplakia and are currently enrolling additional patients.

Liver Metastases of Colorectal Cancer.    Colorectal cancer is the third leading cause of cancer death in the United States. Aside from the standard therapies for treatment of colorectal cancer, currently there is no standard treatment specifically for liver metastases of colorectal cancer, other than surgery. Approximately 5% of patients with liver metastases of colorectal cancer have disease that may be surgically treated.

        We completed a Phase I/II clinical trial in which ONYX-015 is administered through intrahepatic artery infusion in patients with liver metastases of colorectal cancer. Intrahepatic artery infusion permits simultaneous delivery of ONYX-015 to multiple tumor sites within the liver. In this trial, patients received initial cycles of treatment with ONYX-015 alone and then received a combination of ONYX-015 plus 5-Flourouracil and Leucovorin, the standard chemotherapeutic regimen for colorectal cancer treatment, for subsequent treatment cycles. A total of 33 patients were treated and evaluated. Six patients were treated in the dose escalation phase and 27 patients received the high doses. All patients tolerated the regimen. Patients receiving the highest dose experienced extended survival compared with patients receiving lower doses. Patients who received low doses survived a maximum of 155 days. However, patients receiving higher doses had a median survival rate of 342 days with 10 of 27 patients surviving more than one year. As a result of these data, we intend to begin a Phase II clinical trial evaluating ONYX-015 in this indication in mid-2002.

Oral Leukoplakia.    The development of oral cavity cancer is frequently preceded by premalignant growths, or dysplastic lesions, in the oral mucosa. This condition is often referred to as oral leukoplakia. We reported the interim results of a Phase I/II clinical trial where ONYX-015, given as a mouthwash, is well tolerated and may cause resolution of dysplasia in patients. In the Phase II study, ONYX-015 was administered at weekly doses for 12 weeks. Repeated biopsies were performed to evaluate evidence of persistent disease. Patients demonstrating histologic improvement were eligible to receive 12 weeks of therapy. In the 10 patients on this regimen, two patients had resolution of evident dysplasia, four patients had improvement in the histologic grade of dysplasia and one patient had initial improvement followed by progression. Three patients had progression of the disease despite therapy. No significant clinical toxicity has been observed to date. We are enrolling additional patients in this trial and plan to present the final analysis of this trial at future scientific meetings.

BAY 43-9006

        The ras gene and its related biochemical pathway, or the ras signaling pathway, play a key role in cell proliferation. In normal cell proliferation, when the ras signaling pathway is activated, or "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. Raf kinase is an enzyme in the pathway that ras activates to signal cell growth. Other kinases in this part of the growth signaling pathway include MEK and ERK. The ras signaling pathway gets triggered by activation of growth factor receptors as well as through mutational activation of the ras gene. We believe that the ras signaling pathway plays an integral role in growth of some tumor types, and that inhibiting this pathway could have an effect on tumor growth. Mutations in the ras gene occur in approximately 30% of all human cancers, including 90% of pancreatic cancer, 50% of colon cancer and some lung cancers.

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Phase I Clinical Trials.    To date, we have reported on 89 patients with advanced cancers treated in Phase I clinical trials being conducted in Germany, Belgium, Canada and the United States. The objective of the Phase I studies was to test the safety, pharmacokinetics and pharmacodynamics of BAY 43-9006 when administered orally at various dosing regimens and schedules. Treated patients had advanced cancers including colorectal, hepatocellular, breast, non-small cell lung, ovarian and other cancers. Few adverse events or toxicities clearly related to BAY 43-9006 have been reported. Toxicities were generally mild and included skin reactions, anorexia, fatigue and diarrhea. Patients enrolled in these trials have achieved serum BAY 43-9006 levels equivalent to the levels at which anti-tumor activity was seen in preclinical studies. In the Phase I study in Germany, the investigator reported that some patients treated with BAY 43-9006 achieved stable disease for several weeks. We are enrolling additional patients in these studies and plan to present the final analysis of this trial at future scientific meetings.

Phase I and Phase II Clinical Trials in AML and MDS.    Together with Bayer, we initiated a Phase I clinical trial in AML and MDS patients. The first phase of the study is a dose escalation study to be followed by an expansion Phase II study.

Phase I and Phase II Clinical Trials in Multiple Tumor Types.    Together with Bayer, we initiated a Phase I clinical trial studying BAY 43-9006 in combination with chemotherapy. Additional Phase I and multiple Phase II clinical trials in various solid tumors will be initiated in 2002.

Other Product Opportunities

ONYX-411 and Armed Therapeutic Virus Products

        We believe that the RB pathway function is abnormal in most cancers. We engineered human viruses to selectively replicate in and kill cancer cells based on defects in the RB function in these cells. With our lead RB-selective virus, ONYX-411, we have shown that treatment with ONYX-411 produces significant tumor shrinkage in animal models.

        We are developing therapeutic viruses armed with anticancer genes. A number of anticancer chemotherapeutic agents are inactive forms of drugs, or prodrugs, that are converted to their active forms by specific chemical modifications. Specific enzymes, or prodrug converting enzymes, are known to carry out this conversion. We developed a system to arm our therapeutic viruses such as ONYX-015 and ONYX-411 with genes that produce prodrug converting enzymes. With this strategy, we arm each virus with a single gene that produces an enzyme that converts a prodrug into an anticancer chemotherapeutic drug at the tumor site. As a result, we believe that arming our viruses should enable the concentrated delivery of the anticancer chemotherapeutic drug to the tumor, thereby enhancing the therapeutic effect.

        Together with Warner-Lambert, we are currently developing ONYX-015 armed with the prodrug converting enzyme, CD. We are also independently developing ONYX-411 armed with CD.

        In addition, we are conducting research and development of particular genes that encode cytokines that activate an immune response in the tumor. This immune response may result either from the protein expressed by the gene itself, or from other elements of the human immune system that are activated as a result. We are currently collaborating with Sangamo BioSciences, Inc. to develop an armed virus with Sangamo's zinc finger DNA-binding transcription factor, or ZFP TF, to express the granulocyte macrophase colony-stimulating factor, or GM-CSF, in the virus in order to induce immune response. We believe that inducing immune response in the tumor will further enhance the tumor killing power of the virus.

        We are conducting preclinical studies with ONYX-411 and Armed Therapeutic Viruses. Pending the final results of these ongoing preclinical studies for all three products, we intend to select one product candidate by the fourth quarter of 2002 for further development.

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Cell Cycle and Inflammation Programs

        Together 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 is currently evaluating the most advanced lead compound in this program for its effectiveness in animal models of human cancer. We also identified other lead compounds in cell cycle and one lead compound that inhibits an enzyme associated with inflammatory diseases during the collaboration period. These leads are currently being optimized at Warner-Lambert. If Warner-Lambert develops and markets products from this research, we will receive milestone payments and royalties on their worldwide sales.

Business Strategy

        Our objective is to be a leading developer of novel cancer therapies by developing compounds that attack cancer at the molecular level. We intend to develop and commercialize a broad portfolio of products based on our selectively replicating virus technology and small molecule drugs resulting from our long-standing research and development collaborations with Bayer and Warner-Lambert.

        Elements of our strategy are to:

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Develop and obtain regulatory and marketing approvals for ONYX-015 in local and regional indications.  After we have completed our discussions with the FDA to ensure that our clinical trials and CMC amendments for ONYX-015 drug supplies from XOMA are aligned with the FDA requirements for registration and approval, we intend to complete the necessary clinical trials aimed at gaining regulatory approval of ONYX-015. In addition, we expect to develop ONYX-015 for various cancer types such as liver metastases of colorectal cancer, oral leukoplakia and other cancers.



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Develop and obtain regulatory and marketing approvals for BAY 43-9006 in various cancer indications.  Together with Bayer, we are committed to developing this novel small molecule drug in multiple tumor indications. We and Bayer are actively conducting Phase I clinical trials and intend to initiate additional Phase I and multiple Phase II clinical trials in various cancer indications as a single agent and in combination with widely used chemotherapeutic agents.



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Identify and develop additional virus products.  We are developing Armed Therapeutic Viruses that incorporate prodrug converting enzymes to selectively activate chemotherapeutic drugs at the tumor site and Armed Therapeutic Viruses incorporating cytokines. We intend to select one of these product candidates for further development by the end of 2002.



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Retain substantial co-promotion rights to our products.  We intend to build sales and marketing capabilities to promote our products in the United States and Canada. In establishing new product collaborations, we seek to retain at least 50% of marketing and profit-sharing rights in the United States. In our collaboration with Warner-Lambert for the virus programs, we retained co-promotion rights as well as the opportunity for equal profit sharing in the United States and Canada. Our collaboration with Bayer offers us co-development, co-promotion and profit-sharing rights in the United States for BAY 43-9006 and any other products resulting from our collaboration that satisfy definitions contained in the agreement.



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Establish strategic product partnerships for other virus products.  We believe that our therapeutic virus platform offers an opportunity to generate multiple development product candidates. We intend to establish strategic relationships to ensure that all product opportunities are fully maximized.

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Collaborations

Warner-Lambert: ONYX-015 and Armed Therapeutic Viruses

        Effective September 1999, we entered into an agreement with Warner-Lambert for the purpose of developing and commercializing ONYX-015 and two armed therapeutic viruses. Under the terms of this agreement, we had the right to co-promote ONYX-015 and two armed virus products with Warner-Lambert in the United States and Canada. We also had the right to share equally in resulting profits or losses in these territories. Additionally, Warner-Lambert was responsible for commercializing the products in the rest of the world and was obligated to pay us a royalty on net sales in these markets. To retain its rights for the two armed virus product candidates, Warner-Lambert is required to fully fund the research and preclinical development of these product candidates.

        We retained the rights to independently develop and commercialize products based on p53-selective armed viruses other than the two selected in the collaboration. In addition, we retained the rights to all other products derived from our therapeutic virus technology.

        Pursuant to a related agreement, Warner-Lambert purchased $10 million of our common stock from us in two installments in 2000 and 2001.

        Warner-Lambert has the right to terminate this agreement, or terminate its efforts directed at select product candidates, at any time on 90 days advance notice. In such event, all product rights, or related product rights in the case of termination directed at select product candidates, would revert to us. These product rights would be royalty-free in the case of ONYX-015, and would be royalty-bearing to Warner-Lambert in the case of the armed virus product candidates, if such candidates had entered clinical trials prior to termination.

        In August 2001, Onyx and Warner-Lambert amended the collaboration agreement for the development and commercialization of ONYX-015. We regained full rights to develop and commercialize ONYX-015 for head and neck cancer and other cancers that are treated via direct injections to the tumors and other local and regional routes of administration. We will fund all costs associated with these efforts and will retain all profit derived from worldwide sales of ONYX-015 in these indications, subject to the potential re-establishment of the original collaboration agreement. Warner-Lambert will retain development rights for ONYX-015 for cancers where the drug is administered intravenously. The parties have discontinued the clinical trials for ONYX-015 administered intravenously, and Onyx will utilize all available drug supply for clinical trials in head and neck cancer as well as other clinical trials involving local or regional administration. Once adequate drug supply for the intravenous trials is available, Warner-Lambert will have the option to pursue the development and regulatory approval of ONYX-015 for intravenous administration at its own cost. If Warner-Lambert does not exercise its option to reinitiate clinical trials for intravenous administration, we may establish one or more collaborative relationships with other parties for the development of ONYX-015. If Warner-Lambert exercises its option and if ONYX-015 receives marketing approval for intravenous administration in the United Sates, Onyx and Warner-Lambert will re-establish the collaboration under the terms of the original collaboration agreement for all indications. At that time, Onyx and Warner-Lambert will co-promote ONYX-015 in the United States and Canada and will share equally in any resulting profits.

        Onyx and Warner-Lambert are continuing their collaboration for the research and development of a CD armed virus. When a product candidate is selected for clinical development, we are obligated to pay 25% of the development costs to retain our profit sharing and co-promotion rights in the United States and Canada for this product candidate. If we choose not to or are unable for any reason to (1) fund our portion of the development costs for this Armed Therapeutic Virus product candidate, or (2) maintain our required co-promotion effort, then:

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we would lose our co-promotion and profit-sharing rights for this product;

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we would license this product exclusively to Warner-Lambert; and



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we would receive a royalty on these sales in the applicable market.

        The rights to research and develop a cytokine armed virus product were reacquired from Warner-Lambert in November 2001.

Warner-Lambert: Cell Cycle

        In May 1995, we entered into a research and development collaboration agreement with Warner-Lambert 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. Warner-Lambert is responsible for subsequent medicinal chemistry and preclinical investigations on the active compounds. We will receive milestone payments on clinical development and registration and royalties on worldwide sales of the products. Warner-Lambert is obligated to conduct and fund all clinical development, make regulatory filings and manufacture for sale the collaboration compounds. The research term under the agreement ended in August 2001. Warner-Lambert may develop products identified during the research term and, if Warner-Lambert receives FDA approval, we could receive milestone payments and royalties on these marketed products.

Warner-Lambert: Inflammation

        In July 1997, we entered into a research and development collaboration agreement with Warner-Lambert to discover and commercialize small molecule drugs for the treatment of acute and chronic inflammatory disorders. The obligations of the parties are similar to those agreed to under the cell cycle program. We would receive milestone payments based on the development and registration of any resulting products and would receive royalties on worldwide sales. The research term under the agreement ended in August 2001. Warner-Lambert may develop products identified during the research term and, if Warner-Lambert receives FDA approval, we could receive milestone payments and royalties on these marketed products.

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 or that appropriately modulate the activity of this pathway to treat cancer and other diseases. Bayer and we concluded collaborative research under this agreement in 1999. Based on this research, Bayer and we identified a development candidate, BAY 43-9006, a compound that inhibits ras signaling in cells by inhibiting Raf kinase. In our Raf kinase inhibitor program, we are conducting with Bayer Phase I clinical trials in Germany, the United States, Canada and Belgium and a Phase I trial in AML and MDS. Together with Bayer, we will initiate multiple Phase I and Phase II studies in various cancer indications studying BAY 43-9006 as a single agent and also in combination with chemotherapeutic agents.

        Bayer has paid all the costs of research and preclinical development of this drug candidate. Under our agreement with Bayer, we have the opportunity to co-fund 50% of clinical development costs worldwide, excluding Japan, and we are currently co-funding 50% of clinical development costs. Bayer will fund 100% of development costs in Japan and pay us a royalty on sales. If we continue to co-fund and we exercise our right to co-promote in the United States, we would share equally in profits or losses in this territory. 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. In other parts of the world except

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Japan, Bayer would also receive this preferential distribution. Based on our continued co-funding of development costs, Bayer will pay us $5 million at the initiation of Phase II studies and $15 million at the initiation of Phase III studies. These amounts will be repayable to Bayer from any of our future profits and royalties. At any time during product development, either company may terminate its participation in development costs, in which case the other party would retain exclusive rights to the product on a royalty-bearing basis. If we do not continue to bear 50% of product development costs, Bayer would retain exclusive, worldwide rights to this product candidate and would pay royalties to us on net sales.

        In addition to the development candidate referred to above, Bayer's chemists have optimized an additional lead compound identified in the course of the collaborative research. This continuing work has resulted in the identification of an inhibitor of Rho kinase. Rho kinase is also believed to be involved in the ras signaling pathway leading to tumor growth. This small molecule compound has been selected by Bayer to enter clinical trials. We are reviewing with Bayer the history of the discovery of this compound. Bayer has asserted that we have no economic interest in this compound, but on the basis of our current information, we believe we would have the right to receive our economic return in the event this compound is successfully developed and commercialized. We are seeking to resolve the existing disagreement, but we cannot assure you as to the ultimate outcome.

Chiron Corporation

        Our business began in April 1992 by means of the transfer from Chiron to us of the drug discovery program being conducted at Chiron by Dr. Frank McCormick, our scientific founder, and his research team. Under an agreement between Chiron and us, Chiron has an option through April 2007 to receive an exclusive or co-exclusive royalty-bearing license to any diagnostic and vaccine product candidates we may develop. If Chiron does not exercise its option rights with respect to a particular product candidate, then prior to the completion of Phase II clinical trials, we may seek a third party licensor of that product, subject to a right of first refusal in favor of Chiron, and after the completion of Phase II clinical trials for product candidates, the related option rights of Chiron expire.

        This agreement also includes a mechanism for our making proposals to Chiron for future collaborations. In these proposals, we would disclose to Chiron the material information known to us regarding the program and propose a set of commercial terms. If a proposal is made, and we and Chiron do not reach agreement within 60 days after we make the proposal, then we may, within 120 days thereafter, enter into an agreement with a third party on terms no more favorable taken as a whole than the terms that we offered to Chiron. Chiron has advised us that it believes the foregoing provision, in the context of the other provisions of this agreement, requires us to offer gene therapy programs to Chiron pursuant to this mechanism before we license any such program to a third party. We do not agree that these provisions impose this obligation to make proposals to Chiron. However, the resulting uncertainty about the interpretation of this agreement may impede our ability to enter into agreements with other companies for gene therapy products in the absence of a waiver by Chiron.

        Chiron has never exercised any right to receive a product license from us. We executed the agreement with Warner-Lambert concerning ONYX-015 and armed viruses pursuant to a waiver letter from Chiron. We understand that in recent years Chiron has reduced its research activities in the field of gene therapy. However, it is possible that Chiron will, in the future, assert rights under this agreement, which may impede or delay our ability to enter into collaboration agreements with others.

Marketing and Sales

        We currently have no marketing, sales or distribution capabilities, but we intend to build these capabilities to promote our products in the United States and Canada. Consequently, we have retained co-promotion rights in these territories for most of our products. We also expect to exploit relationships

10

with one or more pharmaceutical companies with established marketing, sales and distribution capabilities and direct sales forces to market our products. We may be unable to establish in-house marketing, sales and distribution capabilities or relationships with third parties, and may not be successful in gaining market acceptance for our products.

Manufacturing

        At this time, we do not have internal manufacturing capabilities to supply small or large-scale clinical trials or commercial quantities of ONYX-015. To manufacture our products for clinical trials or on a commercial scale, if we are required to or choose to do so, we will have to build or gain access to a manufacturing facility, which will require a significant amount of funds. In our collaborations in small molecule drug discovery, Bayer and Warner-Lambert are obligated to manufacture all such drugs for clinical development and commercialization.

        We have used contract manufacturers for the production of ONYX-015 for use in our clinical trials. Molecular Medicine LLC has manufactured ONYX-015 for use in our Phase III clinical trial using a small-scale manufacturing process. Although Molecular Medicine has produced viral products for Phase I and Phase II clinical trials, prior to the commencement of our Phase III clinical trial of ONYX-015, Molecular Medicine had not produced Phase III clinical trial materials for us or any other parties.

        To date, we have had delays in the production and the release of batches of clinical material manufactured by Molecular Medicine. While we have successfully produced and released batches of materials to support the Phase III clinical trial, Molecular Medicine has had production problems resulting in failed batches. Our agreement with Molecular Medicine terminates in June 2002.

        In January 2001, we entered into a process development and manufacturing agreement for ONYX-015 with XOMA. The agreement would allow us to obtain clinical and commercial supplies of ONYX-015 from XOMA. The agreement calls for XOMA to develop a large-scale production process for ONYX-015, produce clinical supplies, prepare the manufacturing facility for FDA review and provide commercial supplies to us. Together with XOMA, we are improving the existing manufacturing process to produce ONYX-015 on a large-scale basis.

        Together with XOMA, we are developing a process to produce ONYX-015 batches in a bioreactor which is 10 times larger than that of Molecular Medicine. Once we have completed the 10-fold scale up, we will work with XOMA to develop commercial manufacturing in a bioreactor 50 times larger than that of Molecular Medicine. We are currently working with XOMA to modify the process and manufacture consistent batches of ONYX-015 at the 10-fold scale increase to demonstrate consistency in the larger-scale process for filing of the CMC amendment. We expect to complete the process development and manufacture consistent batches to pass compliance testing and to be released for clinical trials by the second half of 2002. We expect to move forward with the 50-fold scale up development and manufacturing in 2003. Although XOMA has produced a number of protein products on a large-scale basis, XOMA does not have experience in large-scale viral manufacturing. XOMA may terminate the contract with 48 months' notice for any reason.

        Bayer has the manufacturing responsibility to supply BAY 43-9006 for clinical trials and to support commercial requirements. To date, there has been sufficient drug supply to support all clinical trials in progress as well as future clinical trials. We believe that Bayer has the capability to meet all future drug supply needs and meet the FDA and other regulatory agency requirements for commercialization.

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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. In October 1997, we were awarded United States Patent No. 5,677,178 for claims covering the use of ONYX-015 for the treatment of functionally p53-deficient cancers. In April 1999, we were awarded European Patent No. 689,447, for claims covering the use of ONYX-015 for the treatment of functionally p53-deficient cancers. We were also awarded United States Patent No. 5,801,029, a broad methods of use patent, for claims covering the use of adenoviral mutants that kill functionally RB-deficient tumor cells and the corresponding European Patent No. 931830. Each of these patents includes claims covering armed viruses with anticancer genes. Further, we have made additional filings worldwide that claim adenoviruses can be used to kill functionally deficient p53 or RB cancer cells, with or without a prodrug converting enzyme. We were also awarded United States Patent No. 5,846,945, for claims covering compositions of matter that consist of ONYX-015 and a chemotherapeutic. As of December 31, 2000, we owned or had licensed rights to 35 United States patents and 41 United States patent applications, and generally, foreign counterparts of these filings. We have licensed patents and patent applications covering formulations of viruses, prodrug converting enzymes and other technology useful in the conduct of our business.

        Generally, patent applications in the United States are maintained in secrecy until patents issue and 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 patent applications for such inventions. 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 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 with similar technology may challenge or circumvent our patents or patent applications, if issued, and the rights granted thereunder may not provide proprietary protection or competitive advantages to us with respect to these competitors. Furthermore, others may independently develop similar technologies or duplicate technology that we have developed. 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.

        We are aware of pending patent applications that others have filed that may pertain to aspects of our programs. 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.

        With respect to ONYX-015 and selectively-replicating viruses, we are aware of a patent application filed in the United States, Europe, Japan and Canada by General Hospital Corporation, an affiliate of Massachusetts General Hospital. This patent application is related to research involving a modified

12

herpes simplex virus but it also includes broader claims that, if they were to issue, would cover ONYX-015 and other selectively-replicating viruses. We believe, and have received an opinion from outside counsel to the effect, that such broad claims made in the General Hospital patent application are not patentable. Consistent with this opinion is a review of the European patent status of the General Hospital patent application, which shows that the patent examiner is requiring that General Hospital limit the claims to herpes viruses. However, General Hospital may receive broad claims in one or more countries, and we may not successfully challenge these claims. We may not obtain a license if this patent were to issue.

        We identified United States Patent No. 5,837,520 that covers methods of purification of viral vectors. Canji, Inc. either owns or has licensed the rights to this patent. We may seek a license under this patent from Canji. However, if a license were not available at commercially reasonably terms, or at all, we believe that we could develop purification methods that are not covered by the patent.

        We identified four European Patent Applications, EPA 415, 731; EPA 657, 539; EPA 657, 540; and EPA 690, 129, that claim enzymes for converting prodrugs to their active forms for treating disease, including cancer, and methods of delivering the enzymes using viruses. Glaxo Wellcome either owns or has licensed the rights to these patent applications. The European Applications were filed in 1989, and as yet, have not been granted. We assume that one or more corresponding United States patent applications have been filed, but none have issued yet. The issuance of any of these patent applications in either Europe or the United States will not prevent us from developing and commercializing ONYX-015. However, these patent applications, should they issue, may restrict our ability to incorporate prodrug converting enzymes into viruses. Moreover, we may not be successful in challenging these claims, under any of these patents if they were to issue, and we may not obtain a license to the patent.

        Genetic Therapeutic Inc. owns or has licensed the rights of United States patent No. 5,998,205. This patent covers adenoviruses that replicate in specific tissue types in which replication is controlled by genetic elements whose expression is unique to those tissues. This patent does not cover ONYX-015, but may cover a subset of our RB-selective viruses whose replication is controlled by a genetic element expressed in nearly all tumor cells regardless of the tissue of origin. If this patent were asserted against us, we may not successfully challenge these claims and we may not obtain a license.

        Introgen Therapeutics, Inc. owns or has licensed the rights of United States Patent No. 6,194,191. This patent covers methods for producing/purifying adenoviruses. We may seek a license to this patent. However, if a license were not available at commercially reasonably terms, or at all, we believe that we could develop purification methods that are not covered by the patent.

        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 the agreement, 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 research 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 discovered or developed by us, or that may arise out of our research. We must obtain the requisite regulatory approval by government agencies prior to commercialization of our products. We anticipate that our products will be subject to

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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, recordkeeping and marketing and promotion of such products.

        The steps ordinarily required before a drug or biological product may be marketed in the United States include:

•

preclinical studies;



•

the submission to the FDA of an IND that must become effective before human clinical trials may commence;



•

adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug or biologic;



•

the submission of a marketing application to the FDA; and



•

FDA approval of the marketing application, including inspection and approval of the product manufacturing facility.

        Preclinical trials involve laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of each product. 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 following its receipt by the FDA. Submission of an IND may not result in FDA clearance to commence clinical trials, and the FDA's failure to object to an IND does not guarantee FDA approval of a marketing application.

        Clinical trials involve the administration of the investigational product 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 patient's 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 certain other European and Asian countries have similar regulations.

        The goal of Phase I clinical trials is to establish initial data about safety and tolerance of the investigational product in humans. The goal of Phase II clinical trials is to provide evidence about the desired therapeutic efficacy of the investigational product 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. The Phase III clinical trial consists of expanded, large-scale, multicenter studies in the target patient population. The goal of these studies is to obtain definitive statistical evidence of the efficacy and safety of the proposed product and dosage regimen.

        We would need to submit all data obtained from this comprehensive development program as a marketing application to the FDA, and to the corresponding agencies in other countries for review and approval, before marketing products. The FDA may elect to present data on our products to one of its advisory committees for review and recommendation before it grants approval. Essentially all of our proposed products will be subject to demanding and time-consuming approval procedures in the countries where we intend to commercialize our products. These regulations define not only the form

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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;



•

testing;



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quality assurance;



•

packaging;



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storage;



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documentation;



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recordkeeping;



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labeling;



•

advertising; and



•

marketing procedures.

        Effective commercialization also requires inclusion of our products in national, state, provincial, or institutional formularies or cost reimbursement systems.

        The FDA must approve our products, including the manufacturing processes and facilities used to produce these products, before the products may be marketed in the United States. 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 drug. Moreover, if regulatory approval of a drug 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. Moreover, even if regulatory approval is granted, such approval may include significant limitations on indicated uses for which a product could be marketed. In some instances, regulatory approval may be granted with the condition that confirmatory Phase IV clinical trials are carried out. If these Phase IV clinical trials do not confirm the results of previous studies, regulatory approval for marketing may be withdrawn. Failure to comply with FDA and other applicable regulatory requirements may result in, among other things:

•

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



•

withdrawal of approval of our products.

        In addition to regulations enforced by the FDA, we are subject to regulation under:

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the Occupational Safety and Health Act;



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the National Environmental Policy Act;

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•

the Toxic Substances Control Act;



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the Resource Conservation and Recovery Act; and



•

other present and potential future federal, state or local regulations.

        Our potential products may require review by the Recombinant DNA Advisory Committee. In other countries, similar regulations may apply. Our research and development involves the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources.

        Whether or not we obtain FDA approval, approval of a product by comparable regulatory authorities will be necessary in foreign countries prior to the commencement of marketing of the product in such 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 drug and biological products discovered by us or arising from our programs.

Competition

        We are engaged in a rapidly changing and highly competitive field. Other products and therapies that currently exist or are being developed will compete with the products we are seeking to develop and market. Some of these competitive products are in clinical trials. Direct competitors to our BAY 43-9006 program include Pfizer, Astra Zeneca PLC, OSI Pharmaceuticals, Inc., Genentech, Inc. and Protein Design Labs, Inc., or PDLI. Pfizer is conducting Phase I clinical trials with a small molecule targeting the MEK kinase, an enzyme that is also involved in the ras signaling pathway. In addition, potential competition may come from agents that target cancer cells with positive Epidermal Growth Factor, or EGF, receptors and Vascular Endothelial Growth Factor, or VEGF, receptors. These agents include antibodies and small molecules. In particular, OSI Pharmaceuticals and Astra Zeneca are developing small molecule inhibitors of tyrosine kinase. These products, IRESSA™ and Tarceva™ are currently in Phase III clinical trials. Companies working on developing antibody approaches include ImClone Systems, Incorporated with a C225 antibody targeting EGF receptors and Genentech and PDLI with antibodies targeting VEGF receptors. In addition, many other pharmaceutical companies are developing novel cancer therapies that, if successful, would provide competition for BAY 43-9006.

        The agents directly competitive to our therapeutic viruses include Introgen Therapeutics' p53 gene therapy product that is currently in Phase III clinical trials for treatment of head and neck cancer. Targeted Genetics Corporation's tumor inhibiting gene therapy in combination with radiation therapy for the treatment of head and neck cancer is currently in Phase II clinical trials. Vical Incorporated is in Phase II clinical trials with Allovectin-7®, a gene therapy product, for treatment of early stage cancer of the oral cavity. In addition, there are other therapeutic approaches in development to treat head and neck cancer and liver metastases of colorectal cancer. These approaches include monoclonal antibodies and small molecules targeting cancer cells with positive EGF receptors. ImClone Systems is conducting Phase II/III clinical trials of a monoclonal antibody targeting EGF receptors in patients with head and neck cancer and liver metastases of colorectal cancer. OSI Pharmaceuticals is conducting Phase II/III clinical trials of a small molecule targeting tyrosine kinase for treatment of head and neck cancer. Other small molecule approaches in Phase II clinical trials for treatment of head and neck cancer

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include Tularik Inc.'s Lometrexol, an anti-folate, and Eli Lilly and Company's Gemcitabine. If approved, the products of these and other competitors now in clinical trials will compete directly with ONYX-015.

        We compete with our competitors based on a variety of factors, including:

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product efficacy and safety;



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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.

Employees

        As of December 31, 2001, we had 85 full-time employees of whom 19 hold Ph.D. or M.D. degrees. Of our employees, 59 are in research and development and 26 are in corporate development, finance and administration. No employee of ours is represented by a labor union and we consider our employee relations to be good. In late 2001, we reduced the size of our workforce, primarily impacting the research and administrative functions, by approximately 30 percent in addition to implementing various cost-saving measures in all areas of the company.

Properties

        We occupy a total of approximately 50,000 square feet of office and laboratory space in our primary facility in Richmond, California. The lease expires in April 2005 with an option to extend the lease for an additional five years. We entered into a sublease with Syrrx, Inc. to use 1,450 square feet of this facility and certain common areas for a six-month term commencing in November 2001. The sublease fee is $6,850 per month. Syrrx has one option to extend the term for up to an additional three months.

        We also lease an additional 12,000 square feet of space in a secondary facility in Richmond, California. The lease for approximately 9,000 square feet in this facility expires in September 2010 with renewal options at the end of the lease for two subsequent five-year terms. The lease for 3,000 square feet in this facility expires in October 2003 with renewal options at the end of the lease term for three years and four years. We determined that we no longer require this space as a result of the reduction in force that was announced in October 2001, and we are currently attempting to sublease all of the 12,000 square feet in this facility.

Legal Proceedings

        We are not a party to any material legal proceedings.

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ADDITIONAL BUSINESS RISKS

        In addition to the risks discussed in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," our business is subject to the business risks set forth below.

If we are not able to demonstrate the effectiveness of ONYX-015 in our clinical trials or if our clinical trials are delayed, we may be unable to commercialize ONYX-015.

        In June 2000, we initiated a 360-patient, multi-center Phase III clinical trial of ONYX-015 administered by direct injection into tumors, or intratumoral injection, in patients with head and neck cancer that has progressed following initial treatment with surgery and/or radiation, or recurrent disease. Enrollment to this trial has proceeded very slowly. In the first quarter of 2002, we decided to modify our development plan for ONYX-015 in head and neck cancer prior to advancing ONYX-015 in the FDA registration process and, therefore, we are not accelerating the Phase III clinical trial until these development modifications are complete. In addition, we are planning to initiate a Phase II/III clinical trial in head and neck cancer patients with refractory disease. Historically, many companies have failed to demonstrate the effectiveness of pharmaceutical products in Phase III clinical trials notwithstanding favorable results in Phase II clinical trials. We may fail to demonstrate desired effectiveness levels in our Phase III clinical trial of ONYX-015. In addition, we may observe previously unforeseen side effects. We may fail to extend the findings of previous clinical trials in our Phase III clinical trial of ONYX-015, including similar tumor response rates, duration of tumor response or safety.

        The process of obtaining FDA and other required regulatory approvals, including foreign approvals, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. We have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. We are currently under discussions with the FDA on the design of our clinical trials to determine whether they meet the needs of the FDA for registration. The FDA may not accept our Phase III clinical trial and our planned Phase II/III clinical trial in refractory head and neck cancer as registration trials. In addition, the FDA may not accept the results of our clinical trials or accept as sufficient for market approval other elements of the application that we may file for ONYX-015. The FDA may require changes in our current trials or may require additional clinical trials, which may be extensive, expensive and time-consuming. We cannot market ONYX-015 unless we receive regulatory approval.

        In addition, 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 that may be unrelated to ONYX-015. These adverse effects may impact the interpretation of clinical trial results.

We may fail to demonstrate that ONYX-015 is effective for the treatment of other types of cancer even if ONYX-015 is proven effective for the treatment of head and neck cancer.

        We are initially developing ONYX-015 for treatment of head and neck cancer using intratumoral injection. Even if we are successful in developing ONYX-015 for this type of cancer, we may not demonstrate that ONYX-015 is effective in the treatment of a broader array of cancer types. We conducted a Phase I/II clinical trial for treatment of liver metastases of colorectal cancer with ONYX-015 administered through intrahepatic artery infusion. In addition, we are in the process of completing Phase I/II clinical trials of ONYX-015 for treatment of oral dysplasia. The Phase I/II clinical trial in liver metastases of colorectal cancer is based on a small number of patients, and we may not reproduce the results from these clinical trials in future clinical trials with additional patients. If we are not successful in establishing the effectiveness of ONYX-015 in a broad range of cancer types that are treated via direct injections to the tumors and other local and regional routes of administration or

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demonstrate effectiveness in metastatic cancers treated via intravenous administration, ONYX-015 may not have a broad commercial use.

We do not have manufacturing expertise or capabilities and are dependent on third parties to fulfill our manufacturing needs, which could result in the delay of clinical trials or regulatory approval.

        We lack the resources, experience and capabilities to manufacture our products on our own. We would require substantial funds to establish these capabilities. Consequently, we are dependent on third parties, including collaborative parties and contract manufacturers, to manufacture our products and product candidates. 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 delay our 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 our products or to develop our own manufacturing capabilities.

We currently rely on a limited number of sources for the manufacturing of ONYX-015, and if these sources are unable or unwilling to deliver the required quantities, we may not be able to find replacement manufacturers, which could result in a delay in clinical trials or in regulatory approval.

        We currently rely on two sources for the manufacturing of ONYX-015, Molecular Medicine and XOMA. We are aware of only a limited number of manufacturers who we believe would have the ability and capacity to manufacture this product or any other therapeutic viruses we may develop. Currently, we have clinical supplies produced and released for clinical trials from Molecular Medicine. Molecular Medicine has experienced production problems resulting in failed batches. In addition, we have held up final release of some of the batches from Molecular Medicine until the manufacturer completed documentation that complies with our manufacturing standards. Our agreement with Molecular Medicine will expire in June 2002.

        In our manufacturing collaboration with XOMA, we made modifications to the process to increase the scale of the manufacturing process and to minimize batch failures. We do not expect XOMA to begin supplying us with ONYX-015 for use in clinical trials before mid-2002. This could delay our clinical trials and our applications for regulatory approval with the FDA. If XOMA fails to supply us with sufficient materials, we may be forced to incur additional expenses to pay for the manufacture of materials using a replacement contract manufacturer, if we can find a replacement manufacturer, or to develop our own manufacturing capabilities, which may not occur within a reasonable amount of time or at commercially reasonable rates.

No one has manufactured replicating human viruses at a large commercial scale; if we are unable to develop an effective process to manufacture ONYX-015 on a large scale, our clinical trials and regulatory approval would be delayed.

        No one has produced replicating human viruses using a commercial-scale manufacturing process. To date, Molecular Medicine and we have experienced production problems using a small-scale process to supply our clinical trials. We are making changes to the process and operations using a larger scale process at XOMA. However, we may need to make additional process changes and operational changes to make the manufacturing process more reliable and to make the process easier for us to develop into a larger commercial-scale manufacturing process. If we are unable to improve the large-scale manufacturing process, we may not increase the number of clinical trials for ONYX-015 and the number of sites enrolling patients. If we are unable to expand the number of clinical trials, clinical sites

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enrolling patients and patients receiving ONYX-015, the results from our clinical trials will be delayed, and we will not receive regulatory approval without the results from these trials.

XOMA may not be able to produce commercial quantities of ONYX-015, which could delay regulatory approval.

        To obtain regulatory approval for ONYX-015, we will need to treat a large percentage of the patients in our clinical trials for registration using ONYX-015 produced from the manufacturing process and in the same manufacturing facility that we intend to use following FDA approval. In conjunction with XOMA, we will need to modify the manufacturing process to produce large quantities of ONYX-015 and to lower the cost by improving the efficiency of the process. To modify the manufacturing process and to meet our quality standards for ONYX-015, in conjunction with XOMA, we will need to spend a significant amount of time and capital and complete a substantial amount of experimentation. In conjunction with XOMA, we will need to expand and modify existing manufacturing facilities to produce commercial quantities of ONYX-015. XOMA does not have experience in large-scale viral manufacturing.

        In addition, XOMA may terminate our process development and manufacturing agreement with us for any reason by providing notice 48 months in advance. Further, if Warner-Lambert asserts its right as the sole manufacturer of ONYX-015 for commercial supply after having exercised the option to develop and commercialize ONYX-015 in intravenous indications, we will have to rely on Warner-Lambert for commercial supply of ONYX-015 rather than XOMA and the timing for the availability of the commercial supply will depend on when Warner-Lambert decides to invest in a commercial manufacturing facility.

        We will need to demonstrate to the FDA that the product from the process manufactured at XOMA is comparable to ONYX-015 produced from the process at Molecular Medicine. Filing of our applications for regulatory approval may be delayed if we:

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encounter difficulties in modifying the manufacturing process;



•

fail to treat patients in our clinical trials required for registration with product from the new manufacturing process; or



•

fail to meet the FDA requirements for the CMC submission for the Biologics License Application, or BLA.

We are dependent upon collaborative relationships to develop, manufacture and commercialize our products and to obtain regulatory approval, which could delay the development and commercialization of our products.

        Our strategy for developing, manufacturing and commercializing our products and obtaining regulatory approval depends in large part upon maintaining and entering into collaboration agreements with pharmaceutical companies or other collaborators. We have entered into a number of collaboration agreements with different parties, including research, development and marketing agreements with Warner-Lambert and Bayer. If we fail to maintain these collaborative relationships or to establish new collaborative relationships, we would need to undertake these research, development, manufacturing and marketing activities at our own expense, which would significantly increase our capital requirements and limit the programs we are able to pursue. Further, we would incur significant delays with the development, manufacture or sale of our products.

        In August 2001, Onyx and Warner-Lambert amended the collaboration agreement for the development and commercialization of ONYX-015. We regained full rights to develop and commercialize ONYX-015 in head and neck cancer and other cancers that are treated via direct injections to the tumors and other local and regional routes of administration. We will fund all costs associated with these efforts and will retain all profit derived from worldwide sales of ONYX-015 in

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these indications, subject to the potential re-establishment of the original collaboration agreement. Warner-Lambert will retain development rights for ONYX-015 for cancers where the drug is administered intravenously.

        We are subject to a number of risks associated with our dependence upon collaborative relationships, including:

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the amount and timing of expenditure of resources can vary because of collaborator decisions;



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business combinations and changes in a collaborator's business strategy may adversely affect the party's willingness or ability to complete its obligations under the collaboration agreement with us;



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the right of the collaborator to terminate its collaboration agreement with us on limited notice and for reasons outside our control;



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loss of significant rights to our collaborative parties if we fail to meet our obligations under these agreements;



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disagreements as to ownership of clinical trial results or regulatory approvals, and the refusal of the FDA to recognize us as holding the regulatory approvals necessary to commercialize our products;



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withdrawal of support by a collaborator following the development or acquisition by the collaborator of competing products; and



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disagreements with a collaborator regarding the collaboration agreement or ownership of proprietary rights.

        Due to these factors and other possible disagreements with collaborators, we could suffer delays in the research, development or commercialization of our products or we may become involved in litigation or arbitration, which would be time consuming and expensive.

Chiron may have preferential rights to establish collaborations with us, which may complicate our future collaborative arrangements.

        We were established in April 1992 by means of a transfer from Chiron to us of the drug discovery program conducted at Chiron by Dr. Frank McCormick, our scientific founder, and his research team. Under the agreement executed at that time, we granted Chiron preferential rights to receive product licenses in the fields of diagnostics and vaccines, and also established a mechanism for our making proposals to Chiron for future collaborations. Chiron has advised us that it believes this mechanism requires us to offer gene therapy programs to Chiron before licensing any of these programs to a third party. We and Chiron have different interpretations of this agreement as it relates to the scope of Chiron's rights. We executed our agreement with Warner-Lambert for the development of ONYX-015 and two other virus products pursuant to a waiver letter from Chiron. If Chiron does not grant us further waivers and asserts rights under the April 1992 agreement, or if disputes arise, we may encounter difficulties or delays in entering into future collaborations for other product candidates.

We do not fully understand the biological characteristics of our therapeutic viruses, and their interactions with other drugs and the human immune and other defense systems, which may cause us to fail to demonstrate the safety and effectiveness of our products in clinical trials.

        Therapeutic viruses are novel and we are still determining the biological characteristics of these viruses. For example, in our clinical trials to date, we have achieved the best results when ONYX-015 is used in combination with standard chemotherapy drugs, but we are uncertain as to the reasons for and the nature of the interaction of the virus with these drugs. In addition, we are still investigating the response of the human immune system to our therapeutic viruses, and the immune system may play a

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role in limiting the tumor-killing effect of our therapeutic viruses. We also do not know the extent the human body may clear our therapeutic viruses from circulation in the bloodstream and limit the tumor-killing activity of our therapeutic viruses. Further, we are uncertain as to whether the killing activity of ONYX-015 is specific to cells having the abnormal function involving the p53 gene. Moreover, we do not understand all of the many factors that contribute to the formation of each individual patient's cancer. These factors include not only the cancer type, but also the pressures within the tumor and the presence of normal cells and fibrous tissue within the tumor. These factors make each tumor unique. Because of the variety of factors, some cancer patients respond to a particular type of cancer therapy while others do not, even among patients with the same cancer type. The novelty and scientific uncertainties regarding our therapeutic viruses and the uniqueness of human cancers from patient-to-patient increase the risk that we will not successfully develop our product candidates or prove their safety and effectiveness in clinical trials. Even if we succeed in developing our product candidates, our product candidates may not have a therapeutic effect in a broad patient population.

Even if our products are approved, the market may not accept our products.

        Even if our product development efforts are successful and even if the requisite regulatory approvals are obtained, our products may not gain market acceptance among physicians, patients, healthcare payers and the medical community. 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 our 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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availability of third-party reimbursement;



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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.

        If any of our products do not achieve market acceptance, we may lose our investment in that product which may cause our stock price to decline.

We do not have marketing or sales experience or capabilities and are dependent on the efforts of others, which could limit our ability to commercialize our products.

        We intend to enter into agreements with third parties to market and sell most of our products if we receive regulatory approval for a product. We may not be able to enter into marketing and sales agreements with others on acceptable terms, if at all. To the extent that we enter into marketing and sales agreements with other companies, our revenues, if any, will depend on the efforts of others. We also have the right under our collaboration agreements to co-promote our products in conjunction with our collaborators. If we are unable to enter into third-party agreements or if we are exercising our rights to co-promote a product, then we will be required to develop marketing and sales capabilities. We may not successfully establish marketing and sales capabilities or have sufficient resources to do so. If we do not develop marketing and sales capabilities, we may not meet our co-promotion obligations under our collaboration agreements, which could result in our losing these co-promotion rights. If we do develop such capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations and we will incur additional expenses.

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Adverse events in the field of viral gene therapy may negatively affect regulatory approval or public perception of our products, which could delay our clinical trials.

        We depend in part on public acceptance of the use of viruses as therapeutics or as delivery vehicles for gene therapy for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that these therapies are unsafe, and these therapies may not gain acceptance by the public or the media. As a result of negative public reaction to these therapies, the FDA and the Recombinant DNA Advisory Committee, which acts as an advisory body to the National Institutes of Health, may impose greater regulation, stricter clinical trial oversight and stricter commercial product labeling requirements. Any adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation of our product candidates and potential regulatory delays relating to the testing or approval of our product candidates.

We have a history of losses, and we expect to continue to incur losses.

        As of December 31, 2001, we had an accumulated deficit of approximately $113 million. We have incurred these losses principally from costs incurred in our research and development programs and from our general and administrative costs. We derived no significant revenues from product sales or royalties. We expect to incur significant and increasing operating losses over the next several years as we expand our research and development efforts, preclinical testing and clinical trial and manufacturing activities, including the 2001 manufacturing contract with XOMA. We expect our operating losses to increase even more dramatically with the amendment of the collaboration agreement with Warner-Lambert for the development of ONYX-015. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the establishment or termination of collaborations, the timing and amount of collaboration payments under the terms of our collaboration agreements, or the initiation, success or failure of clinical trials.

        We do not expect to generate revenues from the sale of products for the foreseeable future. We expect that substantially all of our revenues for the foreseeable future will result from payments under our collaboration agreements. Our ability to achieve profitability depends upon our success in completing development of our potential products, obtaining required regulatory approvals and manufacturing and marketing our products.

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 research, preclinical testing and clinical trials necessary to develop our technology and proposed products, and to establish or maintain relationships with collaborative parties. Our future capital requirements will depend upon a number of factors, including:

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continued scientific progress in the research and development of our technology programs;



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the size and complexity of these programs;



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our ability to establish and maintain collaboration agreements;



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our ability to manufacture sufficient drug supply to complete clinical trials;



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progress with preclinical testing and clinical trials;



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the time and costs involved in obtaining regulatory approvals;



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the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;



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competing technological and market developments; and

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product commercialization activities.

        We may not be able to raise additional financing on favorable terms, or at all. If we are unable to obtain additional funds, we may delay or terminate clinical trials, 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.

If we lose our key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.

        The loss of the services of one or more of our 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, other than for our chief executive officer. We depend on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We face competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, and other research institutions. Because of the scientific nature of our business, we are highly dependent on principal members of our scientific and management staff. To pursue our product development plans, we will need to hire additional management personnel and additional qualified scientific personnel to perform research and development, as well as personnel with expertise in clinical testing, government regulation and manufacturing. We may not be successful in hiring or retaining qualified personnel.

We face intense competition and rapid technological change, and many of our competitors have substantially greater managerial resources than we have.

        We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market products 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 products are in clinical trials. If approved, the products of these and other competitors now in clinical trials will compete directly with BAY 43-9006 and ONYX-015. Other companies are developing drugs targeting cancer cells that may compete with our other product candidates.

        Many of our competitors, either alone or together with collaborators, have substantially greater financial resources and larger research and development staffs than we do. 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.

        Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before we do. If we 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 products to treat each of the diseases for which we are seeking to develop therapeutic products. In addition, our product candidates 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