UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

or

For the transition period from                     to                    

Commission File Number: 0-28298

ONYX PHARMACEUTICALS, INC.

3031 Research Drive
Richmond, California 94806
(Address of principal executive offices)

(510) 222-9700
(Registrant’s telephone number, including area code)

     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 proceeding 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. [X] Yes [  ] No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [  ] No

     Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 34,906,990 as of August 2, 2004.

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INDEX

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

CONDENSED BALANCE SHEETS

See accompanying notes.

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CONDENSED STATEMENTS OF OPERATIONS

See accompanying notes.

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CONDENSED STATEMENTS OF CASH FLOWS

See accompanying notes.

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NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004, or for any other future operating periods.

     The condensed balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

     Certain amounts have been reclassified from research and development expenses to marketing expenses to conform to the current period presentation.

     For further information, refer to the financial statements and footnotes thereto included in the Onyx Pharmaceuticals, Inc. (the “Company” or “Onyx”) Annual Report on Form 10-K for the year ended December 31, 2003.

Note 2. Stock-Based Compensation

     The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), to account for employee stock options, because the alternative fair value method of accounting prescribed by Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant.

     The pro forma information regarding net loss and loss per share prepared in accordance with SFAS 123, as amended, has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS 123. The fair value of options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

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     The following table illustrates the pro forma effects on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

Note 3. Net Loss Per Share

     Basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. Potentially dilutive outstanding securities consisting of 2,655,994 stock options and warrants as of June 30, 2004 and 3,656,087 stock options and warrants as of June 30, 2003 were not included in the computation of diluted net loss per share because their effect would have been antidilutive.

Note 4. Comprehensive Loss

     Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss is comprised of unrealized holding gains and losses on the Company’s available-for-sale securities that are excluded from net loss and reported separately in stockholders’ equity. Comprehensive loss and its components are as follows:

Note 5. Recent Accounting Pronouncements

     In March 2004, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) reached a consensus on EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 provides guidance regarding disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The guidance for evaluating whether an investment is other-than- temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The Company’s adoption of this EITF did not have a material effect on the Company’s financial position or results of operations.

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Note 6. Sale of Equity Securities

     In February 2004, the Company sold 4,637,000 shares of common stock at a price of $33.75 per share in an underwritten public offering pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. Also in February 2004, the underwriters for the offering purchased an additional 48,693 shares of the Company’s common stock to cover over-allotments at a price of $33.75 per shares. The Company received aggregate net cash proceeds of approximately $148.3 million from this public offering.

Note 7. Restructuring

     In June 2003, the Company announced the discontinuation of its therapeutic virus program and the termination of all internal research and development activities. The decision was part of a business realignment that placed an increased priority on the development of BAY 43-9006, Onyx’s lead product candidate that is being developed jointly with Bayer Pharmaceuticals Corporation. In 2003, the Company recorded an aggregate charge of $5.5 million associated with the restructuring, including a reduction in force of approximately 75 positions. The Company recorded an additional restructuring charge of $258,000 in the three and six months ended June 30, 2004 due to a change in estimate related to the discontinued use and inability to sublet a portion of the Company’s leased facility. At December 31, 2003, the accrual for restructuring was $325,000. As of June 30, 2004, the accrual for restructuring was $416,000, consisting of charges related to the discontinued use of a portion of the Company’s leased facilities. The remaining accrued restructuring costs are expected to be fully amortized by the second quarter of 2005.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. These statements appearing throughout our Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth under “Business Risks.”

Overview

     We are a biopharmaceutical company dedicated to developing innovative therapies that target the molecular mechanisms that cause cancer. With our collaborators, we are developing small molecule, orally available drugs with the goal of changing the way cancer is treated.™ A common feature of cancer cells is the excessive activation of signaling pathways that cause abnormal cell proliferation. In addition, tumors require oxygen and nutrients from newly formed blood vessels to support their growth. The formation of these new blood vessels is a process called angiogenesis. We are applying our expertise to develop oral anticancer therapies designed to prevent cancer cell proliferation and angiogenesis by inhibiting proteins that signal or support tumor growth. By exploiting the genetic differences between cancer cells and normal cells, we aim to create novel anticancer agents that minimize damage to healthy tissue. Our lead drug candidate, BAY 43-9006, is currently in Phase III clinical development with our collaborator, Bayer Pharmaceuticals Corporation.

     BAY 43-9006 is a novel, orally available signal transduction inhibitor and is one of a new class of anticancer treatments that target growth signaling in cancer. BAY 43-9006 operates through dual mechanisms of action by inhibiting proliferation of cancer cells and inhibiting angiogenesis. Several drugs developed and owned by others, and approved by the U.S. Food and Drug Administration, or FDA, validate this treatment approach. However, BAY 43-9006 is the first small molecule agent to enter clinical trials directed against the enzyme RAF kinase to inhibit tumor cell proliferation. In addition, BAY 43-9006 displays activity that inhibits VEGFR-2 and PDGFR-ß, two key proteins involved in angiogenesis.

     We and Bayer are developing and, if approved, will market BAY 43-9006 under our collaboration agreement. Together with Bayer, we are conducting multiple clinical trials of BAY 43-9006. To date, we have treated over 1,000 patients. In October 2003, we announced the initiation of a pivotal Phase III clinical trial after a Special Protocol Assessment, or SPA, with the FDA, in patients with advanced renal cell carcinoma, also known as kidney cancer. This decision was based on interim Phase II data, which provided encouraging signs of tumor shrinkage and disease stabilization in patients with advanced kidney cancer. The agent is also being studied in multiple Phase II clinical trials for the treatment of kidney, melanoma, liver and other cancers, as well as in multiple Phase Ib trials evaluating its use in combination with standard chemotherapy drugs.

     In collaboration with Warner-Lambert Company, now a subsidiary of Pfizer Inc, we identified a number of lead compounds that modulate the activity of key enzymes that regulate the process whereby a single cell replicates itself and divides into two identical new cells, a process known as the cell cycle. Mutations in genes that regulate the cell cycle are present in a majority of human cancers. Warner-Lambert is currently advancing a lead candidate from that collaboration, a small molecule cell cycle inhibitor targeting a cyclin-dependent kinase, CDK4, expected to enter Phase I clinical trials in 2004.

     In February 2004, we sold 4,637,000 shares of our common stock at $33.75 per share in an underwritten public offering pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. Also in February 2004, the underwriters for the offering exercised their over-allotment option and purchased an additional 48,693 shares of our common stock to cover over-allotments at a price of $33.75 per share. We received aggregate net cash proceeds of approximately $148.3 million from this public offering.

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     We have not been profitable since inception and expect to incur substantial and increasing losses for the foreseeable future, due to expenses associated with the development and commercialization of BAY 43-9006. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. As of June 30, 2004, our accumulated deficit was approximately $225.2 million.

     Our business is subject to significant risks, including the risks inherent in our development efforts, the results of the BAY 43-9006 clinical trials, our dependence on collaborative parties, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process, and competition from other products. For a discussion of these and some of the other risks and uncertainties affecting our business, see “Business Risks.” We currently have no products that have received marketing approval, and we have generated no revenues from the sale of products. We do not expect to generate revenues from the sale of proposed products in the foreseeable future. We expect that all of our revenues in the foreseeable future, if any, will be generated from collaboration agreements.

Critical Accounting Policies and the Use of Estimates

     Critical accounting policies are those that require significant estimates, assumptions and judgments by management about matters that are inherently uncertain at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider certain accounting policies related to research and development expenses and use of estimates to be critical policies. Significant estimations used in 2003 included estimated charges related to our restructuring and assumptions used in the determination of stock-based compensation related to stock options granted to non-employees. Actual results could differ materially from these estimates. There have been no other changes to our critical accounting policies since we filed our 2003 Annual Report on Form 10-K with the Securities and Exchange Commission on March 15, 2004. For a description of our critical accounting policies, please refer to our 2003 Annual Report on Form 10-K.

Recent Accounting Developments

     In March 2004, the Financial Accounting Standards Board, or FASB, issued a Proposed Statement of Financial Accounting Standards, “Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95,” also referred to as the Exposure Draft. The Exposure Draft would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require such transactions be accounted for using a fair-value-based method and the resulting cost recognized in the financial statements. We are closely monitoring developments related to the Exposure Draft and will adopt the final standards upon issuance.

     In March 2004, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 provides guidance regarding disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. Our adoption of this EITF did not have a material effect on our financial position or results of operations.

Results of Operations

Three and six months ended June 30, 2004 and 2003

Research and Development Expenses

     Research and development expenses were $9.8 million for the three months ended June 30, 2004, a net increase of $3.1 million, or 47 percent, from the same period in 2003. In the three months ended June 30, 2004, expenses for Onyx’s share of the codevelopment costs with Bayer for the BAY 43-9006 program increased by $6.2 million as compared to the same period in 2003. BAY 43-9006 development costs during the second quarter of 2004 reflect increased expenditures from the Phase III clinical trial initiated in

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the fourth quarter of 2003 and the expansion of Phase Ib and Phase II clinical trials evaluating BAY 43-9006 in a number of different tumor types. The increase in BAY 43-9006 program expenses were partially offset by a $3.1 million decrease in the therapeutic virus program expenses as a result of the termination of the program in 2003. Research and development expenses were $16.6 million for the six months ended June 30, 2004, a net increase of $822,000, or 5 percent, from the same period in 2003. In the six months ended June 30, 2004, expenses for Onyx’s share of the codevelopment costs with Bayer for the BAY 43-9006 program increased by $7.9 million as compared to the same period in 2003 due to the expansion into the Phase III clinical trial for BAY 43-9006. The increase in BAY 43-9006 program expenses were partially offset by a $7.1 million decrease in the therapeutic virus program expenses as a result of the 2003 termination of the program. Future cost savings from the discontinuation of our therapeutic virus program are expected to be offset by increased costs associated with advancing the clinical development of BAY 43-9006.

     The major components of research and development costs include clinical manufacturing costs, clinical trial expenses, consulting and other third-party costs, salaries and employee benefits, supplies and materials, and allocations of various overhead and occupancy costs. The scope and magnitude of future research and development expenses are difficult to predict at this time given the number of studies that will need to be conducted for any of our potential product candidates. In general, biopharmaceutical development involves a series of steps beginning with identification of a potential target and includes proof of concept in animals and Phase I, II and III clinical studies in humans, each of which is typically more expensive than the previous step. Success in development results in increasing expenditures, and the timing for completion of these steps is uncertain.

     The following table summarizes our principal product development initiatives, including the related stages of development for each product in development and the research and development expenses recognized in connection with each product. The information in the column labeled “Phase of Development - - Estimated Completion” is only our estimate of the timing of completion of the current in-process development phases. The actual timing of completion of those phases could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see our “Business Risks” section below.

     The overall completion dates of our major research and development programs are estimates based on current information. The clinical development portion of these programs may span as many as seven to ten years, and estimation of completion dates or costs to complete would be highly speculative and subjective due to the numerous risks and uncertainties associated with developing biopharmaceutical products, including significant and changing government

ONYX PHARMACEUTICALS, INC.

regulation, the uncertainty of future preclinical and clinical study results and uncertainties associated with process development and manufacturing as well as marketing. These risks and uncertainties make the reliable estimate of overall completion dates and total costs to complete development highly speculative. For additional discussion of factors affecting overall completion dates and total costs, see the “Business Risks” section below.

Marketing Expenses

     Marketing expenses consist primarily of salaries and employee benefits, consulting and other third-party costs, and allocations for overhead and occupancy costs. We reclassified $229,000 from research and development expenses to marketing expenses for the three months ended June 30, 2003, and we reclassified $309,000 for the six months ended June 30, 2003, to conform to the current period presentation. Marketing expenses were $1.5 million for the three months ended June 30, 2004, a net increase of $1.2 million from the same period in 2003. Marketing expenses were $1.8 million for the six months ended June 30, 2004, a net increase of $1.5 million from the same period in 2003. The increases for both the three months and six months ended June 30, 2004 as compared to the same periods in the prior year were due to third-party costs and employee-related expenses for additional resources from Bayer and Onyx working on marketing activities as we establish a commercial infrastructure and engage in pre-commercial activities. It is anticipated that marketing expenses will increase in future periods as we develop our marketing capabilities in order for us to copromote BAY 43-9006 with Bayer in the U.S.

General and Administrative Expenses

     General and administrative expenses consist primarily of salaries and employee benefits and corporate functional expenses. General and administrative expenses were $2.2 million for the three months ended June 30, 2004, a net increase of $666,000, or 43 percent, from the same period in 2003. General and administrative expenses were $3.9 million for the six months ended June 30, 2004, a net increase of $1.1 million, or 37 percent, from the same period in 2003. The increases for both the three months and six months ended June 30, 2004 as compared to the same periods in the prior year were related to consulting expenses primarily for information systems and increased personnel costs to support the growth in our clinical and marketing functions. We anticipate that general and administrative expenses may continue to increase modestly in the remainder of 2004 as compared to expenses for the first half of 2004 due to additional hiring to support our Bayer collaboration activities and third-party costs, including costs related to satisfying the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Restructuring

     In June 2003, we announced that we were discontinuing our therapeutic virus program and terminating all internal research and development activities. The decision was part of a business realignment that placed an increased priority on the development of BAY 43-9006. We recorded $5.5 million of restructuring expenses in 2003, including a reduction in force of approximately 75 positions. See Note 7 to our condensed financial statements included in this quarterly report for more description of our restructuring activities. We recorded additional restructuring charges of $258,000 in the three and six months ended June 30, 2004 due to a change in estimate related to the discontinued use and inability to sublet a portion of our leased facility. We expect that the remaining accrued restructuring costs of $416,000 at June 30, 2004 will be fully amortized by the second quarter of 2005.

Interest Income (Expense), net

     Interest income increased $593,000 to $728,000 for the three months ended June 30, 2004, and increased $975,000 to $1.3 million for the six months ended June 30, 2004, from the same periods in 2003, primarily due to higher average cash and investment balances resulting from our February 2004 and July 2003 sale of equity securities from which we received approximately $222.1 million in net cash proceeds. Interest expense was immaterial for the periods presented.

Other Expense – Related Party

     In the quarter ended June 30, 2003, based on a further round of financing completed by Syrrx, Inc. in April 2003, we recorded a write-down of $275,000 as “Other expense-related party” to reduce the carrying value of our investment in Syrrx

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to $375,000. We consider the reduction in carrying value of the investment to be other than temporary. We did not record any write-downs in the three months or six months ended June 30, 2004.

Liquidity and Capital Resources

     Since our inception, our cash expenditures have substantially exceeded our revenues, and we have relied primarily on the proceeds from the sale of equity securities to fund our operations.

     At June 30, 2004, we had cash, cash equivalents, and marketable securities of $237.2 million, compared to $105.4 million at December 31, 2003. The increase of $131.8 million was attributable to our public offering completed in February 2004, which raised aggregate net cash proceeds of $148.3 million, as well as $3.8 million received from the exercise of stock options and warrants and $451,000 received from the sale of fixed assets. These sources of cash were partially offset by cash used in operating activities of $20.4 million. The cash was used primarily for cofunding the clinical development program with Bayer for BAY 43-9006.

     Total capital expenditures for equipment and leasehold improvements for the six-month period ended June 30, 2004, were $68,000. We currently expect to make expenditures for capital equipment and leasehold improvements of up to $500,000 for the remainder of 2004.

     We believe that our existing capital resources and interest thereon will be sufficient to fund our current and planned operations through the end of 2006. We anticipate that our codevelopment costs for the BAY 43-9006 program will increase over the next several years as the Phase III clinical trial program advances. In addition, marketing expenses are expected to increase as we and Bayer incur costs in anticipation of the commercial launch of BAY 43-9006. While these costs are unknown at the current time, we expect that we will need to raise additional capital to continue the cofunding of the program in future periods beyond 2006.

     Changes in our research and development and marketing plans or other changes affecting our operating expenses may result in the expenditure of our resources before the end of 2006, and in any event, we will need to raise additional capital to fund our operations beyond 2006. We intend to seek this additional funding through public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or to obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.

Business Risks

     BAY 43-9006 is our only product candidate currently in clinical development, and our ability to discover and promote additional candidates to clinical development is constrained. If BAY 43-9006 is not successfully commercialized, we may be unable to identify and promote alternative product candidates and our business would fail.

     BAY 43-9006 is our only product candidate in clinical development. In June 2003, following an unsuccessful search for new collaboration partners for our therapeutic virus product candidates, including ONYX-015 and ONYX-411, we announced that we were discontinuing the development of all therapeutic virus product candidates, eliminating all employee positions related to these candidates, and terminating all related manufacturing capabilities. As a result, we do not have internal research and preclinical development capabilities. Our remaining scientific and administrative employees are dedicated to managing our relationship with Bayer, and the development of BAY 43-9006, but are not actively discovering

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or developing new product candidates. As a result of the termination of our therapeutic virus program and drug discovery programs, we do not have a clinical development pipeline beyond BAY 43-9006. If BAY 43-9006 is not successful in clinical trials, does not receive marketing approval, or is not successfully commercialized, we may be unable to identify and promote alternative product candidates to clinical development, which would cause our business to fail.

     If our clinical trials fail to demonstrate the safety and effectiveness of BAY 43-9006, we will be unable to commercialize BAY 43-9006, and our business may fail.

     In collaboration with Bayer, we are conducting multiple clinical trials of BAY 43-9006. We have completed Phase I single-agent clinical trials of BAY 43-9006. We are currently conducting a number of Phase Ib clinical trials of BAY 43-9006 in combination with standard chemotherapeutic agents. Phase I trials are not designed to test the efficacy of a drug candidate but rather to test safety; to study pharmacokinetics, or how drug concentrations in the body change over time; to study pharmacodynamics, or how the drug candidate acts on the body over a period of time; and to understand the drug candidate’s side effects at various doses and schedules.

     With Bayer, we are currently conducting single-agent Phase II clinical trials of BAY 43-9006 in kidney, melanoma, liver and other cancers. Phase II trials are designed to explore the efficacy of a product candidate in several different types of cancers and are normally randomized and double-blinded to ensure that the results are due to the effects of the drug. We and Bayer have initiated a Phase III clinical trial without randomized Phase II clinical trial data. In June 2004, we updated interim investigator-reported data from 106 patients. The Phase II trial is still in progress, early data is subject to confirmation, and final results, including an independent review of the data, are not yet available. Frequently, independently reviewed data is less favorable than investigator-reported data, and our independent review could fail to confirm the interim results. We believe that any clinical trial designed to test the efficacy of BAY 43-9006, whether Phase II or Phase III, will involve a large number of patients to achieve statistical significance and will be expensive. We may conduct a lengthy and expensive clinical trial of BAY 43-9006 only to learn that this drug candidate is not an effective treatment. Historically, many companies have failed to demonstrate the effectiveness of pharmaceutical product candidates in Phase III clinical trials notwithstanding favorable results in Phase I or Phase II clinical trials. In addition, we may observe previously unforeseen adverse side effects.

     If efficacy of BAY 43-9006 is not demonstrated, or if previously unforeseen and unacceptable side effects are observed, we may not proceed with further clinical trials of BAY 43-9006. If we do not proceed with additional clinical trials of BAY 43-9006, we cannot seek regulatory approval of BAY 43-9006 with the FDA, which may cause our business to fail.

     In our clinical trials, we treat patients who have failed conventional treatments and who are in advanced stages of cancer. During the course of treatment, these patients may die or suffer adverse medical effects for reasons unrelated to BAY 43-9006. These adverse effects may impact the interpretation of clinical trial results, which could lead to an erroneous conclusion regarding the toxicity or efficacy of BAY 43-9006.

     We are dependent upon our collaborative relationship with Bayer to develop, manufacture and commercialize BAY 43-9006 and to obtain regulatory approval. There may be circumstances which delay or prevent the development and commercialization of BAY 43-9006.

     Our strategy for developing, manufacturing and commercializing BAY 43-9006 and obtaining regulatory approval depends in large part upon our relationship with Bayer. If we are unable to maintain our collaborative relationship with Bayer, we would need to undertake these development, manufacturing and marketing activities at our own expense, which would significantly increase our capital requirements and limit the indications we are able to pursue and could prevent us from commercializing BAY 43-9006.

     Under the terms of the collaboration agreement, we and Bayer are conducting multiple clinical trials of BAY 43-9006. We and Bayer must agree on the development plan for BAY 43-9006. If we and Bayer cannot agree, clinical trial progress could be significantly delayed or halted.

     Under our agreement with Bayer, we have the opportunity to fund 50 percent of clinical development costs worldwide except in Japan, where Bayer will fund 100 percent of development costs and pay us a royalty on sales. We are currently funding 50 percent of development costs for BAY 43-9006, and depend on Bayer to fund the balance of these costs. Our

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collaboration agreement with Bayer does not, however, create an obligation for either us or Bayer to fund the development of BAY 43-9006, or any other product candidate. If a party declines to fund development or ceases to fund development of a product candidate under the collaboration agreement, then that party will be entitled to receive a royalty on any product which is ultimately commercialized, but not to share in profits. Bayer could, upon 60 days notice, elect at any time to terminate its cofunding of the development of BAY 43-9006. If Bayer terminates its cofunding