UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

or

For the transition period from                     to                     

Commission File Number: 0-28298

ONYX PHARMACEUTICALS, INC.

2100 Powell Street
Emeryville, California 94608
(Address of principal executive offices)

(510) 597-6500
(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.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     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 35,291,034 as of May 3, 2005.

ONYX PHARMACEUTICALS, INC.

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
(Unaudited)

See accompanying notes.

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CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes.

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NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

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 months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005, or for any other future operating periods.

     The condensed balance sheet at December 31, 2004 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.

     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, as amended, for the year ended December 31, 2004.

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 because 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 net 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 and employee stock purchase plan 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. Revenue

     Effective January 2005, the Company licensed exclusive rights to its p53-selective virus, ONYX-015, to Shanghai Sunway Biotech Co., Ltd. headquartered in Shanghai, People’s Republic of China. Under this agreement, Shanghai Sunway is responsible for the research, development, manufacture and commercialization of ONYX-015 worldwide. During the quarter ended March 31, 2005, the Company received a cash payment of $1.0 million in exchange for the transfer to Shanghai Sunway of the intellectual property and know-how to ONYX-015. As the Company has no further obligations under the license agreement, the $1.0 million payment was recorded as license fee revenue in the accompanying statement of operations.

Note 4. 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 each period. Potentially dilutive outstanding securities consisting of 3,048,892 stock options and warrants as of March 31, 2005 and 2,778,092 stock options and warrants as of March 31, 2004 were not included in the computation of diluted net loss per share because their effect would have been antidilutive.

Note 5. Comprehensive Loss

     Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (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:

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Note 6. Restructuring

     In June 2003, the Company restructured its operations and discontinued its therapeutic virus program in order to place an increased priority on the development of sorafenib, Onyx’s lead product candidate that is being developed jointly with Bayer Pharmaceuticals Corporation. During 2003, the Company recorded an aggregate charge of $5.5 million associated with the restructuring. In the second quarter of 2004, the Company recorded an additional restructuring charge of $258,000 due to a change in estimate related to the discontinued use and inability to sublet a portion of the Company’s leased facility in Richmond, California. At March 31, 2005, the accrual for restructuring was $84,000, consisting of charges related to the discontinued use of a portion of the Company’s leased facilities and employee severance benefits. The remaining accrued restructuring costs are expected to be fully paid during the second quarter of 2005.

Note 7. Recent Accounting Development

     In December 2004, the Financial Accounting Standards Board, (“FASB”) issued SFAS No. 123(R), “Share-Based Payment,” (“SFAS 123(R)”), a revision to SFAS No. 123 “Accounting for Stock-Based Compensation,” effective for reporting periods beginning after June 15, 2005. SFAS 123(R) supersedes APB No. 25 and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and employee stock purchase plans to be recognized in the income statement based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. On April 14, 2005, the Securities and Exchange Commission adopted a rule amendment that delayed the compliance dates for SFAS 123(R) such that the Company is now allowed to adopt the new standard no later than January 1, 2006. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

     1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

     2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

     Although the Company has not determined whether the adoption of SFAS 123(R) will result in amounts that are similar to the current pro forma disclosures under SFAS 123, the Company is evaluating the requirements under SFAS 123(R) and expects the adoption to have a material impact on the Company’s consolidated statements of operations and net loss per share.

Note 8. Subsequent Event

     In April 2005, the Company redeemed its investment in Syrrx Inc. as a result of the acquisition of Syrrx by Takeda Pharmaceutical Company Limited. The Company received cash of $750,000 as a result of the redemption and will record a gain of $375,000 as other income in the quarter ending June 30, 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.^TM

     Our lead drug candidate, sorafenib (formerly known as BAY 43-9006), is currently in Phase III clinical development with our collaborator, Bayer Pharmaceuticals Corporation. Together with Bayer, we are conducting multiple clinical trials of sorafenib. To date, we have treated approximately 2,000 patients. In October 2003, we initiated a pivotal Phase III clinical trial after reaching written agreement via a Special Protocol Assessment, or SPA, with the Food and Drug Administration, or FDA, in patients with advanced renal cell carcinoma, also known as kidney cancer.

     In March 2005, we and Bayer announced that an independent data monitoring committee, or DMC, had reviewed the safety and efficacy data from the Phase III kidney cancer trial. Based on its analysis, the DMC concluded that the trial met its surrogate endpoint resulting in statistically significant longer progression-free survival in those patients administered sorafenib versus those patients administered placebo. Progression-free survival, or PFS, is a measure of the time that a patient lives without significant tumor growth.

     In April 2005, we and Bayer announced that the companies were recommending that all patients in this Phase III kidney cancer trial be offered access to sorafenib. This decision followed further review of data from the recent analysis of PFS, as well as additional discussions with the principal investigators, the DMC, and with regulatory authorities. As a result of the PFS analysis, we and Bayer are preparing a New Drug Application, or NDA, for possible approval in the United States.

     In May 2005, we and Bayer announced that sorafenib has been accepted into the FDA Pilot 1 Program for continuous marketing applications. The Pilot 1 Program was designed for therapies that have been granted Fast Track status by the FDA and that have the potential to provide important therapeutic benefit over available therapy. Sorafenib was granted Fast Track status for kidney cancer in March 2004. If we receive FDA approval for sorafenib, we would anticipate a United States commercial launch as early as the first half of 2006.

     In March 2005, we and Bayer announced the initiation of a Phase III clinical trial of sorafenib in patients with advanced hepatocellular carcinoma, or liver cancer. We and Bayer also plan to initiate an additional Phase III clinical trial of sorafenib in patients with malignant melanoma. We and Bayer are sponsoring multiple Phase II clinical trials of sorafenib for the treatment of breast, non-small cell lung and other cancers, as well as ten Phase Ib trials evaluating its use in combination with other anticancer agents. Two single-agent Phase II trials of sorafenib in patients with kidney cancer and in patients with liver cancer were completed in 2004. There are also multiple studies underway being conducted by the Cancer Therapy Evaluation Program, or CTEP, of the National Cancer Institute, or NCI.

     In a previous collaboration with Warner-Lambert Company, now a subsidiary of Pfizer Inc, we identified a number of lead compounds that modulate the activity of key enzymes that regulate the process whereby a single cell replicates itself and divides into two identical new cells, a process known as the cell cycle. Mutations in genes that regulate the cell cycle are present in a majority of human cancers. Warner-Lambert is currently advancing a lead candidate from that collaboration, PD

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332991, a small molecule cell cycle inhibitor targeting a cyclin-dependent kinase, or CDK. In September 2004, we announced that Pfizer initiated Phase I clinical testing of this CDK4 inhibitor.

     In 2003, we restructured our operations and discontinued our therapeutic virus program in order to place an increased priority on the development of sorafenib. Effective January 2005, Onyx licensed exclusive rights to our p53-selective virus, ONYX-015, to Shanghai Sunway Biotech Co., Ltd. headquartered in Shanghai, People’s Republic of China. Under this agreement, Shanghai Sunway is responsible for the research, development, manufacture and commercialization of ONYX-015 worldwide. We received a payment of $1.0 million that we recorded as license fee revenue. We may receive additional payments if Shanghai Sunway achieves certain clinical, regulatory and commercial events. We will also receive royalties on net sales of ONYX-015, if any.

     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 sorafenib. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. As of March 31, 2005, our accumulated deficit was approximately $266.7 million.

     Our business is subject to significant risks, including the risks inherent in our development and commercialization efforts, the results of the sorafenib 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, if any, from the sale of proposed products until at least 2006 and expect that until at least that time all of our revenues, 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 2005 included 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 changes to our critical accounting policies since we filed our 2004 Annual Report on Form 10-K, as amended, for the year ended December 31, 2004, with the Securities and Exchange Commission, or SEC. For a description of our critical accounting policies, please refer to our 2004 Annual Report on Form 10-K, as amended.

Recent Accounting Development

     In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS 123(R), “Share-Based Payment,” a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123, effective for reporting periods beginning after June 15, 2005. SFAS 123(R) supersedes Accounting Principals Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and employee stock purchase plans to be recognized in the income statement based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. On April 14, 2005, the SEC adopted a rule amendment that delayed the compliance dates for SFAS 123(R) such that we are now allowed to adopt the new standard no later than January 1, 2006. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

1.

A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b)

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		based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
	2.	A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

     Although we have not determined whether the adoption of SFAS 123(R) will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123(R) and expect the adoption to have a material impact on our consolidated statements of operations and net loss per share.

Results of Operations

Three months ended March 31, 2005 and 2004

Revenue

     Effective January 2005, we licensed exclusive rights to our p53-selective virus, ONYX-015, to Shanghai Sunway Biotech Co., Ltd. headquartered in Shanghai, People’s Republic of China. Under this agreement, Shanghai Sunway is responsible for the research, development, manufacture and commercialization of ONYX-015 worldwide. We received a payment of $1.0 million, which was recorded as license fee revenue, and may receive additional payments if Shanghai Sunway achieves certain clinical, regulatory and commercial events. We may also receive royalties on net sales of ONYX-015, if any. We recorded no revenue for the three months ended March 31, 2004.

Research and Development Expenses

     Research and development expenses were $13.5 million for the three months ended March 31, 2005, a net increase of $6.9 million, or 105 percent, from $6.6 million in the same period in 2004. In the three months ended March 31, 2005, expenses related to Onyx’s share of the codevelopment costs with Bayer for sorafenib increased by $7.5 million as compared to the same period in 2004. Sorafenib development costs reflect multiple ongoing Phase Ib and Phase II clinical trials, a Phase III kidney cancer trial initiated in the fourth quarter of 2003 and a Phase III trial in liver cancer initiated in the first quarter of 2005. The increase in expenses related to Onyx’s share of the codevelopment costs with Bayer for sorafenib was partially offset by $620,000 decreased expenses related to our 2003 restructuring that discontinued our therapeutic virus program. It is anticipated that research and development expenses will continue to increase in future periods as the clinical trial program of sorafenib advances and new trials are initiated.

     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.

     The following table summarizes our principal product development initiatives, including the related stages of development for each product in development and the research and development expenses recognized in connection with each product. The information in the column labeled “Phase of Development — Estimated Completion” is only our estimate of the timing of completion of the current in-process development phases based on current information. The actual timing of completion of those phases could differ materially from the estimates provided in the table. We cannot reasonably estimate the timing of completion of each clinical phase of our development programs due to the risks and uncertainties associated with developing pharmaceutical product candidates. The clinical development portion of these programs may span as many as seven to ten years, and estimation of completion dates or costs to complete would be highly speculative and subjective due to the numerous risks and uncertainties associated with developing biopharmaceutical products, including significant and changing government regulation, the uncertainty of future preclinical and clinical study results and uncertainties

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associated with process development and manufacturing as well as marketing. For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see our “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. Marketing expenses were $2.0 million for the three months ended March 31, 2005, a net increase of $1.7 million from $289,000 in the same period in 2004. The increase was due to employee related costs for additional hires as well as third-party costs incurred by Onyx and Bayer in establishing a commercial infrastructure in anticipation of our product launch of sorafenib. It is anticipated that marketing expenses will increase in future periods as we develop our marketing capabilities in order for us to copromote sorafenib with Bayer in the United States should sorafenib receive FDA approval.

General and Administrative Expenses

     General and administrative expenses consist primarily of salaries and employee benefits, and corporate functional expenses. General and administrative expenses were $2.8 million for the three months ended March 31, 2005, a net increase of $1.0 million, or 58 percent, from $1.8 million in the same period in 2004. The change was due to increased spending required to support our growing infrastructure needs, including employee-related costs for additional headcount, as well as costs associated with our new corporate office. In the first quarter of 2004, the lower occupancy costs in our former facility reflected prior restructuring write downs related to the discontinued use of a portion of that leased facility and the disposal of certain property and equipment. We anticipate that general and administrative expenses may continue to increase in the remainder of 2005 as compared to first quarter expenses to support our growing infrastructure needs.

Interest Income and (Expense), net

     We had net interest income of $1.2 million for the three months ended March 31, 2005, an increase of $708,000 from $524,000 in the same period in 2004, primarily due to higher interest rates as well as higher average cash and investment balances in the current quarter resulting from our February 2004 sale of equity securities from which we received $148.3 million in net cash proceeds.

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.

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     At March 31, 2005, we had cash, cash equivalents and marketable securities of $193.6 million, compared to $209.6 million at December 31, 2004. The decrease of $16.0 million was attributable to net cash used in operations of $15.6 million. The cash was used primarily for cofunding the clinical development program and the development of a commercial infrastructure with Bayer for sorafenib.

     Total capital expenditures for equipment and leasehold improvements for the three-month period ended March 31, 2005, were $118,000. We currently expect to make expenditures for capital equipment and leasehold improvements of up to $900,000 for the remainder of 2005.

     We believe that our existing capital resources and interest thereon will be sufficient to fund our current and planned operations into 2007. However, if we change our development plans, we may need additional funds sooner than we expect. In addition, we anticipate that our codevelopment costs for the sorafenib program will increase over the next several years as the Phase III clinical trial program advances. While these costs are unknown at the current time, we may need to raise additional capital to continue the cofunding of the program in future periods beyond 2007. We intend to seek this additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or 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

Sorafenib (formerly known as BAY 43-9006) is our only product candidate currently in Phase II and Phase III clinical development, and our ability to promote additional candidates to clinical development is constrained. If sorafenib is not successfully commercialized, we may be unable to identify and promote alternative product candidates and our business would fail.

     Sorafenib is our only product candidate in Phase II and Phase III 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 research and 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 sorafenib, but are not actively discovering or developing new product candidates. As a result of the termination of our therapeutic virus program and drug discovery programs, we do not have a clinical development pipeline beyond sorafenib. If sorafenib 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 later stage clinical development, which would cause our business to fail.

Our clinical trial of sorafenib in kidney cancer may not yield statistically significant overall survival data, which may negatively impact the commercialization of sorafenib.

     In March 2005, an independent data monitoring committee reviewed the safety and efficacy data from our ongoing Phase III trial of sorafenib in kidney cancer and concluded that the trial met its surrogate endpoint, resulting in statistically significant longer progression-free survival in those patients administered sorafenib versus those patients administered placebo. As a result, we and Bayer are preparing a New Drug Application, or NDA, seeking approval of sorafenib to treat patients with kidney cancer in the United States. We are also in discussion with regulators about possible approval in other territories.

     In April 2005, we and Bayer recommended that all patients in the companies' ongoing Phase III kidney cancer trial be offered access to sorafenib. This decision followed further review of the progression-free survival data, as well as additional discussions with the principal investigators, an independent data monitoring committee, and with regulatory authorities. As a result, patients who were previously administered placebo in the trial may now elect to receive sorafenib. This action is expected to significantly reduce the number of patients in the trial receiving placebo, and will negatively impact our ability to collect survival data for sorafenib in kidney cancer patients. As a result, we believe we may not be able to obtain statistically significant data on overall survival of patients with kidney cancer participating in this clinical trial. We and Bayer are planning to file for approval of sorafenib based on the progression-free survival data.

     We and Bayer do not know whether regulatory authorities, including the Food and Drug Administration, or FDA, and its foreign counterparts, will grant full approval to sorafenib as a treatment for kidney cancer on the basis of the surrogate endpoint and without statistically significant overall survival data. It is possible that in the absence of statistically significant overall survival data, sorafenib will not receive full marketing approval, or will not receive approval in some countries. Lack of marketing approval in a particular country would prevent us from selling sorafenib in that country, which could harm our business. If sorafenib is approved as a treatment for advanced kidney cancer based on statistically significant longer progression-free survival data, it may be at a competitive disadvantage to third parties' drugs that are approved based on overall patient survival, which could impair our ability to successfully market sorafenib.

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If our clinical trials fail to demonstrate that sorafenib is safe and effective for cancer types other than kidney cancer, we will be unable to broadly commercialize sorafenib as a treatment for cancer, and our business may fail.

     In collaboration with Bayer, we are conducting multiple clinical trials of sorafenib. We have completed Phase I single-agent clinical trials of sorafenib. We are currently conducting a number of Phase Ib clinical trials of sorafenib in combination with other anticancer 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 have completed Phase II clinical trials of sorafenib in kidney and liver cancer and are currently conducting Phase II clinical trials in breast, non-small cell lung 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. In October 2003 we and Bayer initiated a Phase III clinical trial to treat patients with advanced kidney cancer. We and Bayer initiated a second Phase III clinical trial of sorafenib in patients with liver cancer in March 2005 and are planning a third Phase III clinical trial of sorafenib in patients with malignant melanoma. Phase III trials are designed to more rigorously test the efficacy of a product candidate and are also normally randomized and double-blinded.

     Although we believe we have demonstrated the efficacy and tolerability of sorafenib in patients with advanced kidney cancer, in other types of cancer the efficacy of sorafenib has not been proven. 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, if previously unforeseen and unacceptable side effects are observed, we may not proceed with further clinical trials of sorafenib. 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 sorafenib. These adverse effects may impact the interpretation of clinical trial results, which could lead to an erroneous conclusion regarding the toxicity or efficacy of sorafenib.

     Our clinical trials may fail to demonstrate that sorafenib is safe and effective as a treatment for types of cancer other than kidney cancer, which would prevent us from marketing sorafenib as a treatment for those other types of cancer, limiting the potential market for the product, which may cause our business to fail.

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

     Our strategy for developing, manufacturing and commercializing sorafenib 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 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 sorafenib.

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

     Under our agreement with Bayer, we have the opportunity to fund 50 percent of clinical development costs worldwide except in Japan, where Bayer will fund 100 percent of development costs and pay us a royalty on net sales. We are currently funding 50 percent of development costs for sorafenib and depend on Bayer to fund the balance of these costs. Our collaboration agreement with Bayer does not, however, create an obligation for either us or Bayer to fund the development

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of sorafenib, or any other product candidate. If a party declines to fund development or ceases to fund development of a product candidate under the collaboration agreement, then that party will be entitled to receive a royalty on any product that is ultimately commercialized, but not to share in profits. Bayer could, upon 60 days notice, elect at any time to terminate its cofunding of the development of sorafenib. If Bayer terminates its cofunding of sorafenib development, we may be unable to fund the development costs on our own and may be unable to find a new collaborator, which could cause our business to fail.

     Bayer has been the sponsor for all regulatory filings with the FDA. As a result, we have been dependent on Bayer’s experience in filing and pursuing applications necessary to gain regulatory approvals. Bayer has limited experience in developing drugs for the treatment of cancer.

     Our collaboration agreement with Bayer calls for Bayer to advance us creditable milestone-based payments. To date, Bayer has advanced us $20 million for achievement of specific milestones. Any funds advanced under the agreement are repayable out of a portion of our future profits and royalties, if any, from any of our products.

     Our collaboration agreement with Bayer terminates when patents expire that were issued in connection with product candidates discovered under that agreement, or upon the time when neither we nor Bayer are entitled to profit sharing under that agreement, whichever is later. Bayer holds the global patent applications related to sorafenib. At present, it is anticipated that, if issued, the United States patent related to sorafenib will expire in 2022, subject to possible patent-term extension, the entitlement to which and the term of which cannot presently be calculated.

     We are subject to a number of additional risks associated with our dependence on our collaborative relationship with Bayer, including:

	•	the amount and timing of expenditure of resources can vary because of decisions by Bayer;
	•	possible disagreements as to development plans, including clinical trials or regulatory approval strategy;
	•	the right of Bayer to terminate its collaboration agreement with us on limited notice and for reasons outside our control;
	•	loss of significant rights if we fail to meet our obligations under the collaboration agreement;
	•	withdrawal of support by Bayer following the development or acquisition by it of competing products; and
	•	possible disagreements with Bayer regarding the collaboration agreement or ownership of proprietary rights.

     Due to these factors and other possible disagreements with Bayer, we may be delayed or prevented from developing or commercializing sorafenib, or we may become involved in litigation or arbitration, which would be time consuming and expensive.

If Bayer’s business strategy changes, it may adversely affect our collaborative relationship.

     Bayer may change its business strategy. A change in Bayer’s business strategy may adversely affect activities under its collaboration agreement with us, which could cause significant delays and funding shortfalls impacting the activities under the collaboration and seriously harming our business.

Provisions in our collaboration agreement with Bayer may prevent or delay a change in control.

     Our collaboration agreement with Bayer provides that, if Onyx is acquired by another entity by reason of merger, consolidation or sale of all or substantially all of our assets, and Bayer does not consent to the transaction, then for 60 days following the transaction, Bayer may elect to terminate Onyx’s codevelopment and copromotion rights under the collaboration agreement. If Bayer were to exercise this right, Bayer would gain exclusive development and marketing rights to the product candidates being developed under the collaboration agreement, including sorafenib. If this happened, Onyx, or the successor to Onyx, would receive a royalty based on any sales of sorafenib and other collaboration products, rather

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ONYX PHARMACEUTICALS, INC.

than a share of any profits. In this case, Onyx or its successor would be permitted to continue cofunding development, and the royalty rate would be adjusted to reflect this continued risk-sharing by Onyx or its successor. These provisions of our collaboration agreement with Bayer may have the effect of delaying or preventing a change in control, or a sale of all or substantially all of our assets, or may reduce the number of companies interested in acquiring Onyx.

Our clinical trials could take longer to complete than we project or may not be completed at all.

     Although for planning purposes we project the commencement, continuation and completion of clinical trials for sorafenib, the actual timing of these events may be subject to significant delays relating to various causes, including actions by Bayer, scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, and shortages of available drug supply. We may not complete clinical trials involving sorafenib as projected or at all.

     We rely on Bayer, academic institutions and clinical research organizations to conduct, supervise or monitor clinical trials involving sorafenib. We will have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own.

     In addition, we expect to directly supervise and monitor certain planned Phase II and Phase III clinical trials of sorafenib for the treatment of malignant melanoma. Onyx has not conducted a clinical trial that has led to an NDA filing. Consequently, we may not have the necessary capabilities to successfully execute and complete these planned clinical trials in a way that leads to approval of sorafenib for the target indication. Failure to commence or complete, or delays in, any of our planned clinical trials would prevent us from commercializing sorafenib in melanoma, and thus seriously harm our business.

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 product candidates that will compete with other products and therapies that currently exist or are being developed. Many other companies are actively seeking to develop products that have disease targets similar to those we are pursuing. Some of these competitive product candidates are in clinical trials, and others are approved. Competitors that target the same tumor types as our sorafenib program and that have commercial products or product candidates in clinical development include Pfizer, Novartis International AG, AstraZeneca PLC, OSI Pharmaceuticals, Inc., Genentech, Inc., Chiron Corporation, and Abgenix, Inc., among others. Novartis, Pfizer, Wyeth, and others have investigational agents for advanced kidney cancer in clinical development. A number of companies have small molecules targeting Vascular Endothelial Growth Factor, or VEGF; VEGF receptors; Epidermal Growth Factor, or EGF; EGF receptors; and other enzymes. These agents include antibodies and small molecules. In particular, OSI Pharmaceuticals with Tarceva^TM and AstraZeneca with IRESSA^TM are developing small molecule inhibitors of the EGF receptor tyrosine kinase. Both drugs have been approved in the United States. Companies working on developing antibody approaches include ImClone Systems, Inc. with Erbitux and Abgenix with antibodies targeting EGF receptors. Erbitux has been approved in the United States. Genente