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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2003

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.

     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 29,125,351 as of August 7, 2003.

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INDEX

PART I:   FINANCIAL INFORMATION

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

CONDENSED BALANCE SHEETS
(In thousands)

See accompanying notes.

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CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See accompanying notes.

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CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes.

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NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)

Note 1. Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003, or for any other future operating periods.

     The condensed balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles 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 for the year ended December 31, 2002.

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 by SFAS 148, 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 summarizes the pro forma effects assuming compensation cost for such awards had been recorded based upon the estimated fair value.

Note 3. Net Loss Per Share

     Basic and diluted net loss per share are presented in conformity with SFAS 128, “Earnings Per Share,” for all periods presented. Basic net loss per share and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. Common stock equivalents have been excluded since their effect would be antidilutive.

Note 4. Comprehensive Loss

     Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) is comprised of unrealized holding gain (loss) 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. Recently Issued Accounting Standards

     In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring, discontinued operations, plant closing, or other exit or disposal activities. SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred. Previous guidance in Emerging Issues Task Force, (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” required that a liability for an exit cost be recognized at the date of a company’s commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003 and recorded its January and June 2003 restructurings in accordance with the provisions of SFAS 146.

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     In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s results of operations and financial position.

     In November 2002, the FASB issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF
00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 will have a material effect on its financial position and results of operations.

     In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company’s adoption of the disclosure requirements in January 2003 did not have an impact on the Company’s financial position or results of operations. The adoption of the recognition requirements of FIN 46 in June 2003 did not have a material impact on the Company’s financial position or results of operations.

     Note 6. Restructuring

     In June 2003, the Company announced the discontinuation of its therapeutic virus program and the termination of all internal research 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. As a first step in the realignment, in January 2003, the Company suspended Phase II and Phase III clinical trials of ONYX-015 for head and neck cancer, canceled plans to initiate a Phase II trial in metastatic colorectal cancer and suspended all manufacturing activity. In the quarter ended March 31, 2003, the Company reduced staff levels by approximately 25 positions and recognized approximately $0.4 million of restructuring charges primarily related to employee termination costs, all of which were paid by June 30, 2003. In the quarter ended June 30, 2003, the Company announced it will further reduce staff levels by approximately 50 positions, the majority of which are associated with research and development for the therapeutic virus program and the remainder are general and administrative staff. The Company recorded $2.8 million of restructuring expenses in the quarter ended June 30, 2003. Of this amount, $0.3 million was due to severance-related benefits. All 50 employees were notified prior to June 30, 2003. Certain of the terminated employees must provide services to the Company beyond the minimum retention period of 60 days to receive severance-related benefits. For those employees, the Company measured the fair value of the severance-related benefits at the communication date and will amortize the amount over the expected

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service period, which ranges from 80 days to six months. The fair value of the severance-related benefits was $1.3 million, of which $0.3 million was amortized to restructuring expenses during the three months ended June 30, 2003. The Company expects to record a majority of the remaining severance charges of $1.0 million in the quarter ending September 30, 2003, and the remainder by December 31, 2003. The remaining restructuring charge of $2.5 million recorded in the quarter ended June 30, 2003 was due to the termination of the process development and manufacturing agreement with XOMA (US) LLC, including a termination fee of $1.0 million, a $1.0 million write-off of the unamortized up-front payment originally made in 2001, and $0.5 million of other obligations under the contract.

     Of the $2.8 million restructuring expenses recognized during the second quarter, at June 30, 2003, $1.8 million was accrued, including $1.5 million for the termination of the XOMA agreement and $0.3 million for severance-related benefits.

Note 7. Sale of Equity Securities

     In February 2003, the Company received net proceeds of $10.0 million in connection with the completion of a private placement of 2,105,263 shares of its common stock at $4.75 per share, primarily to entities affiliated with Deerfield Management Company. These shares were registered for resale in June 2003.

Note 8. Related Party Transaction

     In November 2001, the Company sold and licensed to Syrrx, Inc. assets from the Company’s small molecules discovery program in exchange for Syrrx preferred stock valued at $800,000, which was recorded as “Other income.” The value of the preferred stock was initially determined based on similar sales of Syrrx preferred stock for cash. In December 2002, the Company recorded a $100,000 expense to reduce the value of its Syrrx investment. In the quarter ended June 30, 2003, based on a further round of financing completed by Syrrx in April 2003, the Company recorded an additional write-down of $275,000 as “Other expense” to reduce the carrying value of the investment. Management considers the reduction in carrying value of the investment to be other than temporary. A director and officer of Syrrx is a member of the board of directors of Onyx.

Note 9. Subsequent Events

     On July 25, 2003, the Company sold 5.0 million shares of common stock at a price of $15.25 per share in an underwritten public offering pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. The Company received an aggregate of approximately $71.2 million of net proceeds from this public offering. On August 1, 2003, the underwriters for the offering purchased an additional 179,000 shares of the Company’s common stock to cover over-allotments at a price of $15.25 per share. The Company received an aggregate of approximately $2.5 million of net proceeds

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from the sale of these additional shares.

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