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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
COMMISSION FILE NO. 0-28298
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ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3154463
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3031 RESEARCH DRIVE
RICHMOND, CALIFORNIA 94806
(510) 222-9700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK $.001 PAR VALUE NASDAQ NATIONAL MARKET
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant based upon the last trade price of the common stock reported
on the Nasdaq National Market on March 18, 1998 was approximately $49,891,000.
The number of shares of common stock outstanding as of March 18, 1998 was
11,262,569.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 1998 Annual
Meeting are incorporated herein by reference into Part III of this Report.
Certain Exhibits filed with the Company's Registration Statement on
Form SB-2 (Registration No. 333-3176-LA), as amended, the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1997 and September 30,
1997 and the Company's Current Report on Form 8-K filed on January 26, 1998,
are incorporated by reference into Part IV of this Report.
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PART I.
ITEM 1. BUSINESS
OVERVIEW
Onyx Pharmaceuticals, Inc. ("Onyx" or the "Company") is engaged in the
discovery and development of novel therapeutics based upon the genetics of human
disease, with an emphasis on cancer. The Company's goal is to capitalize on the
discoveries of the past decade that have established cancer as a genetic-based
disease. When certain genes are mutated, cells grow and proliferate unchecked
and become resistant to internal mechanisms that would normally cause their
death. The Company's drug discovery and development programs focus on innovative
therapies which target the most frequent mutations causing cancer.
Onyx is pursuing several important pathways by which normal cells become
cancerous. Currently, the Company has five therapeutic discovery programs
focused on the following cancer mutations: p53, ras, cell cycle checkpoints,
BRCA1 and APC. The Company's lead product, ONYX-015, is an adenovirus which has
been modified to replicate in and kill cancer cells with p53 mutations. These
mutations occur in over 50% of human cancer cases. The Company completed
treatment at all dose levels in a Phase I open-label, dose escalation clinical
trial in head and neck cancer and reported the results in the second and third
quarters of 1997. ONYX-015 was found to be safe and well-tolerated, as well as
biologically active. Based upon this data, in July the Company initiated a
Phase II efficacy trial with ONYX-015 in the same patient population and later
in the year opened another Phase II clinical trial testing the virus in
combination with two standard chemotherapies. In March 1998, the Company
initiated a third Phase II clinical trial in head and neck cancer patients with
a different, more aggressive, dosing regimen than the single-agent trial that
was already underway. Additional Phase I clinical trials are ongoing in
pancreatic and ovarian cancer and gastrointestinal cancer that has metastasized
to the liver.
In addition to the Company's cancer programs, Onyx initiated a
collaboration with Warner-Lambert Company ("Warner-Lambert") in July 1997 in the
area of inflammation and autoimmune diseases. Additionally, the Company has
developed a cancer genomics program focusing on the use of murine model systems.
The Company's overall business strategy is to enter into collaborations
with corporate partners in each of its drug development programs in order to
gain complementary skills in drug development, clinical trials, regulatory
affairs, and marketing and sales operations.
The Company is engaged in collaborative research with corporate partners in
three of its cancer programs -- Bayer Corporation ("Bayer") in the ras program,
Warner-Lambert in the cell cycle program, and Eli Lilly & Company ("Eli Lilly")
in the BRCA1 program.
CANCER
Cancer is a heterogeneous group of diseases characterized by uncontrolled
growth and proliferation of abnormal cells. Cancer accounts for 25% of all
deaths in the United States, ranking second only to cardiovascular disease.
According to estimates by the American Cancer Society, approximately 1.4 million
people in the United States were diagnosed with cancer in 1997, and
approximately 60% of these individuals will die within five years following
their diagnosis. Despite increased cancer screening and earlier diagnosis, and
notwithstanding improved surgical procedures and new therapeutic regimens, there
has been a steady rise in the overall cancer mortality rate in the United States
over the past 50 years. However, recent studies have reported a decline in the
incidence and death rates for cancer between 1990 and 1995.
Estimates for 1997 of new cancer cases and cancer deaths in the United
States are presented below for some of the solid tumors which are targeted by
the Company's drug discovery programs.
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ESTIMATED DEATHS AND NEW CANCER CASES
UNITED STATES, 1997
CANCER TYPE DEATHS NEW CASES
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Lung................................................... 160,400 178,100
Colon and rectum....................................... 54,900 131,200
Breast................................................. 44,190 181,600
Prostate............................................... 41,800 334,500
Pancreas............................................... 28,100 27,600
Ovary.................................................. 14,200 26,800
Head and neck*......................................... 12,560 44,050
Kidney................................................. 11,300 28,800
Bladder................................................ 11,700 54,500
Melanoma............................................... 7,300 40,300
Uterus................................................. 6,000 34,900
Cervix................................................. 4,800 14,500
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* Includes cancers of the larynx, oral cavity and pharynx.
Source: American Cancer Society
According to the American Cancer Society, the direct costs of cancer
patient care in the United States are estimated at $35 billion per year. The
cancer drug market in the United States was estimated to be approximately
$4 billion in 1997, which accounts for slightly more than 10% of the direct
costs of cancer patient care. The Company believes that the worldwide cancer
drug market is approximately $7.5 billion per year.
A major limitation in the treatment of cancer is that drug therapy at the
present time continues to be primarily cytotoxic drugs. Cytotoxic drugs are
toxic to all cells in the human body but are most lethal to faster growing
cells, including cancer cells. These cytotoxic drugs do not discriminate between
malignant and normal cells, and therefore, treatment with these drugs can have
serious adverse side effects which frequently limit therapy. Biological drugs,
such as interferons, have, in some cases, represented an improvement over
classic cytotoxic therapy but have proven effective on a limited basis in only
certain types of cancer.
GENETIC BASIS OF CANCER
Cancer is now known to be caused by a number of genetic changes, or
mutations, which give the cancer cell a selective growth and survival advantage
over normal cells. Some of these mutations result in an increased rate of cell
division while others result in a decreased rate of cell death. The precise
mechanisms by which these mutations achieve their effects are becoming better
understood, providing opportunities for therapeutic intervention directly at the
cause of the disease.
Mutations that increase the rate of cell division affect two major pathways
in cells. One of these, the ras pathway, is normally involved in instructing
cells to divide in response to external signals, such as growth factors.
Mutations in the ras gene cause the cell to divide continuously, even in the
absence of external signals. The ras gene is thus turned on in many types of
cancer cells. Genes whose products are turned on by mutation are referred to as
oncogenes. Ras oncogenes are present in 90% of pancreatic cancers, 50% of colon
and certain lung cancers and approximately 30% of many other cancers.
The second pathway regulates the cell cycle, which is the process by which
all cells duplicate themselves. During the cell cycle, certain proteins act as
natural checkpoints to control orderly replication and ensure the fidelity of
the process. If cells grow too rapidly or an error occurs in the replication of
DNA, these checkpoint proteins act to stop cell growth. If mutations occur in
checkpoint genes, uncontrolled growth results. The Company believes that the
cell cycle checkpoints are turned off in approximately 90% of human cancer
cells. These genes are referred to as tumor suppressor genes.
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In addition, the body has a process for ridding itself of damaged cells,
including cancer cells that have mutations in ras pathway or cell cycle
regulatory pathway genes. This process is referred to as apoptosis or cell
suicide. The most frequent mechanism for inactivating the apoptosis pathway is
through mutations in the p53 gene. These p53 mutations allow damaged or abnormal
cells to survive and proliferate and are observed in over 50% of human cancer
cases.
In addition to the pathways described above, there are other genes that
play a role in cancer. These include, the tumor suppressor gene BRCA1, which
causes some breast and ovarian cancers, and the APC gene, which is implicated in
nearly all colon cancers.
ONYX TECHNOLOGY
Onyx's research is directed toward identifying the function of genes
associated with cancer, including the p53 gene, ras oncogenes, cell cycle
checkpoint genes, the APC gene, and the BRCA1 gene. Insights into the pathways
through which these genes operate are used by Onyx to identify points which
might be targets for drug intervention.
The activities involved in assigning functions to genes are collectively
referred to as "functional genomics." Onyx scientists have identified functions
and pathways of various cancer genes through the use of a number of
technologies, including expression of recombinant proteins in different cell
systems, novel tagging methods which allow rapid purification of recombinant
proteins for functional studies, screening technologies which identify
interactions of unknown gene products with known proteins, and various methods
for ascribing functions to proteins.
Proteins, that are either directly encoded by cancer genes or situated
along pathways in which the cancer genes operate, are potential targets for
therapeutic intervention. Once biochemical functions are identified with these
proteins, Onyx employs various technologies, including "reverse genetics," to
interfere with these functions and assess the consequences in cell-based
systems. Potential targets are validated by confirming that interference with
the target either modulates or reverses the cancerous process.
After a target is validated, Onyx evaluates and implements work on
potential approaches for using the target for drug discovery. One such approach
is to develop high-throughput screening assays to identify small molecule drugs
that interfere with the function of the target. This approach is particularly
applicable to targets such as oncogenes, which are turned on by mutation.
Targets which involve loss of function through mutation, such as tumor
suppressor genes, have been more difficult to approach. Onyx has discovered and
is developing a proprietary new technology based on therapeutic viruses to
target mutant tumor suppressor genes, such as p53. The therapeutic virus
technology uses genetically engineered viruses to selectively kill cancer cells
in which the tumor suppressor gene is nonfunctional.
In addition to cancer genes, functional genomics can be applied to any
other gene of unknown function, including novel genes discovered by the Human
Genome Project and other groups engaged in gene sequencing. The Company intends
to continue to apply its functional genomics technology to the discovery of new
therapeutic strategies for cancer and for other major diseases that have a
genetic component.
In 1997, the Company entered into a corporate collaboration with
Warner-Lambert to apply this functional genomics technology beyond the field
of cancer in a program that targets inflammation and autoimmune disorders.
DRUG DISCOVERY AND DEVELOPMENT PROGRAMS
Onyx has established six drug discovery and development programs based on
genetic mutations in cancer and an additional program focused on genetic
mutations playing a role in inflammatory disorders. Although the
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focus of the initial six programs is the treatment of cancer, there may be other
hyperproliferative diseases addressed by product leads discovered in these
programs, as evidenced by the inflammation discovery.
ONYX DRUG DISCOVERY AND DEVELOPMENT PROGRAMS
PROGRAM PRODUCT INDICATION STATUS PARTNER
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p53 ONYX-015 Head and neck cancer Phase II
therapeutic virus Pancreatic and ovarian Phase I
cancers; gastrointestinal
metastases to the liver
Other cancers Preclinical
Cell Cycle Small molecule inhibitors Most cancer indications; Preclinical Warner-
other proliferative Lambert
diseases
ras Small molecule inhibitors Colon, lung, pancreatic, Preclinical Bayer
and other cancers; other
proliferative diseases
BRCA1 Inhibitors of BRCA1 pathways Breast and ovarian cancer Research Eli Lilly
APC Inhibitors of Beta-catenin Colon cancer Research
pathways
Cancer Diagnostic or therapeutic Cancer Research
Genomics
Inflammation Small molecule inhibitors Inflammation and autoimmunity Discovery Warner-
Lambert
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Phase II: Second phase of human clinical testing to obtain additional
safety data and to determine an optimal treatment protocol for
potential use in a pivotal trial.
Phase I: Initial phase of human clinical testing to determine safety and
maximum tolerated dose.
Preclinical: Pharmacological and toxicological testing in animals.
Discovery: Initiation of screening by Onyx's partner using validated assays
developed by Onyx.
Research: Identifying and validating mutated genes and protein targets
p53 PROGRAM
Mutations in the p53 tumor suppressor gene are the most common type of
genetic abnormality in cancer and are found in over 50% of human cancer cases.
The role of normal p53 in the cells is to detect errors in DNA and to either
stop the cell cycle from proceeding until the errors are corrected or to force
destruction of the cell via apoptosis (cell suicide). Loss of p53 function is
associated with decreased survival rates in breast, prostate, lung and bladder
cancers.
The Company's lead product, ONYX-015, is a genetically engineered
adenovirus that when tested in preclinical studies, IN VITRO and in
immunodeficient mice, has replicated in and killed tumor cells deficient in p53
tumor suppressor activity ("p53-deficient" cells), and not replicated
efficiently in or killed normal cells.
Adenoviruses are common, relatively benign, viruses that are widespread in
human populations. When an unmodified adenovirus infects a normal cell, it turns
the cell into a factory for producing viral DNA and proteins. The cell is killed
and thousands of new virus particles are released to infect neighboring cells.
To take control of the cell, the virus must inactivate p53, which acts to
prevent abnormal DNA replication. To inactivate p53, the virus makes a protein
called E1B 55k, which binds directly to p53 and blocks its function. Once p53
has been inactivated, the virus can replicate its DNA and proceed through its
growth cycle.
ONYX-015 has been modified so that it cannot make E1B 55k. As a result, it
should not disarm the p53 system when it infects normal cells and should not
complete its growth cycle. However, in the majority of cancer cells, p53 is
already disarmed through mutation of the p53 gene or other mechanisms. When
ONYX-015 infects
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cells lacking p53 function, the virus growth cycle should proceed unchecked. It
is expected that the cancer cells will be killed, new virus particles will be
produced, and neighboring cancer cells will be infected and killed.
IN VITRO and IN VIVO animal tests by the Company have shown that ONYX-015
replicates in and kills tumor cells with mutant p53 gene sequence. In addition,
the Company has shown that tumor cells with normal p53 gene sequence but lacking
p53 function are also destroyed by ONYX-015. The ONYX-015 replication and cell
killing effect is markedly reduced (100 to 1000 fold) in numerous normal cell
types. However, certain normal skin cells, when tested IN VITRO, appeared to be
more sensitive to ONYX-015 than normal cells of other types tested, despite the
presence of p53 in these cells. This, however, has not been seen in patients
enrolled in the clinical trials. The p53 program includes a research program
which studies ONYX-015, and other viruses as well, to learn more about their
impact on normal cells and cells deficient in p53 tumor suppressor activity.
In animal studies, ONYX-015 was shown to cause tumor shrinkage and complete
tumor regressions in immunodeficient mice in which p53-deficient human tumor
cell lines of various types were grown. ONYX-015 was found to be well-tolerated
in safety studies in animals. However, ONYX-015 efficacy has not been tested in
animals with a fully functioning immune system, and the effect of the human
immune response on ONYX-015 efficacy continues to be uncertain. No reliable
immunocompetent animal tumor model currently exists. The Company has a project
underway to develop such a mouse tumor model. Based in part on a study
conducted in the 1950's with unmodified adenovirus, the Company believes that
the human immune response may reduce anti-tumor effects of ONYX-015 that would
be observed in the absence of such a response. However, the extent of this
effect cannot be predicted. If such reduction in anti-tumor effect is
substantial, the Company may be required to engineer additional genes into the
virus, to explore alternative viral strains, or to include immunosuppressive
drugs as part of the clinical regimen for ONYX-015.
Initial research and clinical development of ONYX-015 in the p53 program
was focused on direct intratumoral dosing of the virus. The next step was to
introduce the virus regionally, as has been done in the ovarian cancer Phase I
trial, by delivering the virus into the peritoneal cavity via indwelling
catheter. In order to meet the needs of a wider spectrum of cancer patients and
to treat metastatic cancers, the virus must be delivered systemically. The
prospect of systemic delivery of the virus raises two challenges for the Onyx
research team. First, the presence of antibodies and other immune response
factors may require a virus which has additional capabilities beyond those of
ONYX-015. Second, it is known that the liver is very effective in clearing
adenovirus from the bloodstream. To overcome these potential obstacles,
research is underway to formulate or modify the virus for systemic delivery.
Onyx is collaborating with a third party which has proprietary technology for
coating adenovirus with polyethylene glycol ("PEG"), a process called
pegylation. Preclinical studies have shown that with increasing levels of PEG
per adenovirus particle, the virus maintains infectivity even in the presence
of neutralizing antibodies. Pegylation of the virus may increase the
circulating lifetime of the virus in the bloodstream by reducing the clearing
efficiency of the liver with consequential increased uptake of the virus by
tumors. If pegylation is not successful, other modifications to the virus to
improve targeting to specific tumor types or reduce inherent immunogenicity
of the virus may be required. Since fewer virus particles are likely to reach
the target tumor cells, a number of enhancements to the virus may be
desirable. One area of research focuses on engineering changes to the viral
genome. The virus may be modified to enhance potency by increasing
replication or cell lysis efficiencies. In addition to these possible
modifications, Onyx may add a prodrug converting enzyme which could activate
a small molecule chemotherapeutic, specifically at the tumor site.
In April 1996, the Company initiated a Phase I open-label, dose escalation
clinical trial in recurrent or locally advanced squamous cell carcinoma of the
head and neck conducted in both the United States and the United Kingdom. The
primary objectives of this Phase I study were to determine the safety of
directly injecting ONYX-015 into tumors of the head and neck; to determine the
maximum tolerated dose; and to assess the safety of repeat treatment. Patients
in this study had previously received a range of treatments including surgery,
radiation and chemotherapy, individually or in combination.
Two dosing regimens were utilized. The first 19 patients received a
single, direct intratumoral injection, that could be repeated every 28 days for
patients whose tumors did not progress after the first injection. Later, an
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additional nine patients received direct intratumoral injections daily over five
days, also with the option of repeat treatment. A final cohort of four patients
received a single direct intratumoral injection at the highest feasible dose
level to confirm that the desired dose level for Phase II trials is within an
acceptable safety margin for virus dosing. A total of 32 patients were treated
in the Phase I trial, of which 13 patients received repeat treatments. ONYX-015
was well-tolerated, and investigators observed no dose-limiting toxicities.
Mild, transient flu-like symptoms were observed in approximately 30% of the
single dose patients and in approximately 60% of the multiple dose patients.
While the focus of this study was safety, the effect of injection on tumor
growth was a secondary objective of the study. Of the 23 patients receiving
single injection treatment, three experienced more than 50% reduction in the
size of their injected tumors, with one patient experiencing a greater than 70%
decrease. An additional three patients had significant necrosis (> 30%) of
their injected tumors. Several patients experienced lesser degrees of tumor
necrosis, including six whose tumors were stable and non-progressive following
treatment. In comparison, of the nine patients treated with the virus daily for
five days, three experienced more than 50% reduction in the size of their
injected tumors, with one patient experiencing a greater than 70% decrease
lasting over six months. An additional three patients had significant necrosis
of their injected tumors, and one patient's tumor was non-progressive following
treatment. In some patients, tumor necrosis was associated with clinical
benefit, including decreased pain, improved ability to swallow and improved
speech.
Researchers also studied the ability of ONYX-015 to replicate in tumors, as
well as the local and systemic immune response to the virus. Viral replication
was detected in two of 13 patients with evaluable biopsies on the single dose
regimen, and in four of four patients with evaluable biopsies on the multiple
dose regimen, six or seven days following the patient's first ONYX-015
injection. Viral replication was less pronounced than was the case in animal
studies. While approximately 70 percent of the 28 patients tested entered the
study with neutralizing antibodies to the adenovirus; after treatment, all
patients in the study had neutralizing antibodies, including those patients who
experienced tumor necrosis. Additional clinical research is planned to
determine if other immune and inflammatory factors may be enhancing tumor
necrosis.
The Company opened three additional Phase I open-label, dose-escalation
clinical trials with ONYX-015 in 1997. Two of these trials utilized direct
intratumoral dosing regimens; one in patients with pancreatic cancer, and one in
patients with gastrointestinal metastases to the liver. The Company also opened
a Phase I trial in patients with ovarian cancer -- the first trial to test use
of ONYX-015 in a regional administration by intraperitoneal injection. Over the
next twelve months, Onyx may initiate additional Phase I clinical trials of
ONYX-015. The Phase I study in patients with gastrointestinal metastases to the
liver has completed enrollment of patients after advancing through all cohorts
of a dose-escalation trial. These patients will be evaluated and the results of
this trial will be reported during the second quarter of 1998. The Company is
preparing to move into a Phase I/II clinical trial using hepatic artery infusion
later this year. Each of the remaining Phase I studies begun in 1997,
pancreatic and ovarian, continues to progress with escalating doses. It is
expected that enrollment in the Phase I clinical trial in patients with
pancreatic cancer will be completed in the second quarter of 1998, and that data
from the majority of evaluable patients will be reported on during such quarter.
The Company is also preparing to advance trials in this indication into a Phase
I/II study using endoscopic ultrasound delivery. The Phase I trial for ovarian
cancer will likely be completed, and the results reported, during the second
half of 1998.
During 1997, the Company initiated two Phase II efficacy trials with
ONYX-015 in patients with head and neck cancer. The first trial, initiated in
July, will treat approximately 30 head and neck cancer patients with recurrent
and refractory tumors utilizing the highest multiday dosing regimen used in the
Phase I safety trial. The second trial, initiated in November, utilizes the
virus in combination with two chemotherapeutic drugs, Cisplatin-TM- and
5-Fluorouracil ("5-FU"). This clinical trial will include approximately 30 head
and neck cancer patients with recurrent disease whose recurrent tumor scheduled
for treatment must not have been treated with Cisplatin-TM- or 5-FU. The dosing
regimen provides for five daily direct intratumoral injections of ONYX-015 on
days 1-5; intravenous dosing of Cisplatin-TM- on day 1 and intravenous dosing of
5-FU on days 1-5. Onyx is conducting the Phase II trials at 10 sites in the
United States, the United Kingdom and Canada. The participating patients will
initially receive injections of ONYX-015 directly into the target tumor and then
into additional tumors, if present, after the second cycle of treatment.
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In March 1998, the Company announced the commencement of a third Phase II
clinical trial of ONYX-015 in head and neck cancer. This third trial involves
the administration of ONYX-015 as a single agent with a more aggressive dosing
regimen than in the trial that commenced in July 1997. This trial will treat
patients with ONYX-015 daily for five days for two consecutive weeks. After a
third week with no treatment, patients will be evaluated and may continue for
another intensive two-week treatment cycle or receive maintenance treatment.
The Company expects to release the results of its first Phase II clinical
trial in the second quarter of 1998. The results of the second and the third
Phase II clinical trials would be available later in the year. There is no
assurance regarding the results of any of these trials. See Additional Business
Risks - "Uncertainty Regarding Clinical Trials of ONYX-015."
The Company believes that it is unlikely to partner this program prior to
the release of Phase II data. Onyx has self-funded the development of ONYX-015
to date. The Company seeks a large pharmaceutical company for a possible
collaboration for further preclinical and clinical development and
commercialization of ONYX-015 and other potential therapeutic viruses that
selectively replicate in p53-deficient cells. The Company is engaged in ongoing
discussions with potential partners. However, the Company has not reached
agreement with any such company regarding this program, and there is no
assurance that any such collaboration will be established.
RAS PROGRAM
The ras family of oncogenes were the first oncogenes to be identified in
human cancer. They are present in 90% of pancreatic cancers, 50% of colon cancer
and certain lung cancers, and approximately 30% of cancers of many other types,
as well as some other proliferative diseases. Ras proteins play a central role
in transmitting signals from the extracellular environment, via growth factor
receptors on the cell surface, to the nucleus of the cell where DNA
transcription is activated and the cell cycle is initiated. This series of
signals is called the "signal transduction pathway." These signals result in
cell growth and division. In normally functioning cells, when the extracellular
signal stops, the signal transduction pathway also stops and cells stop growing.
In cancer cells, abnormal ras proteins are produced that lock the signal
transduction pathway in an active state even when extracellular signals are not
being received, and cells, therefore, do not stop growing.
It has been established in preclinical studies that inhibition of ras
oncogene function in cancer cells is sufficient to reverse the cancerous changes
caused by these oncogenes. Ras proteins play a crucial role in the transmission
of extracellular signals through a number of different pathways into the nucleus
of the cell. A key property of these proteins is that they exist in two states:
an inactive or off state, and an active or on state. These two states are
subject to regulation at numerous points during this cycle of activation and
deactivation. Mutations in the ras oncogenes destroy the off switch so that the
proteins stay locked in the on state, thus resulting in uncontrolled growth.
Onyx has made significant contributions to the delineation of the
components of the ras signaling pathway and has converted these findings into
drug discovery efforts to identify small molecule inhibitors of the activated
pathways.
Effective February 1994, the Company entered into a collaboration agreement
with Bayer with respect to the ras Program. Under the terms of this agreement,
Onyx is responsible for performing research on ras signaling pathways,
identifying and validating targets for drug screening, and developing assays for
screening small molecules. Bayer is responsible for screening the assays with
its compound libraries, synthesizing chemical analogs of compounds that are
identified in the screens, and conducting preclinical and clinical testing on
compounds selected for development. Bayer is obligated, subject to certain
conditions, to fund Onyx's research under the collaboration. In April 1996, the
parties amended the agreement to add targets and programs outside ras. To date,
the Company has transferred ten assays to Bayer. Active compounds identified by
screening Onyx's and Bayer's compound libraries are undergoing further
evaluation and characterization. Chemical analoging programs have been initiated
by Bayer on several structural classes of compounds.
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In June 1997, Bayer identified a lead compound, which it deemed a
strategic project, from one of the assays transferred by Onyx. Bayer chemists
are performing preclinical studies to optimize the lead candidate and to test
for efficacy in animal models. There can be no assurance that the results of
these efforts will yield a clinical development compound, and if so, the Company
does not expect that Bayer will commence clinical trials of such compound prior
to the year 2000.
Efforts are underway to extend the Bayer collaboration on the ras Program
which currently is scheduled to expire in January 1999, or to identify other
pharmaceutical partners to fund ongoing research and drug discovery in this
area. However, the Company has not yet reached an agreement with any such
collaborator regarding this program, and there is no assurance that any such
collaboration will be established.
CELL CYCLE PROGRAM
The cell cycle is the process by which cells duplicate their DNA and then
divide into two identical cells. This cycle is strictly regulated, so that cells
only duplicate their DNA when conditions are perfectly favorable, and then only
divide into two new cells when DNA has been precisely duplicated. Before cells
commit to making DNA, they must pass through a checkpoint. If conditions appear
favorable, they pass through the checkpoint and may then begin DNA replication.
In cancer cells, however, this checkpoint is defective and cancer cells can
therefore duplicate their DNA in an unregulated manner. The molecular basis of
this checkpoint is now relatively well known and understood to be a pathway that
includes cyclin-dependent kinases, the retinoblastoma tumor suppressor protein
and a number of regulatory proteins such as the p16 protein. The Company
believes that mutations are found in one of these components in over 90% of all
cancers, resulting in a loss of checkpoint control.
Onyx has developed screening assays to search for small molecule inhibitors
of mutant cell cycle checkpoint genes which regulate DNA replication. The
Company also has initiated research efforts to identify pathways regulating the
second checkpoint in the cell cycle that controls the decision to begin cell
division.
In May 1995, the Company entered into a collaboration agreement with
Warner-Lambert on the Cell Cycle Program. Under the terms of this collaboration,
Onyx is responsible for performing research into cell cycle regulatory pathways,
identifying and validating targets for drug screening, and developing assays for
screening small molecules. Warner-Lambert (i) uses these assays to screen its
compound libraries, (ii) synthesizes and tests chemical analogs of classes of
compounds which are identified in the screens, and (iii) conducts preclinical
and clinical testing of compounds selected for development. In this agreement,
Warner-Lambert is obligated, subject to certain conditions, to partially fund
Onyx's researchers. Each of the parties must commit an equivalent number of
researchers to the collaboration. In December 1997, Onyx and Warner-Lambert
extended the Cell Cycle collaboration through 2001. Warner-Lambert will
increase its funding to the full complement of 15 staff working on this
project in return for expanded worldwide rights to products arising out of
the collaboration.
From the initial two assays transferred by Onyx, the collaboration
identified a lead compound that Warner-Lambert is advancing into preclinical
study, and additional compounds have been identified from other assays
transferred for high-throughput screening at Warner-Lambert. These compounds are
undergoing early analoging for consideration as potential leads or additional
product candidates. The Company cannot predict whether the results of these
efforts will yield a clinical development compound, and if so, the Company does
not expect that Warner-Lambert will commence clinical trials of a compound from
the Cell Cycle Program prior to the year 2000.
BRCA1 PROGRAM
Breast cancer is the most common cause of cancer-related mortality in
women. A subset of breast cancers, representing an estimated 10% of the total
number of cases, has an inherited component. As is the case with most inherited
cancer genes, it is expected that the breast cancer genes identified to date may
play a role in non-inherited
10
breast cancers as well. One of the breast cancer genes, termed BRCA1, was
identified through genetic studies of families exhibiting a high frequency of
disease.
Onyx has commenced a research effort to identify the function of the BRCA1
gene. This project was initiated by Eli Lilly as part of its BRCA1 research
program, and is intended to lead to a pathway that will present opportunities
for therapeutic intervention. The first objective of this project is to identify
proteins which bind directly to the BRCA1 gene product. Onyx has cloned two
novel genes of interest that express proteins which physically interact with
BRCA1. Further analysis of these genes and their associated proteins is in
progress. The Company currently does not expect that Eli Lilly will commence
clinical trials of any potential products from the BRCA1 Program for at least
several years.
The BRCA1 Program was initiated in May 1995 with Eli Lilly as a one-year
collaborative research and license agreement. In June 1996, Onyx and Eli Lilly
agreed to extend and expand their collaboration for an additional three years.
Under the terms of this agreement, Eli Lilly is funding a specific number of
Onyx's researchers to conduct investigations into the identification of drug
targets and compounds relevant to the BRCA1 signaling pathway. Each of the
parties must dedicate a specified number of researchers to the collaboration.
APC PROGRAM
Onyx's APC Program targets proteins that are regulated by the APC tumor
suppressor gene. This gene, first identified through genetic studies of families
exhibiting the disease familial adenomatous polyposis, is mutated in over 80% of
human colon cancers and is now considered essential for cancer progression in
this tissue. Recent studies have indicated that the APC gene may be mutated in
other cancers as well. Onyx has validated APC as a target for drug discovery by
demonstrating that reintroduction of the normal APC gene into colon cancer cells
will reverse the cancerous properties of these cells.
Onyx has shown that the loss of APC activity results in overexpression of
the Beta-catenin protein, which in turn promotes uncontrolled growth through its
interaction with other protein targets. These targets are now being identified
and include certain transcription factors, the epidermal growth factor receptor,
and certain kinases which have yet to be identified. The Company is evaluating
these targets as a basis for therapeutic intervention and is creating assays for
high-throughput screening. The Company currently does not expect to commence
clinical trials of any potential products from the APC Program for at least
several years.
The APC Program has been funded by the Company with support from Federal
government funding in the form of a Phase I and a Phase II Small Business
Innovation Research (SBIR) Grant.
INFLAMMATION PROGRAM
Onyx's research in the area of inflammation stems from findings in the ras
program whereby molecules involved in the ras cascade play a role, outside of
cancer, in inflammation and autoimmunity. Opportunistically, the Company has
developed a research program to elucidate the molecular components of pathways
that regulate the activation of neutrophils and other phagocytes, and to develop
novel therapeutic strategies for intervention into these pathways, potentially
impacting both upstream and downstream events associated with neutrophil
activation.
In addition to the beneficial infection-fighting properties of phagocytes,
these aggressive cells can cause extensive tissue damage. These cells are
implicated in a number of acute inflammatory disorders including Adult
Respiratory Distress Syndrome (ARDS) and ischaemia-reperfusion injury; and
chronic inflammatory disorders, such as arthritis, inflammatory bowel disease,
asthma and psoriasis. Over fifty different toxins are stored in phagocyte
granules and are released into the phagocytic vacuole during active killing of
pathogens. Phagocyte-mediated tissue injury is caused by the release of
phagocyte granule components (proteolytic enzymes and cationic proteins) and
oxygen-free radicals extracellularly, rather than into the phagocytic vacuole.
All three of the tissue-damaging mechanisms -- formation of oxygen radicals,
activation of metalloproteinases and inactivation of antiproteinases -- would be
inhibited by blocking phagocyte activity. This selective inhibition of
phagocytes may decrease tissue damage while still allowing the immune system to
respond to infection.
11
Effective July 1997, the Company entered into a collaboration agreement
with Warner-Lambert on the Inflammation Program. Under the terms of this
collaboration, Onyx is responsible for performing research on the pathways that
regulate the activation of neutrophils and other phagocytes, identifying and
validating targets for drug screening, and developing assays for screening small
molecules. Warner-Lambert (i) uses these assays to screen its compound
libraries, (ii) synthesizes and tests chemical analogs of classes of
compounds that are identified in the screens, and (iii) conducts preclinical
and clinical testing of compounds selected for development. Warner-Lambert is
obligated, subject to certain conditions, to fund Onyx's researchers. Each of
the parties must commit an equivalent number of researchers to the
collaboration. As of March 1998, the Company has transferred one assay for
high-throughput screening at Warner-Lambert. The Company does not expect that
Warner-Lambert will commence clinical trials of any potential products from
the Inflammation Program for at least several years.
CANCER GENOMICS
Onyx is capitalizing on the similarities available between mouse models and
the human species as researchers work to identify genes that confer
susceptibility or resistance to cancer in certain tissues. This research effort
is focused on the discovery of important new cancer genes to provide targets for
functional genomics and drug discovery efforts (biochemical analysis and drug
screening). This program is at an early research stage.
RESEARCH AND DEVELOPMENT COLLABORATIONS
Onyx intends to develop products that are discovered through the Company's
research only in partnership with pharmaceutical companies. The stage at which
the Company will seek a partner and the roles of Onyx and the partner will vary,
depending on the nature of the program:
- THERAPEUTIC VIRUSES. Onyx plans to conduct research and preclinical
studies, file for regulatory approval to initiate human clinical
studies, and conduct early clinical research on products based on
therapeutic viruses, prior to seeking partnerships for such programs.
The initiation of such partnerships, if any, could vary from the
preclinical stage to Phase II clinical trials or later. The p53
Program is an example of this strategy.
- SMALL MOLECULE DRUGS. Onyx intends to focus its efforts on
identifying the function of novel genes, validating targets, and
developing assays for high-throughput screening of small molecule
compound libraries. The Company plans to seek partners with diverse
compound libraries, strong chemistry capabilities, and established
preclinical, clinical and regulatory capabilities for small molecule
drug development. The Company intends to establish such collaborations
early in the discovery stage or in the research stage to access the
partner's complementary discovery capabilities in chemistry and its
library of small molecules. The ras and Cell Cycle Programs are
examples of this strategy.
The Company's strategy for entering collaborative partnerships is to seek
partners with significant global presence and financial resources, whose
development capabilities are complementary with those of the Company. To date,
the Company has established collaborations with Bayer for the ras Program,
Warner-Lambert for the Cell Cycle Program and the Inflammation Program, and Eli
Lilly for the BRCA1 Program. The Company is presently pursuing collaboration
discussions with a number of major pharmaceutical companies in the United
States, Europe and Japan with respect to its p53 Program. The Company cannot
predict whether or when any of such discussions will result in a completed
agreement or on what terms.
The success of the Company's research and development programs is largely
dependent upon the performance of its collaborative partners with respect to
each program, as well as the achievement of certain milestones under such
collaboration, including the clearance of Investigational New Drug ("IND")
applications, the initiation of human clinical trials, and the receipt of United
States Food and Drug Administration ("FDA") approval to market products. No
assurance can be given that any of such milestones will be achieved, that the
Company's collaborative partners will fulfill their research, development and
funding obligations or that they will
12
not terminate such agreements without cause. Any such failure to achieve
milestones or to perform such obligations, or any such termination of the
agreements, would have a material adverse effect on the Company's business,
financial condition and results of operations.
BAYER CORPORATION
Effective February 1994, Onyx established a research and development
collaboration with Bayer to discover, develop and market compounds that inhibit
the function of the ras pathway or that appropriately modulate the activity of
such pathway in order to treat cancer and other diseases. In April 1996, the
parties amended the agreement to provide that during the research term Onyx
will, and Bayer may, propose additional cancer research targets or programs
outside of ras for inclusion, by mutual agreement, in the research
collaboration. No additional targets were proposed by either party during 1997.
In addition, Bayer agreed that the research collaboration would continue for its
full five-year scheduled term (through January 1999), subject only to
termination for breach or in the event of the acquisition of Onyx. The Company's
obligation to propose certain cancer targets for inclusion in the collaboration
may inhibit or delay the Company's ability to establish research collaborations
with third parties related to such targets.
The collaboration agreement provides for Bayer to pay Onyx an aggregate of
$25.0 million to fund Onyx's research efforts over the five-year research term,
of which $4.7 million was recorded by the Company as revenue in 1997,
$5.2 million in 1996 and $5.2 million in 1995. In addition, Bayer made a
$13.5 million equity investment in the Company in 1994. Bayer also has the right
to have its nominee elected to the Company's Board of Directors until the later
of (i) the end of the research term, or (ii) if the parties have a Collaboration
Compound (as defined below) in clinical development, until such time as the
parties do not have a Collaboration Compound in clinical development.
Under the agreement, compounds that demonstrate the required level of
activity in collaboration assays, as established by the Joint Research and
Development Committee ("JRDC"), are deemed "Collaboration Compounds" subject to
exclusive rights under the collaboration. For Collaboration Compounds selected
by the JRDC for additional preclinical investigation, Bayer funds all such
preclinical work necessary to determine which compounds to take into clinical
development and to obtain approval for conducting clinical trials.
The JRDC selects Collaboration Compounds (but excluding compounds active
against Bayer-proposed targets) for joint development by the parties into
products ("Collaboration Products"), and upon filing of an IND, the parties will
share equally all costs of developing each Collaboration Product worldwide
(excluding Japan), subject to each party's right to elect not to pay such costs.
Under the agreement, Bayer shall make substantial payments to Onyx, based on
achievement of development milestones by Collaboration Products, which payments
are subject to repayment by Onyx out of its share of marketing profits and
royalties, subject to certain annual limitations. Bayer shall market the
Collaboration Products worldwide (excluding Japan), and Onyx has the option to
co-promote such products in the United States, provided that the Company shares
equally all costs of development, in which case its expenses would be paid out
of product sales. Onyx and Bayer will share equally the marketing profits or
losses from commercializing jointly developed Collaboration Products, although
in the calculation of such net profits recognition is given to Bayer's
investment in sales and marketing infrastructure. At any time during the
development of a particular Collaboration Product, either party may terminate
paying its share of such development costs, with the other party retaining
exclusive, royalty-bearing rights to such product.
Bayer has the sole and exclusive right to develop and market Collaboration
Compounds as royalty-bearing products in Japan and will bear all related
development expenses. Further, Bayer has the sole and exclusive right to develop
and market any Collaboration Compounds active against Bayer-proposed targets as
royalty-bearing products. In addition, either party may independently develop a
Collaboration Compound as a royalty-bearing product if the JRDC declines such
party's proposal to select the compound for joint development as a Collaboration
Product, but subject to the other party's right to require the return of such
compound to the collaboration prior to commencement of clinical trials.
13
WARNER-LAMBERT COMPANY
In May 1995, Onyx entered into a research, development and marketing
collaboration agreement with Warner-Lambert to discover and commercialize
therapeutic agents that restore control of or otherwise intervene in
misregulated cell cycle transitions related to pathological conditions, such as
in tumor cells or proliferating vascular smooth muscle cells in arterial
disease. Under the research collaboration, Onyx develops screening assays for
particular targets selected by the parties, and transfers such assays to
Warner-Lambert for high-throughput screening of Warner-Lambert's compound
library to identify active compounds. Warner-Lambert is responsible for
subsequent medicinal chemistry and preclinical investigations on such active
compounds. Warner-Lambert will conduct and fund all clinical development, make
regulatory filings and manufacture for sale the collaboration compounds.
The initial collaboration agreement was scheduled to expire in May 1998.
In December 1997, Onyx and Warner-Lambert extended this collaboration for
another three years through May 2001. The original agreement obligated
Warner-Lambert to make additional payments for achievement of milestones in
the development of collaboration compounds and provided Warner-Lambert with
exclusive rights to manufacture, market and sell products emerging from the
collaboration in all areas of the world except Japan, subject to payment of
royalties to Onyx and to Onyx's right to co-promote such compounds in the
United States. Moreover, Onyx's co-promotion rights terminate if there is a
change of control of Onyx or if Onyx files a New Drug Application ("NDA") on
a competing product or receives FDA approval to market a competing product.
The extended agreement has been amended to expand Warner-Lambert's
development and royalty-bearing marketing rights to include Japan for all
products stemming from the collaboration. Warner-Lambert will increase its
funding to the full complement of 15 staff working on this project in return
for these worldwide rights to products arising out of the collaboration. In
addition, Onyx will receive milestone payments tied specifically to
development efforts in Japan.
Onyx retains the right to develop a certain number of collaboration
compounds independently, provided that Warner-Lambert does not accept Onyx's
request that Warner-Lambert commence development of such compounds. Such
compounds will be royalty bearing to Warner-Lambert, and Onyx will be obligated
to pay Warner-Lambert certain milestone payments for achievement of development
milestones.
Under the initial collaboration agreement, each party must dedicate a
specified number of scientific personnel to the collaborative research over the
three-year research period, and Warner-Lambert will provide Onyx approximately
$6.2 million of funding to support a substantial portion of Onyx's research
efforts related to the collaboration. The Company recorded revenue of $1.8
million in 1997, $2.1 million in 1996 and $1.4 million in 1995. In addition,
Warner-Lambert made a $10.3 million equity investment in the Company over three
years. Under the extended agreement, each party must continue to dedicate a
specified number of scientific personnel to the collaborative research over the
three-year research period, and Warner-Lambert will provide Onyx approximately
$10.1 million of funding to support Onyx's research efforts related to the
collaboration.
Onyx and Warner-Lambert also entered into the Compound Library Access
Agreement, in which Warner-Lambert agreed to screen its compound library against
assays for targets outside the Cell Cycle Program selected by Onyx and approved
by Warner-Lambert, in its sole discretion. Based on the results of the
screening, Onyx may select a number of active leads for further work, and Onyx
will have exclusive rights to any products resulting from such leads for use
against the identified targets, subject to payment of royalties and development
milestone payments to Warner-Lambert on such products.
In July 1997, Onyx entered into its second research, development and
marketing collaboration agreement with Warner-Lambert. This collaboration will
focus on the discovery and commercialization of therapeutic agents that regulate
the activation of neutrophils and other phagocytes implicated in a number of
acute and chronic inflammatory disorders. Under the research collaboration,
Onyx develops screening assays for particular targets selected by the parties,
and transfers such assays to Warner-Lambert for high-throughput screening of
Warner-Lambert's compound library to identify active compounds. Warner-Lambert
is responsible for subsequent
14
medicinal chemistry and preclinical investigations on such active compounds.
Warner-Lambert will conduct and fund all clinical development, make regulatory
filings and manufacture for sale the collaboration compounds.
Warner-Lambert is also obligated to make additional payments for
achievement of milestones in the development of collaboration compounds and has
exclusive rights to manufacture, market and sell such products worldwide,
subject to payment of royalties to Onyx.
Under the inflammation collaboration agreement, each party must dedicate a
specified number of scientific personnel to the collaborative research over the
three-year research period, and Warner-Lambert will provide Onyx approximately
$6.2 million of funding to support Onyx's research efforts related to the
collaboration. Additionally, Warner-Lambert will make a $2.0 million license
payment over three years. No funds were received by the Company and no revenue
was recognized for the year ended December 31, 1997.
ELI LILLY & COMPANY
In May 1995, Onyx entered into a collaborative research and license
agreement with Eli Lilly to conduct a one-year research program to discover and
develop targets for drug discovery in the modulation of the BRCA1 breast cancer
gene pathway. Under the agreement, Onyx was obligated to dedicate a specified
number of scientists over the course of the year to identify targets and
compounds reactive with the BRCA1 gene product. Eli Lilly provided funding to
Onyx to support the costs of the researchers working on the project at Onyx, and
Eli Lilly was also obligated to dedicate several Eli Lilly scientists to work on
the research. In addition, Eli Lilly made a $600,000 equity investment in the
Company in 1995.
Under the collaboration agreement, Eli Lilly has the exclusive
royalty-bearing right to market products resulting from the research provided
that, if Eli Lilly does not elect to do so, Onyx has the option to obtain an
exclusive royalty-bearing license to market such products. If Onyx were to
develop and market such products, Onyx may be required to pay Myriad
Genetics, Inc., Eli Lilly's licensor of certain BRCA1 technology, royalties on
such products as well.
In June 1996, Onyx and Eli Lilly agreed to extend the collaboration to June
1999 and to expand their research and development collaboration to discover and
develop targets for drug discovery in the modulation of the BRCA1 breast cancer
gene pathway. Under the collaboration agreement, each party must dedicate a
specified number of scientific personnel to the collaborative research over the
three-year research period.
Eli Lilly will conduct and fund all clinical development, make regulatory
filings and manufacture for sale the collaboration compounds. Eli Lilly is also
obligated to make additional payments for achievement of milestones in the
development of collaboration compounds and has exclusive rights to manufacture,
market and sell such products worldwide subject to payment of royalties to Onyx.
In September 1996, Eli Lilly made a milestone payment of $685,000 for the
achievement of the collaboration's first milestone. Eli Lilly will provide Onyx
approximately $3.0 million of research funding, exclusive of milestone payments,
to support a substantial portion of Onyx's research efforts related to the
collaboration. The Company recorded revenue of $1.2 million in 1997, $910,000 in
1996 and $375,000 in 1995, inclusive of the September 1996 milestone payment.
Either party may terminate the agreement at any time upon ninety (90) days
advance written notice provided to the other party. The agreement also provides
Eli Lilly the right to terminate the agreement upon thirty (30) days written
notice if within sixty (60) days following the departure of Dr. Paul Polakis,
Onyx is unable to select a replacement that is reasonably acceptable to Eli
Lilly.
CHIRON CORPORATION
In April 1992, the Company was established by means of the transfer from
Chiron to the Company of the drug discovery program being conducted at Chiron by
Dr. Frank McCormick, the scientific founder of Onyx, and his research team. The
work being conducted by this team at that time was primarily in the field of ras
research. As part of such transaction, Chiron and Onyx executed a Technology
Transfer Agreement dated April 24, 1992 (the
15
"Transfer Agreement"), pursuant to which Chiron consented to the transfer of
such research program, including the research team and its trade secrets and
materials used in its research. Chiron also granted a license to Onyx under
certain patent rights held by Chiron which are useful in such research. Such
license was generally nonexclusive, although as part of such agreement, Chiron
agreed not to reestablish its research program in the field for a period of
three years. In May 1994, in connection with the formation of the collaboration
between Bayer and Onyx, the Transfer Agreement was amended to make Onyx the sole
licensee under one of the research assays transferred from Chiron until
January 1, 1999, in consideration of which the covenant against Chiron
reestablishing its research program in the field was eliminated.
In addition, through April 2007, Chiron has an option to receive a
royalty-bearing license with respect to diagnostic and vaccine products of Onyx.
Such license would be exclusive unless an arbitrator determines that Chiron does
not have the ability to commercialize the product in question so as to provide
Onyx with a reasonable return, in which case such license will be co-exclusive.
If Chiron does not exercise such option rights with respect to a particular
product, then prior to the completion of Phase II clinical trials of the
product, the Company may seek a third party licensee of the product in question,
subject to a right of first refusal in favor of Chiron, and after the completion
of Phase II clinical trials, the option rights of Chiron expire.
The Transfer Agreement also provides that Onyx may propose collaborations
to Chiron in the field of gene therapy. Such proposal would require that Onyx
disclose to Chiron the material information known to Onyx regarding the program
in question and also propose a set of terms. If such a proposal is made, and
Onyx and Chiron do not reach agreement within 60 days after the proposal by
Onyx, then the Company may, within 120 days thereafter, enter into an agreement
regarding such program with a third party on terms no more favorable taken as a
whole, to the third party than the terms which Onyx offered to Chiron. Chiron
has advised Onyx that it believes the foregoing provision, in the context of
other provisions of the Transfer Agreement, imposes an obligation on Onyx to
offer gene therapy programs to Chiron pursuant to this mechanism before it
licenses any such program to a third party. The Company does not agree that such
provision imposes an obligation on Onyx to make such proposals. Separately,
Chiron has agreed that this provision does not apply to the p53 Program for
therapeutic applications, although the exact scope of this agreement by Chiron
beyond ONYX-015 itself remains subject to uncertainty.
MARKETING AND SALES
The Company currently has no sales, marketing or distribution capability.
The Company intends to rely on relationships with one or more pharmaceutical
companies with established distribution systems and direct sales forces to
market its products. In the event that the Company is unable to reach agreement
with one or more pharmaceutical companies to market its products, it may be
required to market its products directly and to develop a marketing and sales
force with technical expertise and with supporting distribution capability.
There can be no assurance that the Company will be able to establish in-house
sales and distribution capabilities or relationships with third parties, or that
it will be successful in gaining market acceptance for its products. To the
extent that the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will depend upon the efforts
of third parties, and there can be no assurance that such efforts will be
successful.
MANUFACTURING
The Company expects that its collaborative partners will manufacture
products for clinical development and commercialization. Under the existing
agreements, the Company's collaborative partners have the exclusive right to
manufacture the products that result from those programs. The Company currently
does not have the facilities to manufacture products for small or large-scale
clinical trials or in commercial quantities, and has no experience in such
manufacturing. To manufacture its products for clinical trials or on a
commercial scale, if the Company is required to or chooses to do so, it will
have to build or gain access to a manufacturing facility, which will require a
significant amount of funds.
The Company has been employing a contract manufacturer, MAGENTA Corporation
("MAGENTA"), for the clinical trial production of ONYX-015 and intends to use
MAGENTA or other contract manufacturers for
16
some or all of the Company's clinical trial production. The Company is aware of
only a limited number of manufacturers who it believes would have the ability
and capacity to manufacture this product or any other therapeutic viruses the
Company may develop. Failure of any such third-party manufacturer to comply with
state and federal regulations and to deliver the required quantities on a timely
basis and at commercially reasonable prices would materially adversely affect
the Company's business, financial condition and results of operations. No
assurance can be given that the Company, alone or with a third party, will be
able to make the transition to commercial-scale production of its potential
products successfully, if at all, or that if successful, the Company will be
able to maintain such production.
The Company anticipates that substantial improvements in the manufacturing
process would be required to produce commercial quantities of ONYX-015. While
the Company has built and expanded staffing of a process development laboratory
to investigate the feasibility of improving the manufacturing process, there can
be no assurance that such improvements will be achieved. No assurance can be
given as to the ability of the Company to produce or obtain clinical or
commercial quantities of its potential products in compliance with applicable
regulations or at an acceptable cost.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patent and trade secret protection is crucial to
its business and that its future will depend in part on its ability to obtain
patents, maintain trade secret protection and operate without infringing the
proprietary rights of others, both in the United States and other countries. In
October 1997, the Company was awarded a United States patent, No. 5,677,178 from
the United States Patent and Trademark Office for claims covering the use of
ONYX-015 for the treatment of p53-deficient cancers. Additionally, the Company
has received two notices of allowance for two United States patent applications,
the first of which claims certain adenoviral mutants that kill Rb- tumor cells
and another that claims compositions of matter that consist of ONYX-015 and a
chemotherapeutic. As of March 5, 1998, the Company owned or had licensed rights
to 19 United States patents and 42 United States patent applications, and
generally, foreign counterparts of these filings. These patents and patent
applications cover in most cases discoveries made with respect to biological
materials and interactions of biological materials, including research tools
used by the Company in its drug discovery programs. The Company's rights under
five of the United States patents and nine of the United States patent
applications are nonexclusive rights held under a license from Chiron that was
granted to the Company in connection with its formation. Additionally, the
Company has exclusive rights to one patent application under the Chiron license.
The Company also has nonexclusive rights under one United States patent held
under license from the State University of New York-Stony Brook.
The Company's existing patent rights may not have a deterrent effect on
competitors who are conducting or desire to commence competitive research
programs with respect to the biological targets or fields of inquiry being
pursued by the Company. The Company's ultimate patent position will depend on
the success of its drug discovery program and its ability to obtain effective
patent coverage for the compositions of matter identified in such drug discovery
programs. Because the Company's drug discovery programs are at an early stage
and, except in the p53 Program, potential products have not yet been identified,
it cannot be determined whether potential products that may be derived from the
Company's drug discovery program may be subject to the patent rights of third
parties.
Since patent applications in the United States are maintained in secrecy
until patents issue and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, the Company cannot be
certain that it was the first to make the inventions covered by each of its
pending patent applications or that it was the first to file patent applications
for such inventions. The patent positions of biotechnology and pharmaceutical
companies are highly uncertain and involve complex legal and factual questions.
Therefore, the breadth of claims allowed in biotechnology and pharmaceutical
patents, or their enforceability, cannot be predicted. To date there has emerged
no consistent policy regarding the breadth of claims allowed in biotechnology
patents. There can be no
17
assurance that any of the Company's patents or patent applications, if issued,
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company against competitors with similar technology. Furthermore, there can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by the Company. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that before any of the Company's products can be commercialized,
any related patent may expire, or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent.
The Company is aware of pending patent applications that have been filed by
others that may pertain to certain aspects of the Company's programs. If patents
are issued to others containing preclusive or conflicting claims and such claims
are ultimately determined to be valid, the Company may be required to obtain
licenses to these patents or to develop or obtain alternative technology. The
Company's breach of an existing license or failure to obtain a license to
technology required to commercialize its products may have a material adverse
effect on the Company's business, financial condition and results of operations.
Litigation, which could result in substantial costs to the Company, may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of third-party proprietary rights. If competitors of the Company
prepare and file patent applications in the United States that claim technology
also claimed by the Company, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to the
Company, even if the eventual outcome is favorable to the Company. An adverse
outcome could subject the Company to significant liabilities to third parties
and require the Company to seek licenses of the disputed rights from third
parties or to cease using such technology if such licenses are not available,
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
In respect of the foregoing, the Company is aware of a patent application
filed in the United States, Europe, Japan and Canada by General Hospital
Corporation, an affiliate of Massachusetts General Hospital. This patent
application is related to research involving a modified herpes simplex virus but
it also includes broader claims that, if they were to issue, would cover the p53
Program including ONYX-015. The Company believes, and has received an opinion
from outside counsel to the effect, that claims made in the General Hospital
patent application that may impinge on ONYX-015 and the p53 Program are not
patentable. However, there can be no assurance that broad claims applicable to
ONYX-015 or the p53 Program will not issue from the General Hospital patent
application in one or more countries, that the Company would be successful in
challenging any such claims, or that a license would be available under any such
patent if it were to issue.
In June 1997, ICT Pharmaceuticals, Inc. ("ICT") notified the Company of two
issued U.S. Patents, Nos. 4,980,281 and 5,266,464 that ICT believes cover the
use of a cell for the screening, testing or pharmacological characterization of
new drugs or other substances. Foreign counterparts of the U.S. Patents are
pending. ICT has offered the Company a license to the patents. The Company has
not determined whether to negotiate a license. In any event, the Company does
not believe that these patents will have a material adverse effect on the
Company's business, assets, liabilities, financial condition, operations or
prospects.
The Company has identified two issued U.S. Patents, Nos. 5,499,755 and
5,645,999 that cover recombinant cyclin E compositions, or methods of using the
same to identify possible drug candidates, respectively. Foreign counterparts
of the U.S. Patents are pending. Mitotix Corporation ("Mitotix") either owns,
or has licensed the rights to the two patents. The Company may seek a license
under the patents from Mitotix. If such license is not available at
commercially reasonable terms, or at all, then the Company would be required to
develop assays that are not covered by the patents. In any event, the Company
does not believe that these patents will have a material adverse effect on the
Company's business, assets, liabilities, financial condition, operations or
prospects.
The Company has also identified an additional issued U.S. Patent, No.
5,691,147 that covers an assay for screening test compounds for an inhibitor of
an interaction of a cyclin-dependent kinase with a cyclin-dependent kinase 4
binding protein. Mitotix either owns or has licensed the rights to the patent.
A foreign counterpart of the U.S. Patent is pending. The Company may seek a
license under the patent from Mitotix. If such license is not available on
commercially reasonable terms, or at all, then the Company would be required to
develop assays that are not covered by the patent.
18
The Company has further identified three issued U.S. Patents, Nos.
5,441,880, 5,695,950 and 5,443,962 that cover assays and compositions for
identifying inhibitors of CDC25, respectively. Foreign counterparts of the U.S.
Patents are pending. Mitotix either owns, or has licensed the rights to these
patents. The Company has approached Mitotix for a license and the request was
denied. Consequently, should the Company wish to use the methods and
compositions covered in these patents to identify inhibitors of CDC25, it will
have to do so abroad, while the foreign applications are still pending and
before they are granted. Alternatively, the Company may be required to develop
methods and compositions that are not covered by these patents if it wishes to
identify inhibitors of CDC25.
The Company and its licensors also rely on trade secrets to protect its
technology, especially where patent protection is not believed to be appropriate
or obtainable. However, trade secrets are difficult to protect. The Company
protects its proprietary technology and processes, in part, by confidentiality
agreements with its employees, consultants, collaborators and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors. To the extent that Onyx or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes may also arise as to the rights in related or
resulting know-how and inventions.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries will be a significant factor in the manufacturing and marketing of any
products that may be discovered or developed by the Company, or that may arise
out of the Company's research. All of the Company's products will require
regulatory approval by government agencies prior to commercialization. The
Company anticipates that its products will be subject to rigorous preclinical
and clinical testing and premarket approval procedures by the FDA and similar
health authorities in foreign countries. Various federal statutes and
regulations also govern or influence the manufacturing, testing, labeling,
storage, record keeping and marketing and promotion of such products.
The steps ordinarily required before a drug or biological product may be
marketed in the United States include (a) preclinical and clinical studies;
(b) the submission to the FDA of an IND which must become effective before human
clinical trials may commence; (c) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug or biologic; (d) the
submission of a marketing application to the FDA; and (e) FDA approval of the
marketing application, including inspection and approval of the product
manufacturing facility.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practice. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of clinical
trials. Unless the FDA objects to an IND, the IND will become effective 30 days
following its receipt by the FDA. There can be no assurance that submission of
an IND will result in FDA clearance to commence clinical trials or that the lack
of an objection means that the FDA will ultimately approve an application for
marketing approval.
Clinical trials involve the administration of the investigational product
to humans under the supervision of a qualified principal investigator. In the
United States, clinical trials must be conducted in accordance with Good
Clinical Practices under protocols submitted to the FDA as part of the IND. In
addition, each clinical trial must be approved and conducted under the auspices
of an Institutional Review Board ("IRB") and with patient informed consent. The
IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution conducting the clinical
trial. The United Kingdom and certain other European and Asian countries have
similar regulations.
In January 1996 and December 1995, Onyx submitted an IND in the United
States and a CTX in the United Kingdom, respectively, for permission from the
FDA and comparable regulatory authorities in the United Kingdom to initiate
human clinical studies with ONYX-015. Both applications were cleared.
The goal of Phase I clinical trials is to establish initial data about
safety and tolerance of the investigational product in humans. In Phase II
clinical trials, evidence is sought about the desired therapeutic efficacy of
the
19
investigational product, in limited studies with small numbers of carefully
selected subjects. Efforts are made to evaluate the effects of various dosages
and to establish an optimal dosage level and dosage schedule. Additional safety
data are also gathered from these studies. The Phase III clinical trial program
consists of expanded, large-scale, multicenter studies in the target patient
population. The goal of these studies is to obtain definitive statistical
evidence of the efficacy and safety of the proposed product and dosage regimen.
All data obtained from this comprehensive development program are submitted
as a marketing application to the FDA and the corresponding agencies in other
countries for review and approval. FDA approval of a marketing application is
required before marketing may begin in the United States. The FDA may elect to
present data on the Company's products to one of its advisory committees for
review and recommendation before approval is granted. Essentially all proposed
products of the Company will be subject to demanding and time-consuming approval
procedures in the countries where the Company intends to commercialize its
products. These regulations define not only the form and content of the
development of safety and efficacy data regarding the proposed product, but also
impose specific requirements regarding manufacture of the product, testing,
quality assurance, packaging, storage, documentation, record keeping, labeling,
advertising, and marketing procedures. Effective commercialization also requires
inclusion of the Company's products in national, state, provincial, or
institutional formularies or cost reimbursement systems.
FDA approval of the Company's products, including a review of the
manufacturing processes and facilities used to produce such products, will be
required before such products may be marketed in the United States. The process
of obtaining FDA approval can be costly, time consuming and subject to
unanticipated delays. The FDA may refuse to approve an application if it
believes that applicable regulatory criteria are not satisfied. The FDA may also
require additional testing for safety and efficacy of the drug. Moreover, if
regulatory approval of a drug product is granted, the approval will be limited
to specific indications. There can be no assurance that approvals of the
Company's proposed products, processes or facilities will be granted on a timely
basis, if at all. Any failure to obtain, or delay in obtaining, such approvals
would have a material adverse affect on the Company's business, financial
condition and results of operations. Moreover, even if regulatory approval is
granted, such approval may include significant limitations on indicated uses for
which a product could be marketed. In some instances, regulatory approval may be
granted with the condition that confirmatory (Phase IV) clinical studies be
carried out. If these Phase IV studies do not confirm the results of previous
studies, regulatory approval for marketing may be withdrawn. Failure to comply
with FDA and other applicable regulatory requirements may result in, among other
things, warning letters, civil penalties, criminal prosecution, injunctions,
seizure or recall of products, total or partial suspension of production,
refusal of the government to grant approval, or withdrawal of approval of the
Company's products.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Nuclear Regulatory
Commission, the Resource Conservation and Recovery Act, and other present and
potential future federal, state or local regulations. Certain of the Company's
potential products may require review by the Recombinant DNA Advisory Committee
(RAC) of the United States National Institutes of Health. In other countries,
similar regulations may apply. The Company's research and development involves
the controlled use of hazardous materials and chemicals. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities will be necessary in foreign countries prior
to the commencement of marketing of the product in such countries. The approval
procedure varies among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there is now a
centralized European Community approval mechanism in place, each European
country may nonetheless impose its own procedures and requirements, many of
which are time consuming and expensive. Thus, there can be substantial delays in
obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed.
20
The Company expects to rely on corporate partners and licensees, along with
Company expertise, to obtain governmental approval in foreign countries of drug
and biological products discovered by the Company or arising from the Company's
programs.
COMPETITION
Onyx is engaged in a rapidly changing and highly competitive field. Other
products and therapies that will compete directly with the products that the
Company is seeking to develop and market currently exist or are being developed.
Many other companies are actively seeking to develop products that have disease
targets similar to those being pursued by the Company. Some of these competitive
products are in clinical trials. In particular, Schering-Plough Corporation is
conducting a Phase I clinical trial in colon metastases to the liver and
Introgen Therapeutics, Inc. is conducting a Phase II clinical trial in head and
neck cancer with p53 gene therapy products, and other companies are in earlier
stages of research with small molecule drug and antisense approaches to treat
p53-deficient tumors. Such products would compete directly with ONYX-O15. Other
companies, including Merck & Co. and Genentech, Inc., are developing small
molecule drugs to inhibit targets involving the ras pathways. Such products may
compete with potential products identified in the Company's ras Program. Other
companies are in earlier stages of research with small molecule drugs, gene
therapy and antisense approaches to treat ras-related cancers. Other companies,
such as Mitotix Corporation, are developing proprietary positions including
patented reagents and assays which may require the Company to seek licenses to
the technology or may impact the Company's research by limiting the use of
certain technology. There can be no assurance that the Company's competitors
will not succeed in developing cancer-specific therapies that are more effective
than any that are being developed or that may be developed by the Company, or
that would render the Company's technologies obsolete and noncompetitive.
Moreover, there are currently commercially available products for the treatment
of certain disease targets being pursued by the Company.
Competition from fully integrated pharmaceutical companies and more
established biotechnology companies is intense and is expected to increase.
Substantially all of these companies have significantly greater financial
resources and expertise in research and development, manufacturing, preclinical
and clinical testing, obtaining regulatory approvals, and marketing than the
Company. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
established biotechnology companies. Many of these competitors have significant
products that have been approved or are in development and operate large,
well-funded research and development programs. Academic institutions,
governmental agencies and other public and private research organizations also
conduct research, seek patent protection and establish collaborative
arrangements for products, and clinical development and marketing, that compete
with the Company's programs. These companies and institutions also compete with
the Company in recruiting and retaining highly qualified scientific and
management personnel. In addition to the above factors, Onyx will face
competition based on product efficacy and safety, the timing and scope of
regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, price and patent position. There is no assurance that
the Company's competitors will not develop more effective or more affordable
products, or achieve earlier patent protection or product commercialization than
the Company.
EMPLOYEES
As of December 31, 1997, the Company had 128 full-time employees of whom 44
hold Ph.D. or M.D. degrees. One hundred of the Company's employees are in
research and development, and 28 are in business development, finance and
administration. No Company employee is represented by a labor union and the
Company considers its employee relations to be good.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board ("SAB") consists of individuals
with expertise in many aspects of molecular oncology who advise the Company and
provide critical review of the various development activities of the Company.
The SAB meets several times a year. In addition, the SAB members consult with
and meet informally with the Company on a frequent basis. Certain SAB members
own shares of common stock of the
21
Company. Every member of the SAB has entered into a consulting agreement with
the Company covering the terms of their positions as consultants to the Company
and as members of the SAB. The members of the Company's SAB are as follows:
ERIC R. FEARON, M.D., PH.D. has served as the Maisel Professor of Oncology,
as an Associate Professor in the Departments of Internal Medicine, Human
Genetics and Pathology, and as Associate Director for Basic Research, at the
University of Michigan Comprehensive Cancer Center since 1995. Prior to that,
Dr. Fearon served as an Assistant Professor at Yale University School of
Medicine in the Departments of Pathology and Biology. Dr. Fearon's research
focuses on the understanding of the genetic defects that underlie the invasive
and metastatic behavior of advanced forms of human cancer, particularly cancers
of the gastrointestinal tract and breast.
DOUGLAS HANAHAN, PH.D. has served as Associate Director of the Hormone
Research Institute since July 1992 and has served as a Professor in the
Department of Biochemistry and Biophysics at the University of California, San
Francisco since August 1988. Dr. Hanahan's laboratory is a leader in developing
genetically engineered mouse models of cancer, and applying those models to
identify key genetic and cellular changes that specify a tumor's developmental
pathway and essential characteristics, including the control of angiogenesis and
cell death, and increasingly in exploring transgenic mice as platforms for
preclinical evaluation of therapeutic strategies.
EDWARD E. HARLOW, JR., PH.D. has served as Chairman of the SAB since
September 1997 and previously from April 1992 to March 1996. He has served as
Scientific Director of the Massachusetts General Hospital Cancer Center and has
served as Professor of Genetics at the Harvard Medical School since 1990.
Dr. Harlow's research interests include regulation of the mammalian cell cycle,
biochemistry of the retinoblastoma protein and related proteins and cdc2
kinases. Dr. Harlow is a member of the National Academy of Sciences.
FRANK MCCORMICK, PH.D., F.R.S., founder of the Company served as Chairman
of the SAB from March 1996 to September 1997, Vice President and Chief
Scientific Officer of the Company from 1995 until December 31, 1996, and as a
director of the Company from April 1992 to May 1997. Dr. McCormick served as
Vice President of Research from April 1992 until 1995. Prior to founding the
Company, Dr. McCormick served as Vice President of Therapeutic Research at
Chiron from December 1991 until April 1992. Prior to that, Dr. McCormick was
employed at Cetus in various positions from 1982 until December 1991, serving as
Vice President of Discovery Research of Cetus from 1990 until December 1991.
Dr. McCormick received a Ph.D. in biochemistry from Cambridge University in
England, and completed post-doctoral research at the State University of New
York at Stony Brook and the Imperial Cancer Research Fund in London. He is a
Fellow of the Royal Society of Great Britain.
OWEN N. WITTE, M.D. has served as Professor of Microbiology at the
University of California at Los Angeles since 1980 and as a Howard Hughes
Institute Investigator since 1984. Dr. Witte's research focuses on genes
associated with cancer and other diseases, including the Abelson murine leukemia
virus tyrosine kinase oncogene, the BCR-ABL oncogene, and the gene responsible
for X-linked agammaglobulinemia. Dr. Witte has been the recipient of the
Rosenthal Prize from the American Association of Cancer Research, the Dameshek
Prize of the American Society of Hematology and the Milken Family Award in
Cancer Research. Dr. Witte is a member of the National Academy of Sciences.
ADDITIONAL BUSINESS RISKS
THE DISCUSSION IN THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS DISCUSSED BELOW
AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND "BUSINESS", AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
ANNUAL REPORT.
22
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT
Onyx is at an early stage of development and must be evaluated in light of
the uncertainties present in an early stage biotechnology company. Since its
inception in 1992, the Company has devoted substantially all of its resources to
the research and development of potential products and no revenue has been
generated from product sales. If any products result from the Company's research
and development programs, they are not expected to be commercially available for
a number of years even if they are successfully developed and proven to be safe
and effective. There can be no assurance that any of the Company's product
development efforts will be successfully completed, that any of the Company's
products will be proven to be safe and effective, that regulatory approvals will
be obtained at all or be as broad as sought, that the Company's products will be
capable of being produced in commercial quantities at reasonable cost or that
any products, if introduced, will achieve market acceptance.
TECHNOLOGICAL UNCERTAINTY
Drug discovery methods based upon the genetic basis of cancer are
relatively new, and there can be no assurance that the Company will be able to
employ these methods of drug discovery successfully or that these methods will
lead to the discovery of commercially viable pharmaceutical products. Only one
of the Company's compounds, the ONYX-015 therapeutic virus, has entered human
clinical trials, and there can be no assurance that any of the Company's other
current or future research and development programs will lead to additional
compounds which will be submitted for clinical testing or advance to human
clinical trials. Although the Company has demonstrated the safety of its lead
product, ONYX-015, in human clinical trials, the Company has not demonstrated
the efficacy of the Company's compounds, including ONYX-015, in human clinical
trials. The effect of the human immune response on the ONYX-015 therapeutic
virus cannot be predicted and could cause significant delays in the development
process. The Company's ras and Cell Cycle Programs are also in the early stages
of research and development, and the Company does not expect that its
collaborative partners will commence clinical trials prior to the year 2000.
The Company currently does not expect that clinical trials of any potential
products arising from its BRCA1 or APC Programs will commence for at least
several years. Even if the Company's potential products are found to be safe or
efficacious, or otherwise to have utility, they will require significant
additional research and development efforts, preclinical and clinical testing,
regulatory approvals, and additional investment prior to their
commercialization, and there can be no assurance that any of these efforts will
be successful.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company or its collaborative partners must
demonstrate through preclinical testing and clinical trials that the product is
safe and effective for use in each target indication. The results from
preclinical testing and early clinical trials may not be predictive of results
that will be obtained in later clinical trials and large-scale testing, and
there can be no assurance that clinical trials of products identified by or
developed in collaboration with the Company will demonstrate sufficient safety
and efficacy to obtain the requisite regulatory approvals or will result in
marketable products. Clinical trials may require the enrollment of large numbers
of patients and suitable patients may be difficult to identify and recruit. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in every stage of clinical trials, even in advanced clinical trials
after promising results in earlier trials. Any delays in, or termination of, the
clinical trial efforts of the Company or its collaborative partners would have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTY REGARDING CLINICAL TRIALS OF ONYX-015
The Company is currently engaged in three self-funded Phase II clinical
trials of ONYX-015 for the treatment of head and neck cancer. The ability of
the Company to obtain a corporate partner for the p53 program and to continue to
develop ONYX-015 as a potential product will depend materially on the results of
these trials. The Company expects to present the results of the first trial in
the second quarter of 1998 and the results of the other trials later in the
year. There is no assurance that such results will be positive or, even if they
are positive,
23
that they will be sufficiently strong to support the Company's corporate
partnering or product development objectives. In this regard, while the Phase I
trials of ONYX-015 demonstrated a very favorable safety profile and, in many
patients, tumor necrosis, the observation of viral replication was less
pronounced than was the case in animal studies. If the Phase II clinical trial
results do not support the commencement of a Phase III pivotal trial, the
Company would be required to conduct additional Phase I and Phase II clinical
trials to determine an appropriate indication and treatment regimen for
ONYX-015, if it were to continue development of such product.
NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on its corporate officers and other
principal members of its scientific and management staff, the loss of any of
whose services might significantly delay or prevent the achievement of the
Company's research, development or business objectives. In addition, the Company
relies on consultants and advisors, including the members of its Scientific
Advisory Board, to assist the Company in formulating its research and
development strategy. None of the Company's consultants and advisors are
employees of the Company and all have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to the Company.
In order to pursue its product development plans, the Company will be required
to hire additional qualified scientific personnel to perform research and
development, as well as personnel with expertise in clinical testing, government
regulation and manufacturing. These requirements are also expected to demand
additional management personnel and the development of additional expertise by
existing management personnel. The Company faces competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms,
if at all, and the failure to do so would have a material adverse effect on the
Company, including its ability to enter into additional collaborative
arrangements.
DEPENDENCE ON COLLABORATIVE AGREEMENTS
The Company's strategy for the development, clinical trials, manufacturing
and commercialization of its products includes maintaining and entering into
various collaborations with corporate partners, licensors, licensees and others.
To date, the Company has entered into collaborative arrangements with Bayer with
respect to the Company's ras Program, Warner-Lambert with respect to the
Company's Cell Cycle Program and the Company's Inflammation Program, and Eli
Lilly with respect to the Company's BRCA1 Program. The Company is currently
seeking a collaborative partner for its p53 Program, including the development
and commercialization of ONYX-015. There can be no assurance that the Company
will be able to maintain existing collaborative agreements, negotiate
collaborative arrangements in the future on acceptable terms, if at all, or that
any such collaborative arrangements will be successful. To the extent that the
Company is not able to maintain or establish such arrangements, the Company
would be required to undertake such activities at its own expense, which would
significantly increase the Company's capital requirements and limit the programs
the Company is able to pursue. In addition, the Company may encounter
significant delays in introducing its products into certain markets or find that
the development, manufacture or sale of its products in such markets is
adversely affected by the absence of such collaborative agreements.
The Company cannot control the amount and timing of resources which its
collaborative partners devote to the Company's programs or potential products,
which can vary because of factors unrelated to the potential product. These
relationships may in some cases be terminated at the discretion of the Company's
collaborative partners with only limited notice to the Company and for reasons
outside the Company's control. If any of the Company's collaborative partners
breach or terminate their agreements with the Company or otherwise fail to
conduct their collaborative activities in a timely manner, the preclinical or
clinical development or commercialization of product candidates or research
programs will be delayed, and the Company will be required to devote additional
resources to product development and commercialization or terminate certain
development programs. There also can be no assurance that disputes will not
arise in the future with respect to the ownership of rights to any technology
developed with third parties. These and other possible disagreements between
collaborators and the Company could lead to delays in the collaborative
research, development or commercialization of certain product candidates or
could require or result in litigation or arbitration,
24
which would be time consuming and expensive, and would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's collaborative partners may develop, either alone
or with others, products that compete with the development and marketing of the
Company's products. Competing products, either developed by the collaborative
partners or to which the collaborative partners have rights, may result in their
withdrawal of support with respect to all or a portion of the Company's
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF FUTURE PROFITABILITY; ACCUMULATED DEFICIT
The Company has generated no revenues from product sales and has
experienced significant operating losses since inception. As of December 31,
1997, the Company had an accumulated deficit of approximately $45.6 million. The
Company expects to incur significant and increasing operating losses over at
least the next several years as the Company's research and development efforts
and preclinical testing and clinical trial activities expand. The Company does
not expect to generate revenues from the sale of its potential products, if any,
for the foreseeable future. The Company's ability to achieve profitability
depends in part upon its ability, alone or with others, to complete development
of its potential products, to obtain required regulatory approvals and to
successfully manufacture and market such potential products. The Company expects
its operating expenses and operating losses to increase in 1998 and beyond.
There can be no assurance that Onyx, or its collaborative partners, will
successfully develop, manufacture, commercialize and market any potential
product, or that the Company will ever achieve product revenues or
profitability.
NEED FOR FUTURE FUNDING
The development of the Company's technology and proposed products will
require a commitment of substantial funds to conduct the costly and
time-consuming research and preclinical testing and clinical trials necessary to
develop such technology and proposed products, and to establish relationships
with collaborative partners to bring any such products to market. The Company's
future capital requirements will depend upon a number of factors, including
continued scientific progress in the research and development of the Company's
technology programs, the size and complexity of these programs, the ability of
the Company to establish and maintain collaborative arrangements, progress with
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, competing technological
and market developments and product commercialization activities.
SIGNIFICANT GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The Company's ongoing research and development activities and, if any
product is successfully developed and obtains regulatory approval, the
production and marketing of the Company's products are subject to extensive
regulation by numerous government authorities in the United States and other
countries. Prior to marketing in the United States, any product developed by the
Company must undergo rigorous preclinical testing and clinical trials and an
extensive regulatory approval process implemented by the FDA under the Food,
Drug and Cosmetic Act and the United States Public Health Service Act.
Satisfaction of such regulatory requirements, which includes demonstrating that
the product is both safe and effective, typically takes several years or more
depending upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Because certain of the products that may
result from the Company's research and development programs involve the
application of new technologies and will be based on new therapeutic approaches,
such products may be subject to substantial additional review by various
governmental regulatory authorities and as a result, regulatory approvals may be
obtained more slowly than for products using more conventional technologies.
There can be no assurance that FDA and other regulatory approvals will be
obtained in a timely manner, or at all. Any delay in obtaining, or the failure
to obtain, such approvals would adversely affect the Company's ability to
generate product or royalty revenues. Preclinical studies to demonstrate product
safety must be conducted in conformance with the FDA's Good Laboratory Practice
regulations. Clinical testing must meet requirements for institutional review
board
25
oversight and informed consent, as well as FDA prior review, oversight and Good
Clinical Practice requirements. The Company or the FDA may suspend clinical
trials at any time if it believes that the subjects participating in such trials
are being exposed to unacceptable health risks. Even if FDA and other regulatory
approvals are obtained, the marketing and manufacturing of products are subject
to continuing FDA and other regulatory review, and later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market. Additional governmental regulations may be promulgated that
could delay regulatory approval of the Company's or a corporate partner's
potential products. The Company cannot predict the impact of adverse
governmental regulation which might arise from future legislative or
administrative action.
Accordingly, no assurance can be given that the Company will ever receive
approval from the FDA or foreign regulatory authorities for any of its products
and the failure to receive such approval, or significant delays in obtaining
such approval, could prevent the commercial development of such products and
would have a material adverse effect on the Company.
LACK OF MANUFACTURING EXPERIENCE
The Company's collaborative partners generally have the exclusive right to
manufacture products resulting from the collaborations, and the Company expects
to have similar manufacturing arrangements in its other collaborations. The
Company currently does not have the facilities to manufacture products for small
or large-scale clinical trials or in commercial quantities, and has no
experience in such manufacturing. The Company is dependent on third parties,
including its collaborative partners, for the manufacturing of its products.
There can be no assurance that such parties will be able to meet the Company's
needs either with respect to timing, quantity or quality. If the Company is
unable to obtain or retain third-party manufacturing on acceptable terms, it may
be delayed in its ability to commercialize products. The Company's dependence
upon third parties, including its collaborative partners, for the manufacturing
of products may adversely affect the Company's profit margins and its ability to
develop, deliver and sell products on a timely and competitive basis. In the
event the Company undertakes to establish its own commercial manufacturing
capabilities, it will require substantial additional funds, manufacturing
facilities, equipment and personnel.
UNCERTAINTY OF MARKET ACCEPTANCE
Even if the requisite regulatory approvals are obtained for the Company's
potential products or for products developed in collaboration with the Company,
uncertainty exists as to whether such products will be accepted by the market. A
number of additional factors also may limit the market acceptance of products
which may be developed by or discovered through collaboration with the Company,
including the rate of adoption by health care practitioners, the indications for
which the product is approved, the rate of the products' acceptance by the
target population, the timing of market entry relative to competitive products,
the availability of alternative therapies, the price of the Company's product
relative to alternative therapies, the availability of third-party reimbursement
and the extent of marketing efforts by the Company and third-party distributors
or agents retained by the Company. Side effects or unfavorable publicity
concerning the Company's products or any similar product could have an adverse
effect on the Company's ability to obtain physician, patient or third-party
payor acceptance and on efforts to sell the Company's products. There can be no
assurance of the Company's ability, or the length of time required, to achieve
commercialization of the Company's products or that physicians, patients or
third-party payors will accept any of the Company's products as readily as
alternative therapies or at all.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
The Company currently has no sales, marketing or distribution capability.
The Company intends to rely on relationships with one or more pharmaceutical
companies with established distribution systems and direct sales forces to
market its products. In the event that the Company is unable to reach agreement
with one or more pharmaceutical companies to market its products, it may be
required to market its products directly and to develop a marketing and sales
force with technical expertise and supporting distribution capability. There can
be no assurance that the Company will be able to establish in-house sales and
distribution capabilities or relationships
26
with third parties, or that it will be successful in gaining market acceptance
for its products. To the extent that the Company enters into co-promotion or
other licensing arrangements, the Company must develop its own sales, marketing
or distribution capability, and there can be no assurance that such efforts will
be successful.
RISK OF PRODUCT LIABILITY; UNCERTAINTY OF AVAILABILITY OF INSURANCE
The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
therapeutic products. The Company has obtained clinical trial liability
insurance but there can be no assurance that it will be able to maintain such
insurance for any of its clinical trials. In addition, there can be no assurance
that the Company will be able to obtain or maintain product liability insurance
in the future on acceptable terms or with adequate coverage against potential
liabilities.
UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
private health insurers and other organizations. In addition, other third-party
payors are increasingly challenging the price and cost effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of newly approved health care products. There can be no assurance that
the Company's potential products or products discovered in collaboration with
the Company will be considered cost-effective or that adequate third-party
reimbursement will be available to enable Onyx to maintain price levels
sufficient to realize an appropriate return on its investment in product
research, discovery and development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products are
approved for marketing. Adoption of such legislation could further limit
reimbursement for medical products. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's products, the market acceptance of these products would be adversely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substan