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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 0-28298
ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   94-3154463
     
(State or other jurisdiction of   (I.R.S. Employer ID Number)
incorporation or organization)    
2100 Powell Street
Emeryville, California 94608
(Address of principal executive offices)
(510) 597-6500
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
                         
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller Reporting Company o
 
          (Do not check if a smaller reporting company)        
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The number of outstanding shares of the registrant’s common stock, $0.001 par value, was 62,135,049 as of October 31, 2009.
 
 

 


 

INDEX
         
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    3  
 
       
    3  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    16  
 
       
    21  
 
       
    22  
 
       
    23  
 
       
    23  
 
       
    24  
 
       
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    42  
 
       
    43  
 
       
    43  
 
       
    45  
 EX-10.29
 EX-31.1
 EX-31.2
 EX-32.1

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PART I: FINANCIAL INFORMATION
Item 1.   Financial Statements (Unaudited)
CONDENSED BALANCE SHEETS
                 
    September 30,     December 31,  
    2009     2008  
    (Unaudited)     (Note 1)  
    (In thousands)  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 334,907     $ 235,152  
Marketable securities, current
    469,763       183,272  
Receivable from collaboration partner
    51,444       35,836  
Prepaid expenses and other current assets
    7,389       7,799  
 
           
Total current assets
    863,503       462,059  
Marketable securities, non-current
    38,410       39,622  
Property and equipment, net
    3,124       3,363  
Other assets
    9,014       4,723  
 
           
Total assets
  $ 914,051     $ 509,767  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,347     $ 93  
Advance from collaboration partner
          16,633  
Accrued liabilities
    8,115       4,523  
Accrued clinical trials and related expenses
    6,758       6,041  
Accrued compensation
    6,668       6,014  
 
           
Total current liabilities
    22,888       33,304  
Deferred rent and lease incentives
    986       1,263  
Convertible senior notes due 2016
    141,559        
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Common stock
    62       57  
Receivable from stock option exercises
    (315 )     (455 )
Additional paid-in capital
    1,198,717       950,628  
Accumulated other comprehensive loss
    (808 )     (4,320 )
Accumulated deficit
    (449,038 )     (470,710 )
 
           
Total stockholders’ equity
    748,618       475,200  
 
           
Total liabilities and stockholders’ equity
  $ 914,051     $ 509,767  
 
           
See accompanying notes.

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CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (In thousands, except per share amounts)  
Revenue:
                               
Revenue from collaboration agreement
  $ 69,137     $ 50,766     $ 183,074     $ 144,693  
 
                       
Total operating revenue
    69,137       50,766       183,074       144,693  
Operating Expenses:
                               
Research and development
    35,635       21,792       92,478       63,845  
Selling, general and administrative
    23,440       19,319       68,899       58,985  
 
                       
Total operating expenses
    59,075       41,111       161,377       122,830  
 
                       
Income from operations
    10,062       9,655       21,697       21,863  
Investment income
    1,015       2,763       3,108       10,696  
Interest expense
    (2,255 )           (2,255 )      
 
                       
Income before provision for income taxes
    8,822       12,418       22,550       32,559  
Provision for income taxes
    589       175       878       424  
 
                       
Net income
  $ 8,233     $ 12,243     $ 21,672     $ 32,135  
 
                       
 
                               
Net income per share:
                               
Basic
  $ 0.14     $ 0.22     $ 0.37     $ 0.58  
 
                       
Diluted
  $ 0.14     $ 0.21     $ 0.37     $ 0.57  
 
                       
 
                               
Shares used in computing net income per share:
                               
Basic
    60,248       56,197       58,201       55,755  
 
                       
Diluted
    60,624       57,194       58,511       56,773  
 
                       
See accompanying notes.

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CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Nine Months Ended September 30,  
    2009     2008  
    (In thousands)  
Cash flows from operating activities:
               
Net income
  $ 21,672     $ 32,135  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Realized gains on sales of short-term marketable securities
          (483 )
Depreciation and amortization
    1,145       992  
Stock-based compensation
    16,206       15,017  
Excess tax benefit from stock-based awards
    (36 )     (120 )
Amortization of convertible senior notes discount and debt issuance costs
    1,105        
Changes in operating assets and liabilities:
               
Receivable from collaboration partner
    (15,608 )     (35,384 )
Prepaid expenses and other current assets
    446       (1,678 )
Other assets
    (19 )     (60 )
Accounts payable
    1,254       106  
Accrued liabilities
    3,592       1,277  
Accrued clinical trials and related expenses
    717       3,577  
Accrued compensation
    654       (1,104 )
Deferred rent and lease incentives
    (277 )     5  
 
           
Net cash provided by operating activities
    30,851       14,280  
 
           
 
               
Cash flows from investing activities:
               
Purchases of marketable securities
    (525,272 )     (268,804 )
Sales of marketable securities
    38,505       87,916  
Maturities of marketable securities
    205,000       320,415  
Capital expenditures
    (906 )     (525 )
 
           
Net cash provided by (used in) investing activities
    (282,673 )     139,002  
 
           
 
               
Cash flows from financing activities:
               
Purchases of treasury stock
    (18 )     (529 )
Payments to collaboration partner
    (16,633 )     (14,374 )
Net proceeds from issuances of common stock
    145,442       22,671  
Proceeds from issuance of convertible senior notes
    230,000        
Convertible senior notes debt issuance costs
    (7,250 )      
Excess tax benefit from stock-based awards
    36       120  
 
           
Net cash provided by financing activities
    351,577       7,888  
 
           
 
               
Net increase in cash and cash equivalents
    99,755       161,170  
Cash and cash equivalents at beginning of period
    235,152       161,653  
 
           
Cash and cash equivalents at end of period
  $ 334,907     $ 322,823  
 
           
 
               
See accompanying notes.

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NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or for any other future operating periods.
The condensed balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Onyx Pharmaceuticals, Inc. (the “Company” or “Onyx” and the references “we,” “us” and “our”) Annual Report on Form 10-K for the year ended December 31, 2008.
Note 2. Revenue from Collaboration Agreement
Nexavar is currently marketed and sold primarily in the United States and the European Union for the treatment of advanced kidney cancer and liver cancer. Nexavar also has regulatory applications pending in other territories internationally. The Company co-promotes Nexavar in the United States with Bayer HealthCare Pharmaceuticals, or Bayer, under collaboration and co-promotion agreements. In March 2006, the Company and Bayer entered into a co-promotion agreement to co-promote Nexavar in the United States. This agreement amends the collaboration agreement and supersedes the provisions of that agreement that relate to the co-promotion of Nexavar in the United States. Outside of the United States, the terms of the collaboration agreement continue to govern under which Bayer has exclusive marketing rights and the Company shares equally in the profits or losses, excluding Japan. In the United States, under the terms of the 2006 co-promotion agreement and consistent with the collaboration agreement, the Company and Bayer share equally in the profits or losses of Nexavar, if any, in the United States, subject only to the Company’s continued co-funding of the development costs of Nexavar worldwide, excluding Japan, and the Company’s continued co-promotion of Nexavar in the United States. The collaboration was created through a contractual arrangement, not through a joint venture or other legal entity.
Outside of the United States, excluding Japan, Bayer incurs all of the sales and marketing expenditures, and the Company reimburses Bayer for half of those expenditures. In addition, for sales generated outside of the United States, excluding Japan, the Company reimburses Bayer a fixed percentage of sales for their marketing infrastructure. Research and development expenditures on a worldwide basis, excluding Japan, are equally shared by both companies regardless of whether the Company or Bayer incurs the expense. In Japan, Bayer is responsible for all development and marketing costs, and the Company receives a royalty on net sales of Nexavar.
In the United States, Bayer provides all product distribution and all marketing support services for Nexavar, including managed care, customer service, order entry and billing. Bayer is compensated for distribution expenses based on a fixed percent of gross sales of Nexavar in the United States. Bayer is reimbursed for half of its expenses for marketing services provided by Bayer for the sale of Nexavar in the United States. The companies share equally in any other out-of-pocket marketing expenses (other than expenses for sales force and medical science liaisons) that the Company and Bayer incur in connection with the marketing and promotion of Nexavar in the United States.
Bayer manufactures all Nexavar sold in the United States and is reimbursed at an agreed transfer price per unit for the cost of goods sold.
In the United States, the Company contributes half of the overall number of sales force personnel required to market and promote Nexavar and half of the medical science liaisons to support Nexavar. The Company and Bayer each bear its own sales force and medical science liaison expenses. These expenses are not included in the calculation of the profits or losses of the collaboration.

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Revenue from collaboration agreement consists of the Company’s share of the pre-tax commercial profit generated from its collaboration with Bayer, reimbursement of the Company’s shared marketing costs related to Nexavar and royalty revenue. Under the collaboration, Bayer recognizes all sales of Nexavar worldwide. The Company records revenue from collaboration agreement on a quarterly basis. Revenue from collaboration agreement is derived by calculating net sales of Nexavar to third-party customers and deducting the cost of goods sold, distribution costs, marketing costs (including without limitation, advertising and education expenses, selling and promotion expenses, marketing personnel expenses, and Bayer marketing services expenses), Phase 4 clinical trial costs and allocable overhead costs. Reimbursement by Bayer of the Company’s shared marketing costs related to Nexavar and royalty revenue are also included in the revenue from collaboration agreement line item.
The Company’s portion of shared collaboration research and development expenses is not included in this line item, but is reflected under operating expenses. According to the terms of the collaboration agreement, the companies share all research and development, marketing and non-US sales expenses. United States sales force and medical science liaison expenditures incurred by both companies are borne by each company separately and are not included in the calculation. Some of the revenue and expenses recorded to derive the revenue from collaboration agreement during the period presented are estimates of both parties and are subject to further adjustment based on each party’s final review should actual results differ from these estimates.
Revenue from collaboration agreement was $69.1 million and $183.1 million for the three and nine months ended September 30, 2009, respectively, compared to $50.8 million and $144.7 million for the three and nine months ended September 30, 2008, respectively, calculated as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (In thousands)  
Onyx’s share of collaboration commercial profit
  $ 61,732     $ 44,390     $ 162,781     $ 127,192  
Reimbursement of Onyx’s shared marketing expenses
    5,342       5,484       16,079       15,771  
Royalty revenue
    2,063       892       4,214       1,730  
 
                       
Revenue from collaboration agreement
  $ 69,137     $ 50,766     $ 183,074     $ 144,693  
 
                       
Note 3. Fair Value Measurements
In accordance with Accounting Standards Codification (“ASC”) Subtopic 820-10, formerly known as Statement of Financial Accounting Standards No. 157 “Fair Value Measurements,” the Company measures certain assets and liabilities at fair value on a recurring basis using the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers include:
    Level 1, defined as observable inputs such as quoted prices for identical assets in active markets;
 
    Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
 
    Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring management to develop its own assumptions based on best estimates of what market participants would use in pricing an asset or liability at the reporting date.
The Company’s fair value hierarchies for its financial assets and liabilities (cash equivalents, current and non-current marketable securities and convertible senior notes), which require fair value measurement on a recurring basis are as follows:

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    As of September 30, 2009
    (In thousands)
    As reflected
on the unaudited
balance sheet
  Level 1   Level 2   Level 3   Total
Assets:
                                       
Money market funds
  $ 296,500     $ 296,500     $     $     $ 296,500  
Corporate and financial institutions debt
    99,891             99,891             99,891  
Auction rate securities
    38,510             100       38,410       38,510  
U.S. government agencies
    143,240             143,240             143,240  
U.S. treasury bills
    260,111       260,111                   260,111  
Liabilities:
                                       
Convertible senior notes due 2016 (face value $230,000)
  $ 141,559         $ 244,881         $ 244,881  
                                         
    As of December 31, 2008
    (In thousands)
    As reflected
on the unaudited
balance sheet
  Level 1   Level 2   Level 3   Total
Assets:
                                       
Money market funds
  $ 113,832     $ 113,832     $     $     $ 113,832  
Corporate debt
    109,866             109,866             109,866  
Auction rate securities
    39,622                   39,622       39,622  
U.S. government agencies
    143,376             143,376             143,376  
U.S. treasury bills
  $ 49,993     $ 49,993             $ 49,993  
The estimated fair value of the Company’s convertible senior notes as of September 30, 2009 is provided in accordance with ASC Subtopic 825-10, formerly known as Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments (as amended).” The Company’s convertible senior notes are not marked-to-market and are shown in the accompanying unaudited condensed balance sheet at their original issuance value net of amortized discount.
Level 3 assets consist of securities with an auction reset feature (“auction rate securities”), which are classified as available for sale securities and reflected at fair value. In February 2008, auctions began to fail for these securities and each auction for the majority of these securities since then has failed. As of September 30, 2009 the fair value of each of these securities is estimated utilizing a discounted cash flow analysis. The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets:
                 
    Auction Rate Securities  
    Nine Months Ended  
    September 30, 2009     September 30, 2008  
    (In thousands)  
Fair value at beginning of period
  $ 39,622     $ 50,000  
Redemptions
    (5,450 )      
Transfer to Level 2
    (100 )     (5,000 )
Change in valuation
    4,338       (3,310 )
 
           
Fair value at end of period
  $ 38,410     $ 41,690  
 
           
As a result of the decline in fair value of the Company’s auction rate securities, which the Company believes is temporary and attributes to liquidity rather than credit issues, the Company has recorded an unrealized loss of $1.0 million included in the accumulated other comprehensive income (loss) line of stockholders’ equity. All of the auction rate securities held by the Company at September 30, 2009, consist of securities collateralized by student loan portfolios, which are substantially guaranteed by the United States government. Any future fluctuation in fair value related to the non-current marketable securities that the Company deems to be temporary, including any recoveries of previous write-downs, will be recorded in accumulated other comprehensive income (loss). If the Company determines that any decline in fair value is other than temporary, it will record a charge to earnings as appropriate.

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Note 4. Marketable Securities
Marketable securities consist of securities that are classified as “available for sale”. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and shown separately as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The Company may pay a premium or receive a discount upon the purchase of marketable securities. Interest earned and gains realized on marketable securities and amortization of discounts received and accretion of premiums paid on the purchase of marketable securities are included in investment income. The weighted average maturity of the Company’s marketable securities as of September 30, 2009 was five months.
Available-for-sale marketable securities consisted of the following:
                                 
    September 30, 2009  
    Adjusted     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value  
    (In thousands)  
Agency bond investments:
                               
Current
  $ 387,436     $ 348     $ (17 )   $ 387,767  
 
                       
Total agency bond investments
  $ 387,436     $ 348       (17 )   $ 387,767  
 
                       
Corporate debt investments:
                               
Current
    82,095       3       (102 )     81,996  
Non-current
    39,450       27       (1,067 )     38,410  
 
                       
Total corporate investments
    121,545       30       (1,169 )     120,406  
 
                       
Total available-for-sale marketable securities
  $ 508,981     $ 378     $ 1,186     $ 508,173  
 
                       
                                 
    December 31, 2008  
    Adjusted     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value  
    (In thousands)  
Agency bond investments:
                               
Current
  $ 132,319     $ 1,054     $ (4 )   $ 133,369  
 
                       
Total agency bond investments
    132,319       1,054       (4 )     133,369  
 
                       
Corporate debt investments:
                               
Current
    49,903                   49,903  
Non-current
    45,000             (5,378 )     39,622  
 
                       
Total corporate investments
    94,903             (5,378 )     89,525  
 
                       
Total available-for-sale marketable securities
  $ 227,222     $ 1,054     $ (5,382 )   $ 222,894  
 
                       
The Company’s investment portfolio includes $39.6 million of AAA rated auction rate securities that are collateralized by student loans. Since February 2008, these types of securities have experienced failures in the auction process. However, a limited number of these securities have been redeemed at par by the issuing agencies. As a result of the auction failures, interest rates on these securities reset at penalty rates linked to LIBOR or Treasury bill rates. The penalty rates are generally higher than interest rates set at auction. Due to the failures in the auction process, these securities are not currently liquid. Of the $39.6 million of par value auction rate securities, $0.1 million in securities were redeemed at par in October 2009. Therefore, the Company has classified a portion of the auction rate securities with a fair value of $0.1 million, based on the amount redeemed in October 2009, as current marketable securities and the remaining auction rate securities with an estimated fair value of $38.4 million, based on a discounted cash flow model, as non-current marketable securities on the accompanying unaudited condensed balance sheet at September 30, 2009. The Company has reduced the carrying value of the marketable securities classified as non-current by $1.0 million through accumulated other comprehensive income or loss instead of earnings because the Company has deemed the impairment of these securities to be temporary.
Note 5. Other Long-Term Assets

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In December 2008 the Company entered into a development collaboration, option and license agreement with S*BIO Pte Ltd, or S*BIO. Under the terms of the agreement, in December 2008 the Company made a $25.0 million payment to S*BIO, of which the Company expensed an up-front payment of $20.7 million and recognized an equity investment of $4.3 million. As a result, the accompanying unaudited condensed balance sheet at September 30, 2009 includes $4.3 million for this long-term private equity investment in other long-term assets. The equity investment is accounted for using the cost method of accounting.
Note 6. Convertible Senior Notes due 2016
In August 2009, the Company issued, through an underwritten public offering, $230.0 million aggregate principal amount of 4.0% convertible senior notes due 2016 (the “2016 Notes”). The 2016 Notes will mature on August 15, 2016 unless earlier redeemed or repurchased by the Company or converted. The 2016 Notes bear interest at a rate of 4.0% per year, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2010.
The 2016 Notes are general unsecured senior obligations of the Company and rank equally in right of payment with all of the Company’s future senior unsecured indebtedness, if any, and senior in right of payment to our future subordinated debt, if any.
The 2016 Notes will be convertible, under certain circumstances and during certain periods, at an initial conversion rate of 25.2207 shares of common stock per $1,000 principal amount of the 2016 Notes, which is equivalent to an initial conversion price of approximately $39.65 per share of common stock. The conversion rate is subject to adjustment in certain circumstances. Upon conversion of a 2016 Note, the Company will deliver, at its election, shares of common stock, cash or a combination of cash and shares of common stock.
Upon the occurrence of certain fundamental changes involving the Company, holders of the 2016 Notes may require the Company to repurchase all or a portion of their 2016 Notes for cash at a price equal to 100% of the principal amount of the 2016 Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Beginning August 20, 2013, the Company may redeem all or part of the outstanding 2016 Notes, provided that the last reported sale price of the common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day prior to the date the Company provides the notice of redemption to holders of the 2016 Notes exceeds 130% of the conversion price in effect on each such trading day. The redemption price will equal 100% of the principal amount of the 2016 Notes to be redeemed, plus all accrued and unpaid interest, plus a “make-whole premium” payment. The Company must make the make-whole premium payments on all 2016 Notes called for redemption prior to August 15, 2016, including the 2016 Notes converted after the date the Company delivered the notice of redemption.
The 2016 Notes are accounted for in accordance with Accounting Standards Codification (“ASC”) Subtopic 470-20, formerly known as Financial Accounting Standards Board (“FASB”) Staff Position Accounting Principles Board 14-1. Under ASC Subtopic 470-20 issuers of certain convertible debt instruments that have a net settlement feature and may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of any outstanding debt instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument.
The following is a summary of the principal amount of the liability component of the 2016 Notes, its unamortized discount and its net carrying amount as of September 30, 2009:
                         
    September 30, 2009  
    (In thousands)  
Long-term   Principal     Discount     Net Carrying Value  
2016 Notes — 4.00%
  $ 230,000     $ 88,441     $ 141,559  
 
                 
The effective interest rate used in determining the liability component of the 2016 was 12.5%. The application of ASC Subtopic 470-20 resulted in an initial recognition of $89.5 million as the debt discount with a corresponding increase to paid-in capital, the equity component, for the 2016 Notes. The debt discount and debt issuance costs are amortized as interest expense through August 2016. The cash interest expense for the three and nine months ended September 30, 2009 for the 2016 Notes was $1.2 million relating to the

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4.0% stated coupon rate. The non-cash interest expense relating to the amortization of the debt discount for the 2016 Notes for the three and nine months ended September 30, 2009 was $1.0 million.
Note 7. Advance from Collaboration Partner
The Company received $40.0 million in development payments from Bayer pursuant to its collaboration agreement. These development payments contain no provision for interest and are repayable to Bayer from a portion of the Company’s share of collaboration profits after deducting certain contractually agreed upon expenditures. As of September 30, 2009, the entire amount of these development payments had been repaid to Bayer.
Note 8. Stock-Based Compensation
The Company accounts for stock-based compensation to employees and directors by estimating the fair value of stock-based awards using the Black-Scholes option-pricing model and amortizing the fair value of the stock-based awards granted over the applicable vesting period. Total employee stock-based compensation expense was $5.0 million and $14.9 million for the three and nine months ended September 30, 2009, respectively, and $4.3 million and $13.8 million for the three and nine months ended September 30, 2008, respectively. The stock-based compensation expense for the nine months ended September 30, 2008 includes $2.0 million for the modifications of stock-based awards relating to two employees. The terms of the modifications included accelerated vesting and the extension of the vesting period for stock-based awards previously granted.
Valuation Assumptions
As of September 30, 2009 and 2008, the weighted average assumptions used in the Black-Scholes option-pricing model to estimate the fair value of stock-based awards for employee stock option awards and employee stock purchases made under the Employee Stock Purchase Plan were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
Stock Option Plans:
                               
Risk-free interest rate
  2.51%   3.28%   1.89%   2.91%
Expected life
  4.3 years   4.4 years   4.3 years   4.4 years
Expected volatility
  58%   64%   65%   64%
Expected dividends
  None   None   None   None
Weighted average option fair value
  $15.41   $21.67   $15.34   $17.66
 
                               
Stock Bonus Awards:
                               
Expected life
  3 years         3 years   3 years
Expected dividends
  None         None   None
Weighted average fair value per share
  $32.07     $29.05   $30.77
 
                               
ESPP:
                               
Risk-free interest rate
  0.31%   2.19%   0.29%   2.69%
Expected life
  6 months   6 months   6 months   6 months
Expected volatility
  56%   55%   60%   59%
Expected dividends
  None   None   None   None
Weighted average shares fair value
  $8.16   $10.73   $9.16   $13.56

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Note 9. Common Stock Offering
In August 2009, the Company sold 4,600,000 shares of its common stock at a price to the public of $30.50 per share in an underwritten public offering pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. The Company received cash proceeds, net of underwriting discounts and commissions, of approximately $134.0 million from this public offering.
Note 10. Income Taxes
The Company calculates its quarterly income tax provision in accordance with ASC 740-270, Income Taxes, formerly known as FAS No. 109, “Accounting For Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company has established and continues to maintain a full valuation allowance against its deferred tax assets as the Company does not currently believe that realization of those assets is more likely than not.
For the quarter ended September 30, 2009, the Company calculated its income tax provision on a year-to-date basis instead of estimating its annual effective tax rate. Therefore, for the three and nine months ended September 30, 2009, the Company recorded a provision for income taxes of $589,000 and $878,000, respectively. For the three and nine months ended September 30, 2008, the Company recorded a provision for income taxes of $175,000 and $424,000, respectively. Based on the Company’s ability to fully offset federal taxable income with its net operating loss carry forwards, the Company’s estimated tax expense is principally related to federal alternative minimum tax and California state income tax.
There were no material changes to the Company’s unrecognized tax benefits for the nine months ended September 30, 2009, and the Company does not expect to have any significant changes to unrecognized tax benefits over the next twelve months. The tax years from 1993 and forward remain open to examination by the federal and state taxing authorities due to net operating loss and credit carryforward. The Company is currently not under examination by the Internal Revenue Service or any other taxing authorities.
Note 11. Net Income per Share
Basic net income per share amounts for each period presented were computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted net income per share for each period presented was computed by dividing net income plus interest on dilutive convertible senior notes by the weighted-average number of shares of common stock outstanding during each period plus all additional common shares that would have been outstanding assuming dilutive potential common shares had been issued for dilutive convertible senior notes and other dilutive securities.
Dilutive potential common shares for dilutive convertible senior notes are calculated based on the “if-converted” method. Under the “if-converted” method, when computing the dilutive effect of convertible senior notes, the numerator is adjusted to add back the amount of interest and debt issuance costs recognized in the period and the denominator is adjusted to add back the amount of shares that would be issued if the entire obligation is settled in shares. As of September 30, 2009, the Company’s outstanding indebtedness consisted of its 4.0% convertible senior notes due 2016.
Dilutive potential common shares also include the dilutive effect of the common stock underlying in-the-money stock options and are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option, the average amount of compensation cost, if any, for future service that the Company has not yet recognized when the option is exercised, are assumed to be used to repurchase shares in the current period. Dilutive potential common shares also reflect the dilutive effect of unvested restricted stock units.

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The computations for basic and diluted net income per share were as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (In thousands, except per share amounts)  
Net income — basic
  $ 8,233     $ 12,243     $ 21,672     $ 32,135  
Add: interest and issuance costs related to convertible senior notes
                       
 
                       
Net income — diluted
  $ 8,233     $ 12,243     $ 21,672     $ 32,135  
 
                       
 
                               
Weighted average common shares outstanding — basic
    60,248       56,197       58,201       55,755  
Dilutive effect of convertible senior notes
                       
Dilutive effect of options
    376       997       310       1,018  
 
                       
Weighted average common shares outstanding and dilutive potential common shares — diluted
    60,624       57,194       58,511       56,773  
 
                       
 
                               
Net income per share:
                               
 
                       
Basic
  $ 0.14     $ 0.22     $ 0.37     $ 0.58  
 
                       
 
                               
 
                       
Diluted
  $ 0.14     $ 0.21     $ 0.37     $ 0.57  
 
                       
Under the “if-converted” method, 5.8 million potential common shares relating to the 2016 Notes were not included in diluted earnings per share for the three and nine months ended September 30, 2009 because their effect would be anti-dilutive. Diluted net income per share does not include the effect of 3.3 million and 3.9 million stock-based awards that were outstanding during the three and nine months ended September 30, 2009, respectively, and 1.6 million and 1.6 million stock-based awards outstanding during the three and nine months ended September 30, 2008, respectively, because their effect would have been anti-dilutive.
The table below sets the potential common shares related to convertible notes and equity plans and the interest expense related to the convertible notes not included in dilutive shares because their effect would be anti-dilutive.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
            (In thousands)          
Potential common shares — 2016 Notes
    5,801             5,801        
Potential common shares — equity plans
    3,312       1,614       3,897       1,636  
2016 Notes interest and issuance expense not added back under the “if-converted” method
  $ (2,255 )   $     $ (2,255 )   $  
Note 12. Comprehensive Income
Comprehensive income is composed of net income and other comprehensive income (loss). Other comprehensive income (loss) is comprised of unrealized holding gains and losses on the Company’s available-for-sale securities that are excluded from net income and reported separately in stockholders’ equity. Comprehensive income and its components are as follows:

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    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (In thousands)  
Net income — as reported
  $ 8,233     $ 12,243     $ 21,672     $ 32,135  
Other comprehensive income (loss):
                               
Change in unrealized gain (loss) on available-for-sale securities
    557       (2,125 )     3,512       (3,564 )
 
                       
Comprehensive income
  $ 8,790     $ 10,118     $ 25,184     $ 28,571  
 
                       
The activities in other comprehensive income are as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (In thousands)  
Increase (decrease) in unrealized gain (loss) on available-for-sale securities
  $ 557     $ (2,125 )   $ 3,512     $ (4,047 )
Reclassification adjustment for net gains on available-for-sale securities including in net income
                      483  
 
                       
Change in unrealized gain (loss) on available-for-sale securities
  $ 557     $ (2,125 )   $ 3,512     $ (3,564 )
 
                       
Note 13. Subsequent Events
On October 10, 2009, the Company entered into a definitive Agreement and Plan of Merger with Proteolix, Inc., Profiterole Acquisition Corp. and Shareholder Representative Services LLC (the “Merger Agreement”), The Merger Agreement provides that Profiterole Acquisition Corp. will merge with and into Proteolix (the “Merger”), with Proteolix surviving the Merger as a wholly-owned subsidiary of the Company. Proteolix is a privately held biopharmaceutical company focused on discovering and developing novel therapies that target the proteasome for the treatment of hematological malignancies and solid tumors. Proteolix’s lead compound, carfilzomib, is a proteasome inhibitor currently in multiple clinical trials, including an advanced Phase 2b clinical trial for patients with relapsed and refractory multiple myeloma.
Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each outstanding share of Proteolix capital stock will be converted into the right to receive the consideration described in the Merger Agreement. All Proteolix stock options outstanding at the Effective Time will fully vest and be cancelled and the holder of a cancelled option will be entitled to receive merger consideration for each share of Proteolix common stock subject to the option less the option exercise price, as described in the Merger Agreement.
Under the terms of the Merger Agreement, and assuming the Merger is consummated, the Company will make a $276.0 million cash payment upon closing of the transaction and up to $575.0 million in earn-out payments upon the receipt of certain regulatory approvals and the satisfaction of other milestones. These additional payments include $40.0 million payable in 2010 based on the achievement of a development milestone and up to $535.0 million contingent upon the achievement of certain regulatory approvals for carfilzomib in the U.S. and Europe. Of the potential $535.0 million, a payment of $170.0 million is based upon the achievement of accelerated U.S. Food and Drug Administration approval. The transaction is expected to close in the fourth quarter of 2009, subject to the receipt of clearance under the Hart-Scott-Rodino Act and customary closing conditions.
The Company evaluated subsequent events from the date of the accompanying unaudited financial statement through November 3, 2009, the date the financial statements were issued and did not identify any other events.
Note 14. Related Party Transactions
At September 30, 2009, the Company had loans with two employees outstanding. One loan with $174,000 outstanding bears interest at 2.85% per annum and is payable in five annual payments beginning in 2009. The other loan with $151,000 outstanding bears interest at 0.72% per annum and is payable in a lump sum within eighteen months.

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Note 15. Recent Accounting Pronouncements
In June 2009, the FASB issued FAS 167, “Amendments to FASB Interpretation No. 46(R),” which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R). This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and has currently not been codified in the ASC. This statement will be effective for the Company in fiscal year 2010, and the Company is still assessing the potential impact of adoption, if any.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations,” codified to ASC Topic 805. ASC Topic 805 establishes principles and requirements for recognizing and measuring assets acquired, liabilities assumed and any non-controlling interests in the acquired target in a business combination. ASC Topic 805 also provides guidance for recognizing and measuring goodwill acquired in a business combination; requires purchased in-process research and development to be capitalized at fair value as intangible assets at the time of acquisition; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination; expands the definition of what constitutes a business; and requires the acquirer to disclose information that users may need to evaluate and understand the financial effect of the business combination. ASC Topic 805 is effective on a prospective basis and will impact business combination transactions for which the acquisition date occurs after December 15, 2008. If the Merger closes, ASC Topic 805 will have a material impact on the Company’s consolidated financial position and results of operations.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. These statements appearing throughout our Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth under Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.
Overview
Changing the way cancer is treated®
We are a biopharmaceutical company dedicated to developing innovative therapies that target the molecular mechanisms that cause cancer. With our collaborators, we are developing anticancer therapies, and we are applying our expertise to develop and commercialize therapies designed to exploit the genetic differences between cancer cells and normal cells.
Our first commercially available product, Nexavar® (sorafenib) tablets, being developed with our collaborator, Bayer HealthCare Pharmaceuticals, or Bayer, is approved by the United States Food and Drug Administration, or FDA, for the treatment of patients with advanced kidney cancer and liver cancer. Nexavar is a novel, orally available kinase inhibitor and is one of a new class of anticancer treatments that target both cancer cell proliferation and tumor growth through the inhibition of key signaling pathways. In December 2005, Nexavar became the first newly approved drug for patients with advanced kidney cancer in over a decade. In November 2007, Nexavar was approved as the first and is currently the only systemic therapy for the treatment of patients with liver cancer. Nexavar is now approved in more than 90 countries for the treatment of advanced kidney cancer and in more than 80 countries for the treatment of liver cancer. We and Bayer are also conducting clinical trials of Nexavar in several important cancer types in addition to advanced kidney cancer and liver cancer, including lung, breast, thyroid, ovarian and colon cancers.
We and Bayer are commercializing Nexavar, for the treatment of patients with advanced kidney cancer and liver cancer. Nexavar has been approved and is marketed for these indications in the United States and in the European Union, as well as other territories worldwide. In the United States, we co-promote Nexavar with Bayer. Outside of the United States, Bayer manages all commercialization activities. For the nine months ended September 30, 2009, worldwide net sales of Nexavar as recorded by Bayer were $608.3 million.
In collaboration with Bayer, we initially focused on demonstrating Nexavar’s ability to benefit patients suffering from a cancer for which there were no or few established therapies. With the approval of Nexavar for the treatment of advanced kidney cancer and liver cancer, the two companies have established the Nexavar brand and created a global commercial oncology presence. In order to benefit as many patients as possible, we and Bayer are also investigating the administration of Nexavar with previously approved and investigational anticancer therapies in many common cancers, with the objective of enhancing the anti-tumor activity of existing therapies through combination with Nexavar.
We and Bayer are developing and marketing Nexavar under our collaboration and co-promotion agreements. We fund 50% of the development costs for Nexavar worldwide, excluding Japan. With Bayer, we co-promote Nexavar in the United States and share equally in any profits or losses. Outside of the United States, excluding Japan, Bayer has exclusive marketing rights and we share profits equally. In Japan, Bayer funds all product development, and we receive a royalty on any sales. Our agreements with Bayer also provide that we receive creditable milestone-based payments totaling $40.0 million, all of which have been received. These payments were repayable by us to Bayer from a portion of our share of any quarterly collaboration profits and royalties after deducting certain contractually agreed upon expenditures. As of September 30, 2009, was all of these payments were paid back to Bayer based on the profitability of the collaboration thus far.
We have expanded our development pipeline through the acquisition of rights to development-stage novel anticancer agents. In November 2008, we entered into an agreement to license worldwide development and commercialization rights to ONX 0801, previously known as BGC 945, from BTG International Limited, or BTG, a London-based specialty pharmaceuticals company. ONX 0801 is in clinical development and is believed to work by combining two established approaches to improve outcomes for cancer patients, selectively targeting tumor cells through the alpha-folate receptor, which is overexpressed in a number of tumor types, and inhibiting thymidylate synthase, a key enzyme responsible for cell growth and division. In December 2008, we acquired options to

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license SB1518 (designated by Onyx as ONX 0803) and SB1578 (designated by Onyx as ONX 0805), which are both Janus Kinase 2, or JAK2, inhibitors, from S*BIO Pte Ltd, or S*BIO, a Singapore-based company. The activation of JAK2 stimulates blood cell production and the JAK2 pathway is known to play a critical role in the proliferation of certain types of cancer cells and in the anti-inflammatory pathway. ONX 0803 is in multiple Phase 1 studies and ONX 0805 is in preclinical development.
In October 2009, we entered into an Agreement and Plan of Merger with Proteolix, Inc., pursuant to which we expect to acquire Proteolix, Inc., a privately held biopharmaceutical company focused on discovering and developing novel therapies that target the proteasome for the treatment of hematological malignancies and solid tumors. Proteolix’s lead compound, carfilzomib, is a proteasome inhibitor currently in multiple clinical trials, including an advanced Phase 2b clinical trial for patients with relapsed and refractory multiple myeloma.
With the exception of the year ended December 31, 2008, we have incurred annual net losses since our inception. Our ability to achieve continued and sustainable profitability is uncertain and is dependent on a number of factors. These factors include, but are not limited to, the level of patient demand for Nexavar, the ability of Bayer’s distribution network to process and ship product on a timely basis, investments in sales and marketing efforts to support the sales of Nexavar, Bayer and our investments in the research and development of Nexavar, fluctuations in foreign exchange rates and expenditures we may incur to acquire or develop and commercialize additional products. Our operating results will likely fluctuate from quarter to quarter and from year to year, and are difficult to predict. Since inception, we have relied on public and private financings, combined with milestone payments from our collaborators, to fund our operations and may continue to do so in future periods. As of September 30, 2009, our accumulated deficit was approximately $449.0 million.
Our business is subject to significant risks, including the risks inherent in our development efforts, the results of the Nexavar clinical trials, the marketing of Nexavar as a treatment for patients in approved indications, our dependence on collaborative parties, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. For a discussion of these and some of the other risks and uncertainties affecting our business, see Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and the Use of Estimates
Critical accounting policies are those that require significant estimates, assumptions and judgments by management about matters that are inherently uncertain at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider certain accounting policies related to the fair value of marketable securities, stock-based compensation, revenue from collaboration agreement, research and development expenses and the use of estimates to be critical policies. Significant estimates used in 2009 included assumptions used in the determination of the fair value of marketable securities, stock-based compensation related to stock options granted, revenue from collaboration agreement, fair value of convertible senior notes and research and development expenses. Actual results could differ materially from these estimates.
Convertible Senior Notes
In August 2009, we issued, through an underwritten public offering, $230.0 million aggregate principal amount of 4.0% convertible senior notes due 2016 (the “2016 Notes”). The 2016 Notes are accounted for in accordance with Accounting Standards Codification (“ASC”) Subtopic 470-20, formerly known as Financial Accounting Standards Board (“FASB”) Staff Position Accounting Principles Board 14-1. Under ASC Subtopic 470-20 issuers of certain convertible debt instruments that have a net settlement feature and may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the 2016 Notes was computed by estimating the fair value of a similar liability issued at 12.5% effective interest rate, which is determined by considering the rate of return investors would require in our capital structure as well as taking into consideration effective interest rates derived by comparable companies. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the 2016 Notes and results in a corresponding increase to debt discount. Subsequently, the debt discount is amortized as interest expense through the maturity date of the 2016 Notes.
Other than as set forth herein, there have been no other material changes in our critical accounting policies, estimates and judgments during the three months ended September 30, 2009 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.
Results of Operations

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Three and nine months ended September 30, 2009 and 2008
Revenue
Nexavar, our only marketed product, was approved in the United States in December 2005. In accordance with our collaboration agreement with Bayer, Bayer recognizes all revenue from the sale of Nexavar. As such, for the three and nine months ended September 30, 2009 and 2008, we reported no product revenue. For the three and nine months ended September 30, 2009, Nexavar net sales recorded by Bayer were $229.2 million and $608.3 million, primarily in the United States and the European Union. This represents an increase of $48.3 million, or 27%, and $107.0 million, or 21%, over Nexavar net sales of $180.9 million and $501.3 million recorded by Bayer for the three and nine months ended September 30, 2008.
Revenue from Collaboration Agreement
Nexavar is currently marketed and sold in the United States, most countries in the European Union and other countries worldwide. We co-promote Nexavar in the United States with Bayer under collaboration and co-promotion agreements. Under the terms of the co-promotion agreement and consistent with the collaboration agreement, we and Bayer share equally in the profits or losses of Nexavar worldwide, excluding Japan. In the United States, we contribute half of the overall number of sales force personnel required to market and promote Nexavar and half of the medical science liaisons to support Nexavar. We and Bayer each bear our own sales force and medical science liaison expenses. These expenses are not included in the calculation of the profits or losses of the collaboration.
Revenue from collaboration agreement consists of our share of the pre-tax commercial profit generated from our collaboration with Bayer, reimbursement of our shared marketing costs related to Nexavar and royalty revenue. Under the collaboration, Bayer recognizes all sales of Nexavar worldwide. We record revenue from collaboration agreement on a quarterly basis. Revenue from collaboration agreement for the three and nine months ended September 30, 2009 and 2008 is calculated as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (In thousands)     (In thousands)  
 
                               
Nexavar product revenue, net (as recorded by Bayer)
  $ 229,243     $ 180,887     $ 608,295     $ 501,303  
 
                       
Nexavar revenue subject to profit sharing (as recorded by Bayer)
  $ 199,774     $ 168,141     $ 548,093     $ 476,584  
Combined cost of goods sold, distribution, selling, general and administrative expenses
    76,309       79,362       222,531       222,200  
 
                       
Combined collaboration commercial profit
  $ 123,465     $ 88,779     $ 325,562     $ 254,384  
 
                       
Onyx’s share of collaboration commercial profit
  $ 61,732     $ 44,390     $ 162,781     $ 127,192  
Reimbursement of Onyx’s shared marketing expenses
    5,342       5,484       16,079       15,771  
Royalty revenue
    2,063       892       4,214       1,730  
 
                       
Revenue from collaboration agreement
  $ 69,137     $ 50,766     $ 183,074     $ 144,693  
 
                       
For the three months ended September 30, 2009 and 2008, revenue from collaboration agreement was $69.1 million and $50.8 million, respectively. For the nine months ended September 30, 2009 and 2008, revenue from collaboration agreement was $183.1 million and $144.7 million, respectively. The increase in revenue from collaboration agreement is primarily a result of increased net product revenue on sales of Nexavar as recorded by Bayer in countries around the world and royalty revenue. Additionally, revenue from collaboration agreement for the three months ended September 30, 2009 as compared to the same period in 2008 increased as a result of a decrease in shared marketing expenses.
Revenue from collaboration agreement increases with increased Nexavar net revenue, or decreases with decreased Nexavar net revenue, over and above the associated cost of goods sold, distribution, selling and general administrative expenses. Increases to the associated costs of goods sold, distribution, selling and general and administrative expenses decreases revenue from collaboration agreement and decreases to these costs will increase revenue from collaboration agreement. Additionally, prolonged or profound

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economic downturn may result in adverse changes to product reimbursement and pricing and sales levels, which would harm our operating results. We expect Nexavar sales and Bayer’s and our shared cost of goods sold, distribution, selling and general administrative expense to increase as Bayer continues to expand Nexavar marketing and sales activities outside of the United States.
Research and Development Expenses
Research and development expenses were $35.6 million for the three months ended September 30, 2009, a net increase of $13.8 million, or 64%, from $21.8 million in the same period in 2008. For the nine months ended September 30, 2009 research and development expenses were $92.5 million, a net increase of $28.6 million, or 45%, from $63.8 million in the same period in 2008. The increase is primarily due to planned increases in the development program for Nexavar across additional tumor types, such as thyroid, colorectal and adjuvant liver cancer, and Onyx’s costs to further develop ONX 0801, including a milestone payment of $7.0 million to BTG, partially offset by decreased spending for lung cancer trials. A significant portion of our research and development expenses, approximately 61% and 67% for the three and nine months ended September 30, 2009, respectively, and approximately 73% and 77% for the three and nine months ended September 30, 2008, respectively, relate to our cost sharing arrangement with Bayer and represent our share of the research and development costs incurred by Bayer for Nexavar. As a result of the cost sharing arrangement between us and Bayer for research and development costs, there was a net reimbursable amount of $17.7 million and $47.8 million due to Bayer for the three and nine months ended September 30, 2009, respectively. For the three and nine months ended September 30, 2008 there was net reimbursable amount of $10.8 million and $36.8 million, respectively, due to Bayer as a result of the cost sharing arrangement. Such amounts were recorded based on invoices and estimates we receive from Bayer. When such invoices have not been received, we must estimate the amounts owed to Bayer based on discussions with Bayer. If we underestimate or overestimate the amounts owed to Bayer, we may need to adjust these amounts in a future period, which could have an effect on earnings in the period of adjustment.
The major components of research and development costs include clinical manufacturing costs, clinical trial expenses, consulting and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead and occupancy costs. In addition, our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial sites and clinical research organizations. In the normal course of business, we contract with third parties to perform various clinical trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, and the completion of portions of the clinical trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical trials are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract. If we underestimate activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.
We expect research and development expenses to increase in future periods as we and Bayer continue to expand our investment in the development of Nexavar by conducting clinical trials to test Nexavar’s efficacy in other potential indications in future periods. We also expect our research and development activities to include developing ONX 0801 further. In addition, we expect our research and development expenses to increase if we exercise our options to license the rights to ONX 0803 and/or ONX 0805. S*BIO will retain responsibility for all development costs prior to the option exercise. After the exercise of our option to license rights to either compound, we are required to assume development costs for the U.S., Canada, and Europe subject to S*BIO’s option to fund a portion of the development costs in return for enhanced royalties on any future product sales. Upon the exercise of our option of either compound, S*BIO is entitled to receive a one-time fee, milestone payments upon achievement of certain development and sales levels and royalties on any future product sales.
Together with Bayer, we have executed a broad-based global development strategy for Nexavar that implements simultaneous clinical programs currently designed to expand the number of approved indications of Nexavar and evaluate the use of Nexavar in new and/or novel combinations. Our global development plan includes Phase 3 investments in liver, kidney, thyroid and non-small cell lung cancers and Phase 2 investments in breast, ovarian and colorectal cancers. As of September 30, 2009, our share of the Nexavar development costs incurred to date under the collaboration was $474.7 million.
In connection with the Agreement and Plan of Merger to acquire Proteolix, Inc. we expect our research and development expenses to increase substantially in future periods, if consummated. The transaction is expected to close in the fourth quarter of 2009, subject to the receipt of clearance under the Hart-Scott-Rodino Act and customary closing conditions. Under the terms of the transaction, we will make a $276.0 million cash payment upon closing of the transaction. Additional payments include $40 million payable in 2010 based

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on the achievement of a development milestone and four additional payments of up to $535.0 million contingent upon obtaining regulatory approvals of carfilzomib in the U.S. and Europe.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $23.4 million for the three months ended September 30, 2009, a net increase of $4.1 million, or 21%, from $19.3 million in the same period in 2008. For the nine months ended September 30, 2009 selling, general and administrative expenses were $68.9 million, a net increase of $9.9 million, or 17%, from $59.0 million in the same period in 2008. This increase is primarily due to increased headcount and increased employee-related expenses to support Nexavar’s commercial growth, as well as increased headcount and legal and employee-related expenses to support our growth. The nine months ended September 30, 2008 included non-recurring employee related expenses consisting of $2.0 million for modifications of previously granted stock-based awards for two employees and $2.0 million for compensation, search fees and other expenses related to the transition of the chief executive officer. Selling, general and administrative expenses consist primarily of salaries, employee benefits, consulting, advertising and promotion expenses, other third party costs, corporate functional expenses and allocations for overhead and occupancy costs. We expect our selling, general and administrative expenses to increase due to increases in marketing expenses related to Nexavar, increases in personnel and increases in transaction related costs.
Investment Income
Investment income consists of interest income and realized gains or losses from the sale of marketable equity investments. We had investment income of $1.0 million for the three months ended September 30, 2009, a decrease of $1.7 million, or 63%, from $2.8 million in the same period in 2008. For the nine months ended September 30, 2009, we recorded investment income of $3.1 million, a decrease of $7.6 million, or 71%, from $10.7 million in the same period in 2008. These decreases were primarily due to lower effective interest rates in the market as well as a change in the asset allocation of our investment portfolio.
Interest Expense
Interest expense of $2.3 million for the third quarter 2009 relates to the 4.0% convertible senior notes due 2016 issued in August 2009, and includes non-cash imputed interest expense of $1.0 million as a result of the application of Accounting Standards Codification (“ASC”) Subtopic 470-20, formerly known as FASB Staff Position Accounting Principles Board 14-1.
Liquidity and Capital Resources
With the exception of the profitability we achieved for the year ended December 31, 2008, we have incurred significant annual net losses since our inception, and we have relied primarily on public and private financing to fund our operations.
At September 30, 2009, we had cash, cash equivalents and current and non-current marketable securities of $843.1 million, compared to $458.0 million at December 31, 2008. The increase of $385.1 million was primarily attributable to net proceeds raised by our convertible senior notes and equity financings in August 2009. Our collaboration agreement with Bayer calls for creditable milestone-based payments. These amounts are interest-free and are repayable to Bayer from a portion of our profits and royalties. We received a total of $40.0 million of milestone payments from Bayer in connection with the approval of Nexavar. As of September 30, 2009, all of the development payments had been repaid to Bayer.
Our investment portfolio includes $39.6 million of AAA rated securities with an auction reset feature (“auction rate securities”) that are collateralized by student loans. In October 2009, $0.1 million in securities were redeemed at par and, accordingly, we classified them as current marketable securities in the accompanying unaudited balance sheet at September 30, 2009. Therefore, a remaining balance of $39.5 million of par value auction rate securities is currently outstanding in our investment portfolio. Since February 2008, these types of securities have experienced failures in the auction process. However, a limited number of these securities have been redeemed at par by the issuing agencies. As a result of the auction failures, interest rates on these securities reset at penalty rates linked to LIBOR or Treasury bill rates. The penalty rates are generally higher than interest rates set at auction. Based on the overall failure rate of these auctions, the frequency of the failures, the underlying maturities of the securities, a portion of which are greater than 30 years, and our belief that the market for these student loan collateralized instruments may take in excess of twelve months to fully recover, we have classified the auction rate securities with a par value of $39.5 million as non-current marketable securities on the accompanying unaudited condensed balance sheet. We have determined the fair value to be $38.4 million for these securities, based on a discounted cash flow model, and have reduced the carrying value of these marketable securities by $1.0 million through accumulated other comprehensive income (loss) instead of earnings because we have deemed the impairment of these securities to be temporary. Further adverse developments in the credit market could result in an impairment charge through earnings in the future. The

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discounted cash flow model used to value these securities is based on a specific term and liquidity assumptions. An increase in either of these assumptions could result in a $1.6 million decrease in value. Alternatively, a decrease in either of the assumptions could result in a $1.7 million increase in value.
Currently, we believe these investments are not other-than-temporarily impaired as all of them are substantially backed by the federal government, but it is not clear in what period of time they will be settled. We believe that, even after reclassifying these securities to non-current assets and the possible requirement to hold all such securities for an indefinite period of time, our remaining cash and cash equivalents and current investments will be sufficient to meet our anticipated cash needs.
We believe that our existing capital resources and interest thereon will be sufficient to fund our current and planned operations beyond 2010. However, if we change our development plans, including acquiring or developing additional product candidates or complementary businesses, we may need additional funds sooner than we expect. We anticipate that our co-development costs for the Nexavar program may increase over the next several years as we continue to fund our share of the clinical development program and prepare for the potential product launches throughout the world. In addition, we anticipate that we will incur expenses for the development of ONX 0801 and, if we exercise one or both of our options, ONX 0803 and ONX 0805, we will be required to pay significant license fees and will incur development expenses.
If the planned acquisition of Proteolix, Inc. is completed, we anticipate significant cash outlays, including the initial merger consideration payment of $276.0 million and the contingent earn-out payment of $40.0 million expected to be paid out in 2010, which we plan to finance using existing cash. We also anticipate that we will incur cash outlays to conduct and support additional clinical trials both currently underway and planned for the development of carfilzomib and Proteolix’s other development candidates, as well as to support increased headcount. In addition, we may be obligated for up to $535.0 million of contingent earn-out payments upon the achievement of regulatory approvals for carfilzomib in the U.S. and Europe, payable in either cash or common stock, at our discretion.
While most of our anticipated development costs are unknown at the current time, we may need to raise additional capital to continue the funding of our product development programs and our development plans in future periods beyond 2010. We intend to seek any required additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our development programs or to obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. This means that a change in prevailing interest rates may cause the principal amount of the investments to fluctuate. Under our policy, we minimize risk by placing our investments with high quality debt security issuers, limit the amount of credit exposure to any one issuer, limit duration by restricting the term, and hold investments to maturity except under rare circumstances. We maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including commercial paper, money market funds, and investment grade government and non-government debt securities. Through our money managers, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. If market interest rates were to increase or decrease by 100 basis points, or 1%, as of September 30, 2009, the fair value of our portfolio would decline or increase, respectively, by approximately $4.2 million. Additionally, a hypothetical increase or decrease of 1% in market interest rates during the three and nine months ended September 30, 2009 would have resulted in a $1.8 million or $4.1 million change in our investment income for the three and nine months ended September 30, 2009, respectively.
The table below presents the amounts and related weighted interest rates of our cash equivalents and marketable securities at:
                                                 
    September 30, 2009   December 31, 2008
                    Average                   Average
            Fair Value   Interest           Fair Value   Interest
    Maturity   (In millions)   Rate   Maturity   (In millions)   Rate
Cash equivalents, fixed rate
  0 — 3 months   $ 330.1       0.21 %   0 — 3 months   $ 233.8       0.53 %
Marketable securities, fixed rate
  0 — 24 months   $ 508.2       0.50 %   0 — 12 months   $ 222.9       0.87 %
Liquidity Risk

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Our investment portfolio includes $39.6 million of AAA rated auction rate securities collateralized by student loans. In October 2009, $0.1 million in securities were redeemed at par and, accordingly, we classified them as current marketable securities in the accompanying unaudited balance sheet at September 30, 2009. Therefore, a remaining balance of $39.5 million of par value auction rate securities is currently outstanding in our investment portfolio. Since February 2008, securities of this type have experienced failures in the auction process. However, a limited number of these securities have been redeemed at par by the issuing agencies. As a result of the auction failures, interest rates on these securities reset at penalty rates linked to LIBOR or Treasury bill rates. The penalty rates are generally higher than interest rates set at auction. Based on the overall failure rate of these auctions, the frequency of the failures, the underlying maturities of the securities, a portion of which are greater than 30 years, and our belief that the market for these student loan collateralized instruments may take in excess of twelve months to fully recover, we have classified the auction rate securities with a par value of $39.5 million as non-current marketable securities on the accompanying unaudited condensed balance sheet. We have determined the fair value to be $38.4 million for these securities, based on a discounted cash flow model, and have reduced the carrying value of these marketable securities by $1.0 million through accumulated other comprehensive income (loss) instead of earnings because we have deemed the impairment of these securities to be temporary.
Foreign Currency Exchange Rate Risk
A majority of Nexavar sales are generated outside of the United States, and a significant percentage of Nexavar commercial and development expenses are incurred outside of the United States. Fluctuations in foreign currency exchange rates affect our operating results. Changes in exchange rates between these foreign currencies and the U.S. Dollar will affect the recorded levels of our assets and liabilities as foreign assets and liabilities are translated into U.S. dollars for presentation in our financial statements, as well as our net sales, cost of goods sold, and operating margins. The primary foreign currency in which we have exchange rate fluctuation exposure is the Euro. A hypothetical increase or decrease of 1% in exchange rates between the Euro and U.S. Dollar during the three and nine months ended September 30, 2009 would have resulted in a $0.2 million and $0.5 million change, respectively, in our net income for the three and nine months ended September 30, 2009 based on our expected exposure to the Euro. We utilize a Euro to U.S. Dollar exchange rate based on average exchange rates for the reporting period.
As we expand, we could be exposed to exchange rate fluctuation in other currencies. Exchange rates between foreign currencies and U.S. dollars have fluctuated significantly in recent years and may do so in the future. We did not hold any derivative instruments as of September 30, 2009, and we have not held derivative instruments in the past. However, our investment policy does allow us to use derivative financial instruments for the purposes of hedging foreign currency denominated obligations. Our cash flows are denominated in U.S. dollars.
Item 4.   Controls and Procedures
Evaluation of Disclosure Controls and Procedures: The Company’s chief executive officer and chief financial officer reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2009 to ensure the information required to be disclosed by the Company in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting: There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls: Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

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PART II: OTHER INFORMATION
Item 1.   Legal Proceedings.
In May 2009, we filed a complaint against Bayer Corporation and Bayer A.G. in the United States District Court for the Northern District of California under the caption Onyx Pharmaceuticals, Inc. v. Bayer Corporation and Bayer AG, Case No. CV09-2145 MHP (N.D. Cal.). In the complaint, we have asserted our rights to a Phase 2 anti-cancer compound we allege was discovered during joint research between us and Bayer and seek compensatory and punitive monetary damages and a declaration that fluoro-sorafenib is a jointly-owned collaboration compound under the collaboration agreement, along with other remedies.

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Item 1A.   Risk Factors.
You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below contain forward-looking statements, and our actual results may differ materially from those discussed here. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.
We have marked with an asterisk (*) those risk factors below that reflect material changes from the risk factors included in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2009.
Nexavar® (sorafenib) tablets is our only approved product. If Nexavar fails and we are unable to develop and commercialize alternative product candidates our business would fail.*
Nexavar is our only approved product. Last year we acquired rights to develop and commercialize ONX 0801 and options to license ONX 0803 and ONX 0805 in the United States, Canada and Europe. In addition, we recently agreed to acquire Proteolix, Inc. and, if that transaction obtains necessary approvals and closes, we will acquire rights to develop and commercialize several proteasome and immunoproteasome inhibitors, including carfilzomib, currently in Phase 2b clinical trials. However, ONX 0801, 0803 and 0805 and the Proteolix compounds are in early- to mid-stage development and we may be unable to successfully develop and commercialize these or other product candidates. If Nexavar ceases to be commercially successful and we are unable to develop and commercialize any other products, our business would fail.
There are several competing therapies approved and in development for the treatment of advanced kidney cancer. If Nexavar is unable to successfully compete against existing and future therapies in advanced kidney cancer, our business would be harmed.*
There are several competing therapies approved for the treatment of kidney cancer, including Sutent, a multi-kinase inhibitor marketed in the United States, the European Union and other countries by Pfizer; Torisel, an mTOR inhibitor marketed in the United States, the European Union and other countries by Wyeth; Avastin, an angiogenesis inhibitor approved for the treatment of advanced kidney cancer in the United States and the European Union and marketed by Genentech and Roche; Afinitor, an mTOR inhibitor marketed in the United States and the European Union by Novartis; and GlaxoSmithKline’s Votrient, a multi kinase inhibitor recently approved by the FDA. Nexavar’s market share in advanced kidney cancer has decreased following the introduction of these products into the market.
A demonstrated survival benefit is an important element in determining standard of care. While we did not demonstrate a statistically significant overall survival benefit for patients treated with Nexavar in our Phase 3 kidney cancer trial, we believe the outcome was impacted by the crossover of patients from placebo to Nexavar during the conduct of our pivotal clinical trial. Competitors with statistically significant overall survival data could be preferred in the marketplace, which could impair our ability to successfully market Nexavar. Furthermore, the use of any particular therapy may limit the use of a competing therapy with a similar mechanism of action. The FDA approval of Nexavar permits Nexavar to be used as an initial, or first-line, therapy and subsequent lines of therapy for the treatment of advanced kidney cancer, but some other approvals do not. For example, the European Union approval indicates Nexavar only for advanced kidney cancer patients that have failed prior cytokine therapy or whose physicians deem alternate therapies inappropriate.
We expect competition to increase as additional products are approved to treat advanced kidney cancer. The successful introduction of other new therapies to treat advanced kidney cancer could significantly reduce the potential market for Nexavar in this indication.
There are several existing approaches and several therapies in development for the treatment of liver cancer. If Nexavar is unable to successfully compete against existing and future therapies in liver cancer, our business would be harmed.*
There are many existing approaches used in the treatment of liver cancer including alcohol injection, radiofrequency ablation, chemoembolization, cryoablation and radiation therapy. While Nexavar is the first systemic therapy to demonstrate a survival benefit for liver cancer, several other therapies are in development, including Pfizer’s sunitinib, a multi-kinase inhibitor and Bristol-Meyers Squibb’s brivanib, a Vascular Endothelial Growth Factor Receptor 2 (VEGFR 2) inhibitor. If Nexavar is unable to compete or be combined successfully with existing approaches or if new therapies are developed for liver cancer, our business would be harmed.
Although Nexavar has been approved in the United States, the European Union and other territories for the treatment of patients

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with liver cancer, adoption may be slow or limited for a variety of reasons including the geographic distribution of the patient population, the current treatment paradigm for liver cancer patients, the underlying liver disease present in most liver cancer patients and limited reimbursement. If Nexavar is not broadly adopted for the treatment of liver cancer, our business would be harmed.
Nexavar has been approved in the United States, the European Union and many other countries as the first systemic treatment for liver cancer. The rate of adoption and the ultimate market size will be dependent on several factors including educating treating physicians on the appropriate use of Nexavar and the management of patients who are receiving Nexavar. This may be difficult as liver cancer patients typically have underlying liver disease and other comorbidities and can be treated by a variety of medical specialists. In addition, screening, diagnostic and treatment practices can vary significantly by region. Further, liver cancer is common in many regions in the developing world where the healthcare systems are limited and reimbursement for Nexavar is limited or unavailable, which will likely limit or slow adoption. If we are unable to change the treatment paradigms for this disease, we may be unable to successfully achieve the market potential of Nexavar in this indication, which could harm our business.
While we and Bayer have received marketing approval for Nexavar in the United States, the European Union and other territories to treat liver cancer, some regulatory authorities have not completed their review of the submissions and any review may not result in marketing approval by these other authorities in this indication. In addition, although Nexavar is approved for the treatment of patients with liver cancer in the European Union and elsewhere, certain countries require pricing to be established before reimbursement for this indication may be obtained. We may not receive or maintain pricing approvals at favorable levels or at all, which could harm our ability to broadly market Nexavar.
If our ongoing and planned clinical trials fail to demonstrate that Nexavar is safe and effective or we are unable to obtain necessary regulatory approvals, we will be unable to expand the commercial market for Nexavar and our business may fail.
In collaboration with Bayer, we are conducting multiple clinical trials of Nexavar. We are currently conducting a number of clinical trials of Nexavar alone or in combination with other anticancer agents in kidney, liver, non-small cell lung, breast, colorectal, ovarian, thyroid and other cancers including a number of Phase 3 clinical trials.
Phase 3 trials are designed to more rigorously test the efficacy of a product candidate and are normally randomized and double-blinded. Phase 3 trials are typically monitored by independent data monitoring committees, or DMC, which periodically review data as a trial progresses. A DMC may recommend that a trial be stopped before completion for a number of reasons including safety concerns, patient benefit or futility. Our clinical trials may fail to demonstrate that Nexavar is safe and effective, and Nexavar may not gain additional regulatory approval, which would limit the potential market for the product causing our business to fail.
Nexavar has not been approved in cancer types other than advanced kidney and liver cancers. Success in one or even several cancer types does not indicate that Nexavar would be approved or have successful clinical trials in other cancer types. For example, Bayer and Onyx have conducted Phase 3 trials in melanoma and non-small cell lung cancer (NSCLC) that were not successful. In addition, in one non-small cell lung cancer Phase 3 trial, higher mortality was observed in the subset of patients with squamous cell carcinoma of the lung treated with Nexavar and carboplatin and paclitaxel than in the subset of patients treated with carboplatin and paclitaxel alone. Based on this observation, further enrollment of squamous cell carcinoma of the lung was suspended from other NSCLC trials sponsored by us. Other cancer types with a histology similar to squamous cell carcinoma of the lung may yield a similar adverse treatment outcome. If so, patients having this histology may be excluded from ongoing and future clinical trials, which could potentially delay clinical trial enrollment and would reduce the number of patients that could potentially receive Nexavar.
Many companies have failed to demonstrate the effectiveness of pharmaceutical product candidates in Phase 3 clinical trials notwithstanding favorable results in Phase 1 or Phase 2 clinical trials. We are conducting clinical trials of Nexavar in a variety of cancer types, stages of disease and in combination with a variety of therapies and therapeutic agents. If previously unforeseen and unacceptable side effects are observed, we may not proceed with further clinical trials of Nexavar in that cancer type, stage of disease or combination. In our clinical trials, we may treat patients with Nexavar as a single agent or in combination with other therapies, who have failed conventional treatments and who are in advanced stages of cancer. During the course of treatment, these patients may die or suffer adverse medical effects for reasons unrelated to Nexavar. These adverse effects may impact the interpretation of clinical trial results, which could lead to an erroneous conclusion regarding the toxicity or efficacy of Nexavar.
We are dependent upon our collaborative relationship with Bayer to further develop, manufacture and commercialize Nexavar. There may be circumstances that delay or prevent Bayer’s ability to develop, manufacture and commercialize Nexavar. *

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Our strategy for developing, manufacturing and commercializing Nexavar depends in large part upon our relationship with Bayer. If we are unable to maintain our collaborative relationship with Bayer, we would need to undertake development, manufacturing and marketing activities at our own expense. This would significantly increase our capital and infrastructure requirements, may limit the indications we are able to pursue and could prevent us from effectively developing and commercializing Nexavar.
We are subject to a number of risks associated with our dependence on our collaborative relationship with Bayer, including:
    adverse decisions by Bayer regarding the amount and timing of resource expenditures for the development and commercialization of Nexavar;
 
    possible disagreements as to development plans, including clinical trials or regulatory approval strategy;
 
    the right of Bayer to terminate the collaboration agreement with us on limited notice and for reasons outside our control;
 
    loss of significant rights if we fail to meet our obligations under the collaboration agreement;
 
    the development or acquisition by Bayer of competing products. For example, Bayer has been developing fluoro-sorafenib (which Bayer sometimes refers to by its International Nonproprietary Name of regorafenib) and is expected to initiate Phase 3 clinical trials in kidney cancer in 2010. The ownership of this compound is being disputed by us through the lawsuit we filed against Bayer;
 
    adverse regulatory or legal action against Bayer resulting from failure to meet healthcare industry compliance requirements in the promotion, sale, or federal and state reporting of Nexavar;
 
    changes in key management personnel at Bayer that are members of the collaboration’s executive team; and
 
    disagreements with Bayer regarding the collaboration agreement or ownership of proprietary rights.
Due to these factors and other possible disagreements with Bayer, we may be delayed or prevented from further developing, manufacturing or commercializing Nexavar, and we may become involved in additional litigation or arbitration against Bayer, which could be time consuming and expensive.
While we continue to collaborate with Bayer in the development and commercialization of Nexavar, in May 2009, we filed a complaint against Bayer seeking a declaration that fluoro-sorafenib, a variant of sorafenib that has the same chemical structure as Nexavar, except that a single fluorine atom has been substituted for a hydrogen atom, is a jointly-owned collaboration compound under our collaboration agreement, together with other remedies. We believe that Onyx has rights to this drug candidate under the terms of our collaboration agreement with Bayer and Bayer has asserted that we have no such rights. Our litigation against Bayer may be time consuming and expensive, and may be a distraction to our management. Should it ultimately be determined that Onyx has no rights to fluoro-sorafenib and this product candidate were to successfully complete development and be approved for marketing, it could compete with Nexavar. In addition, such development could create different incentives between us and Bayer regarding the development and promotion of Nexavar, thereby harming our business.
Our collaboration agreement with Bayer terminates when patents expire that were issued in connection with product candidates discovered under that agreement, or upon the time when neither we nor Bayer are entitled to profit sharing under that agreement, whichever is later. Bayer holds the global patent applications related to Nexavar. The patents and patent applications covering Nexavar are owned by Bayer and are licensed to us through our collaboration agreement with Bayer. We have no control over the prosecution of Bayer’s patents. Bayer has United States patents that cover Nexavar and pharmaceutical compositions of Nexavar which we believe provide adequate patent protection until at least 2020. Bayer also has a European patent that covers Nexavar which will expire in 2020. Bayer has other patents/patent applications that are pending worldwide that cover Nexavar alone or in combination with other drugs for treating cancer.
We face intense competition and rapid technological change, and many of our competitors have substantially greater resources than we have.*
We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market Nexavar to compete with other products and therapies that currently exist or are being developed. If our acquisition of Proteolix closes and we acquire rights to

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carfilzomib and other proteasome inhibitors, we will be developing product candidates for the treatment of multiple myeloma and potentially for other diseases. Many other companies are actively seeking to develop products that have disease targets similar to those we are pursuing. Some of these competitive product candidates are in clinical trials and others are approved. In addition, following the expiration or invalidation of applicable patents, generic drug manufacturers may gain the ability to manufacture and sell generic versions of our competitors’ approved products, in which case our approved products would potentially compete with generic drug manufacturers. Competitors that target the same tumor types as our Nexavar program and that have commercial products or product candidates at various stages of clinical development include Pfizer, Roche, Wyeth, Novartis International AG, Amgen, AstraZeneca PLC, OSI Pharmaceuticals, Inc., GlaxoSmithKline, Eli Lilly and several others. A number of companies have agents such as small molecules or antibodies targeting Vascular Endothelial Growth Factor, or VEGF; VEGF receptors; Epidermal Growth Factor, or EGF; EGF receptors; and other enzymes. In addition, many other pharmaceutical companies are developing novel cancer therapies that, if successful, would also provide competition for Nexavar. In multiple myeloma, carfilzomib, if approved, would compete directly with products marketed by Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited: Celgene Corporation; and potentially against agents currently in development for treatment of this disease by Merck & Co. Inc., Bristol-Meyers Squibb, Keryx Biopharmaceuticals, Inc., Nereus Pharmaceuticals and Cephalon, Inc.
Many of our competitors, either alone or together with collaborators, have substantially greater financial resources and research and development staffs. In addition, many of these competitors, either alone or together with their collaborators, have significantly greater experience than we do in:
    developing products;
 
    undertaking preclinical testing and human clinical trials;
 
    obtaining FDA and other regulatory approvals of products; and
 
    manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection, receiving regulatory approval in the U.S. or other countries, or commercializing product candidates before we do. We will compete with companies with greater marketing and manufacturing capabilities, areas in which we have limited or no experience. In addition, we have not developed or marketed products for any hematological cancer, including multiple myeloma, and may be at a disadvantage to our competitors.
We also face, and will continue to face, competition from academic institutions, government agencies and research institutions. Further, we face numerous competitors working on product candidates to treat each of the diseases for which we are seeking to develop therapeutic products. In addition, our product candidates, if approved, may compete with existing therapies that have long histories of safe and effective use. We may also face competition from other drug development technologies and methods of preventing or reducing the incidence of disease and other classes of therapeutic agents.
Developments by competitors may render our product candidates obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborations with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These competitors, either alone or with collaborative parties, may succeed with technologies or products that are more effective than ours.
We anticipate that we will face increased competition in the future as new companies enter our markets and as scientific developments surrounding other cancer therapies continue to accelerate. We have made significant expenditures toward the development of Nexavar and the establishment of a commercialization infrastructure and expect to make significant expenditures toward the development of our other product candidates. If Nexavar or any other product we commercialize cannot compete effectively in the marketplace, we may be unable to realize sufficient revenue to offset our expenditures toward its development and commercialization, and our business will suffer.
If we are not successful at integrating the Proteolix organization with ours, we may not be able to operate efficiently or to realize any benefits from the acquisition.*
Achieving the anticipated benefits of the Proteolix acquisition will depend in part on the successful integration of Onyx’s and Proteolix’s technical and business operations and personnel in a timely and efficient manner. The integration process requires coordination of the personnel of both companies, involves the integration of systems, applications, policies, procedures, business

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processes and operations and is a complex, costly and time-consuming process. The difficulties of combining the operations of the companies include, among others:
    consolidating research and development operations;
 
    retaining key employees;
 
    consolidating corporate and administrative infrastructures;
 
    preserving the research and development and other important relationships of the companies;
 
    integrating and managing the technology of two companies;
 
    using the combined company’s capital and other assets efficiently to develop the business of the combined company;
 
    preserving relationships with third parties, such as clinical research organizations, contract manufacturing organizations, licensors and suppliers;
 
    appropriately managing the liabilities of the combined company; and
 
    difficulty managing new risks associated with Proteolix’s facilities, including environmental risks and compliance with laws regulating laboratories.
Should our acquisition of Proteolix close, we will directly manage research and preclinical development activities, and employ individuals in these functions from Proteolix with whom we have not previously worked. We have limited experience managing discovery research and pre-clinical activities, including operating research laboratories, and may be unsuccessful at doing so or at motivating and retaining key individuals responsible for these activities.
We cannot assure you that we will receive any benefits of this or any other merger or acquisition, or that any of the difficulties described above will not adversely affect the combined company. The integration process may be difficult and unpredictable because of possible conflicts and differing opinions on business, scientific and regulatory matters. If we cannot successfully integrate Proteolix’s technical and business operations and personnel, we may not realize the expected benefits of the acquisition.
The successful integration of Proteolix’s technical and business operations and personnel may place a significant burden on our management and internal resources. The diversion of management’s attention and any difficulties encountered in the transition and integration process could result in delays in clinical trial and product development programs of the combined company and could otherwise harm our business, financial condition and operating results.
Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.*
Our operating results will likely fluctuate from quarter to quarter and from year to year, and are difficult to predict. Due to a highly competitive environment in kidney cancer and launches throughout the world, as well as potential changes in the treatment paradigm in liver cancer, Nexavar sales will be difficult to predict from period to period. Our operating expenses are highly dependent on expenses incurred by Bayer and are largely independent of Nexavar sales in any particular period. In addition, we expect to incur significant operating expenses associated with the development activities of ONX 0801 and carfilzomib, should the Proteolix acquisition close. If we exercise our option rights related to ONX 0803 and ONX 0805, we will be required to pay significant license fees and we also expect to incur significant operating expenses for development of ONX 0803 and ONX 0805. We believe that our quarterly and annual results of operations may be negatively affected by a variety of factors. These factors include, but are not limited to, the level of patient demand for Nexavar, the timing and level of investments in sales and marketing efforts to support the sales of Nexavar, the timing and level of investments in the research and development of Nexavar, the ability of Bayer’s distribution network to process and ship Nexavar on a timely basis, fluctuations in foreign currency exchange rates and expenditures we may incur to acquire or develop ONX 0801, carfilzomib and additional products.

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In addition, we must measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, the magnitude of the expense that we must recognize may vary significantly. Any such variance from one period to the next could cause a significant fluctuation in our operating results.
It is, therefore, difficult for us to accurately forecast profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.
The market may not accept our products and pharmaceutical pricing and reimbursement pressures may reduce profitability.
Nexavar or future product candidates that we may develop may not gain market acceptance among physicians, patients, healthcare payors and/or the medical community or the market may not be as large as forecasted. One factor that may affect market acceptance of Nexavar or future products we may develop is the availability of third-party reimbursement. Our commercial success may depend, in part, on the availability of adequate reimbursement for patients from third-party healthcare payors, such as government and private health insurers and managed care organizations. Third-party payors are increasingly challenging the pricing of medical products and services, especially in global markets, and their reimbursement practices may affect the price levels for Nexavar or future products. In addition, the market for our products may be limited by third-party payors who establish lists of approved products and do not provide reimbursement for products not listed. If our products are not on the approved lists, our sales may suffer. Proposed omnibus healthcare reform or changes in government legislation or regulation, such as the Medicare Act in the United States, including Medicare Part D, or changes in private third-party payors’ policies towards reimbursement for our products may reduce reimbursement of our product costs and increase the amounts that patients have to pay themselves. Non-government organizations can influence the use of Nexavar and reimbursement decisions for Nexavar in the United States and elsewhere. For example, the National Comprehensive Cancer Network, or NCCN, a not-for-profit alliance of cancer centers, has issued guidelines for the use of Nexavar in the treatment of advanced kidney cancer and unresectable liver cancer. These guidelines may affect treating physicians’ use of Nexavar in treatment-naïve advanced kidney and liver cancer patients.
Nexavar’s success in Europe and other regions will also depend largely on obtaining and maintaining government reimbursement. For example, in Europe and in many other international markets, most patients will not use prescription drugs that are not reimbursed by their governments. Negotiating prices with governmental authorities can delay commercialization by twelve months or more. Even if reimbursement is available, reimbursement policies may adversely affect our ability to sell our products on a profitable basis. For example, in Europe and in many international markets, governments control the prices of prescription pharmaceuticals and expect prices of prescription pharmaceuticals to decline over the life of the product or as volumes increase. Further reimbursement policies are subject to change due to economic, political or competitive factors. We believe that this will continue into the foreseeable future as governments struggle with escalating health care spending.
A number of additional factors may limit the market acceptance of products, including the following:
    rate of adoption by healthcare practitioners;
 
    treatment guidelines issued by government and non-government agencies;
 
    types of cancer for which the product is approved;
 
    rate of a product’s acceptance by the target population;
 
    timing of market entry relative to competitive products;
 
    availability of alternative therapies;
 
    price of our product relative to alternative therapies;
 
    extent of marketing efforts by us and third-party distributors or agents retained by us; and
 
    side effects or unfavorable publicity concerning our products or similar products.
If Nexavar or any future product candidates that we may develop do not achieve market acceptance, we may not realize sufficient revenues from product sales, which may cause our stock price to decline.

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Unstable market and economic conditions may have serious adverse consequences on our business.*
Our general business strategy may be adversely affected by the recent economic downturn and volatile business environment and continued unpredictable and unstable market conditions. If the current equity and credit markets do not sustain improvement or begin to deteriorate again, it may make any necessary future debt or equity financing more difficult, more costly, and more dilutive. We believe we are well positioned with significant capital resources to meet our current working capital and capital expenditure requirements. However, a prolonged or profound economic downturn may result in adverse changes to product reimbursement and pricing and sales levels, which would harm our operating results, and may make any necessary future debt or equity financing more difficult, more costly, and more dilutive. Additionally, other challenges resulting from the current economic environment include increases in national unemployment impacting patients’ ability to access drugs, increases in uninsured or underinsured patients affecting their ability to afford pharmaceutical products, potential national healthcare reform’s impact on the pharmaceutical industry and increased U.S. free goods to patients. There is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which would directly affect our ability to attain our operating goals on schedule and on budget. Further dislocations in the credit market may adversely impact the value and/or liquidity of marketable securities owned by the Company. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans or plans to acquire additional technology. There is a possibility that our stock price may decline, due in part to the volatility of the stock market and the general economic downturn, such that we would lose our status as a Well-Known Seasoned Issuer, which allows us to more rapidly and more cost-effectively raise funds in the public markets.
Our clinical trials could take longer to complete than we project or may not be completed at all.*
Although for planning purposes we project the commencement, continuation and completion of ongoing clinical trials, the actual timing of these events may be subject to significant delays relating to various causes, including actions by Bayer, scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, shortages of available drug supply, and should the Proteolix acquisition close, difficulties transitioning Proteolix’s clinical trials to our management and difficulties developing relationships with Proteolix’s development partners, including clinical research organizations, contract manufacturing organizations, key opinion leaders and clinical investigators. We may not complete clinical trials involving Nexavar or any of our other product candidates as projected or at all. We may not be able to commercialize carfilzomib or any other product candidate.
We and Bayer have launched a broad, multinational Phase 2 program in advanced breast and other cancers, including ovarian and colorectal carcinoma. We may not have the necessary capabilities to successfully manage the execution and completion of these planned clinical trials in a way that leads to approval of Nexavar for the target indications. In addition, we rely on Bayer, academic institutions, cooperative oncology organizations and clinical research organizations to conduct, supervise or monitor the majority of clinical trials involving Nexavar. We have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. Failure to commence or complete, or delays in our planned clinical trials would prevent us from commercializing Nexavar in indications other than kidney cancer and liver cancer, and thus seriously harm our business.
If serious adverse side effects are associated with Nexavar, approval for Nexavar could be revoked, sales of Nexavar could decline, and we may be unable to develop Nexavar as a treatment for other types of cancer.
The FDA-approved package insert for Nexavar for the treatment of patients with advanced kidney cancer and unresectable liver cancer includes several warnings relating to observed adverse reactions. These include, but are not limited to, cardiac ischemia and/or infarction; incidence of bleeding; hypertension which may occur early in the therapy; hand-foot skin reaction and rash; and some instances of gastrointestinal perforations. Other treatment-emergent adverse reactions observed in patients taking Nexavar include, but are not limited to, diarrhea, fatigue, abdominal pain, weight loss, anorexia, alopecia, nausea and vomiting. With continued and potentially expanded commercial use of Nexavar and additional clinical trials of Nexavar, we and Bayer anticipate we will routinely update adverse reactions listed in the package insert to reflect current information. For example, subsequent to the initial FDA approval, we and Bayer have updated the package insert to include additional information on new adverse reactions reported by physicians using Nexavar. If additional adverse reactions emerge, or a pattern of severe or persistent previously observed side effects is observed in the Nexavar patient population, the FDA or other international regulatory agencies could modify or revoke approval of Nexavar or we may choose to withdraw it from the market. If this were to occur, we may be unable to obtain approval of Nexavar in additional indications and foreign regulatory agencies may decline to approve Nexavar for use in any indication. Any of these

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outcomes would have a material adverse impact on our business. In addition, if patients receiving Nexavar were to suffer harm as a result of their use of Nexavar, these patients or their representatives may bring claims against us. These claims, or the mere threat of these claims, could have a material adverse effect on our business and results of operations.
We are subject to extensive government regulation, which can be costly, time consuming and subject us to unanticipated delays. If we are unable to obtain or maintain regulatory approvals for our products, compounds or product candidates, we will not be able to market or further develop them.*
Drug candidates under development and approved for marketing are subject to extensive and rigorous domestic and foreign regulation, including the FDA’s requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. We have received regulatory approval for the use of Nexavar in the treatment of advanced kidney and liver cancer in the United States, in the European Union and a number of foreign markets, and we are developing Nexavar for several additional indications. Any compounds or product candidates that we may develop, including ONX 0801, carfilzomib, ONX 0803 and ONX 0805 cannot be marketed in the U.S. until they have been approved by the FDA, and then they can only be marketed for the indications and claims approved by the FDA.
For Nexavar, we rely on Bayer to manage communications with regulatory agencies, including filing new drug applications, submission of promotional materials and generally directing the regulatory processes for Nexavar. We also rely on Bayer to complete the necessary government reporting obligations such as price calculation reporting and clinical study disclosures to federal and state regulatory agencies. We and Bayer may not obtain necessary additional approvals from the FDA or other regulatory authorities. If we fail to obtain required governmental approvals, we will experience delays in or be precluded from marketing Nexavar in particular indications or countries. The FDA or other regulatory authorities may approve only limited label information for the product. The label information describes the indications and methods of use for which the product is authorized, and if overly restrictive, may limit our and Bayer’s ability to successfully market any approved product. If we have disagreements as to ownership of clinical trial results or regulatory approvals, and the FDA refuses to recognize us as holding, or having access to, the regulatory approvals necessary to commercialize Nexavar, we may experience delays in or be precluded from marketing products.
For carfilzomib, should the Proteolix acquisition closes, we will be responsible for managing communications with regulatory agencies, including filing investigational new drug application, filing new drug application, submission of promotional materials and generally directing the regulatory processes. We have limited experience directing such activities and may not be successful with our planned development strategies, on the planned timelines, or at all. In addition, if the Proteolix acquisition closes, it will be necessary for us to transition key relationships from Proteolix to Onyx, including relationships with clinical investigators, regulatory agencies and key opinion leaders. We may experience delays and difficulties making such transitions.
Even if carfilzomib or any other product candidate is designated for “fast track” or “priority review” status or seeks approval under accelerated approval (Subpart H) regulations, such designation or approval pathway does not necessarily mean a faster development process or regulatory review process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Accelerated development and approval procedures will only be available to us if the indications for which we are developing products remain unmet medical needs and if our clinical trial results support use of surrogate endpoints, respectively. Even if these accelerated development or approval mechanisms are available to us, depending on the results of clinical trials, we may elect to follow the more traditional approval processes for strategic and marketing reasons, since drugs approved under accelerated approval procedures are more likely to be subjected to post-approval requirements for Phase 4 clinical studies to provide confirmatory evidence that the drugs are safe and effective. If we fail to conduct any such required post-approval studies or if the studies fail to verify that any of our product candidates are safe and effective, our FDA approval could be revoked. It can be difficult, time-consuming and expensive to enroll patients in Phase 4 clinical trials because physicians and patients are less likely to participate in a clinical trial to receive a drug that is already commercially available. Drugs approved under accelerated approval procedures also require regulatory pre-approval of promotional materials which may delay or otherwise hinder commercialization efforts.

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For any compounds or product candidates that we may further develop, we cannot be sure that we will be able to receive necessary regulatory approvals on a timely basis, if at all. Delays in obtaining approvals could prevent us from marketing any potential products and would adversely affect our business.
The regulatory review and approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance and may involve ongoing requirements for post-marketing studies. Additional or more rigorous governmental regulations may be promulgated that could delay regulatory approval of our products or product candidates. Delays in obtaining regulatory approvals would adversely affect the successful commercialization of our products or product candidates.
After Nexavar and any other products we may develop are marketed, the products and their manufacturers are subject to continual review. Later discovery of previously unknown problems with Nexavar or any other products we may develop and manufacturing and production by Bayer or other third parties may result in restrictions on our products or product candidates, including withdrawal from the market. In addition, problems or failures with the products of others, before or after regulatory approval, including our competitors, could have an adverse effect on our ability to obtain or maintain regulatory approval. Increased industry trends in U.S. regulatory scrutiny of promotional activity by the FDA, Department of Justice, Office of Inspector General and Offices of State Attorney Generals resulting from healthcare fraud and abuse, including, but not limited to, violations of the Food, Drug and Cosmetic Act, False Claims Act and federal anti-kickback statute, have led to significant penalties for those pharmaceutical companies alleged of non-compliance. If we or Bayer fail to comply with applicable regulatory requirements, including strict regulation of marketing and sales activities, we could be subject to penalties, including fines, suspensions of regulatory approval, product recall, seizure of products and criminal prosecution.
Some of our product candidates may be based on new technologies, which may affect our ability or the time we require to obtain necessary regulatory approvals. For example, carfilzomib, which we will acquire if our acquisition of Proteolix closes, is based on proteasome inhibition, which has not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional products. As a result, we may experience a longer development or regulatory process in connection with any products that we develop based on these new technologies or new therapeutic approaches.
We are dependent on the efforts of Bayer to market and promote Nexavar.
Under our collaboration and co-promotion agreements with Bayer, we and Bayer are co-promoting Nexavar in the United States.
We do not have the right to co-promote Nexavar in any country outside the United States, and we are dependent solely on Bayer to promote Nexavar in foreign countries where Nexavar is approved. In all foreign countries, except Japan, Bayer will first receive a portion of the product revenues to repay Bayer for its foreign commercialization infrastructure, before determining our share of profits and losses. In Japan, we receive a single-digit royalty on any sales of Nexavar.
We have limited ability to direct Bayer in its promotion of Nexavar in foreign countries where Nexavar is approved. Bayer may not have sufficient experience to promote oncology products in foreign countries and may fail to devote appropriate resources to this task. If Bayer fails to adequately promote Nexavar in foreign countries, we may be unable to obtain any remedy against Bayer. If this were to happen, sales of Nexavar in any foreign countries where Nexavar is approved may be harmed, which would negatively impact our business.
Similarly, Bayer may establish a sales and marketing infrastructure for Nexavar outside the United States that is too large and expensive in view of the magnitude of the Nexavar sales opportunity or establish this infrastructure too early in view of the ultimate timing of potential regulatory approvals. Since we share in the profits and losses arising from sales of Nexavar outside of the United States, rather than receiving a royalty (except in Japan), we are at risk with respect to the success or failure of Bayer’s commercial decisions related to Nexavar as well as the extent to which Bayer succeeds in the execution of its strategy.
We are dependent on the efforts of and funding by Bayer for the development of Nexavar.
Under the terms of the collaboration agreement, we and Bayer must agree on the development plan for Nexavar. If we and Bayer cannot agree, clinical trial progress could be significantly delayed or halted. Further, if we or Bayer cease funding development of Nexavar under the collaboration agreement, then that party will be entitled to receive a royalty, but not to share in profits. Bayer could, upon 60 days notice, elect at any time to terminate its co-funding of the development of Nexavar. If Bayer terminates its co-funding of Nexavar development, we may be unable to fund the development costs on our own and may be unable to find a new collaborator, which could cause our business to fail.

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ONX 0801and carfilzomib, should the Proteolix acquisition close, may not be developed successfully, which would adversely affect our prospects for future revenue growth and our stock price.*
ONX 0801 is in the pre-clinical stage of development and carfilzomib is in mid-stage clinical development. Successful development of these compounds is highly uncertain and depends on a number of factors, many of which are beyond our control. Compounds that appear promising in research or development, including Phase 2 clinical trials, may be delayed or fail to reach later stages of development or the market for a variety of reasons including:
    preclinical tests may show the product to be toxic or lack efficacy in animal models;
 
    clinical trial results may show the product to be less effective than desired or to have harmful or problematic side effects;
 
    the necessary regulatory approvals may not be received, or may be delayed due to factors such as slow enrollment in clinical studies, extended length of time to achieve study endpoints, additional time requirements for data analysis or preparation of the investigational new drug application (IND), discussions with regulatory authorities, requests from regulatory authorities for additional pre-clinical or clinical data, analyses or changes to study design, or unexpected safety, efficacy or manufacturing issues;
 
    difficulties formulating the product, scaling the manufacturing process or in getting approval for manufacturing;
 
    manufacturing costs, pricing or reimbursement issues, or other factors may make the product uneconomical;
 
    the proprietary rights of others and their competing products and technologies may prevent the product from being developed or commercialized; and
 
    the contractual rights of our collaborators or others may prevent the product from being developed or commercialized.
If this compound is not developed successfully, our prospects for future revenue growth and our stock price would be harmed.
We do not have the manufacturing expertise or capabilities for any current and future products and are dependent on others to fulfill our manufacturing needs, which could result in lost sales and the delay of clinical trials or regulatory approval.*
Under our collaboration agreement with Bayer, Bayer has the manufacturing responsibility to supply Nexavar for clinical trials and to support our commercial requirements. However, should Bayer give up its right to co-develop Nexavar, we would have to manufacture Nexavar, or contract with another third party to do so for us. Additionally, under our agreement with BTG we are responsible for all product development and commercialization activities of ONX 0801. Under our agreement with S*BIO, if we exercise our options and if S*BIO fails to supply us inventory through manufacturing, or other specified events occur, we have co-exclusive rights (with S*BIO) to make and have made ONX 0803 and ONX 0805 for use and sale in the United States, Canada and Europe. Should our acquisition of Proteolix close, we would have manufacturing responsibility for carfilzomib and Proteolix’s other product candidates.
We lack the resources, experience and capabilities to manufacture Nexavar, ONX 0801 and, if required, carfilzomib, ONX 0803 and ONX 0805 or any future product candidates on our own and would require substantial funds to establish these capabilities. Consequently, we are, and expect to remain, dependent on third parties to manufacture our product candidates and products. These parties may encounter difficulties in production scale-up, including problems involving production yields, control and quality assurance, regulatory status relating to our products or those of our clients or shortage of qualified personnel. These third parties may not perform as agreed or may not continue to manufacture our products for the time required by us to successfully market our products. These third parties may fail to deliver the required quantities of our products or product candidates on a timely basis and at commercially reasonable prices. Failure by these third parties could impair our ability to meet the market demand for Nexavar, and could delay our ongoing clinical trials and our applications for regulatory approval. If these third parties do not adequately perform, we may be forced to incur additional expenses to pay for the manufacture of products or to develop our own manufacturing capabilities.
We have a history of losses, and we may continue to incur losses.*
Although we achieved profitability for the year ended December 31, 2008, we incurred net losses for the years ended December 31, 2007 and 2006 of $34.2 million and $92.7 million, respectively. As of September 30, 2009, we had an accumulated deficit of

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approximately $449.0 million. We have incurred losses principally from costs incurred in our research and development programs, from our general and administrative costs and the development of our commercialization infrastructure. We may continue to incur operating losses as we expand our development and commercial activities for our products, compounds and product candidates.
We have made, and plan to continue to make, significant expenditures towards the development and commercialization of Nexavar. We may never realize sufficient product sales to offset these expenditures. In addition, we will require significant funds for the research and development, and if approved, commercialization of ONX 0801, carfilzomib and our other product candidates. Upon the attainment of specified milestones, we are required to make milestone payments to BTG. Similarly, if the acquisition of Proteolix closes, we will be required to make a payment of $276.0 million in cash due upon closing and up to $575.0 million in earn-out payments upon the receipt of certain regulatory approvals and the satisfaction of other milestones. These payments will require significant funds. Exercising any of our option rights under our agreement with S*BIO will also cause us to incur additional operating expenses that would require significant funds. Our ability to achieve and maintain consistent profitability depends upon success by us and Bayer in marketing Nexavar in approved indications and the successful development and regulatory approvals of Nexavar in additional indications.
We incurred significant indebtedness through the sale of our 4.0% convertible senior notes due 2016, and we may incur additional indebtedness in the future. The indebtedness created by the sale of the notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and results of operations.
We incurred $230.0 million of senior indebtedness in August 2009 when we sold$230.0 million aggregate principal amount of 4.0% convertible senior notes due 2016, or the 2016 Notes. We may also incur additional long-term indebtedness or obtain additional working capital lines of credit to meet future financing needs. Our indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:
    increasing our vulnerability to adverse economic and industry conditions;
 
    limiting our ability to obtain additional financing;
 
    requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;
 
    limiting our flexibility in planning for, or reacting to, changes in our business; and
 
    placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.
We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of the 2016 Notes, or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the 2016 Notes and such other indebtedness to accelerate the maturity of the notes and such other indebtedness and could cause defaults under the 2016 Notes and such other indebtedness. Any default under the notes or any indebtedness which we may incur in the future could have a material adverse effect on our business, results of operations and financial condition.
The conditional conversion features of the 2016 Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion features of the 2016 Notes are triggered, holders of notes will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to make cash payments to satisfy all or a portion of our conversion obligation based on the applicable conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their 2016 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2016 Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.

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If we lose our key employees or are unable to attract or retain qualified personnel, our business could suffer.*
The loss of the services of key employees, including key Proteolix employees, should our acquisition of Proteolix close, may have an adverse impact on our business unless or until we hire a suitably qualified replacement. We do not maintain key person life insurance on any of our officers, employees or consultants. Any of our key personnel could terminate their employment with us at any time and without notice. We depend on our continued ability to attract, retain and motivate highly qualified personnel. We face competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other research institutions. We are conducting research and development of product candidates other than Nexavar, and we will need to continue to hire individuals with the appropriate scientific skills. If we cannot hire these individuals in a timely fashion, we will be unable to engage in new product candidate discovery activities.
We may need additional funds, and our future access to capital is uncertain.*
We may need additional funds to conduct the costly and time-consuming activities related to the development and commercialization of Nexavar, ONX 0801, carfilzomib, should the Proteolix acquisition close, and, if we exercise our option rights, ONX 0803 and ONX 0805, including manufacturing, clinical trials and regulatory approval. Also, we may need funds to acquire rights to additional product candidates or acquire new or complementary businesses. Our future capital requirements will depend upon a number of factors, including:
    revenue from our product sales;
 
    global product development and commercialization activities;
 
    the cost involved in enforcing patent claims against third parties and defending claims by third parties;
 
    the costs associated with acquisitions or licenses of additional products;
 
    the cost of acquiring new or complementary businesses;
 
    competing technological and market developments;
 
    repayment of our of milestone-based advances to Bayer, and
 
    future fee and milestone payments to BTG, S*BIO and, if the acquisition of Proteolix closes, former stockholders of Proteolix.
We may not be able to raise additional capital on favorable terms, or at all. If we are unable to obtain additional funds, we may not be able to fund our share of commercialization expenses and clinical trials. We may also have to curtail operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets or grant licenses on terms that are unfavorable to us.
We believe that our existing capital resources and interest thereon will be sufficient to fund our current development plans beyond 2010. However, if we change our development plans, acquire rights to or license additional products, or seek to acquire new or complementary businesses, we may need additional funds sooner than we expect. In addition, we anticipate that our expenses related to the development of ONX 0801, carfilzomib, should the Proteolix acquisition close, and our share of expenses under our collaboration with Bayer will increase over the next several years as we begin activities to develop ONX 0801 and carfilzomib and continue our share of funding for the Nexavar clinical development program and expansion of commercial activities for Nexavar throughout the world. While these costs are unknown at the current time, we may need to raise additional capital to continue the co-funding of the Nexavar program and to develop ONX 0801, carfilzomib and our other product candidates through and beyond 2010, and may be unable to do so.
If the specialty pharmacies and distributors that we and Bayer rely upon to sell Nexavar fail to perform, our business may be adversely affected.
Our success depends on the continued customer support efforts of our network of specialty pharmacies and distributors. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions, which often require a high level of patient education and ongoing management. The use of specialty pharmacies and distributors involves certain risks,

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including, but not limited to, risks that these specialty pharmacies and distributors will:
    not provide us accurate or timely information regarding their inventories, the number of patients who are using Nexavar or complaints about Nexavar;
 
    not effectively sell or support Nexavar;
 
    reduce their efforts or discontinue to sell or support Nexavar;
 
    not devote the resources necessary to sell Nexavar in the volumes and within the time frames that we expect;
 
    be unable to satisfy financial obligations to us or others; and
 
    cease operations.
Any such failure may result in decreased Nexavar sales and profits, which would harm our business.
We or Bayer may not be able to protect or enforce our or their intellectual property, which gives us or Bayer the power to exclude third parties from using Nexavar and products we may develop, or we may not be able to operate our business without infringing upon the intellectual property rights of others.*
We can protect our technology from unauthorized use by others only to the extent that our technology is covered by valid and enforceable patents or effectively maintained as trade secrets. As a result, we depend in part on our ability to:
    obtain patents;
 
    license technology rights from others;
 
    protect trade secrets;
 
    operate without infringing upon the proprietary rights of others; and
 
    prevent others from infringing on our proprietary rights, particularly generic drug manufacturers. In the United States, for drugs deemed a new chemical entity, such as Nexavar, FDA regulations preclude the filing of an ANDA, that contains a challenge to the patents, prior to the four year anniversary of marketing approval. As such, we expect that one or more generic drug manufacturers will file an ANDA near the end of 2009, which will be the four year anniversary of Nexavar’s United States marketing approval.
In the case of Nexavar, the global patent applications related to this product candidate are held by Bayer, and are licensed to us in conjunction with our collaboration agreement with Bayer. Bayer has United States patents that cover Nexavar and pharmaceutical compositions of Nexavar, which we believe provide adequate patent protection until at least 2020. Based on a review of the public patent databases, Bayer also has a European patent that covers Nexavar, which will expire in 2020. Bayer has other patents/patent applications pending worldwide that cover Nexavar alone or in combination with other drugs for treating cancer. Certain of these patents may be subject to possible patent-term extensions, either in the U.S. or abroad, the entitlement to and the term of which cannot presently be calculated, in part because Bayer does not share with us information related to its Nexavar patent portfolio. We cannot be certain that these issued patents and future patents if they issue will provide adequate protection for Nexavar or will not be challenged by third parties in connection with the filing of an ANDA, or otherwise. As of September 30, 2009, we owned or had licensed rights to 65 United States patents and 32 United States patent applications and, generally, the foreign counterparts of these filings. Most of these patents or patent applications cover protein targets used to identify product candidates during the research phase of our collaborative agreements with Warner-Lambert Company, now Pfizer, or Bayer, or aspects of our now discontinued virus program. Additionally, we have corresponding patents or patent applications pending or granted in certain foreign jurisdictions.
If we complete our planned acquisition of Proteolix, we will acquire patents and patent applications covering carfilzomib, which will expire in 2025 without patent term extension, as well as patents and patent applications covering other proteasome inhibitors and immunoproteasome inhibitors, which will begin expiring in 2026 and 2027, respectively. We will also obtain a royalty-bearing license to patents covering an excipient used in a carfilzomib formulation, for which patents expire in 2010. We cannot be certain that these

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issued and future patents, if they issue, will provide adequate protection for carfilzomib or any other proteasome inhibitor, or will not be challenged by third parties in connection with the filing of an ANDA, or otherwise.
The patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. Our patents, or patents that we license from others, may not provide us with proprietary protection or competitive advantages against competitors with similar technologies. Competitors may challenge or circumvent our patents or patent applications. Courts may find our patents invalid. Due to the extensive time required for development, testing and regulatory review of our potential products, our patents may expire or remain in existence for only a short period following commercialization, which would reduce or eliminate any advantage the patents may give us. In addition, if a generic competitor to Nexavar were successfully launched prior to the expiration of the Nexavar patents, our business could be materially harmed.
We may not have been the first to make the inventions covered by each of our issued or pending patent applications, or we may not have been the first to file patent applications for these inventions. Third party patents may cover the materials, methods of treatment or dosage related to our product, or compounds to be used in combination with our products; those third parties may make allegations of infringement. We cannot provide assurances that our products or activities, or those of our licensors, will not infringe patents or other intellectual property owned by third parties. Competitors may have independently developed technologies similar or complementary to ours, including compounds to be used in combination with our products. We may need to license the right to use third-party patents and intellectual property to develop and market our product candidates. We may not acquire required licenses on acceptable terms, if at all. If we do not obtain these required licenses, we may need to design around other parties’ patents, or we may not be able to proceed with the development, manufacture or, if approved, sale of our product candidates. We may face litigation to defend against claims of infringement, assert claims of infringement, enforce our patents, protect our trade secrets or know-how, or determine the scope and validity of others’ proprietary rights. In addition, we may require interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions relating to our patent applications. These activities, especially patent litigation, are uncertain, making any outcome difficult to predict and costly and may be a substantial distraction for our management team.
Bayer may have rights to publish data and information in which we have rights. In addition, we sometimes engage individuals, entities or consultants to conduct research that may be relevant to our business. The ability of these individuals, entities or consultants to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. The nature of the limitations depends on various factors, including the type of research being conducted, the ownership of the data and information and the nature of the individual, entity or consultant. In most cases, these individuals, entities or consultants are, at the least, precluded from publicly disclosing our confidential information and are only allowed to disclose other data or information generated during the course of the research after we have been afforded an opportunity to consider whether patent and/or other proprietary protection should be sought. However, these agreements may be breached, despite all precautions taken, and we may not have adequate remedies for any such breach. If we do not apply for patent protection prior to publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information will be harmed, which may impair our competitive position and could adversely affect our growth.
Limited foreign intellectual property protection and compulsory licensing could limit our revenue opportunities.*
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. The requirements for patentability may differ in certain countries, particularly developing countries. We have recently become aware that a third party has filed an invalidity proceeding with the Chinese patent office to invalidate the patents that cover Nexavar. Unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug, such as Nexavar. The invalidity proceeding was heard in July, and the opinion of the Chinese patent office was unfavorable to Bayer. Bayer has appealled the decision, which appeal could take several years to resolve the matter. In addition, in India, Bayer is in the process of enforcing its Nexavar patents against a generics supplier, Cipla Limited. While we believe that the Nexavar patents are valid, we cannot predict the outcome of these proceedings. Some companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe and developing countries, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, Bayer, the owner of the Nexavar patent estate, may have limited remedies if the Nexavar patents are infringed or if Bayer is compelled to grant a license of Nexavar to a third party, which could materially diminish the value of those patents that cover Nexavar. If compulsory licenses were extended to include Nexavar, this could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection, which may make it difficult to stop infringement. Many countries limit the enforceability of

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patents against government agencies or government contractors. These factors could also negatively affect our revenue opportunities in those countries.
We may incur significant liability if it is determined that we are promoting the “off-label” use of drugs or are otherwise found in violation of federal and state regulations in the United States or elsewhere.
Physicians may prescribe drug products for uses that are not described in the product’s labeling and that differ from those approved by the FDA or other applicable regulatory agencies. Off-label uses are common across medical specialties. Physicians may prescribe Nexavar for the treatment of cancers other than advanced kidney cancer or liver cancer, although neither we nor Bayer are permitted to promote Nexavar for the treatment of any indication other than advanced kidney cancer or liver cancer. The FDA and other regulatory agencies have not approved the use of Nexavar for any other indications. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments, the FDA and other regulatory agencies do restrict communications on the subject of off-label use. Companies may not promote drugs for off-label uses. Accordingly, prior to approval of Nexavar for use in any indications other than advanced kidney cancer or liver cancer, we may not promote Nexavar for these indications. The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.
Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional speech concerning their products. We engage in the support of medical education activities and communicate with investigators and potential investigators regarding our clinical trials. Although we believe that all of our communications regarding Nexavar are in compliance with the relevant regulatory requirements, the FDA or another regulatory authority may disagree, and we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.
We may not be able to realize the potential financial or strategic benefits of future business acquisitions or strategic investments, which could hurt our ability to grow our business, develop new products or sell our products.*
In addition to our investment in S*BIO in December 2008 and our planned acquisition of Proteolix, we may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current business or enter into a new product area. Negotiations associated with an acquisition or strategic investment could divert management’s attention and other company resources. Any of the following risks associated with future acquisitions or investments could impair our ability to grow our business, develop new products, or sell Nexavar, and ultimately could have a negative impact on our growth or our financial results:
    difficulty in combining the products, operations or workforce of any acquired business with our business;
 
    difficulty in operating in a new or multiple new locations;
 
    disruption of our ongoing businesses or the ongoing business of the company that we invest in or acquire;
 
    difficulty in realizing the potential financial or strategic benefits of the transaction;
 
    difficulty in maintaining uniform standards, controls, procedures and policies;
 
    disruption of or delays in ongoing research, clinical trials and development efforts;
 
    diversion of capital and other resources;
 
    assumption of liabilities;
 
    diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments;
 
    difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and
 
    impairment of relationships with our or the acquired businesses’ employees and other third parties, such as clinical research organizations, contract manufacturing organizations, licensors, suppliers, or the loss of such relationships as a result of our acquisition or investment

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In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we make an investment in cash or use cash to pay for all or a portion of an acquisition, our cash reserves would be reduced which could negatively impact our liquidity, the growth of our business or our ability to develop new products. However, if we pay the consideration with shares of common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. The significant decline in the trading price of our common stock would make the dilution to our stockholders more extreme and could negatively impact our ability to pay the consideration with shares of common stock or convertible debentures. We cannot forecast the number, timing or size of future strategic investments or acquisitions, or the effect that any such investments or acquisitions might have on our operations or financial results.
We face product liability risks and may not be able to obtain adequate insurance.*
The sale of Nexavar and its and other products’ use in clinical trials exposes us to liability claims. In the United States, FDA approval of a drug may offer little or no protection from liability claims under state law (i.e., federal preemption defense), the tort duties for which may vary state to state. Although we are not aware of any historical or anticipated product liability claims against us, if we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of Nexavar.
We believe that we have obtained reasonably adequate product liability insurance coverage that includes the commercial sale of Nexavar and our clinical trials. However, the cost of insurance coverage is rising. We may not be able to maintain insurance coverage at a reasonable cost. We may not be able to obtain additional insurance coverage that will be adequate to cover product liability risks that may arise should a future product candidate receive marketing approval. Regardless of merit or eventual outcome, product liability claims may result in:
    decreased demand for a product;
 
    injury to our reputation;
 
    withdrawal of clinical trial volunteers; and
 
    loss of revenues.
Thus, whether or not we are insured, a product liability claim or product recall may result in significant losses.
If we do not receive timely and accurate financial information from Bayer regarding the development and sale of Nexavar, we may be unable to accurately report our results of operations.
Due to our collaboration with Bayer, we are highly dependent on Bayer for timely and accurate information regarding any revenues realized from sales of Nexavar and the costs incurred in developing and selling it, in order to accurately report our results of operations. If we do not receive timely and accurate information or incorrectly estimate activity levels associated with the co-promotion and development of Nexavar at a given point in time, we could be required to record adjustments in future periods and may be required to restate our results for prior periods. Such inaccuracies or restatements could cause a loss of investor confidence in our financial reporting or lead to claims against us, resulting in a decrease in the trading price of shares of our common stock.
Provisions in our collaboration agreement with Bayer may prevent or delay a change in control.
Our collaboration agreement with Bayer provides that if we are acquired by another entity by reason of merger, consolidation or sale of all or substantially all of our assets, and Bayer does not consent to the transaction, then for 60 days following the transaction, Bayer may elect to terminate our co-development and co-promotion rights under the collaboration agreement. If Bayer were to exercise this right, Bayer would gain exclusive development and marketing rights to the product candidates developed under the collaboration agreement, including Nexavar. If this happens, we, or our successor, would receive a royalty based on any sales of Nexavar and other collaboration products, rather than a share of any profits, which could substantially reduce the economic value derived from the sales of Nexavar to us or our successor. These provisions of our collaboration agreement with Bayer may have the effect of delaying or

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preventing a change in control, or a sale of all or substantially all of our assets, or may reduce the number of companies interested in acquiring us.
Our stock price is volatile.*
Our stock price is volatile and is likely to continue to be volatile. In the period beginning January 1, 2006 and ending September 30, 2009, our stock price ranged from a high of $59.50 and a low of $10.44. A variety of factors may have a significant effect on our stock price, including:
    fluctuations in our results of operations;
 
    interim or final results of, or speculation about, clinical trials of Nexavar;
 
    development progress of our early stage compounds;
 
    decisions by regulatory agencies, or changes in regulatory requirements;
 
    announcements by us regarding, or speculation about, our business development activities;
 
    ability to accrue patients into clinical trials;
 
    developments in our relationship with Bayer;
 
    public concern as to the safety and efficacy of our product candidates;
 
    changes in healthcare reimbursement policies;
 
    announcements by us or our competitors of technological innovations or new commercial therapeutic products;
 
    government regulation;
 
    developments in patent or other proprietary rights or litigation brought against us;
 
    sales by us of our common stock or debt securities;
 
    foreign currency fluctuations, which would affect our share of collaboration profits or losses; and
 
    general market conditions.
If our proposed acquisition of Proteolix closes, we will be required to make a payment of $276 million in cash upon closing and up to $575 million in earn-out payments upon the receipt of certain regulatory approvals and the satisfaction of other milestones. Under certain circumstances, including if we fail to satisfy our regulatory approval-related diligence obligations, we may be required to make one or more earn-out payments even if the associated regulatory approvals are not received. We may, in our discretion, make any of the earn-out payments, except the first, that become payable to former holders of Proteolix preferred stock, in the form of cash, shares of Onyx common stock or a combination thereof. If we elect to issue shares of our common stock in lieu of making an earn-out payment in cash, this would have a dilutive effect on our common stock and could cause the trading price of our common stock to decline.
Existing stockholders have significant influence over us.
Our executive officers, directors and 5% stockholders own, in the aggregate, approximately 27% of our outstanding common stock. As a result, these stockholders will be able to exercise substantial influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change in control of our company and will make some transactions difficult or impossible to accomplish without the support of these stockholders.

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Bayer, a collaborative party, has the right, which it is not currently exercising, to have its nominee elected to our board of directors as long as we continue to collaborate on the development of a compound. Because of these rights, ownership and voting arrangements, our officers, directors, principal stockholders and collaborator may be able to effectively control the election of all members of the board of directors and determine all corporate actions.
A portion of our investment portfolio is invested in auction rate securities, and if auctions continue to fail for amounts we have invested, our investment will not be liquid. If the issuer of an auction rate security that we hold is unable to successfully close future auctions and their credit rating deteriorates, we may be required to adjust the carrying value of our investment through an impairment charge to earnings.
A portion of our investment portfolio is invested in auction rate securities. The underlying assets of these securities are student loans substantially backed by the federal government. Due to adverse developments in the credit markets, beginning in February 2008, these securities have experienced failures in the auction process. When an auction fails for amounts we have invested, the security becomes illiquid. In the event of an auction failure, we are not able to access these funds until a future auction on these securities is successful. We have reclassified these securities from current to non-current marketable securities, and if the issuer is unable to successfully close future auctions and their credit rating deteriorates, we may be required to adjust the carrying value of the marketable securities through an impairment charge to earnings.
We are at risk of securities class action litigation due to our expected stock price volatility.
In the past, stockholders have often brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us, because biotechnology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. In December 2006, following our announcement that a Phase 3 trial administering Nexavar or placebo tablets in combination with the chemotherapeutic agents carboplatin and paclitaxel in patients with advanced melanoma did not meet its primary endpoint, our stock price declined significantly. Similarly, following our announcement in February 2008 that one of our Phase 3 trials for non-small cell lung cancer had been stopped because an independent DMC analysis concluded that it did not meet its primary endpoint of improved overall survival, our stock price declined significantly. We may in the future be the target of securities class action litigation. Securities litigation could result in substantial costs, could divert management’s attention and resources, and could seriously harm our business, financial condition and results of operations.
Our operating results could be adversely affected by product sales occurring outside the United States and fluctuations in the value of the United States dollar against foreign currencies.
A majority of Nexavar sales are generated outside of the United States, and a significant percentage of Nexavar commercial and development expenses are incurred outside of the United States. Fluctuations in foreign currency exchange rates affect our operating results. Changes in exchange rates between these foreign currencies and the U.S. dollar will affect the recorded levels of our assets and liabilities as foreign assets and liabilities are translated into U.S. dollars for presentation in our financial statements, as well as our net sales, cost of goods sold, and operating margins. The primary foreign currency in which we have exchange rate fluctuation exposure is the Euro. As we expand, we could be exposed to exchange rate fluctuation in other currencies. Exchange rates between these currencies and U.S. dollars have fluctuated significantly in recent years and may do so in the future. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results. We currently do not hedge any foreign currencies.
Provisions in the indenture for the 2016 Notes may deter or prevent a business combination.
If a fundamental change occurs prior to the maturity date of the 2016 Notes, holders of the notes will have the right, at the option, to require us to repurchase all or a portion of their notes. In addition, if a fundamental change occurs prior to the maturity date of 2016 Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its notes in connection with such fundamental change. In addition, the indenture for the notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the 2016 Notes. These and other provisions could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to our stockholders.
Provisions in Delaware law, our charter and executive change of control agreements we have entered into may prevent or delay a change of control.

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We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent a Delaware corporation from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s stock unless:
    the board of directors approved the transaction where the stockholder acquired 15% or more of the corporation’s stock;
 
    after the transaction in which the stockholder acquired 15% or more of the corporation’s stock, the stockholder owned at least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
 
    on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.
As such, these laws could prohibit or delay mergers or a change of control of us and may discourage attempts by other companies to acquire us.
Our certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include:
    our board is classified into three classes of directors as nearly equal in size as possible with staggered three-year terms;
 
    the authority of our board to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of these shares, without stockholder approval;
 
    all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;
 
    special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer, the board or 10% or more of the stockholders entitled to vote at the meeting; and
 
    no cumulative voting.
These provisions may have the effect of delaying or preventing a change in control, even at stock prices higher than the then current stock price.
We have entered into change in control severance agreements with each of our executive officers. These agreements provide for the payment of severance benefits and the acceleration of stock option vesting if the executive officer’s employment is terminated within 24 months of a change in control. The change in control severance agreements may have the effect of preventing a change in control.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.   Defaults Upon Senior Securities.
Not applicable.
Item 4.   Submission of Matters to a Vote of Security Holders.
None.

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Item 5.   Other Information.
Not applicable.
Item 6.   Exhibits.
     
2.1†*(1)
  Agreement and Plan of Merger dated as of October 10, 2009 among Onyx Pharmaceuticals, Inc., Proteolix, Inc., Profiterole Acquisition Corp., and Shareholder Representative Services LLC
 
   
3.1 (2)
  Restated Certificate of Incorporation of the Company.
 
   
3.2 (3)
  Amended and Restated Bylaws of the Company.
 
   
3.3 (4)
  Certificate of Amendment to Amended and Restated Certificate of Incorporation.
 
   
3.4 (5)
  Certificate of Amendment to Amended and Restated Certificate of Incorporation.
 
   
4.1
  Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
 
   
4.2 (2)
  Specimen Stock Certificate.
 
   
4.3(6)
  Indenture dated as of August 12, 2009 between Onyx Pharmaceuticals, Inc. and Wells Fargo Bank, National Association
 
   
4.4(6)
  First Supplemental Indenture dated as of August 12, 2009 between Onyx Pharmaceuticals, Inc. and Wells Fargo Bank, National Association
 
   
4.5(6)
  Form of 4.00% Convertible Senior Note due 2016
 
   
10.29+
  Executive Employment Agreement between the Company and Suzanne M. Shema, effective as of August 31, 2009.
 
   
31.1 (7)
  Certification of Chief Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
   
31.2 (7)
  Certification of Chief Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
   
32.1 (7)
  Certifications required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

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  Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission.
 
*   Certain schedules related to identified agreements and persons have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and Exchange Commission.
 
+   Management contract or compensatory plan.
 
(1)   Filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 6, 2009.
 
(2)   Filed as an exhibit to the Company’s Registration Statement on Form SB-2 (No. 333-3176-LA).
 
(3)   Filed as an exhibit to Company’s Current Report on Form 8-K filed on December 5, 2008.
 
(4)   Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
 
(5)   Filed as an exhibit to the Company’s Registration Statement on Form S-3 (No. 333-134565) filed on May 30, 2006.
 
(6)   Filed as an exhibit to Company’s Current Report on Form 8-K filed on August 12, 2009.
 
(7)   This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Onyx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  ONYX PHARMACEUTICALS, INC.
 
 
Date: November 3, 2009  By:   /s/ N. Anthony Coles    
    N. Anthony Coles   
    President and Chief Executive Officer
(Principal Executive Officer) 
 
 
     
Date: November 3, 2009  By:   /s/ Matthew K. Fust    
    Matthew K. Fust   
    Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 
 

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EXHIBIT INDEX
     
2.1†*(1)
  Agreement and Plan of Merger dated as of October 10, 2009 among Onyx Pharmaceuticals, Inc., Proteolix, Inc., Profiterole Acquisition Corp., and Shareholder Representative Services LLC
 
   
3.1 (2)
  Restated Certificate of Incorporation of the Company.
 
   
3.2 (3)
  Amended and Restated Bylaws of the Company.
 
   
3.3 (4)
  Certificate of Amendment to Amended and Restated Certificate of Incorporation.
 
   
3.4 (5)
  Certificate of Amendment to Amended and Restated Certificate of Incorporation.
 
   
4.1
  Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
 
   
4.2 (2)
  Specimen Stock Certificate.
 
   
4.3(6)
  Indenture dated as of August 12, 2009 between Onyx Pharmaceuticals, Inc. and Wells Fargo Bank, National Association
 
   
4.4(6)
  First Supplemental Indenture dated as of August 12, 2009 between Onyx Pharmaceuticals, Inc. and Wells Fargo Bank, National Association
 
   
4.5(6)
  Form of 4.00% Convertible Senior Note due 2016
 
   
10.29+
  Executive Employment Agreement between the Company and Suzanne M. Shema, effective as of August 31, 2009.
 
   
31.1 (7)
  Certification of Chief Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
   
31.2 (7)
  Certification of Chief Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
   
32.1 (7)
  Certifications required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
 
  Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission.
 
*   Certain schedules related to identified agreements and persons have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and Exchange Commission.
 
+   Management contract or compensatory plan.
 
(1)   Filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 6, 2009.
 
(2)   Filed as an exhibit to the Company’s Registration Statement on Form SB-2 (No. 333-3176-LA).
 
(3)   Filed as an exhibit to the Company’s Current Report on Form 8-K filed on December 5, 2008.
 
(4)   Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
 
(5)   Filed as an exhibit to the Company’s Registration Statement on Form S-3 (No. 333-134565) filed on May 30, 2006.
 
(6)   Filed as an exhibit to Company’s Current Report on Form 8-K filed on August 12, 2009.
 
(7)   This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Onyx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

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