Attached files
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EX-31.2 - EX-31.2 - ONYX PHARMACEUTICALS INC | f53915exv31w2.htm |
EX-31.1 - EX-31.1 - ONYX PHARMACEUTICALS INC | f53915exv31w1.htm |
EX-32.1 - EX-32.1 - ONYX PHARMACEUTICALS INC | f53915exv32w1.htm |
EX-10.29 - EX-10.29 - ONYX PHARMACEUTICALS INC | f53915exv10w29.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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)
Emeryville, California 94608
(Address of principal executive offices)
(510) 597-6500
(Registrants telephone number, including area code)
(Registrants 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 registrants classes of common stock,
as of the latest practicable date. The number of outstanding shares of the registrants common
stock, $0.001 par value, was 62,135,049 as of October 31, 2009.
Table of Contents
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.
3
Table of Contents
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(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.
4
Table of Contents
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(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.
5
Table of Contents
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
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 Companys continued co-funding of the
development costs of Nexavar worldwide, excluding Japan, and the Companys 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.
6
Table of Contents
Revenue from collaboration agreement consists of the Companys share of the pre-tax commercial
profit generated from its collaboration with Bayer, reimbursement of the Companys 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 Companys shared marketing costs
related to Nexavar and royalty revenue are also included in the revenue from collaboration
agreement line item.
The Companys 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 partys
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) | ||||||||||||||||
Onyxs share of collaboration commercial profit |
$ | 61,732 | $ | 44,390 | $ | 162,781 | $ | 127,192 | ||||||||
Reimbursement of Onyxs 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
Companys 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:
7
Table of Contents
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 Companys
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 Companys 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 Companys 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 Companys 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.
8
Table of Contents
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 Companys 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 Companys 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
9
Table of Contents
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 Companys 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 Companys 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
Companys ability to fully offset federal taxable income with its net operating loss carry
forwards, the Companys estimated tax expense is principally related to federal alternative minimum
tax and California state income tax.
There were no material changes to the Companys 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 Companys 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 Companys
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. Proteolixs 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
Companys consolidated financial
position and results of operations.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The
following Managements 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 Nexavars 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. Proteolixs 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 Bayers 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 | ||||||||
Onyxs share of collaboration commercial profit |
$ | 61,732 | $ | 44,390 | $ | 162,781 | $ | 127,192 | ||||||||
Reimbursement of Onyxs 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
18
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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 Bayers 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 Onyxs 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
Nexavars 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*BIOs 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 Nexavars 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 Proteolixs 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 Companys chief executive officer and chief
financial officer reviewed and evaluated the Companys 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 Companys principal executive officer and principal financial officer
concluded that the Companys 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 Commissions rules and forms.
Changes in Internal Control over Financial Reporting: There were no changes in the Companys
internal control over financial reporting during the quarter ended September 30, 2009 that have
materially affected, or are reasonably likely to materially affect the Companys 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 GlaxoSmithKlines Votrient, a multi kinase inhibitor recently approved by the FDA.
Nexavars 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 Pfizers sunitinib, a multi-kinase inhibitor and
Bristol-Meyers Squibbs 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 Bayers 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 collaborations 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 Bayers 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 Onyxs and Proteolixs 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 companys 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 Proteolixs 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
Proteolixs technical and business operations and personnel, we may not realize the expected
benefits of the acquisition.
The successful integration of Proteolixs technical and business operations and personnel may place
a significant burden on our management and internal resources. The diversion of managements
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 Bayers 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 employees 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.
Nexavars 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 products 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 reforms 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 Proteolixs clinical trials to our management and difficulties
developing relationships with Proteolixs 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 FDAs 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 Bayers 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 Bayers 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 Proteolixs
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 Nexavars 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 products 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 physicians
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 managements 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 managements 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 corporations outstanding voting stock, for three years following the
date that the stockholder acquired 15% or more of the corporations stock unless:
| the board of directors approved the transaction where the stockholder acquired 15% or more of the corporations stock; | ||
| after the transaction in which the stockholder acquired 15% or more of the corporations stock, the stockholder owned at least 85% of the corporations 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 officers 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 Companys Current Report on Form 8-K filed on October 6, 2009. | |
(2) | Filed as an exhibit to the Companys Registration Statement on Form SB-2 (No. 333-3176-LA). | |
(3) | Filed as an exhibit to Companys Current Report on Form 8-K filed on December 5, 2008. | |
(4) | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |
(5) | Filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-134565) filed on May 30, 2006. | |
(6) | Filed as an exhibit to Companys 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 Companys Current Report on Form 8-K filed on October 6, 2009. | |
(2) | Filed as an exhibit to the Companys Registration Statement on Form SB-2 (No. 333-3176-LA). | |
(3) | Filed as an exhibit to the Companys Current Report on Form 8-K filed on December 5, 2008. | |
(4) | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |
(5) | Filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-134565) filed on May 30, 2006. | |
(6) | Filed as an exhibit to Companys 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. |
46