UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

249 East Grand Avenue
South San Francisco California, 94080
(Address of principal executive offices)

(650) 266-0000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The number of outstanding shares of the registrant’s common stock, $0.001 par value, was 63,355,402 as of May 2, 2011.

 

 

INDEX

		Page
PART I: FINANCIAL INFORMATION			3
Item 1. Financial Statements (Unaudited)			3
Condensed Consolidated Balance Sheets — March 31, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations —Three months ended March 31, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			29
PART II: OTHER INFORMATION			30
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			47
Item 4. (Removed and Reserved)			47
Item 5. Other Information			47
Item 6. Exhibits			47
SIGNATURES
EX-10.1(i)
EX-10.13(v)
EX-10.22(ii)
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ONYX PHARMACEUTICALS, INC.

		March 31,				December 31,
		2011				2010
		(Unaudited)				(Note 1)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	211,171			$	226,340
Marketable securities, current			322,218				322,973
Restricted cash			—				31,910
Receivable from collaboration partners			50,846				51,412
Prepaid expenses and other current assets			17,982				12,549
Total current assets			602,217				645,184
Marketable securities, non-current			28,293				28,555
Property and equipment, net			18,577				10,822
Intangible assets — in-process research and development			438,800				438,800
Goodwill			193,675				193,675
Other assets			18,178				35,599
Total assets		$	1,299,740			$	1,352,635
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	309			$	16
Accrued liabilities			14,987				16,866
Accrued clinical trials and related expenses			16,308				15,093
Accrued compensation			5,628				9,251
Escrow account liability			—				31,634
Total current liabilities			37,232				72,860
Convertible senior notes due 2016			155,136				152,701
Liability for contingent consideration			264,953				253,458
Deferred tax liability			157,090				157,090
Other liabilities			25,740				18,952
Commitments and contingencies
Stockholders’ equity:
Common stock			63				63
Additional paid-in capital			1,249,775				1,238,204
Receivable from stock option exercises			(551	)			(6	)
Accumulated other comprehensive loss			(1,140	)			(1,291	)
Accumulated deficit			(588,558	)			(539,396	)
Total stockholders’ equity			659,589				697,574
Total liabilities and stockholders’ equity		$	1,299,740			$	1,352,635

See accompanying notes.

ONYX PHARMACEUTICALS, INC.

		Three Months Ended
		March 31,
		2011				2010
		(In thousands, except per
		share amounts)
Revenue:
Revenue from collaboration agreement		$	67,145			$	62,903
Total revenue			67,145				62,903
Operating expenses:
Research and development			62,494				43,575
Selling, general and administrative			34,471				24,721
Contingent consideration			11,495				3,448
Total operating expenses			108,460				71,744
Loss from operations			(41,315	)			(8,841	)
Investment income, net			649				789
Interest expense			(5,002	)			(4,724	)
Other expense			(3,462	)			—
Loss before provision (benefit) for income taxes			(49,130	)			(12,776	)
Provision (benefit) for income taxes			32				(732	)
Net loss		$	(49,162	)		$	(12,044	)
Basic net loss per share		$	(0.78	)		$	(0.19	)
Diluted net loss per share		$	(0.78	)		$	(0.19	)
Shares used in computing basic net loss per share			63,008				62,353
Shares used in computing diluted net loss per share			63,008				62,353

See accompanying notes.

ONYX PHARMACEUTICALS, INC.

		Three Months Ended March 31,
		2011				2010
		(In thousands)
Cash flows from operating activities:
Net loss		$	(49,162	)		$	(12,044	)
Adjustments to reconcile net loss to net cash used in operating activities:
Realized gains on sales of current marketable securities			(4	)			—
Depreciation and amortization			1,634				634
Stock-based compensation			5,752				5,121
Amortization of convertible senior notes discount and debt issuance costs			2,591				2,313
Changes in fair value of liability for contingent consideration			11,495				3,448
Impairment of equity investment			3,000				—
Changes in operating assets and liabilities:
Restricted cash			—				(3	)
Receivable from collaboration partners			566				7,033
Prepaid expenses and other current assets			(5,419	)			(1,833	)
Other assets			14,265				96
Accounts payable			293				(99	)
Accrued liabilities			(1,879	)			(2,852	)
Accrued clinical trials and related expenses			1,215				58
Accrued compensation			(3,623	)			(7,127	)
Escrow liability			(31,634	)			3
Other liabilities			6,788				(188	)
Net cash used in operating activities			(44,122	)			(5,440	)
Cash flows from investing activities:
Purchases of marketable securities			(143,579	)			(93,957	)
Sales of marketable securities			56,802				24,331
Maturities of marketable securities			87,935				90,390
Transfers from restricted cash			31,910				—
Capital expenditures			(9,389	)			(59	)
Net cash provided by investing activities			23,679				20,705
Cash flows from financing activities:
Repurchases of restricted stock awards			(180	)			(27	)
Net proceeds from issuances of common stock			5,454				2,959
Net cash provided by financing activities			5,274				2,932
Net increase (decrease) in cash and cash equivalents			(15,169	)			18,197
Cash and cash equivalents at beginning of period			226,340				107,668
Cash and cash equivalents at end of period		$	211,171			$	125,865
Supplemental cash flow data
Cash paid during the period for income taxes		$	—			$	612
Cash paid during the period for interest		$	4,600			$	4,677

See accompanying notes.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated 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. The condensed consolidated balance sheet at December 31, 2010 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. This Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes contained in the Onyx Pharmaceuticals, Inc. (the “Company” or “Onyx”) Annual Report on Form 10-K for the year ended December 31, 2010.

Significant Accounting Policies

As of March 31, 2011, there have been no material changes to the Company’s significant accounting policies, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Thus, actual results could differ from those estimates. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any other future operating periods.

Principles of Consolidation

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

The Company operates in one segment — the discovery and development of novel cancer therapies.

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) 2010-27, Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers. This update addresses questions concerning how pharmaceutical manufacturers should recognize and classify in the income statement fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act or Acts. The Acts impose an annual fee on the pharmaceutical manufacturing industry for each calendar year beginning on or after January 1, 2011. An entity’s portion of the annual fee is payable no later than September 30 of the applicable calendar year and is not tax deductible. The annual fee is payable to the U.S. Treasury once a pharmaceutical manufacturing entity has a gross receipt from a branded prescription drug sale to any specified government program or in accordance with coverage under any government program for each calendar year beginning on or after January 1, 2011. The Company does not expect that this accounting standard update will have any material impact on its results of operations or financial position.

In December 2010, the FASB issued ASU 2010-28, Intangibles — Goodwill and Other — When to perform Step 2 of the Goodwill Impairment Test for Entities with Zero or Negative Carrying Amount. ASU 2010-28 modifies goodwill impairment testing for entities with zero or negative carrying amounts. The amendment requires these entities to perform Step 2 of the goodwill impairment test, which involves comparing the current value and the current book value of goodwill. The difference between these values represents the impairment amount which must be recognized in the current period. In addition, an entity should consider whether there are any adverse qualitative factors indicating that impairment exists. ASU 2010-28 is effective for interim and annual periods beginning on or after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact, if any, that the adoption may have on its results of operations or financial position.

In December 2010, the FASB issued ASU 2010-29, Business Combinations — Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 clarifies the acquisition date that should be used for reporting the pro forma revenue and earnings disclosure requirements for business combination(s) when comparative financial statements are presented. The amendment specifies that an entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. In addition, the amendment expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). ASU 2010-29 is effective for interim and annual periods beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the adoption will have any material impact on its results of operations or financial position.

Note 2. Revenue from Collaboration Agreement

Nexavar is currently marketed and sold primarily in the United States, the European Union and other territories worldwide for the treatment of unresectable liver cancer and advanced kidney cancer. Nexavar also has regulatory applications pending in other territories internationally. The Company co-promotes Nexavar in the United States with Bayer HealthCare Pharmaceuticals, Inc., or Bayer, under collaboration and co-promotion agreements. In March 2006, the Company and Bayer entered into an agreement to co-promote Nexavar in the United States. This agreement amends the collaboration agreement and generally supersedes the provisions of the collaboration agreement that relate to the co-promotion of Nexavar in the United States. Outside of the United States, the terms of the collaboration agreement continue to govern under which Bayer has exclusive marketing rights and the Company shares equally in the profits or losses, excluding Japan. In the United States, under the terms of the 2006 co-promotion agreement and consistent with the collaboration agreement, the Company and Bayer share equally in the profits or losses of Nexavar, if any, in the United States, subject only to the Company’s continued co-funding of the development costs of Nexavar worldwide, excluding Japan, and the Company’s continued co-promotion of Nexavar in the United States.

The Company’s collaboration agreement with Bayer will terminate when patents expire that were issued in connection with product candidates discovered under the agreement, or at the time when neither the Company nor Bayer are entitled to profit sharing under the agreement, whichever is latest. The Company’s co-promotion agreement with Bayer will terminate upon the earlier of the termination of the Company’s collaboration agreement with Bayer or the date products subject to the co-promotion agreement are no longer sold by either party in the United States due to a permanent product withdrawal or recall or a voluntary decision by the parties to abandon the co-promotion of such products in the United States. Either party may also terminate the co-promotion agreement upon failure to cure a material breach of the agreement within a specified cure period.

In addition, the Company’s collaboration agreement with Bayer provides that if the Company were acquired by another entity by reason of merger, consolidation or sale of all or substantially all of the Company’s assets, or if a single entity other than Bayer or its affiliate acquires ownership of a majority of the Company’s outstanding voting stock, and Bayer does not consent to the transaction, then for 60 days following the transaction, Bayer may elect to terminate the co-development and co-promotion rights under the collaboration agreement and convert the Company’s profit sharing interest under that agreement into a royalty based on any sales of Nexavar and other collaboration products. The applicable royalty rate would be a function of expected profitability of Nexavar for the remaining patent life of Nexavar. Also, either party may terminate the agreement upon 30 days’ notice within 60 days of specified events relating to insolvency of the other party.

Revenue from collaboration agreement was $67.1 million and $62.9 million for the three months ended March 31, 2011 and 2010, respectively, calculated as follows:

		Three Months Ended March 31,
		2011				2010
		(In thousands)
Onyx’s share of collaboration commercial profit		$	59,580			$	55,084
Reimbursement of Onyx’s shared marketing expenses			4,604				5,824
Royalty revenue			2,961				1,995
Revenue from collaboration agreement		$	67,145			$	62,903

Note 3. Agreement with Ono Pharmaceutical Co., Ltd.

In September 2010, the Company entered into an exclusive license agreement with Ono Pharmaceutical Co., Ltd., or Ono, granting Ono the right to develop and commercialize both carfilzomib and ONX 0912 for all oncology indications in Japan. The Company retains all development and commercialization rights for other countries in the Asia Pacific region, as well as in all other regions of the world, including the United States and Europe. The Company agreed to provide Ono with development and commercial supply of carfilzomib and ONX 0912 on a cost-plus basis. Ono is responsible for all development costs in support of regulatory filings in Japan as well as commercialization costs it incurs. If regulatory approval for carfilzomib and/or ONX 0912 is achieved in Japan, Ono is obligated to pay the Company double-digit royalties on net sales of the licensed compounds in Japan.

Global development work is conducted by Onyx at Onyx’s discretion. A percentage of the costs incurred by the Company for the global development of carfilzomib and ONX 0912 that may support filings for regulatory approval in Japan are required to be reimbursed by Ono at cost. These reimbursements are recorded as a reduction of operating expenses by the Company. For the three months ended March 31, 2011, the reimbursement of global development costs was $3.0 million, which reduced the “Research and development expenses” line item in the Condensed Consolidated Statement of Operations.

Ono also agreed to pay the Company global development support and commercial milestone payments based on the achievement of pre-specified criteria, which could total approximately $288.6 million at current exchange rates. In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition, which states that entities can apply the milestone method of revenue recognition to research or development arrangements if the milestones under the arrangements are substantive and there is substantive uncertainty about whether the milestones will be achieved. The Company adopted ASU No. 2010-17 effective January 2010 and determined that the milestones under the agreement with Ono will not be accounted for under the milestone method of revenue recognition. The milestones under the agreement with Ono do not meet the definition of a milestone under ASU 2010-17 because the achievement of these milestones is solely dependent on Ono’s performance and not on any performance obligations of the Company. Revenue from the milestone payments will be recognized if and when such payments become due because the Company does not expect to have any outstanding performance obligations relating to these milestones at the time these milestones are achieved.

The agreement will terminate upon the expiration of the royalty terms specified for each product. In addition, Ono may terminate this agreement for certain scientific or commercial reasons with advance written notice, and either party may terminate this agreement for the other party’s uncured material breach or bankruptcy.

Note 4. Agreement with S*BIO Pte Ltd.

In December 2008, the Company entered into a development, collaboration, option and license agreement with S*BIO Pte Ltd., or S*BIO, pursuant to which the Company acquired options to license rights to each of its novel Janus Kinase, or JAK, inhibitors, SB1518 (designated by the Company as ONX 0803) and SB1578 (designated by the Company as ONX 0805). Under the terms of the agreement, the Company obtained options, which if exercised, would have given it rights to exclusively develop and commercialize ONX 0803 and ONX 0805 for all potential indications in the United States, Canada and Europe. S*BIO would have retained responsibility for all development costs prior to the option exercise, after which the Company would have assumed development costs for the United States, Canada and Europe, subject to S*BIO’s option to fund a portion of the development costs in return for enhanced royalties on any future product sales.

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 $20.7 million as an up-front payment and recognized the remaining amount of $4.3 million as a long-term equity investment. The equity investment is accounted for under the cost method of accounting. In May 2010, the Company announced the expansion of its agreement with S*BIO and provided an additional $20.0 million in funding to S*BIO to broaden and accelerate the development program for ONX 0803 and ONX 0805. S*BIO agreed to utilize the funding to continue to perform the clinical development of ONX 0803 and preclinical through clinical development of ONX 0805. The Company capitalized the $20.0 million as prepaid research and development expense in other long-term assets and amortized a portion of this amount as research and development expense each period based on the actual expenses incurred by S*BIO for the development of ONX 0803 and ONX 0805.

In May 2011, the Company entered into a Termination and Separation Agreement, or the Termination Agreement, with S*BIO to terminate its collaboration agreement and amend the Company’s rights with respect to ONX 0803 and ONX 0805. Under the Termination Agreement, the Company’s option rights to ONX 0803 and ONX 0805, which it had not exercised, will revert to S*BIO and S*BIO will retain responsibility for all development and commercialization of these compounds. The Company retained its equity interest in S*BIO and, in addition to any value associated with its equity interest, may receive up to $20.0 million from S*BIO based on agreed portions of any partnering revenue or future royalty revenue related to ONX 0803 and ONX 0805, or proceeds from any acquisition of S*BIO.

As a result of the termination of the collaboration agreement with S*BIO, the Company will no longer receive clinical development services subsequent to March 31, 2011 relating to the $20.0 million advance funding payment provided to S*BIO in May 2010. The Company recorded a write-off of $12.7 million for the three months ended March 31, 2011 for the remaining unamortized balance of prepaid research and development expense relating to the advance funding payment. In addition, the Company reassessed the fair value of its equity investment in S*BIO in accordance with Accounting Standards Codification (“ASC”) 325-20-35, Investments—Other, and determined that it was impaired as of March 31, 2011. Accordingly, the Company recorded an impairment charge of $3.0 million in the “Other expense” line item in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2011.

S*BIO qualifies as a variable interest entity, or VIE. However, the Company does not have the power to direct the activities that most significantly impact the performance of S*BIO because S*BIO has other compounds in development and has the decision making authority and the power to control the clinical research of these compounds. Therefore, the Company is not considered the primary beneficiary and consolidation is not required. The equity investment in S*BIO could result in the Company absorbing losses up to the amount of its investment. The following is a summary of the Company’s remaining equity investment in S*BIO and the Company’s maximum risk of loss as of March 31, 2011:

		As of March 31, 2011
		Equity Investment				Risk of Loss
		(In thousands)
S*BIO		$	1,250			$	1,250

Note 5. Acquisition of Proteolix

In November 2009, the Company acquired Proteolix Inc., or Proteolix, a privately-held biopharmaceutical company located in South San Francisco, California. Proteolix focused primarily on the discovery and development of novel therapies that target the proteasome for the treatment of hematological malignancies, solid tumors and autoimmune disorders. Proteolix’s lead compound, carfilzomib, is a proteasome inhibitor currently in multiple clinical trials, including an advanced Phase 2b clinical trial for patients with relapsed and refractory multiple myeloma. This acquisition provided the Company with an opportunity to expand into the hematological malignancies market.

Under the Agreement and Plan of Merger, or the Merger Agreement, the aggregate consideration paid by the Company to former Proteolix stockholders at closing consisted of $276.0 million in cash, less $27.6 million that was temporarily held in an escrow account subject to terms described below under Escrow Account Liability. In addition, a $40.0 million earn-out payment, less $4.0 million that was temporarily held in the escrow account, was made in April 2010 related to the achievement of a development milestone. The escrow amounts were paid to the former Proteolix stockholders in February 2011. The Company may be required to pay up to an additional $535.0 million in earn-out payments as outlined below under Liability for Contingent Consideration.

Goodwill

The excess of the consideration transferred over the fair values assigned to the assets acquired and liabilities assumed was $193.7 million, which represents the goodwill amount resulting from the acquisition. None of the goodwill is expected to be deductible for income tax purposes. The Company tests goodwill for impairment on an annual basis or sooner, if deemed necessary. As of March 31, 2011, there were no changes in the recognized amount of goodwill resulting from the acquisition of Proteolix.

Liability for Contingent Consideration

Under the terms of the Merger Agreement, the aggregate cash consideration paid to former Proteolix stockholders at closing was $276.0 million and an additional $40.0 million earn-out payment was made in April 2010, 180 days after completion of enrollment in an ongoing pivotal Phase 2b clinical study involving relapsed and refractory multiple myeloma patients, known as the “003-A1” trial. The Company may also be required to pay up to an additional $535.0 million in earn-out payments payable in up to four installments upon the achievement of certain regulatory approvals for carfilzomib in the United States and Europe within pre-specified timeframes. Under the Merger Agreement, the first of these additional earn-out payments would be in the amount of $170.0 million if achieved by the date originally contemplated, and would be triggered by accelerated marketing approval for carfilzomib in the United States for relapsed/refractory multiple myeloma. In January 2011, the Company entered into Amendment No. 1 to the Merger Agreement. Amendment No. 1 modifies this first payment if the milestone is not achieved by the date originally contemplated on a sliding scale basis, as follows:

	•		if accelerated marketing approval in the United States for relapsed/refractory multiple myeloma is achieved after the date originally contemplated, but within six months of the original date, subject to extension under certain circumstances, then the amount payable will be reduced to $130.0 million; and
	•		if accelerated marketing approval in the United States for relapsed/refractory multiple myeloma is achieved more than six months after the date originally contemplated, but within 12 months of the original date, subject to extension under certain circumstances, then the amount payable will be reduced to $80.0 million.

The remaining earn-out payments will continue to become payable in up to three additional installments as follows:

	•		$65.0 million would be triggered by specified marketing approval in the European Union for relapsed/refractory multiple myeloma;
	•		$150.0 million would be triggered by specified marketing approval in the United States for relapsed multiple myeloma; and
	•		$150.0 million would be triggered by specified marketing approval for relapsed multiple myeloma in the European Union.

The range of the undiscounted amounts the Company could be required to pay for the remaining earn-out payments is between zero and $535.0 million. On the acquisition date, the fair value of the liability for the contingent consideration recognized was $199.0 million, of which $40.0 million related to the first milestone payment that was paid in full in April 2010 and the remaining balance of $159.0 million was classified as a non-current liability in the Condensed Consolidated Balance Sheet. The Company determined the fair value of the non-current liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. These inputs include the probability of technical and regulatory success (“PTRS”) for unapproved product candidates considering their stages of development. For the three months ended March 31, 2011, the fair value of the non-current liability for contingent consideration increased by $11.5 million, of which $6.1 million was due to an increase in the PTRS and $5.4 million was due to the passage of time. The increase in the PTRS was due to the expanded size and change in endpoint of our Phase 3 European clinical trial, referred to as FOCUS, or the “011” trial, announced in March 2011.

Escrow Account Liability

In accordance with the Merger Agreement, 10% of each of the total cash consideration payment in November 2009 and the first earn-out payment made to former Proteolix stockholders in April 2010 was temporarily placed in an escrow account to secure the indemnification rights of the Company and other indemnitees with respect to certain matters, including breaches of representations, warranties and covenants of Proteolix included in the Merger Agreement. This amount was reported as restricted cash on the accompanying Condensed Consolidated Balance Sheets at December 31, 2010 and was paid to former Proteolix stockholders in February 2011.

Note 6. Derivative Instruments

The Company has established a foreign currency hedging program to mitigate the foreign exchange risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. Dollar denominated currencies and reduce volatility in the Company’s cash flow and earnings. The Company hedges a certain portion of anticipated Nexavar-related cash flows owed to the Company with options, typically no more than one year into the future. The underlying exposures, both revenue and expenses, in the Nexavar program are denominated in currencies other than the U.S. Dollar, primarily the Euro and Japanese Yen. For purposes of calculating the cash flows due to or due from the Company each quarter, the foreign currencies are converted into U.S. dollars based on average exchange rates for the reporting period. The Company does not enter into derivative financial contracts for speculative purposes.

In accordance with ASC 815, Derivatives and Hedging, all derivative instruments, such as foreign currency option contracts, are recognized on the Condensed Consolidated Balance Sheet at fair value, taking into consideration current market rates and the current creditworthiness of the counterparties or the Company, as applicable. Changes to the fair value of derivative instruments are recorded in current earnings or accumulated other comprehensive gain (loss) each period, depending on whether or not the derivative instrument is designated as part of a hedging transaction and, if it is, the type of hedging transaction.

The Company’s foreign currency options to hedge anticipated cash flows, where the underlying exposures are the net of Euro-denominated revenues and expenses, are not designated as hedging instruments under ASC 815. The changes in the fair value of these foreign currency options are included in the “Other expense” line item in the Condensed Consolidated Statements of Operations.

The foreign currency options used to hedge anticipated cash flows, where the underlying exposures are Japanese Yen-denominated royalty income from the Nexavar program, are designated as cash flow hedges. At the inception of the hedge, the Company documents the risk management objectives and the nature of the risk being hedged, the hedged instrument and hedged item, as well as the manner in which hedge effectiveness and ineffectiveness will be assessed. On a prospective and retrospective basis, at least quarterly, the Company assesses hedge effectiveness based on the total changes in the option’s cash flow. During the life of the hedge, the Company will periodically verify that the critical terms of the hedging instrument continue to match the forecasted transaction, the forecasted transaction is still probable in occurring at the same time as originally projected based on the most recent forecasts, and the counterparties are still able to honor their obligations under the hedge contract. Hedge ineffectiveness, both prospective and retrospective, will be assessed by evaluating the dollar offset ratio of the dollar change in fair value or cash flows of the hedging instrument with the amount of the dollar change in fair value or cash flows of the “perfectly effective” hypothetical hedging instrument that has the terms that meet the currency, notional amount, timing and credit criteria. The change in the fair value of the hypothetical hedging instrument will be regarded as a proxy for the present value of the cumulative change in the expected future cash flows on the hedged transaction. The ineffective portion of the hedged instrument will be recognized in earnings. The amount of ineffectiveness is calculated as the excess of the cumulative change in the fair value of the actual derivative over the cumulative change in the fair value of the “perfect” hypothetical hedging instrument.

The effective component of the hedged instrument is recorded in accumulated other comprehensive income (loss) (“OCI”) within stockholders’ equity as an unrealized gain or loss on the hedging instrument. When the hedged forecasted transactions occur and the hedge instrument matures, the unrealized gains and losses are reclassified into the “Other expense” line item in the Condensed Consolidated Statement of Operations. The majority of the gains and losses related to the hedged forecasted transactions reported in accumulated OCI at March 31, 2011 are expected to be reclassified to other income (expense) within 6 months. At March 31, 2011, the Company had outstanding foreign currency option contracts with maturity dates ranging from June 30, 2011 to September 30, 2011 and U.S. Dollar notional amounts ranging from $2.1 million to $11.1 million.

At March 31, 2011, the fair value carrying amount of the Company’s derivative instruments were recorded as follows:

		Asset Derivatives								Liability Derivatives
		March 31, 2011								March 31, 2011
		Balance Sheet								Balance Sheet
		Location				Fair Value				Location				Fair Value
							(In thousands)								(In thousands)
Derivatives designated as hedges:
Foreign currency option contracts		Other current assets				$	70			Accrued liabilities				$	—
Total derivatives designated as hedges							70								—
Derivatives not designated as hedges:
Foreign currency option contracts		Other current assets				$	2			Accrued liabilities				$	—
Total derivatives not designated as hedges							2								—
Total derivatives						$	72							$	—

The effect of derivative instruments on the Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 was as follows:

		Foreign Currency Option Contracts
		Three Months Ended March 31, 2011
		(In thousands)
Derivatives designated as hedges:
Net gain recognized in accumulated other comprehensive loss (effective portion)		$	14
Net loss reclassified from accumulated other comprehensive loss to net loss (effective portion) (1)			(33	)
Net gain (loss) recognized in net loss (ineffective portion) (1)			—
Derivatives not designated as hedges:
Net loss recognized in net loss (1)			(429	)

The Company is exposed to counterparty credit risk on all of its derivative financial instruments. The Company has established and maintained strict counterparty credit guidelines and enters into derivative instruments only with financial institutions that are investment grade to minimize the Company’s exposure to potential defaults. The Company does not generally require collateral to be pledged under these agreements. Refer to Note 7 for further information.

Note 7. Fair Value Measurements

In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company measures certain assets and liabilities at fair value on a recurring basis using the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers include:

	•		Level 1, defined as observable inputs such as quoted prices for identical assets in active markets;
	•		Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
	•		Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring management to develop its own assumptions based on best estimates of what market participants would use in pricing an asset or liability at the reporting date.

The Company’s fair value hierarchies for its financial assets and liabilities (cash equivalents, current and non-current marketable securities, derivative instruments, convertible senior notes and current and non-current liabilities for contingent consideration), which require fair value measurement on a recurring basis are as follows:

		As of March 31, 2011
		(In thousands)
		As reflected on the
		unaudited balance
		sheet				Level 1				Level 2				Level 3				Total
Assets:
Money market funds		$	28,762			$	28,762			$	—			$	—			$	28,762
Corporate and financial institutions debt			217,132				—				217,132				—				217,132
Auction rate securities			28,393				—				100				28,293				28,393
U.S. government agencies			96,626				—				96,626				—				96,626
U.S. treasury bills			57,945				57,945				—				—				57,945
Municipal bonds			30,558				—				30,558				—				30,558
Foreign currency option contracts designated as hedges			70				—				70				—				70
Foreign currency option contracts not designated as hedges			2				—				2				—				2
Total		$	459,488			$	86,707			$	344,488			$	28,293			$	459,488
Liabilities:
Liability for contingent consideration		$	264,953			$	—			$	—			$	264,953			$	264,953
Convertible senior notes due 2016 (face value $230,000)			155,136				—				266,547				—				266,547
Total		$	420,089			$	—			$	266,547			$	264,953			$	531,500

		As of December 31, 2010
		(In thousands)
		As reflected on the
		balance sheet				Level 1				Level 2				Level 3				Total
Assets:
Money market funds		$	20,932			$	20,932			$	—			$	—			$	20,932
Corporate and financial institutions debt			197,813				—				197,813				—				197,813
Auction rate securities			31,280				—				2,725				28,555				31,280
U.S. government agencies			99,294				—				99,294				—				99,294
U.S. treasury bills			78,916				78,916				—				—				78,916
Municipal bonds			37,160				—				37,160				—				37,160
Foreign currency option contracts designated as hedges			89				—				89				—				89
Foreign currency option contracts not designated as hedges			188				—				188				—				188
Total		$	465,672			$	99,848			$	337,269			$	28,555			$	465,672
Liabilities:
Liability for contingent consideration		$	253,548			$	—			$	—			$	253,548			$	253,548
Convertible senior notes due 2016 (face value $230,000)			152,701				—				271,768				—			$	271,768
Total		$	406,249			$	—			$	271,768			$	253,548			$	525,316

Marketable Securities

Level 2 assets consist of debt securities issued by corporate and financial institutions and U.S. government and municipal agencies. The fair value of these securities is estimated using a weighted average price based on market prices from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources.

Level 3 assets include 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 March 31, 2011, the fair value of each of these securities is estimated utilizing a discounted cash flow analysis that considers interest rates, the timing and amount of cash flows, credit and liquidity premiums, and the expected holding periods of these securities. The following table provides a summary of changes in fair value of the auction rate securities:

		Auction Rate Securities
		Three Months Ended March 31,
		2011				2010
		(In thousands)
Fair value at beginning of period		$	28,555			$	37,174
Redemptions			(350	)			(200	)
Transfer to Level 2			(100	)			(50	)
Change in valuation			188				444
Fair value at end of period		$	28,293			$	37,368

Transfers of auction rate securities from Level 3 to Level 2 are recognized when the Company becomes aware of actual redemptions of such securities. In April 2011, $0.1 million of securities were redeemed at par and have been classified as current marketable securities with a fair value of $0.1 million based on the amount redeemed. As a result of the decline in fair value of the Company’s auction rate securities, which the Company believes is temporary and attributes to liquidity rather than credit issues, the Company has recorded an unrealized loss of $1.2 million included in the accumulated OCI line of stockholders’ equity. All of the auction rate securities held by the Company at March 31, 2011 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 auction rate 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. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost bases.

Foreign Currency Option Contracts

Level 2 assets and liabilities include foreign currency option contracts, which are reflected at fair value. The Company has established a foreign currency hedging program to manage the economic risk of its exposure to fluctuations in foreign currency exchange rates from the Nexavar program. Refer to Note 6 for further information.

The Company has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability (specifically, LIBOR, cash rates, credit risk at commonly quoted intervals, spot and forward rates). Mid-market pricing is used as a practical expedient for fair value measurements. ASC 820 states that the fair value measurement of an asset or liability must reflect the non-performance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness, when in an asset position, and the Company’s creditworthiness, when in a liability position, has also been factored into the fair value measurement of the derivative instruments and did not have a material impact on the fair value of these derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.

Liability for Contingent Consideration

Level 3 liabilities include the acquisition-related non-current liability for contingent consideration the Company recorded representing the amounts payable to former Proteolix stockholders upon the achievement of specified regulatory approvals within pre-specified timeframes for carfilzomib. The fair value of this Level 3 liability is estimated using a probability-weighted discounted cash flow analysis and a discount rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption. Subsequent changes in the fair value of this liability are recorded to the “Contingent consideration” expense line item in the Condensed Consolidated Statements of Operations under operating expenses. For the three months ended March 31, 2011, the recognized amount of the non-current liability for contingent consideration increased by $11.5 million primarily as the result of the change in the PTRS, a significant input in the discounted cash flow analysis used to calculate the fair value of the non-current liability, and also the passage of time. Refer to Liability for Contingent Consideration in Note 5 for further details. The following table provides a summary of the changes in the fair value of the non-current liability for contingent consideration:

		Liability for Contingent Consideration
		Three Months Ended March 31,
		2011				2010
		(In thousands)
Fair value at beginning of period		$	253,458			$	200,528
Payments			—				(40,000	)
Change in valuation			11,495				3,448
Fair value at end of period		$	264,953			$	163,976

Transfers of these liabilities between Levels are recognized when the Company becomes aware of changes in the circumstances causing the transfer. Refer to Liability for Contingent Consideration in Note 5 for further details.

Convertible Senior Notes due 2016

Level 2 liabilities consist of the Company’s convertible senior notes due 2016. The fair value of these convertible senior notes is estimated by computing the fair value of a similar liability without the conversion option. Refer to Note 9 for further details on the fair value. In accordance with ASC 825-10, Financial Instruments, the estimated market value of the Company’s convertible senior notes as of March 31, 2011 was $266.5 million. The Company’s convertible senior notes are not marked-to-market and are shown at their original issuance value net of the amortized discount and the portion of the value allocated to the conversion option is included in stockholders’ equity in the accompanying unaudited Condensed Consolidated Balance Sheet March 31, 2011.

Note 8. 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 cost of a security sold or the amount reclassified out of accumulated other comprehensive income (loss) into earnings is determined using specific identification. The Company may pay a premium or receive a discount upon the purchase of marketable securities. Interest earned and gains realized on marketable securities and amortization of discounts received and accretion of premiums paid on the purchase of marketable securities are included in investment income. The weighted-average maturity of the Company’s current marketable securities as of March 31, 2011 was approximately seven months.

Available-for-sale marketable securities consisted of the following:

		March 31, 2011
		Adjusted				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
		(In thousands)
Agency bond investments:
Current		$	154,555			$	60			$	(43	)		$	154,572
Total agency bond investments			154,555				60				(43	)			154,572
Corporate debt investments:
Current			247,718				115				(43	)			247,790
Non-current			29,475				—				(1,182	)			28,293
Total corporate investments			277,193				115				(1,225	)			276,083
Total available-for-sale marketable securities		$	431,748			$	175			$	(1,268	)		$	430,655

		December 31, 2010
		Adjusted				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
		(In thousands)
Agency bond investments:
Current		$	178,221			$	18			$	(29	)		$	178,210
Total agency bond investments			178,221				18				(29	)			178,210
Corporate debt investments:
Current			237,547				175				(24	)			237,698
Non-current			29,925				—				(1,370	)			28,555
Total corporate investments			267,472				175				(1,394	)			266,253
Total available-for-sale marketable securities		$	445,693			$	193			$	(1,423	)		$	444,463

The Company’s investment portfolio includes $29.6 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 $29.6 million of par value auction rate securities, $0.1 million of securities were redeemed at par in April 2011. 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 April 2011, as current marketable securities and the remaining auction rate securities with an estimated fair value of $28.3 million, based on a discounted cash flow model, as non-current marketable securities on the accompanying unaudited Condensed Consolidated Balance Sheet at March 31, 2011. The Company has reduced the carrying value of the marketable securities classified as non-current by $1.2 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 9. 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 (“2016 Notes”). The 2016 Notes will mature on August 15, 2016 unless earlier redeemed or repurchased by the Company or converted. The 2016 Notes bear interest at a rate of 4.0% per year, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2010.

The 2016 Notes are general unsecured senior obligations of the Company and rank equally in right of payment with all of the Company’s future senior unsecured indebtedness, if any, and senior in right of payment to our future subordinated debt, if any.

The 2016 Notes will be convertible, under certain circumstances and during certain periods, at an initial conversion rate of 25.2207 shares of common stock per $1,000 principal amount of the 2016 Notes, which is equivalent to an initial conversion price of approximately $39.65 per share of common stock. The conversion rate is subject to adjustment in certain circumstances. Upon conversion of a 2016 Note, the Company will deliver, at its election, shares of common stock, cash or a combination of cash and shares of common stock.

Upon the occurrence of certain fundamental changes involving the Company, holders of the 2016 Notes may require the Company to repurchase all or a portion of their 2016 Notes for cash at a price equal to 100% of the principal amount of the 2016 Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Beginning August 20, 2013, the Company may redeem all or part of the outstanding 2016 Notes, provided that the last reported sale price of the common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day prior to the date the Company provides the notice of redemption to holders of the 2016 Notes exceeds 130% of the conversion price in effect on each such trading day. The redemption price will equal 100% of the principal amount of the 2016 Notes to be redeemed, plus all accrued and unpaid interest, plus a “make-whole premium” payment. The Company must make the make-whole premium payments on all 2016 Notes called for redemption prior to August 15, 2016, including the 2016 Notes converted after the date the Company delivered the notice of redemption.

The 2016 Notes are accounted for in accordance with ASC 470-20. Under ASC 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 March 31, 2011:

		March 31, 2011
		(In thousands)
Carrying amount of the equity component		$	89,468
Net carrying amount of the liability component		$	65,668
Unamortized discount of the liability component		$	74,864

The effective interest rate used in determining the liability component of the 2016 Notes was 12.5%. The application of ASC 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 months ended March 31, 2011 for the 2016 Notes was $2.3 million, relating to the 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 months ended March 31, 2011 was $2.4 million.

Note 10. 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 expenses were $5.4 million and $4.9 million for the three months ended March 31, 2011, and March 31, 2010, respectively.

Note 11. Income Taxes

The Company calculates its quarterly income tax provision in accordance with ASC 740-270, 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 valuation allowance against the majority of its deferred tax assets as the Company does not currently believe that realization of those assets is more likely than not.

For the three months ended March 31, 2011, the Company recorded an income tax expense of $32,000 primarily related to state income taxes. For the three months ended March 31, 2010, the Company recorded an income tax benefit of $732,000 principally related to its election to carryback net operating losses under the Worker, Homeownership and Business Association Act of 2009. The election enabled the Company to eliminate all federal Alternative Minimum Taxes (AMT) previously recorded in 2009.

There were no changes to the Company’s unrecognized tax benefits for the three months ended March 31, 2011. The Company is in the process of completing an analysis of its tax credit carryforwards. Any uncertain tax positions identified in the course of this analysis will not impact the consolidated financial statements if the Company continues to maintain a full valuation allowance on its deferred tax assets. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items as tax expense. No interest or penalties have been recorded for the three months ended March 31, 2011 or March 31, 2010.

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 carryforwards. The Company is currently not under examination by the Internal Revenue Service or any other taxing authorities.

Note 12. Net Loss per Share

Basic net loss per share amounts for each period presented were computed by dividing net loss by the weighted-average number of shares of common stock outstanding. Diluted net loss per share for each period presented was computed by dividing net loss 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 the amount of shares that would be issued if the entire obligation is settled in shares. As of March 31, 2011, the Company’s outstanding indebtedness consisted of its 4.0% convertible senior notes due 2016.

Dilutive potential common shares also include the dilutive effect of the common stock underlying in-the-money stock options and are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option, the average amount of compensation cost, if any, for future service that the Company has not yet recognized when the option is exercised, are assumed to be used to repurchase shares in the current period.

The computations for basic and diluted net loss per share were as follows:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands, except per share amounts)
Numerator:
Net loss — basic		$	(49,162	)		$	(12,044	)
Add: interest and issuance costs related to convertible senior notes			—				—
Net loss — diluted		$	(49,162	)		$	(12,044	)
Denominator:
Weighted average common shares outstanding — basic			63,008				62,353
Dilutive effect of convertible senior notes			—				—
Dilutive effect of options			—				—
Weighted-average common shares outstanding and dilutive potential common shares — diluted			63,008				62,353
Net loss per share:
Basic		$	(0.78	)		$	(0.19	)
Diluted		$	(0.78	)		$	(0.19	)

Under the “if-converted” method, 5.8 million potential common shares relating to the 2016 Notes were not included in diluted net loss per share for the three months ended March 31, 2011 and March 31, 2010 because their effect would be anti-dilutive. Diluted net loss per share does not include the effect of 4.1 million and 3.9 million stock-based awards that were outstanding during the three months ended March 31, 2011 and March 31, 2010, respectively, because their effect would have been anti-dilutive.

Note 13. Comprehensive Loss

Comprehensive loss is composed of net loss and other comprehensive income. Other comprehensive income is comprised of unrealized holding gains and losses on the Company’s available-for-sale securities that are excluded from net income and reported separately in stockholders’ equity. Comprehensive income (loss) and its components are as follows:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Net loss		$	(49,162	)		$	(12,044	)
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-for-sale securities			137				518
Change in unrealized gain (loss) on derivatives designated as hedges			14				—
Comprehensive loss		$	(49,011	)		$	(11,526	)

The activities in other comprehensive income (loss) are as follows:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Available-for-sale securities:
Increase in unrealized gain (loss) on available-for-sale securities		$	141			$	518
Reclassification adjustment for net gains on available-for-sale securities included in net loss			(4	)			—
Change in unrealized gain (loss) on available-for-sale securities		$	137			$	518
Derivatives:
Increase in unrealized gain (loss) on derivatives designated as hedges		$	(19	)		$	—
Realized loss reclassified from accumulated other comprehensive income to net loss			33				—
Change in unrealized gain (loss) on derivatives designated as hedges		$	14			$	—

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. These statements appearing throughout our Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth under Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.

Overview

We are a biopharmaceutical company dedicated to developing innovative therapies that target the molecular mechanisms that cause cancer. Through our internal research programs and in conjunction with our collaborators, we are applying our expertise to develop and commercialize therapies designed to exploit the genetic differences between cancer cells and normal cells. We are continuing to expand our current commercialization opportunities for Nexavar^® (sorafenib) tablets, along with our collaborator, Bayer HealthCare Pharmaceuticals Inc., or Bayer, and we are developing carfilzomib, a selective proteasome inhibitor, for the potential treatment of patients with multiple myeloma and solid tumors. Carfilzomib is a late-stage compound with the potential for accelerated marketing approval in the United States based on our current clinical trial data and assuming favorable regulatory outcomes. In addition, we continue to invest in our development pipeline, with multiple clinical and preclinical stage product candidates.

Collaboration Agreement with Bayer

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 unresectable liver cancer and advanced kidney 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 unresectable liver cancer. Nexavar is now approved in more than 100 countries for the treatment of unresectable liver cancer and advanced kidney cancer. We and Bayer are also conducting clinical trials of Nexavar in several important cancer types in addition to advanced kidney cancer and unresectable liver cancer, including lung, thyroid, breast, ovarian and colon cancers.

We and Bayer are commercializing Nexavar, for the treatment of patients with unresectable liver cancer and advanced kidney 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 three months ended March 31, 2011, worldwide net sales of Nexavar as recorded by Bayer were $235.5 million.

In collaboration with Bayer, we initially focused on demonstrating Nexavar’s ability to benefit patients suffering from a cancer for which there were no or few established therapies. With the approval of Nexavar for the treatment of unresectable liver cancer and advanced kidney 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 sales. Our collaboration agreement with Bayer will terminate when patents expire that were issued in connection with product candidates discovered under the agreement, or at the time when neither we nor Bayer are entitled to profit sharing under the agreement, whichever is latest. Our co-promotion agreement with Bayer will terminate upon the earlier of the termination of our collaboration agreement with Bayer or the date products subject to the co-promotion agreement are no longer sold by either party in the United States. Either party may also terminate the co-promotion agreement upon failure to cure a material breach of the agreement within a specified cure period.

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, or if a single entity other than Bayer or its affiliate acquires ownership of a majority of our outstanding voting stock, 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 and convert our profit sharing interest under that agreement into a royalty based on any sales of Nexavar and other collaboration products. The applicable royalty rate would be a function of expected profitability of Nexavar for the remaining patent life of Nexavar. As of December 20, 2010, the fifth anniversary of the initial regulatory approval of Nexavar, in the event of an acquisition transaction, we believe the economic value of a royalty amount should be substantially equivalent to the economic value of the profit share interest for Nexavar during the remaining patent life absent such an acquisition transaction. Bayer has informed us they do not agree with this conclusion. Also, either party may terminate the agreement upon 30 days’ notice within 60 days of specified events relating to insolvency of the other party.

Acquisition of Proteolix

In November 2009, we made a significant move towards achieving our goal in becoming a multi-product portfolio company by acquiring Proteolix, Inc., or Proteolix, a privately-held biopharmaceutical company located in South San Francisco, California. Proteolix focused primarily on the discovery and development of novel therapies that target the proteasome for the treatment of hematological malignancies, solid tumors and autoimmune disorders. This acquisition, which included carfilzomib, has provided us with an opportunity to expand into the hematological malignancies market. The aggregate cash consideration paid to former Proteolix stockholders at closing was $276.0 million with another $40.0 million paid in April 2010 upon the achievement of a pre-specified milestone. In addition, we may be required to pay up to an additional $535.0 million in earn-out payments upon the receipt of certain regulatory approvals within pre-specified timeframes.

Licensing Agreement with Ono Pharmaceutical

In September 2010, we entered into an exclusive license agreement with Ono Pharmaceutical Co., Ltd., or Ono, granting Ono the right to develop and commercialize both carfilzomib and ONX 0912 for all oncology indications in Japan. We retain development and commercialization rights for all other countries. We agreed to provide Ono with development and commercial supply of carfilzomib and ONX 0912 on a cost-plus basis. Ono agreed to pay us development and commercial milestone payments based on the achievement of pre-specified criteria. In addition, Ono agreed to share a percentage of costs incurred by us for the global development of carfilzomib and ONX 0912 that support filings for regulatory approval in Japan. The milestone and development support payments could total approximately $288.6 million at current exchange rates. Ono is responsible for all development costs in support of regulatory filings in Japan as well as commercialization costs it incurs. If regulatory approval for carfilzomib and/or ONX 0912 is achieved in Japan, Ono is obligated to pay us double-digit royalties on net sales of the licensed compounds in Japan. The agreement will terminate upon the expiration of the royalty terms specified for each product. In addition, Ono may terminate this agreement for certain scientific or commercial reasons with advance written notice, and either party may terminate this agreement for the other party’s uncured material breach or bankruptcy.

Licensing Agreement with BTG

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.

Development, Collaboration, Option and License Agreement with S*BIO

In December 2008, we entered into a development, collaboration, option and license agreement with S*BIO Pte Ltd., or S*BIO, a Singapore-based company, pursuant to which we acquired options to license rights to its novel Janus Kinase, or JAK, inhibitors, SB1518 (designated by Onyx as ONX 0803) and SB1578 (designated by Onyx as ONX 0805). Under the terms of the agreement, we obtained options, which if exercised, would have given us rights to exclusively develop and commercialize ONX 0803 and ONX 0805 for all potential indications in the United States, Canada and Europe. S*BIO would have retained responsibility for all development costs prior to the option exercise, after which we would have assumed development costs for the United States, Canada and Europe, subject to S*BIO’s option to fund a portion of the development costs in return for enhanced royalties on any future product sales.

In May 2011, we entered into a Termination and Separation Agreement, or the Termination Agreement, with S*BIO to terminate our collaboration agreement and amend our rights with respect to ONX 0803 and ONX 0805. Under the Termination Agreement, our option rights to ONX 0803 and ONX 0805, which we had not exercised, will revert to S*BIO and S*BIO will retain responsibility for all development and commercialization of these compounds. We retained our equity interest in S*BIO and, in addition to any value associated with our equity interest, may receive up to $20.0 million from S*BIO based on agreed portions of any partnering revenue or future royalty revenue related to ONX 0803 and ONX 0805, or proceeds from any acquisition of S*BIO.

Business Highlights

In the first quarter of 2011, we continued to execute on our value building strategy by increasing worldwide sales of Nexavar as compared to the same period in 2010, and continued to invest in the development and pre-launch commercialization of carfilzomib.

Nexavar margins increased year over year, and sales of Nexavar as recorded by Bayer in countries around the world increased from $214.4 million for the three months ended March 31, 2010 to $235.5 million for the three months ended March 31, 2011, driven by strong growth in the Asia-Pacific region, particularly Japan and China.

In March 2011, we announced the expansion of our ongoing Phase 3 European clinical trial, referred to as FOCUS, or the “011” trial, designed to evaluate the efficacy and tolerability of carfilzomib in patients with refractory multiple myeloma relapsed after at least three prior regimens. The modification of the trial includes two key enhancements: a change of the primary endpoint to overall survival from progression free survival and an increase in patient enrollment to approximately 300 from 84 in order to demonstrate a potential mortality benefit.

In April 2011, we moved to our new company headquarters at 249 East Grand Avenue, South San Francisco, California.

In May 2011, we entered into a Termination and Separation Agreement with S*BIO under which our option rights to ONX 0803 and ONX 0805, which we had not exercised, will revert to S*BIO.

Financial Highlights

Our operating results for the three months ended March 31, 2011 included revenue from the Nexavar collaboration agreement of $67.1 million, an increase of $4.2 million, or 7%, from $62.9 million for same period in 2010. The increase in revenue from the Nexavar collaboration agreement was driven primarily by an increase in net sales of Nexavar.

Total operating expenses for the three months ended March 31, 2011 was $108.5 million, an increase of $36.8 million, or 51%, from $71.7 million for the same period in 2010. The increase in operating expenses was primarily driven by increases in research and development expenses of $18.9 million and selling, general and administrative expenses of $9.8 million. The increase in research and development expenses includes a $12.7 million expense for the three months ended March 31, 2011 to write-off the remaining balance of advance funding provided to S*BIO in May 2010 and costs incurred for the development of carfilzomib, particularly the Phase 3 ASPIRE and FOCUS trials. The increase in selling, general and administrative expenses was primarily due to planned increases in employee headcount and related costs.

Cash, cash equivalents and current and non-current marketable securities at March 31, 2011 were $561.7 million, a decrease of $16.2 million, or 3%, from $577.9 million at December 31, 2010. The decrease is primarily attributable to net cash used in operations.

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. Actual results may differ materially from these estimates. There have been no significant or material changes to our critical accounting policies or estimates since we filed our 2010 Annual Report on Form 10-K for the year ended December 31, 2010 with the Securities and Exchange Commission (“SEC”).

Results of Operations

Three months ended March 31, 2011 and 2010

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. Accordingly, for the three months ended March 31, 2011 and 2010, we reported no product revenue. For the three months ended March 31, 2011, Nexavar net sales recorded by Bayer were $235.5 million, primarily in the United States, the European Union and other territories worldwide and includes the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act. This represents an increase of $21.1 million, or 10%, over Nexavar net sales of $214.4 million recorded by Bayer for the three months ended March 31, 2010.

Revenue from Collaboration Agreement

Nexavar is currently marketed and sold in the United States, most countries in the European Union and other territories 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 with Bayer, we 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 months ended March 31, 2011 and 2010 is calculated as follows:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Nexavar product revenue, net (as recorded by Bayer)		$	235,467			$	214,361
Nexavar revenue subject to profit sharing (as recorded by Bayer)		$	193,170			$	185,867
Combined cost of goods sold, distribution, selling, general and administrative expenses			74,010				75,698
Combined collaboration commercial profit		$	119,160			$	110,169
Onyx’s share of collaboration commercial profit		$	59,580			$	55,084
Reimbursement of Onyx’s shared marketing expenses			4,604				5,824
Royalty revenue			2,961				1,995
Revenue from collaboration agreement		$	67,145			$	62,903

The increase in revenue from collaboration agreement for the three months ended March 31, 2011 from the same period in 2010 is primarily a result of increased net sales of Nexavar as recorded by Bayer in countries around the world, particularly in certain Asia-Pacific countries. Revenue from collaboration agreement is directly affected by the increases and decreases in Nexavar net revenue, over and above the associated cost of goods sold, distribution, selling and general administrative expenses. In addition, prolonged or profound economic downturn may result in adverse changes to product reimbursement and pricing and sales levels, which would harm our operating results. We expect Nexavar sales and Bayer’s and our shared cost of goods sold, distribution, selling and general administrative expense to increase as Bayer continues to expand Nexavar marketing and sales activities outside of the United States, particularly in certain Asia-Pacific countries.

Research and Development Expenses

Research and development expenses, as compared to the same period of the prior year, were as follows:

		Three Months Ended								Change
		March 31,								2011 vs 2010
		2011				2010				$				%
		(In thousands, except percentages)
Research and development		$	62,494			$	43,575			$	18,919				43	%

For the three months ended March 31, 2011, research and development expenses include costs to develop our product candidates and our share of the research and development costs incurred for Nexavar by Bayer and us under our cost sharing arrangement. In addition, research and development expenses for the three months ended March 31, 2011 includes a $12.7 million expense to write-off the remaining balance of the advance funding provided to S*BIO in May 2010. The remaining increase in research and development expense was primarily due to investments in the development of carfilzomib, particularly relating to our ongoing Phase 3 clinical trials, referred to as ASPIRE, or the “009” trial, and FOCUS, or the “011” trial. The increase in research and development expenses was partially offset by a $3.0 million reimbursement received from Ono. Under the terms of the license agreement with Ono, a percentage of the global development costs we incur for the development of carfilzomib and ONX 0912 is reimbursed by Ono. Refer to Note 3 for further information.

A significant portion of our total research and development expenses, approximately 34% and 50% for the three months ended March 31, 2011 and 2010, respectively, relates to our cost sharing arrangement with Bayer and represents our share of the research and development costs incurred by Bayer. As a result of the cost sharing arrangement between us and Bayer for research and development costs, there was a net reimbursable amount of $19.4 million and $18.5 million due to Bayer for the three months ended March 31, 2011 and 2010, respectively. 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. For the periods covered in the financial statements presented, there have been no significant or material differences between actual amounts and estimates. However, 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. As of March 31, 2011, our share of the Nexavar development costs incurred to date under the collaboration was $619.9 million.

The major components of research and development costs include clinical manufacturing costs, clinical trial expenses, non-refundable upfront payments, 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. Clinical trial expenses include, but are not limited to, investigator fees, site costs, comparator drug costs and clinical research organization 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 our research and development expenses to increase substantially in future periods, primarily as a result of costs incurred to develop carfilzomib. We are currently conducting Phase 3, Phase 2 and Phase 1b studies in relapsed multiple myeloma, a Phase 2b study in relapsed and refractory multiple myeloma and Phase 1b/2 studies in multiple myeloma and relapsed solid tumors. We also expect our research and development activities to include developing ONX 0801 and our other product candidates. Additionally, the terms of the development and license agreement dated November 6, 2008 with BTG provide that we may be required to make payments to BTG of up to $65.0 million upon the attainment of certain global development and regulatory milestones, plus additional milestone payments upon the achievement of certain marketing approvals and commercial milestones.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, as compared to the same period of the prior year were as follows:

		Three Months Ended								Change
		March 31,								2011 vs 2010
		2011				2010				$				%
		(In thousands, except percentages)
Selling, general and administrative		$	34,471			$	24,721			$	9,750				39	%

The increase in selling, general and administrative expenses was primarily due to planned increases in employee headcount and related costs, legal costs, pre-launch costs for carfilzomib and increased facilities-related costs. 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 and increases in personnel and due to preparations for the potential launches of carfilzomib in various territories.

Contingent Consideration Expense

Contingent consideration expense, as compared to the same periods of the prior year, were as follows:

		Three Months Ended								Change
		March 31,								2011 vs 2010
		2011				2010				$				%
		(In thousands, except percentages)
Contingent consideration		$	11,495			$	3,448			$	8,047				233	%

As a result of the acquisition of Proteolix in November 2009 under the terms of an Agreement and Plan of Merger, or the Merger Agreement, which was entered into in October 2009, we made a payment of $40.0 million in April 2010 and may be required to pay up to an additional $535.0 million payable in up to four earn-out payments upon the achievement of certain regulatory approvals for carfilzomib in the U.S. and Europe within pre-specified timeframes. Under the Merger Agreement, the first of these additional earn-out payments would be in the amount of $170.0 million if achieved by the date originally contemplated, and would be triggered by accelerated marketing approval for carfilzomib in the United States for relapsed/refractory multiple myeloma. In January 2011, we entered into Amendment No. 1 to the Merger Agreement. Amendment No. 1 modifies this first payment if the milestone is not achieved by the date originally contemplated on a sliding scale basis, as follows:

	•		if accelerated marketing approval in the United States for relapsed/refractory multiple myeloma is achieved after the date originally contemplated, but within six months of the original date, subject to extension under certain circumstances, then the amount payable will be reduced to $130.0 million; and
	•		if accelerated marketing approval in the United States for relapsed/refractory multiple myeloma is achieved more than six months after the date originally contemplated, but within 12 months of the original date, subject to extension under certain circumstances, then the amount payable will be reduced to $80.0 million.

The remaining earn-out payments will continue to become payable in up to three additional installments as follows:

	•		$65.0 million would be triggered by specified marketing approval in the European Union for relapsed/refractory multiple myeloma;
	•		$150.0 million would be triggered by specified marketing approval in the United States for relapsed multiple myeloma; and
	•		$150.0 million would be triggered by specified marketing approval for relapsed multiple myeloma in the European Union.

We recorded a non-current liability for this contingent consideration related to the four earn-out payments with a fair value of $265.0 million at March 31, 2011 based upon a discounted cash flow model that uses significant estimates and assumptions, including the probability of technical and regulatory success (“PTRS”) of the product candidate, carfilzomib. Contingent consideration expense is due to the change in the fair value of the recognized amount of the non-current liability for contingent consideration. For the three months ended March 31, 2011, the change in the fair value resulted from an increase in the PTRS and the passage of time. The increase in the PTRS was due to the expanded size and change in endpoint of our Phase 3 European clinical trial, referred to as FOCUS, or the “011” trial, announced in March 2011. Any further changes to these estimates and assumptions could significantly impact the fair values recorded for this liability, resulting in significant charges to our Condensed Consolidated Statements of Operations.

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 $0.6 million for the three months ended March 31, 2011, a decrease of $0.2 million, or 25%, from $0.8 million in the same period in 2010. These decreases were primarily due to lower effective interest rates in the market.

Interest Expense

Interest expense of $5.0 million for the three months ended March 31, 2011, primarily relates to the 4.0% convertible senior notes due 2016 issued in August 2009, and includes non-cash imputed interest expense of $2.4 million, as a result of the application of ASC 470-20.

Other Expense

Other expense of $3.5 million for the three months ended March 31, 2011 primarily relates to a $3.0 million expense recorded for the impairment of our equity investment in S*BIO. In accordance with ASC 325-20-35, we reassessed the fair value of our equity investment in S*BIO and determined that our investment was impaired and accordingly, recorded a $3.0 million expense associated with the impairment of this investment. Other expense also includes $0.5 million related to net losses on certain foreign currency option contracts not designated as hedging instruments.

Liquidity and Capital Resources

With the exception of the profitability we achieved for the years ended December 31, 2009 and 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 March 31, 2011, we had cash, cash equivalents and current and non-current marketable securities of $561.7 million, compared to $577.9 million at December 31, 2010. The decrease is primarily attributable to net cash used in operations.

Our investment portfolio includes $29.6 million of AAA rated securities with an auction reset feature (“auction rate securities”) that are collateralized by student loans. In April 2011, $0.1 million in securities were redeemed at par and, accordingly, we classified these securities as current marketable securities in the accompanying unaudited Condensed Consolidated Balance Sheet at March 31, 2011. Therefore, the remaining balance of 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 remaining balance of auction rate securities as non-current marketable securities in the accompanying unaudited Condensed Consolidated Balance Sheet at March 31, 2011. We have determined the fair value to be $28.3 million for these securities, based on a discounted cash flow model, and have reduced the carrying value of these marketable securities by $1.2 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 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 $1.2 million decrease in value. Alternatively, a decrease in either of the assumptions could result in a $1.2 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 do not intend to sell the securities and we believe it is not more likely than not that we will be required to sell the securities prior to the recovery of their amortized cost bases. 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 for at least the next twelve months. 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 we will incur cash outlays to conduct and support additional clinical trials both currently underway and planned for the development of carfilzomib and our other development candidates. We also expect to incur cash outlays as we prepare for potential commercial launches of carfilzomib, should it receive marketing approval. In addition, we anticipate that we will incur expenses for the development of ONX 0801. Further, we may be obligated to make up to an additional $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. The terms of the development and license agreement dated November 6, 2008 with BTG provide that we may be required to make payments to BTG of up to $65.0 million upon the attainment of certain global development and regulatory milestones, plus additional milestone payments upon the achievement of certain marketing approvals and commercial milestones.

In April 2011, we moved to our new company headquarters at 249 East Grand Avenue, South San Francisco, California. We entered into arrangements to lease and sublease these premises in July 2010, and will continue to incur cash outlays associated with the lease and sublease of these premises. The total monthly base rent in the first year for both the lease and sublease is approximately $294,000. The total obligations under both of these operating leases will be approximately $45.9 million. We expect to cease the use of the premises we previously occupied in Emeryville, California and South San Francisco, California in the second quarter of 2011 and expect to incur estimated exit costs in the range of $13.5 million to $14.5 million relating to the remaining lease terms of these premises, which expire in 2013 and 2014, respectively.

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 2011. 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.

Off-Balance Sheet Arrangements

As of March 31, 2011, we did not have any material off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) 2010-27, Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers. This update addresses questions concerning how pharmaceutical manufacturers should recognize and classify in the income statement fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act or Acts. The Acts impose an annual fee on the pharmaceutical manufacturing industry for each calendar year beginning on or after January 1, 2011. An entity’s portion of the annual fee is payable no later than September 30 of the applicable calendar year and is not tax deductible. The annual fee is payable to the U.S. Treasury once a pharmaceutical manufacturing entity has a gross receipt from a branded prescription drug sale to any specified government program or in accordance with coverage under any government program for each calendar year beginning on or after January 1, 2011. We do not expect that this accounting standard update will have any material impact on our results of operations or financial position.

In December 2010, the FASB issued ASU 2010-28, Intangibles — Goodwill and Other — When to perform Step 2 of the Goodwill Impairment Test for Entities with Zero or Negative Carrying Amount. ASU 2010-28 modifies goodwill impairment testing for entities with zero or negative carrying amounts. The amendment requires these entities to perform Step 2 of the goodwill impairment test, which involves comparing the current value and the current book value of goodwill. The difference between these values represents the impairment amount which must be recognized in the current period. In addition, an entity should consider whether there are any adverse qualitative factors indicating that impairment exists. ASU 2010-28 is effective for interim and annual periods beginning on or after December 15, 2010. Early adoption is not permitted. We are currently evaluating the impact, if any, that the adoption may have on our results of operations or financial position.

In December 2010, the FASB issued ASU 2010-29, Business Combinations — Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 clarifies the acquisition date that should be used for reporting the pro forma revenue and earnings disclosure requirements for business combination(s) when comparative financial statements are presented. The amendment specifies that an entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. In addition, the amendment expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). ASU 2010-29 is effective for interim and annual periods beginning on or after December 15, 2010. Early adoption is permitted. We do not expect the adoption will have any material impact on our results of operations or financial position.

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 March 31, 2011, the fair value of our portfolio would decline or increase, respectively, by approximately $2.0 million. Additionally, a hypothetical increase or decrease of 1% in market interest rates during the three months ended March 31, 2011 would have resulted in a change of $1.2 million in our net income for the three months ended March 31, 2011, respectively.

The table below presents the amounts and related weighted average interest rates of our cash equivalents and marketable securities at:

		March 31, 2011										December 31, 2010
				Fair Value				Average						Fair Value				Average
		Maturity		(In millions)				Interest Rate				Maturity		(In millions)				Interest Rate
Cash equivalents, fixed rate		0 - 3 months		$	108.9				0.13	%		0 - 3 months		$	113.9				0.48	%
Marketable securities, fixed rate		0 - 23 months		$	350.5				0.55	%		0 - 20 months		$	351.5				0.57	%

Liquidity Risk

Our investment portfolio includes $29.6 million of AAA rated auction rate securities collateralized by student loans. In April 2011, $0.1 million in securities were redeemed at par and, accordingly, we classified these securities as current marketable securities in the accompanying unaudited Condensed Consolidated Balance Sheet at March 31, 2011. Therefore, the remaining balance of 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 remaining balance of auction rate securities as non-current marketable securities on the accompanying unaudited Condensed Consolidated Balance Sheet at March 31, 2011. We have determined the fair value to be $28.3 million for these securities, based on a discounted cash flow model, and have reduced the carrying value of these marketable securities by $1.2 million through accumulated other comprehensive loss instead of earnings because we have deemed the impairment of these securities to be temporary. We do not intend to sell the securities and we believe it is not more likely than not that we will be required to sell the securities prior to the recovery of their amortized cost bases.

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. Our revenue from collaboration agreement is dependent on these foreign currency denominated activities. As a result of these underlying non-U.S. Dollar denominated activities, 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 operating margins. The primary foreign currencies that we are exposed to are the Euro and the Japanese Yen. A hypothetical increase or decrease of 1% in exchange rates between the Euro and U.S. Dollar during the three months ended March 31, 2011 would have resulted in a change in our net loss of $0.4 million based on our expected exposures. A hypothetical increase or decrease of 1% in exchange rates between the Japanese Yen and U.S. Dollar during the three months ended March 31, 2011 would have resulted in a change in our net loss of $30,000 based on our expected exposures. For these currencies, we utilize 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. Commencing in the third quarter of 2010, we established a foreign currency hedging program. The objective of the program is to mitigate the foreign exchange risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. Dollar denominated currencies in order to reduce volatility in our cash flow and earnings. Currently, we hedge a certain portion of our foreign currency exchange rate exposure with options, typically no more than one year into the future. These derivative instruments, which include derivative instruments that have been designated as hedges under ASC 815, Derivatives and Hedging, are intended to reduce the effects of variations in our cash flow resulting from fluctuations in foreign currency exchange rates. However, in certain circumstances, these derivative instruments may expose us to the risk of financial loss. Our cash flows are denominated in U.S. Dollars.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures: The Company’s chief executive officer and chief financial officer reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2011 to ensure the information required to be disclosed by the Company in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting: There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls: Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective at the reasonable assurance level to ensure the information required to be disclosed in this report is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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 under the Collaboration Agreement to fluoro-sorafenib, an anti-cancer compound that Bayer is developing and to which Bayer refers as regorafenib, its International Nonproprietary Name. Fluoro-sorafenib has the same chemical structure as sorafenib (Nexavar), except that a single fluorine atom has been substituted for a hydrogen atom. Bayer is currently conducting trials of fluoro-sorafenib in mixed solid tumors, gastrointestinal stromal tumors (GIST), kidney, colorectal and liver cancer and non-squamous non-small cell lung cancer (NSCLC) and has initiated a Phase 3 clinical trial in metastatic colorectal carcinoma and GIST. In the lawsuit, we allege that fluoro-sorafenib was discovered during joint research between us and Bayer and we are seeking monetary damages and a court ruling that we have certain rights to fluoro-sorafenib under the collaboration agreement. Bayer has asserted that we have no such rights. In June 2010, we filed an amended complaint to include an allegation that Bayer has prejudiced the value of Nexavar by reason of its interest in other drugs, including fluoro-sorafenib. The trial is scheduled to begin in June 2011 in federal court in San Francisco, California.

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 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2011.

Nexavar^® is our only approved product and we may never obtain regulatory approval for carfilzomib or any other future product candidate. If Nexavar fails and we are unable to develop, obtain approval for and commercialize alternative product candidates our business would fail.

Nexavar is the only approved product that generated commercial revenues for the quarter ended March 31, 2011 and which we rely on to fund our operations. Unless we can successfully commercialize one of our other product candidates, we will continue to rely on Nexavar to generate substantially all of our revenues and fund our operations. All of our other product candidates are still development stage and we may never obtain approval of or earn revenues from any of our product candidates.

Carfilzomib is in late stage clinical development and our other product candidates are in early clinical stage. Successful development and commercialization of these compounds and our other product candidates is highly uncertain and depends on a number of factors, many of which are beyond our control. The New Drug Application, or NDA, for accelerated approval of carfilzomib may take longer to file than we expect or may not be filed at all. We have limited experience managing filing and managing regulatory filings and we may not succeed in obtaining accelerated approval, or full approval of carfilzomib on anticipated timelines or at all.

Our stock price is volatile, our operating results are unpredictable, we have a history of losses and we may be unable to sustain profitability.

Our stock price is volatile and is likely to continue to be volatile. A variety of factors may have a significant effect on our stock price, including:

	•		fluctuations in our results of operations;
	•		results from or speculation about clinical trials or the regulatory status of Nexavar, carfilzomib or other product candidates;
	•		decisions or changes in policy 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 or submit regulatory filings;
	•		developments in our relationship with Bayer;
	•		changes in healthcare reimbursement policies or other government regulations;
	•		changes in generally accepted accounting principles and changes in tax laws;
	•		announcements by us or our competitors of innovations or new products;
	•		sales by us of our common stock or debt securities; and
	•		foreign currency fluctuations, which would affect our share of collaboration profits or losses.

In the past, following our or Bayer’s announcements regarding lower than anticipated Nexavar sales and disappointing clinical trials in melanoma and NSCLC, our stock price has declined, in some cases significantly.

Our operating results and Nexavar sales will likely fluctuate from quarter to quarter and from year to year, and are difficult to predict. Our operating expenses are highly dependent on expenses incurred by Bayer and in certain regions are independent of Nexavar sales. We have to date 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 might incur operating losses in the future as we expand our development and commercial activities for Nexavar and our product candidates. We expect to incur significant operating expenses associated with the development activities of carfilzomib and additional products, including potentially fluoro-sorafenib, if we prevail in our litigation against Bayer.

As a result of the acquisition of Proteolix, we may be required to pay up to an additional $535.0 million in four earn-out payments upon the receipt of certain regulatory approvals within pre-specified timeframes. We recorded a liability for this contingent consideration for the four earn-out payments with a fair value of $265.0 million at March 31, 2011 based upon a discounted cash flow model that uses significant estimates and assumptions. Any changes to these estimates and assumptions could significantly impact the fair values recorded for this liability resulting in significant charges to our Condensed Consolidated Statements of Operations. Moreover, we may, at our discretion, make any of the remaining earn-out payments 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.

It is, therefore, difficult for us to accurately forecast profits or losses. It is possible that in some quarters our operating results could disappoint securities analysts or investors. Many factors, including, but not limited to disappointing operating results and/or the other factors outlined above, could cause the trading price of our common stock to decline, perhaps substantially.

Our clinical trials for Nexavar or carfilzomib could take longer to complete than we project or may not be completed at all, and we may never obtain regulatory approval for carfilzomib or any other product candidate.

The timing of initiation and completion of clinical trials may be subject to significant delays resulting from various causes, including actions by Bayer for Nexavar clinical trials, scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, modification of clinical trial designs, and shortages of available drug supply for clinical and commercial purposes. We may face difficulties developing relationships with carfilzomib development partners, including clinical research organizations, contract manufacturing organizations, key opinion leaders and clinical investigators. We may not complete clinical trials involving Nexavar, carfilzomib or any of our other product candidates as projected or at all.

We may not have the necessary capabilities to successfully manage the execution and completion of clinical trials in a way that leads to approval of Nexavar, carfilzomib or other product candidates for their 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 and carfilzomib. We have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. The timing of review by regulatory authorities is uncertain. We may not obtain priority review from the United States Food and Drug Administration, or FDA, for our application for accelerated approval of carfilzomib, and we may not receive accelerated approval or any approval for carfilzomib.

Development and commercialization of 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:

	•		nonclinical 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;
	•		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 an IND, discussions with regulatory authorities, requests from regulatory authorities for additional preclinical or clinical data, analyses or changes to study design, including possible changes in acceptable trial endpoints, or unexpected safety, efficacy or manufacturing or quality issues;
	•		difficulties formulating the product, scaling the manufacturing process or in validating or getting approval for manufacturing;
	•		manufacturing costs, pricing or reimbursement issues, or other factors may make the product uneconomical;
	•		proprietary or contractual rights of others and their competing products and technologies may prevent our product from being developed or commercialized or may increase the cost of doing so; and
	•		contractual rights of our collaborators or others may prevent our product from being developed or commercialized or may increase the cost of doing so.

Failure to successfully commercialize carfilzomib or to complete additional development of Nexavar for these or any other reasons would significantly harm our business and could cause the trading price of our common stock to decline significantly.

If Nexavar is not broadly adopted for the treatment of unresectable liver cancer, our business would be harmed. If our ongoing and planned clinical trials fail to demonstrate that Nexavar is safe and effective for additional indications or we are unable to obtain necessary approvals for other uses, we will be unable to expand the commercial market for Nexavar and our business may fail.

The rate of adoption of Nexavar for unresectable liver cancer 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. In addition, certain countries require pricing to be established before reimbursement for this indication may be obtained and in some Asian Pacific countries in particular, these approvals require prolonged negotiations with the governments. In addition, we may not receive or maintain pricing approvals at favorable levels or at all, which could harm our ability to broadly market Nexavar.

Nexavar has not been approved in any indications other than unresectable liver cancer and advanced kidney cancer. We and Bayer are currently conducting a number of clinical trials of Nexavar; however, our clinical trials may fail to demonstrate that Nexavar is safe and effective in other indications, and Nexavar may not gain additional regulatory approval, which would limit the potential market for the product causing our business to fail.

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. Bayer and Onyx have conducted Phase 3 trials in melanoma and non-small cell lung cancer, or NSCLC that were not successful. In addition, in the NSCLC 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. Regulatory requirements change over time, including acceptable clinical endpoints. We may be unable to satisfy new requirements or expectations of regulatory authorities and hence, Nexavar may never be approved in additional indications.

We face intense competition and many of our competitors have substantially greater experience and resources than we have.

We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market oncology products that face significant competition from other products and therapies that currently exist or are being developed.

Nexavar faces significant competition. There are many existing approaches used in the treatment of unresectable liver cancer including alcohol injection, radiofrequency ablation, chemoembolization, cryoablation and radiation therapy. Several other therapies are in development, including Bristol-Myers Squibb’s brivanib, a Vascular Endothelial Growth Factor Receptor 2 (VEGFR 2) inhibitor and regorafenib, to which we refer as fluoro-sorafenib, a multiple kinase inhibitor, and which is the subject of litigation between us and Bayer. If Nexavar is unable to compete or be combined successfully with existing approaches or if new therapies are developed for unresectable liver cancer, our business would be harmed.

There are several competing therapies approved for the treatment of advanced kidney cancer, including Sutent, a multiple 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, a member of the Roche Group; Afinitor, an mTOR inhibitor marketed in the United States and the European Union by Novartis; and GlaxoSmithKline’s Votrient, a multiple kinase inhibitor recently approved by the FDA. Nexavar’s U.S. market share in advanced kidney cancer has declined following the introduction of these products into the market. Bayer is conducting clinical trials of fluoro-sorafenib in kidney cancer. We expect competition to increase as additional products are approved to treat advanced kidney cancer. The successful introduction of other new therapies, including generic versions of competing therapies, to treat advanced kidney cancer could significantly reduce the potential market for Nexavar in this indication.

Beyond unresectable liver cancer and advanced kidney cancer, 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 Bayer, Pfizer, Roche, Wyeth, Novartis International AG, Amgen, AstraZeneca PLC, Astellas Pharma Inc., GlaxoSmithKline, Eli Lilly and several others. A number of companies have agents such as small molecules or antibodies targeting 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.

A demonstrated survival benefit is often an important element in determining standard of care in oncology. We did not demonstrate a statistically significant overall survival benefit for patients treated with Nexavar in our Phase 3 kidney cancer trial, which we believe was due in part to 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. The FDA approval of Nexavar permits Nexavar to be marketed as an initial, or first-line, therapy and subsequent lines of therapy for the treatment of advanced kidney cancer, but approvals in some other regions 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 may be unable to compete effectively against competitive products with broader or different marketing authorizations in one or more countries.

Nexavar may face challenges and competition from generic products. Generic manufacturers may file Abbreviated New Drug Applications, or ANDAs, in the U.S. seeking FDA authorization to manufacture and market generic versions of Nexavar, together with Paragraph IV certifications that challenge the scope, validity or enforceability of the Nexavar patents. If Bayer or we fail to timely file a lawsuit against any ANDA filer, that ANDA filer may not be subject to an FDA stay, and upon approval of the ANDA, the ANDA filer may elect to launch a generic version of Nexavar, thereby harming our business. Even if a lawsuit is timely filed, Bayer and we may be unable to successfully enforce and defend the Nexavar patents and we may face generic competition prior to expiration of the Nexavar patents in 2020.

Similarly, outside the United States, generic companies or other competitors may challenge the scope, validity or enforceability of the Nexavar patents, requiring Bayer and us to engage in complex, lengthy and costly litigation or other proceedings. Generic companies may develop, seek approval for, and launch generic versions of Nexavar. For example, a generic version of Nexavar has been launched in Peru and Cipla recently received approval to launch its version of sorafenib in India at a price that is significantly less than that charged for Nexavar in India. Bayer has ongoing litigations with Cipla, including a patent infringement case in India, and has requested the court to issue an injunction against Cipla. Bayer may be unsuccessful in defending or enforcing the Nexavar patents in one or more countries and could face generic competition prior to expiration of the Nexavar patents, which would harm our business.

We have not developed or marketed products for any hematological cancer, including multiple myeloma, and may be at a disadvantage to our competitors. Carfilzomib, if approved for multiple myeloma, 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-Myers Squibb, Keryx Biopharmaceuticals, Inc., Nereus Pharmaceuticals Cephalon, Inc., and other companies.

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:

	•		discovering and patenting products;
	•		undertaking preclinical testing and human clinical trials;
	•		obtaining FDA and other regulatory approvals;
	•		manufacturing products; and
	•		marketing and obtaining reimbursement for products.

Accordingly, our competitors may be more successful than we in any or all of these areas. 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.

We are dependent upon our collaborative relationship with Bayer to further develop, manufacture and commercialize Nexavar. Bayer’s interest in other anti-cancer drugs, including fluoro-sorafenib, may reduce its incentive to develop and commercialize Nexavar.

Our success 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 may be unable to continue development, manufacturing and marketing activities at our own expense. If we were able to do so on our own, this would significantly increase our capital and infrastructure requirements, would necessarily impose delays on development programs, may limit the indications we are able to pursue and could prevent us from effectively developing and commercializing Nexavar. Disputes with Bayer may delay or prevent us from further developing, manufacturing or commercializing or increasing the sales of Nexavar, and could lead to additional litigation or arbitration against Bayer, which could be time consuming and expensive.

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

	•		the outcome of our pending lawsuit against Bayer and the development and commercialization by Bayer of fluoro-sorafenib;
	•		decisions by Bayer regarding the amount and timing of resource expenditures for the development and commercialization of Nexavar;
	•		possible disagreements as to development plans, clinical trials, regulatory marketing or sales;
	•		our inability to co-promote Nexavar in any country outside the United States, which makes us solely dependent on Bayer to promote Nexavar in foreign countries;
	•		Bayer’s right to terminate the collaboration agreement on limited notice in certain circumstances involving our insolvency or material breach of the agreement;
	•		loss of significant rights if we fail to meet our obligations under the collaboration agreement;
	•		adverse regulatory or legal action against Bayer resulting from failure to meet healthcare industry compliance requirements in the promotion and sale of Nexavar, including federal and state reporting requirements;

	•		changes in key management personnel at Bayer, including Bayer’s representatives on the collaboration’s executive team; and
	•		disagreements with Bayer regarding interpretation or enforcement of the collaboration agreement.

We have limited ability to direct Bayer in its promotion of Nexavar and we may be unable to obtain any remedy against Bayer. Bayer may not have sufficient expertise to promote or obtain reimbursement for oncology products in foreign countries and may fail to devote appropriate resources to this task. In addition, 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. We are at risk with respect to the success or failure of Bayer’s commercial decisions related to Nexavar as well as the extent to which Bayer succeeds in the execution of its strategy.

Bayer’s development of other products, including fluoro-sorafenib, may affect Bayer’s incentives to develop and commercialize Nexavar that are different from our own. Our litigation against Bayer regarding fluoro-sorafenib, may be time consuming and expensive, and may be a distraction to our management. If it is ultimately determined that Onyx has no rights to fluoro-sorafenib and if Bayer obtains approval for this product, it would likely compete with and cannibalize sales of Nexavar, thereby harming our business. Bayer has disclosed a clinical development plan for fluoro-sorafenib that includes tumor types for which Nexavar has been approved (renal cell carcinoma and hepatocellular carcinoma), as well as tumor types for which Nexavar is in development (colorectal cancer and NSCLC). In 2010, we filed an amended complaint in our pending litigation against Bayer to include an allegation that Bayer has prejudiced the value of Nexavar by reason of its interest in other drugs, including fluoro-sorafenib; Bayer may continue to prejudice the value 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, further development of Nexavar could be delayed and we may be unable to fund the development costs on our own and may be unable to find a new collaborator.

In addition, Bayer has the right, which it is not currently exercising, to nominate a member 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 not be able to effectively control the election of all members of the board of directors and determine all corporate actions.

Moreover, 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.

Our collaboration agreement with Bayer will terminate when patents expire that were issued in connection with product candidates discovered under that agreement, or at the time when neither we nor Bayer are entitled to profit sharing under that agreement, whichever is later. The worldwide patents and patent applications covering Nexavar are owned by Bayer and certain Nexavar patents are licensed to us through our collaboration agreement. We have no control over the filing, strategy, or prosecution of the Nexavar patent applications nor of enforcement or defense of the Nexavar patents outside the United States.

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 or unintended consequences from our currency contracts.

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. Under our collaboration agreement, when these sales and expenses are translated into U.S. dollars by Bayer in determining amounts payable to us or payable by us, we are exposed to fluctuations in foreign currency exchange rates. In July 2010 we began entering into transactions to manage our exposure to fluctuations in foreign currency exchange rates. Such transactions may expose us to the risk of financial loss in certain circumstances, including instances in which there is a change in the expected differential between the underlying exchange rate in the contracts and actual exchange rate.

The primary foreign currencies in which we have exchange rate fluctuation exposure are the Euro and the Japanese Yen. As we expand our business geographically, we could be exposed to exchange rate fluctuation in other currencies. Exchange rates between these currencies and the U.S. dollar 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 may be unsuccessful in launching, maintaining adequate supply or obtaining reimbursement for carfilzomib, if it receives regulatory approval.

In order to commercialize carfilzomib, if approved, we must ensure an adequate supply chain, including validation of commercial manufacturing processes, build capabilities for managed care and reimbursement by private and public insurers, and expand our U.S. sales force and must develop and maintain an international sales, marketing and distribution infrastructure. We have limited experience building and maintaining a commercialization infrastructure in the U.S., no experience in building such an infrastructure internationally, and no experience in building or maintaining a supply chain or managed care and reimbursement infrastructure, which is difficult and time consuming, and requires substantial financial and other resources. Factors that may hinder our efforts to expand our U.S. presences and develop an international sales, marketing, supply chain, managed care and distribution infrastructure include:

	•		inability to recruit, retain and effectively manage adequate numbers of effective sales and marketing, supply chain and managed care personnel;
	•		inability to establish or maintain relationships with pharmaceutical manufacturers, suppliers, wholesalers, insurers and distributors;
	•		delay in launch due to the need to validate manufacturing processes;
	•		inability to sufficiently manufacture adequate quantities of our products;
	•		the inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products;
	•		the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
	•		unforeseen delays, costs and expenses associated with creating international capabilities, including an international sales and marketing organization and international supply chain and reimbursement capabilities.

If serious adverse side effects are associated with Nexavar or carfilzomib, our business could be harmed.

The FDA-approved package insert for Nexavar includes several warnings relating to observed adverse reactions. With continued commercial use of Nexavar and additional clinical trials of Nexavar, we and Bayer have updated and expect to continue to update adverse reactions listed in the package insert to reflect current information. 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. 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 plan to seek regulatory approval of carfilzomib, and we expect that its package insert will include information related to safety and adverse events.

If previously unforeseen and unacceptable side effects are observed in Nexavar or carfilzomib, we may be unable to proceed with further clinical trials, to seek regulatory approval in one or more indications, or to realize full commercial benefits of our products. In our clinical trials, we may treat patients with Nexavar or carfilzomib as a single agent or in combination with other therapies. During the course of treatment, these patients may die or suffer adverse medical effects for reasons unrelated to our products, including adverse effects related to the products that are administered in combination with our products. These adverse effects may impact the interpretation of clinical trial results, which could lead to adverse conclusions regarding the toxicity or efficacy of Nexavar or carfilzomib.

We are dependent on Bayer and third parties to manufacture and distribute our products, and do not have the manufacturing expertise or capabilities to manufacture or distribute any current or future products.

Under our collaboration agreement with Bayer, Bayer has the manufacturing responsibility to supply Nexavar for clinical trials and for commercialization. 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. In addition, we have manufacturing responsibility for carfilzomib and ONX 0912, which we currently manufacture through third-party contract manufacturers, and have not yet established back-up manufacturers for these compounds.

We lack the resources, experience and capabilities to manufacture Nexavar, carfilzomib or any other product candidate on our own and would require substantial funds and time to establish these capabilities. Consequently, we are, and expect to remain, dependent on third parties for manufacturing. These parties may encounter difficulties and delays in production scale-up, production yields, control and quality assurance, validation, regulatory status or shortage of qualified personnel. They may not perform as agreed or may not continue to manufacture our products for the time required to test or market our products. They may fail to deliver the required quantities of our products or product candidates on a timely basis and at commercially reasonable prices. For example, we utilize a sole manufacturer for carfilzomib, and if this manufacturer became unable to deliver our required quantities of carfilzomib on a timely basis, or ceased production, we would experience delays in the clinical trial schedule of our drugs and drug candidates, the regulatory approval process, ability to timely ship product, and may be required to find an alternative manufacturer. In addition, marketed drugs and their contract manufacturing organizations are subject to continual review, including review and approval of their manufacturing facilities and the manufacturing processes, which can result in delays in the regulatory approval process. For example, in October 2010, we announced a delay in our planned NDA filing for accelerated approval of carfilzomib from 2010 to no earlier than the middle of 2011. The delay was based on pre-NDA discussions with the Chemistry, Manufacturing and Controls, or CMC, reviewing division of the FDA regarding CMC information to support the commercial manufacturing of carfilzomib.

In addition, discovery of previously unknown problems with a medicine may result in restrictions on its permissible uses, or on the manufacturer, including withdrawal of the medicine from the market. The FDA and similar foreign regulatory authorities may also implement additional new standards, or change their interpretation and enforcement of existing standards and requirements for the manufacture, packaging or testing of products at any time. Manufacturing processes and facilities for pharmaceutical products are highly regulated. Regulatory authorities may chose not to certify or may impose restrictions, or even shut down existing manufacturing facilities which they determine are non-compliant. If we or our third party manufacturers are unable to comply, we may be unable to obtain regulatory approval, or if we fail to maintain regulatory approval, this will impair our ability to meet the market demand for our approved drugs, delay ongoing clinical trials of our product candidates or delay our drug 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. In addition, we could be subject to regulatory or civil actions or penalties that could significantly and adversely affect our business.

Our success also 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, 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;
	•		reduce their efforts or discontinue to sell or support or otherwise not effectively 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/or
	•		cease operations.

We are subject to extensive government regulation, which can be costly, time consuming and subject us to unanticipated delays. We may incur significant liability if it is determined that we are in violation of federal and state regulations related to the promotion of drugs in the United States or elsewhere.

If we have disagreements with Bayer regarding ownership of clinical trial results or regulatory approvals for Nexavar, and the FDA refuses to recognize Onyx as holding, or having access to, the regulatory approvals necessary to commercialize Nexavar, we may experience delays in or be precluded from marketing Nexavar.

For carfilzomib, we are responsible for managing communications with regulatory agencies, including filing investigational new drug applications, filing new drug applications, 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. Even if carfilzomib or any other product candidate is designated for “fast track” or “priority review” status or if we seek 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. If we fail to conduct any 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.

If we or Bayer fail to comply with applicable regulatory requirements we could be subject to penalties, including fines, suspensions of regulatory approval, product recall, seizure of products and criminal prosecution.

To date, the FDA has approved Nexavar only for the treatment of advanced kidney cancer and unresectable liver cancer. Physicians are not prohibited from prescribing Nexavar for the treatment of diseases other than advanced kidney cancer or unresectable liver cancer, however, we and Bayer are prohibited from promoting Nexavar for any non-approved indication, often called “off label” promotion. The FDA and other regulatory agencies actively enforce regulations prohibiting off label promotion and the promotion of products for which marketing authorization has not been obtained. A company that is found to have improperly promoted an off label use 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 medical and scientific communication concerning their products. We engage in the support of medical education activities and engage investigators and potential investigators interested in 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.

The market may not accept our products and we may be subject to pharmaceutical pricing and third-party reimbursement pressures.

Nexavar, carfilzomib or our product candidates that may be approved may not gain market acceptance among physicians, patients, healthcare payers and/or the medical community or the market may not be as large as forecasted. A significant factor that affects market acceptance of our products 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 payers, such as government and private health insurers and managed care organizations. Third-party payers 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, carfilzomib, if approved, or any other future product. Governments outside of the US may increase their use of risk-sharing programs, which will only pay for a drug after it demonstrates efficacy in a given patient. In addition, governments may increasingly rely on Heath Technology Assessments to determine payment policy for cancer drugs. Health Technology Assessments are used by governments to assess if health services are safe and cost-effective. In addition, the market for our products may be limited by third-party payers who establish lists of approved products and do not provide reimbursement for products not listed. If our products are not on the approved lists in one or more countries, our sales may suffer. Non-government organizations can influence the use of our products and reimbursement decisions for our products 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.

Nexavar’s success in Europe and other regions, particularly in Asia Pacific, 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 sales and profitability of Nexavar. In addition, 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. In the Asia-Pacific region, excluding Japan, China leads in Nexavar sales, however, reimbursement typically requires multiple steps. Also, in December 2009, health authorities in China published a new National Reimbursement Drug List, or NRDL, which lists medicines that are expected to be sold at government-controlled prices. There were no targeted oncology drugs, including Nexavar, on the NRDL, however, we believe that the Ministry of Human Resource and Social Security, the group responsible for developing the NDRL, plans to establish a mechanism and framework for reimbursement of high-value innovative products, such as targeted oncology drugs. 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 and commercialization of our products, including the following:

	•		rate of adoption by healthcare practitioners;
	•		treatment guidelines issued by government and non-government agencies;
	•		types of cancer for which the product is approved;
	•		rate of a product’s acceptance by the target patient population;
	•		timing of market entry relative to competitive products;
	•		availability of alternative therapies;
	•		price of our product relative to alternative therapies, including generic versions of our products, or generic versions of innovative products that compete with our products;
	•		patients’ reliance on patient assistance programs, under which we provide free drug;
	•		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, carfilzomib or any of our future products do not achieve market acceptance, we may not realize sufficient revenues from product sales, which may cause our stock price to decline.

We may not be able to realize the potential financial or strategic benefits of our acquisition of Proteolix, or any future business acquisitions or strategic investments, which could hurt our ability to grow our business, develop new products or sell our products.

In 2009 we acquired Proteolix, and in the future we may enter into other acquisitions of, or investments in, businesses, in order to complement or expand our current business or enter into a new product area. Achieving the anticipated benefits of the Proteolix acquisition, or any future acquisition, depends upon the successful integration of the acquired business’ operations and personnel in a timely and efficient manner. The difficulties of integration include, among others:

	•		consolidating research and development operations;
	•		retaining key employees;
	•		consolidating corporate and administrative infrastructures, including integrating and managing information technology and other support systems and processes;
	•		preserving relationships with third parties, such as regulatory agencies, clinical investigators, key opinion leaders, clinical research organizations, contract manufacturing organizations, licensors and suppliers;
	•		appropriately identifying and managing the liabilities of the combined company;

	•		utilizing potential tax assets of the acquired business; and
	•		managing risks associated with acquired facilities, including environmental risks and compliance with laws regulating laboratories.

We cannot assure stockholders that we will receive any benefits of the Proteolix acquisition or any other merger or acquisition, or that any of the difficulties described above will not adversely affect us. In addition, integration efforts, such as those for Proteolix, place a significant burden on our management and internal resources, which could result in delays in clinical trial and product development programs and otherwise harm our business, financial condition and operating results.

Negotiations associated with an acquisition or strategic investment could divert management’s attention and other company resources. Any of the following risks associated with future acquisitions or investments could impair our ability to grow our business, develop new products, or sell Nexavar or carfilzomib, and ultimately could have a negative impact on our growth or our financial results:

	•		difficulty in operating in a new or multiple new locations;
	•		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 and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; and
	•		difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions.

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 and investment balances 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.

If we lose our key employees or are unable to attract or retain qualified personnel, our business could suffer. Our recent move of our headquarters may cause additional disruption and turnover of employees.

The loss of the services of key employees may have an adverse impact on our business unless or until we hire a suitably qualified replacement. 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. In order to succeed in our research and development efforts, we will need to continue to hire individuals with the appropriate scientific skills.

In April 2011, we moved our corporate headquarters from Emeryville, California to South San Francisco, California. As a result, we expect to incur additional expenses, including exit costs, and may encounter disruption of operations related to the move, all of which could have an adverse effect on our financial condition and results of operations. In addition, relocation of our corporate headquarters may make it more difficult to retain certain of our employees, and any resulting need to recruit and train new employees could be disruptive to our business.

Provisions in our collaboration agreement with Bayer may impact certain change in control transactions.

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, or if a single entity other than Bayer or its affiliate acquires ownership of a majority of the Company’s outstanding voting stock, 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. Under the royalty formula, an acquisition transaction that occurred prior to the fifth anniversary of the initial regulatory approval of Nexavar, or December 20, 2010, could have substantially reduced the economic value derived from the sales of Nexavar to us or our successor as compared to the economic value of the profit share interest we would have received absent such an acquisition. However, for an acquisition transaction that closes after December 20, 2010, we believe the economic value of the royalty amount, which would depend in part on the expected profitability of Nexavar for the remaining patent life of Nexavar, could be substantially equivalent to the economic value of the profit share interest for Nexavar during the remaining patent life absent such an acquisition transaction. Bayer has notified us that they disagree with this conclusion.

The potential for disagreements and disputes with Bayer regarding interpretation and implementation of these provisions could have the effect of delaying or preventing a change in control, or a sale of all or substantially all of our assets, or could reduce the number of companies interested in acquiring us. However, we believe that a reorganization transaction in which the persons who held majority ownership of Onyx prior to the transaction continue to hold majority ownership of Onyx, directly or through a parent company, after the transaction would be outside the scope of the foregoing provision of the collaboration agreement. Moreover, we believe that a merger transaction in which Onyx was the surviving entity would also be outside the scope of the foregoing provision of the collaboration agreement.

Healthcare policy changes, including recently enacted legislation, may have a material adverse effect on us.

Healthcare costs have risen significantly over the past decade. On March 23, 2010, the President signed one of the most significant health care reform measures in decades. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the Healthcare Reform Act), substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions, including those governing enrollment in federal healthcare programs, the increased use of comparative effectiveness research on healthcare products, reimbursement and fraud and abuse changes, which will impact existing government healthcare programs and will result in the development of new programs. A significant portion of the U.S. Nexavar revenue recorded by Bayer is derived from U.S. government healthcare programs, including Medicare. An expansion in the government’s role in the U.S. healthcare industry may lower reimbursements for pharmaceutical products and adversely affect our business and results of operations. Furthermore, beginning in 2011, the Healthcare Reform Act will impose a non-deductible excise tax on pharmaceutical manufacturers or importers who sell “branded prescription drugs,” which includes innovator drugs and biologics (excluding orphan drugs or generics) to U.S. government programs.

In addition to this recently enacted legislation, there are expected to be other proposals by legislators at both the federal and state levels, regulators and third-party payors to keep healthcare costs down while expanding individual healthcare benefits. Certain of these anticipated changes could impose limitations on the prices we or our collaborators will be able to charge for our products or the amounts of reimbursement available for these products from governmental agencies or third-party payors or may increase the tax requirements for pharmaceutical companies such as ours. While it is too early to predict what affect the recently enacted Health Reform Act or any future legislation or regulation will have on us, such laws could have a material adverse effect on our business, financial position and results of operations.

We may need additional funds, our future access to capital is uncertain, and unstable market and economic conditions may have serious adverse consequences on our business.

We may need additional funds to conduct the costly and time-consuming activities related to the development and commercialization of Nexavar and carfilzomib, including manufacturing, clinical trials and regulatory approval. Also, we may need funds to develop our early stage product candidates, 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 patents 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; and
	•		future fee and milestone payments to BTG and 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 2011. 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 carfilzomib and our share of expenses under our collaboration with Bayer will increase over the next several years. While these costs are unknown at the current time, we may need to raise additional capital and may be unable to do so.

Our general business 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, and may result in adverse changes to product reimbursement and pricing and sales levels, which would harm our operating results. 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 also 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.

Additionally, other challenges resulting from the current economic environment include fluctuations in foreign currency exchange rates, global pricing pressures, increases in national unemployment impacting patients’ ability to access drugs, increases in uninsured or underinsured patients affecting their ability to afford pharmaceutical products 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 us.

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 stockholders 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.

In the event the conditional conversion features of the 2016 Notes are triggered, holders of the 2016 Notes will be entitled to convert the 2016 Notes at any time during specified periods at their option. If one or more holders elect to convert their 2016 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.

We face product liability risks and may not be able to obtain adequate insurance.

The sale of Nexavar and the use of it and other products and product candidates in clinical trials expose us to product liability claims. In the United States, FDA approval of a drug may not offer protection from liability claims under state law (i.e., federal preemption defense), the tort duties for which may vary state to state. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of Nexavar and/or future products.

We may not be able to maintain product liability 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. Whether or not we are insured, a product liability claim or product recall may result in significant losses. Regardless of merit or eventual outcome, product liability claims may result in:

	•		decreased demand for a product;
	•		injury to our reputation;
	•		distraction of management;
	•		withdrawal of clinical trial volunteers; and
	•		loss of revenues.

We or Bayer may not be able to protect or enforce our or their intellectual property and we may not be able to operate our business without infringing 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, effectively maintained as trade secrets, or otherwise protected as confidential information or know-how. 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.

Patents and patent applications covering Nexavar are owned by Bayer. Those Nexavar patents that arose out of our collaboration agreement with Bayer are licensed to us, including two United States patents covering Nexavar and pharmaceutical compositions of Nexavar. Both patents will expire January 12, 2020. These two patents are listed in the FDA’s Approved Drug Product List (Orange Book). Based on publicly available information, Bayer also has patents in several European countries covering Nexavar, which will expire in 2020. Bayer has other patents and 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 extension, 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. Similarly, we cannot be certain that the patents and patent applications acquired in the Proteolix acquisition, or licensed to us by any licensor, will provide adequate protection for carfilzomib or any other product, or will not be challenged by third parties in connection with the filing of an ANDA, or otherwise. The patents related to carfilzomib and 0912 will begin to expire in 2025 and 2027, respectively. Third parties may claim to have rights in the assets that we acquired with Proteolix, including carfilzomib, or to have intellectual property rights that will be infringed by our commercialization of the assets that we acquired with Proteolix. For example, an academic institution has notified us that it believes carfilzomib is covered by its intellectual property and that it is owed certain payments. While we disagree with this academic institution’s assertions and will defend our position, such efforts could be expensive and time-consuming and ultimately may not be successful. If third parties were to succeed in such claims, our business and company could be harmed.

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.

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 or licensees, 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 be unable to 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 in the United States Patent and Trademark Office. These activities 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, including clinical investigators, to conduct research that may be relevant to our business. The ability of these third parties to publish or otherwise publicly disclose information generated during the course of their research is subject to certain contractual limitations; however, these contracts may be breached 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 confidential information, then our ability to receive patent protection or protect our proprietary information will be harmed.

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. In 2009, we became aware that a third-party had filed an opposition proceeding with the Chinese patent office to invalidate the patent that covers 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. Bayer also has a patent in India that covers Nexavar. Cipla Limited, an Indian generic drug manufacturer, applied to the Drug Controller General of India (DCGI) for market approval for Nexavar, which Bayer sought to block based on its patent. Bayer sued the DCGI and Cipla Limited in the Delhi High Court requesting an injunction to bar the DCGI from granting Cipla Limited market authorization. The Court ruled against Bayer, stating that in India, unlike the U.S., there is no link between regulatory approval of a drug and its patent status. Bayer appealed, which it recently lost. Consequently, Bayer has appealed to the Indian Supreme Court, and has filed a patent infringement suit against Cipla that is currently pending before the Delhi high court. 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 aggressive enforcement of patent and other intellectual property protection, which may make it difficult to stop infringement. Many countries limit the enforceability of patents against government agencies or government contractors. These factors could also negatively affect our revenue opportunities in those countries.

If we use hazardous or potentially hazardous materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of hazardous or potentially hazardous materials, including chemical, biological and radioactive materials. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may incur significant additional costs to comply with these and other applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and manufacturing efforts, which could harm our business.

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.

Existing stockholders have significant influence over us.

Our executive officers, directors and 5% stockholders own, in the aggregate, approximately 21% 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.

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 their 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.

We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent a Delaware corporation from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s stock unless:

	•		the board of directors approved the transaction where the stockholder acquired 15% or more of the corporation’s stock;
	•		after the transaction in which the stockholder acquired 15% or more of the corporation’s stock, the stockholder owned at least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
	•		on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

As such, these laws could prohibit or delay mergers or a change of control of us and may discourage attempts by other companies to acquire us.

Our certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include:

	•		our board is classified into three classes of directors as nearly equal in size as possible with staggered three-year terms;
	•		the authority of our board to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of these shares, without stockholder approval;
	•		all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;
	•		special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer, the board or 10% or more of the stockholders entitled to vote at the meeting; and
	•		no cumulative voting.

These provisions may have the effect of delaying or preventing a change in control, even at stock prices higher than the then current stock price.

We have entered into change in control severance agreements with each of our executive officers. These agreements provide for the payment of severance benefits and the acceleration of stock option vesting if the executive officer’s employment is terminated within 24 months of a change in control. The change in control severance agreements may have the effect of preventing a change in control.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. (Removed and Reserved)

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

2.1(1)†*		Agreement and Plan of Merger dated as of October 10, 2009 among the Company, Proteolix, Inc., Profiterole Acquisition Corp., and Shareholder Representative Services LLC.
2.2(2)†		Amendment No. 1 to Agreement and Plan of Merger dated as of January 27, 2011 between the Company and Shareholder Representative Services LLC.
3.1(3)		Restated Certificate of Incorporation of the Company.
3.2(4)		Amended and Restated Bylaws of the Company.
3.3(5)		Certificate of Amendment to Amended and Restated Certificate of Incorporation.
3.4(6)		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(3)		Specimen Stock Certificate.
4.3(7)		Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.4(7)		First Supplemental Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.5(7)		Form of 4.00% Convertible Senior Note due 2016.
10.1(i)†		Collaboration Agreement between Bayer Corporation (formerly Miles, Inc.) and the Company dated April 22, 1994.
10.13(v)+		Form of Stock Unit Award Grant Notice and Agreement between the Company and certain award recipients.
10.22(ii)		Amendment to Exhibit A of License and Supply Agreement dated as of October 12, 2005, by and between CyDex Pharmaceuticals, Inc. (formerly CyDex, Inc.) and Proteolix, Inc., as amended.
31.1(8)		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(8)		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(8)		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).
101***		The following materials from Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010, (iii) Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

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.

EXHIBIT INDEX

2.1(1)†*		Agreement and Plan of Merger dated as of October 10, 2009 among the Company, Proteolix, Inc., Profiterole Acquisition Corp., and Shareholder Representative Services LLC.
2.2(2)†		Amendment No. 1 to Agreement and Plan of Merger dated as of January 27, 2011 between the Company and Shareholder Representative Services LLC.
3.1(3)		Restated Certificate of Incorporation of the Company.
3.2(4)		Amended and Restated Bylaws of the Company.
3.3(5)		Certificate of Amendment to Amended and Restated Certificate of Incorporation.
3.4(6)		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(3)		Specimen Stock Certificate.
4.3(7)		Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.4(7)		First Supplemental Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.5(7)		Form of 4.00% Convertible Senior Note due 2016.
10.1(i)†		Collaboration Agreement between Bayer Corporation (formerly Miles, Inc.) and the Company dated April 22, 1994.
10.13(v)+		Form of Stock Unit Award Grant Notice and Agreement between the Company and certain award recipients.
10.22(ii)		Amendment to Exhibit A of License and Supply Agreement dated as of October 12, 2005, by and between CyDex Pharmaceuticals, Inc. (formerly CyDex, Inc.) and Proteolix, Inc., as amended.
31.1(8)		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(8)		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(8)		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).
101***		The following materials from Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010, (iii) Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.