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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED
DECEMBER 31, 1999.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
COMMISSION FILE NO. 0-28298
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ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3154463
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or Organization)
3031 RESEARCH DRIVE
RICHMOND, CALIFORNIA 94806
(510) 222-9700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK $0.001 PAR VALUE NASDAQ NATIONAL MARKET
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant based upon the last trade price of the common stock reported on the
Nasdaq National Market on March 22, 2000 was approximately $163,512,000.
The number of shares of common stock outstanding as of March 22, 2000 was
14,155,626.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Onyx's Definitive Proxy Statement filed with the Commission
pursuant to Regulation 14A in connection with the 2000 Annual Meeting are
incorporated herein by reference into Part III of this Report.
Certain Exhibits filed with Onyx's Registration Statement on Form SB-2
(Registration No. 333-3176-LA), as amended, Onyx's Annual Report on Form 10-K
for the year ended December 31, 1997, Onyx's Quarterly Report on Form 10-Q for
the quarters ended June 30, 1996, March 31, 1997, September 30, 1997, March 31,
1999 and September 30, 1999, Onyx's Current Report on Form 8-K filed on
January 26, 1998 and Onyx's Current Report on Form 8-K filed on March 1, 2000
are incorporated by reference into Part IV of this Report.
PART I.
ITEM 1. BUSINESS
BUSINESS
OVERVIEW
We are developing innovative products for the treatment of cancer based on
our proprietary virus technology platform. Our platform employs
selectively-replicating viruses to kill cancer cells in the human body, leaving
healthy, non-cancerous tissues unharmed. Our lead product candidate, ONYX-015,
is an engineered virus that has been genetically modified to selectively
replicate in and destroy human cancer cells that are deficient in p53 tumor
suppressor gene function. Mutations in the p53 gene occur in over 50% of human
cancer cases.
We have completed two Phase II clinical trials of ONYX-015 for the treatment
of head and neck cancer. Based on the data from these trials, we intend to begin
a Phase III clinical trial of ONYX-015 in the middle of 2000. This Phase III
pivotal trial will be conducted in conjunction with Warner-Lambert, our
collaborative partner for the development and commercialization of ONYX-015. We
are also evaluating ONYX-015 in Phase I/II and Phase I clinical trials for four
additional cancer indications and expect to report interim results from several
of these studies at the ASCO meeting in May 2000.
To expand our product portfolio, we are developing a number of technologies
that are complementary to our core virus technology platform. First, we are
arming our therapeutic viruses with anticancer genes. We believe that we can arm
viruses to activate the production of a chemotherapeutic agent at the tumor
site. Second, we are developing approaches to enhance systemic delivery of our
viruses. We believe that systemic delivery would enable our therapeutic viruses
to treat a wider spectrum of cancer patients, including those with metastatic
disease. Additionally, we are engineering therapeutic viruses to selectively
replicate in and destroy cancer cells that are deficient in the RB tumor
suppressor gene function. Mutations in the RB gene occur in over 30% of human
cancer cases.
We have entered into an agreement with Warner-Lambert to develop and
commercialize ONYX-015 as well as two armed therapeutic viruses. Under the terms
of this agreement, we have the right to co-promote ONYX-015 in the United States
and Canada and share equally in the resulting profits or losses. Furthermore,
Warner-Lambert has the right to commercialize these products in the rest of the
world and is obligated to pay us a royalty based on net sales in these markets.
Additionally, Warner-Lambert is obligated to fund up to $40.0 million of
development costs related to ONYX-015 and to fully fund preclinical development
of the two armed viruses.
In addition to our therapeutic virus programs, we are working with
Warner-Lambert and Bayer to identify and develop small molecule therapeutic
compounds for a number of cancers. Together with Bayer, we have selected a
compound for clinical development that inhibits ras signaling in cancer cells.
Mutations in the ras gene occur in nearly 30% of human cancer cases. We
anticipate that Bayer will file an IND for this compound in the middle of 2000.
p53 AND RB FUNCTION AND HUMAN CANCER
Cancer is caused by a number of genetic changes or mutations that allow
affected cells to grow uncontrollably. Tumor suppressor genes are normal growth
regulators that are inactivated through mutations, and their loss of function
results in cancer formation. RB and p53 are tumor suppressors that regulate cell
division and cell death in normal cells, and the loss of either function is
often associated with uncontrollable proliferation. The majority of human
cancers appear to be dependent on loss of p53 and RB function. This is a major
difference between cancer and normal cells. Our therapeutic virus platform is
aimed at taking advantage of these important differences.
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TECHNOLOGY PLATFORM
Most current non-surgical therapies for cancer, such as chemotherapy and
radiation, discriminate poorly between tumor and normal cells and result in
damage to healthy tissues. Consequently, these treatments can have serious
adverse side effects that frequently limit their use. Our technology enables the
selective killing of cancer cells based on the presence of mutations affecting
specific tumor suppressor gene function. We utilize our technology to engineer
human adenoviruses to selectively replicate in and kill cancer cells based on
the presence of mutations affecting p53 and RB tumor suppressor gene functions.
In healthy cells, human adenoviruses inactivate p53 and RB to reproduce
themselves. Our therapeutic viruses are engineered to lack the ability to
inactivate p53 and RB in healthy cells, and therefore, cannot reproduce
efficiently in and harm normal tissues. By contrast, because the p53 and RB
tumor suppressor gene functions have been eliminated in cancer cells, our
engineered viruses can replicate efficiently and kill these cells. This leaves
the body's healthy tissue unaffected, while the newly made and released virus
progeny infect nearby cancer cells and perpetuate the selective cancer cell
killing cycle, thereby amplifying the therapeutic effect.
We are developing a number of technologies that complement our
selectively-replicating virus platform. First, we are developing the capability
to arm our therapeutic viruses with anticancer genes. The significant features
of this technology are selective expression and amplification of anticancer
genes within the local tumor environment. Because our virus selectively
replicates in tumor cells, the anticancer gene is also selectively expressed at
the tumor site. We believe this should minimize systemic exposure and toxicity.
Furthermore, we believe that as the virus replicates, it will also steadily
increase the concentration of the therapeutic agent in the cancer mass, thereby
adding to the virus' anticancer effect. Thus, the selectivity and amplification
features inherent to our technology should expose the tumor to higher levels of
the therapeutic agent than is possible with other methods of administration. We
plan to arm our viruses with a number of anticancer genes. The two initial
classes are prodrug converting enzyme genes which might convert a nontoxic
prodrug into a cytotoxic chemotherapeutic, and those genes that might stimulate
immune response against the tumor.
In addition to our armed virus program, we are developing ways to physically
or genetically modify our therapeutic viruses to improve their circulating
half-life upon systemic administration. We believe that this is important for
treatment of a broad range of cancers, including metastatic disease.
ONYX-015
Our lead product, ONYX-015, is a human adenovirus that has been modified so
that it does not make E1B 55k, a viral protein that binds to cellular p53 and
blocks its function. As a result, ONYX-015 cannot inactivate the p53 protein and
effectively harm normal cells. However, in the majority of cancer cells, p53
function is already lost through mutation. When ONYX-015 infects cancer cells,
the virus growth cycle proceeds, the cancer cells are killed, new virus progeny
are produced and neighboring cancer cells are infected and killed.
To date, we have evaluated ONYX-015 efficacy in Phase II trials in which
direct intratumoral injections were used to treat head and neck cancer patients.
Additionally, we are conducting separate Phase I/II trials in patients with
liver metastases of colorectal cancer and in patients with pancreatic cancer.
Furthermore, separate Phase I trials have been completed in patients with
ovarian cancer and in advanced cancer patients with lung involvement. Set forth
below are the American Cancer Society's estimates for
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new cancer cases and cancer deaths in the United States for the year 2000 for
some of the solid tumor cancers that we are targeting with ONYX-015.
CANCER TYPE NEW CASES DEATHS
- ----------- --------- --------
Head and neck*........................................... 40,300 11,700
Colon and rectum......................................... 130,200 56,300
Pancreas................................................. 28,300 28,200
Ovary.................................................... 23,100 14,000
Lung..................................................... 169,000 158,000
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* Includes cancers of the larynx, tongue, mouth, oral cavity and pharynx.
HEAD & NECK CLINICAL PROGRAMS
We have completed two Phase II efficacy trials with ONYX-015 in head and
neck cancer patients. In the first trial, patients with end-stage refractory
tumors received intratumoral injections of ONYX-015 daily over five consecutive
days. Refractory tumors are those that no longer respond to conventional cancer
treatments, including chemotherapy. In this trial, four of 19 evaluable patients
had greater than 50% reduction in the size of their injected tumors, including
two with complete responses. A complete response is defined as a 100% reduction
in the size of the injected tumor. In this trial, ONYX-015 was well tolerated
with 60% of these patients experiencing transient flu-like symptoms.
In the second Phase II trial, ONYX-015 was administered in combination with
cisplatin and 5-fluorouracil to head and neck cancer patients with recurrent
disease. These two chemotherapeutic drugs are the current standard of care for
patients with recurrent head and neck tumors. In this trial, the dosing regimen
provided for daily direct intratumoral injections of ONYX-015 on each of days
one through five, intravenous dosing of cisplatin on day one and intravenous
dosing of 5-fluorouracil on each of days one through five. Nineteen of the 30
evaluable patients, or 63%, had regressions of greater than 50% in their
injected tumor, including eight patients, or 27%, with complete responses. We
believe these rates compare favorably to an average historical response rate
using chemotherapy alone in which approximately 35% of patients had tumor
regressions of greater than 50%, with an average complete response rate of less
than 10%. In this trial, the treatment was generally well tolerated with
chemotherapy-related gastrointestinal symptoms and injection site pain being the
most frequent adverse events reported by patients.
In a separate analysis of this same trial, we compared the efficacy of
ONYX-015 plus chemotherapy in the injected tumor to the efficacy of chemotherapy
alone in distant uninjected tumors. Eleven patients had more than one tumor and
only their largest tumor was injected with ONYX-015. Nine of the 11 tumors
injected with ONYX-015 responded, while only three of the 11 patients'
uninjected tumors responded. We believe that this study, which considers the
patients as their own control, demonstrates the superiority of ONYX-015 plus
chemotherapy over chemotherapy alone.
We have had discussions with the FDA regarding the Phase III trial design
for treating patients with recurrent head and neck cancer with ONYX-015. Based
on these discussions, and together with Warner-Lambert, we intend to initiate a
pivotal Phase III clinical trial in the middle of 2000. The trial will compare
intratumoral injection of ONYX-015 plus standard chemotherapy, 5-fluorouracil
and cisplatin, versus standard chemotherapy alone. We expect that the trial will
take place at numerous centers in the United States and Europe and will include
290 evaluable patients, half in each arm of the study. The primary endpoints for
the trial are progression-free survival and durable tumor response. Secondary
endpoints include patient quality of life measurements and overall survival.
We are also planning to initiate a Phase II/III trial by the end of 2000
which will evaluate ONYX-015 in patients with refractory head and neck cancer.
We expect this trial will include 50 to 100 patients who will receive ONYX-015
in combination with chemotherapy, with durable tumor response as the primary
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endpoint. We anticipate that the results from this second trial will also be
included in the eventual licensing applications for ONYX-015.
OTHER CLINICAL PROGRAMS
We are currently evaluating ONYX-015 in Phase I/II and Phase I clinical
trials in four additional cancer indications. We intend to report interim
results from several of these studies at the ASCO meeting in May 2000. The
trials described below are at an early stage of development and there can be no
assurance that sufficient anticancer activity or clinical benefit will be
observed in later trials to warrant registration or use in patients with these
cancers.
LIVER METASTASES OF COLORECTAL CANCER. We are conducting an ongoing Phase
I/II trial in which ONYX-015 is infused via the hepatic artery in patients with
liver metastases of colorectal cancer. This intra-arterial route permits
simultaneous delivery of ONYX-015 to multiple tumor sites within the liver. In
this trial, patients who tolerate the initial cycles of treatment with ONYX-015
alone receive a combination of ONYX-015 plus 5-fluorouracil and leucovorin, the
standard chemotherapeutic regimen for colorectal cancer treatment, for
subsequent treatment cycles. This study is in the final stages of patient
accrual and, to date, evidence of biological and anticancer activity has been
observed. We believe that the combination of ONYX-015 with chemotherapy was able
to shrink or halt the growth of intrahepatic tumors in a number of patients who
had progressed following prior chemotherapy treatment. As a follow-up to these
clinical trials, we are discussing various Phase II protocols with
Warner-Lambert.
PANCREATIC CANCER. We are conducting an ongoing Phase I/II trial in which
ONYX-015 is administered through endoscopic ultrasound-guided intratumoral
injections in patients with advanced pancreatic cancer. This technique allows
for multiple injections per treatment. Patients who tolerate the initial cycles
of treatment with ONYX-015 alone receive gemcitabine, a chemotherapeutic agent
for the treatment of pancreatic cancer, in combination with ONYX-015 in
subsequent treatment cycles. The final cohort of patients remains to be treated
in this trial. To date, we believe the combination of ONYX-015 plus gemcitabine
resulted in shrinkage or halted tumor growth in a number of patients.
OVARIAN CANCER. We have completed a Phase I trial of ONYX-015 in 16
patients with recurrent or refractory ovarian cancer. This Phase I dose
escalation trial involved administration of five daily ONYX-015 infusions per
cycle via intraperitoneal delivery into the abdominal cavity. In this trial
ONYX-015 was generally well tolerated in patients with minimal tumor mass.
LUNG CANCER. One of our independent investigators has completed a Phase I
trial in ten patients with advanced cancers with lung involvement. The primary
objectives of the trial were to determine safety and pharmacokinetics of
intravenously administered ONYX-015. In this trial, ONYX-015 was generally well
tolerated. As a follow up to this trial, we are discussing future Phase II
intravenous trials in patients with lung and liver tumors with Warner-Lambert.
OTHER PRODUCT OPPORTUNITIES
In addition to ONYX-015, we are also conducting a number of research and
development programs based on our virus technology platform as well as our small
molecule drug discovery efforts.
PRODRUG ARMED THERAPEUTIC VIRUS PROGRAM
To expand the range of cancer indications for our product candidates, we are
developing therapeutic viruses armed with anticancer genes. A number of
anticancer chemotherapeutic agents are prodrugs, or can be synthesized as
prodrugs. A prodrug is the inactive form of a drug that requires specific
modifications to be converted to its active form. Specific enzymes are known to
carry out this conversion.
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We have developed a system to arm our therapeutic viruses with genes coding
for a number of different prodrug converting enzymes. With this strategy, each
virus is armed with a single gene coding for an enzyme that can convert the
prodrug to the specific anticancer chemotherapeutic drug. Therefore the armed
virus would not only reproduce itself, but in the presence of the prodrug would
also turn the infected cancer cell into a miniature chemotherapeutic anticancer
drug factory. We obtained licenses to several prodrug converting enzyme systems
for arming our therapeutic viruses. We are working with Warner-Lambert to select
the first prodrug armed therapeutic virus for preclinical development.
RB-SELECTIVE THERAPEUTIC VIRUS PROGRAM
Nearly 30% of all human cancers contain mutations in the RB gene. It is now
believed that mutated components of the RB pathway are present in nearly all
human cancers. We have engineered human adenoviruses to selectively replicate in
and kill cancer cells based on defects in the RB pathway in these cells. In
preclinical studies, these candidate therapeutic viruses have been shown to
selectively replicate and result in significant tumor shrinkage in animal
models. Depending on the results of these preclinical studies, we may designate
a RB-selective therapeutic virus as a clinical candidate in 2000 for treatment
of human cancers.
RAS PATHWAY INHIBITOR PROGRAM
Mutations in the ras gene occur in approximately 30% of all human cancers,
including 90% of pancreatic, 50% of colon and some lung cancers. With Bayer, we
have selected a compound for clinical development that inhibits ras signaling in
cells. This compound is currently undergoing advanced toxicology studies.
Depending on the results of these studies, we expect Bayer to file an IND for
this compound in the middle of 2000.
CELL CYCLE AND INFLAMMATION PROGRAMS
Together with Warner-Lambert, we have identified a number of lead compounds
that modulate the activity of key enzymes that regulate the cell cycle or are
associated with inflammatory diseases. Cell cycle is the process whereby a
single cell replicates its DNA and divides into two identical new cells.
Mutations in cell cycle regulating enzyme genes are present in a majority of
human cancers. The most advanced lead compound in these programs is currently
being evaluated for its efficacy in animal models of human cancer. Joint
research under these programs is expected to continue until the middle of 2001.
BUSINESS STRATEGY
Our objective is to be a leading developer of novel cancer therapies. We
intend to develop and commercialize a broad portfolio of products based
primarily on our selectively-replicating virus technology platform. Elements of
our strategy are to:
- OBTAIN REGULATORY APPROVAL FOR ONYX-015 FOR HEAD AND NECK CANCER. We have
completed Phase II clinical trials of ONYX-015 for treatment of patients
with head and neck cancer. Together with Warner-Lambert, and based on our
discussions with the FDA, we are ready to begin a Phase III pivotal trial
aimed at gaining regulatory approval of ONYX-015.
- DEVELOP ONYX-015 FOR OTHER CANCER INDICATIONS. We are in the process of
completing separate Phase I/II clinical trials in patients with liver
metastases of colorectal cancer and in patients with pancreatic cancer.
Separate Phase I trials evaluating ONYX-015 as a treatment for patients
with ovarian cancer and advanced cancer patients with lung involvement
have also been completed. Based on the results from these studies, we
expect to initiate further clinical trials in an effort to generate data
supporting the therapeutic value of ONYX-015 in multiple cancer
indications.
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- BROADEN OUR THERAPEUTIC VIRUS PRODUCT PORTFOLIO. We are currently
evaluating RB-selective therapeutic viruses in preclinical models for
efficacy and toxicity effects. In addition, we are developing armed
viruses that incorporate prodrug systems to selectively activate
chemotherapeutic drugs within tumors. We are in the process of developing
our first prodrug armed virus for preclinical development.
- RETAIN SUBSTANTIAL CO-PROMOTION RIGHTS TO OUR PRODUCTS. We intend to build
sales and marketing capabilities to promote our products in the United
States and Canada. In establishing new product collaborations, we seek to
retain at least 50% of marketing and profit-sharing rights in the United
States. For ONYX-015 and the two armed viruses, we have retained
co-promotion rights as well as the opportunity for equal profit sharing in
the United States and Canada. Our collaboration with Bayer offers us
co-promotion and profit-sharing rights of any developed product in the
United States.
- COLLABORATE WITH LEADING PHARMACEUTICAL COMPANIES. To market and
distribute our products worldwide, we intend to collaborate with leading
pharmaceutical companies that have worldwide marketing and distribution
capabilities.
- ACQUIRE TECHNOLOGIES AND PRODUCTS THAT COMPLEMENT OUR BUSINESS. We intend
to in-license or acquire complementary technologies to enhance our product
portfolio and strengthen our market position. Currently, we are focusing
on accessing technologies to strengthen our efforts in arming our
therapeutic viruses with anticancer genes as well as formulating our
therapeutic viruses for systemic delivery. Additionally, we intend to
pursue an acquisition strategy targeting products in late stage
development that fit our focus on cancer.
COLLABORATIONS
WARNER-LAMBERT: ONYX-015 AND TWO ARMED THERAPEUTIC VIRUSES
Effective September 1999, we entered into an agreement with Warner-Lambert
for purposes of developing and commercializing ONYX-015 and two armed
therapeutic viruses. Under the terms of this agreement, we have the right to
co-promote ONYX-015 and the two armed virus products with Warner-Lambert in the
United States and Canada. We also have the right to share equally in resulting
profits or losses in these territories. Additionally, Warner-Lambert is
responsible for commercializing the products in the rest of the world and is
obligated to pay us a royalty on net sales in these markets.
We will jointly manage the development of these products. Warner-Lambert
will be primarily responsible for conducting the agreed-upon Phase III
registration trials of ONYX-015 in head and neck cancer and other registration
trials in various cancer indications. The parties are required to share
responsibility for Phase I and Phase II exploratory trials. Warner-Lambert is
responsible for the commercial manufacturing of the collaboration products.
Warner-Lambert is obligated to provide the first $40 million in funding for
clinical development of ONYX-015. We are obligated to fund 25% of the costs over
$40 million in order to retain our profit sharing and co-promotion rights in the
United States and Canada, and Warner-Lambert is obligated to fund the remaining
75%. Warner-Lambert is also required to fully-fund the research and preclinical
development of the two armed virus product candidates. When a product candidate
is selected for clinical development, we will be obligated to pay 25% of the
development costs in order to retain our profit-sharing and co-promotion rights
in the United States and Canada for any resulting product. If we choose not to
or are unable for any reason to: (a) fund our portion of the development costs
for ONYX-015 or an armed virus product candidate, or (b) maintain our required
co-promotion effort, we would lose our co-promotion and profit-sharing rights
for that product, the product would be exclusively licensed to Warner-Lambert,
and we would receive a royalty on these sales in the applicable market.
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One of these two armed virus product candidates will be a p53-selective
therapeutic virus armed with a prodrug-converting enzyme. The armed virus
products provided for in the agreement are currently in the research stage, and
the timing of clinical trials will depend on the results of research and
preclinical development activities. We have retained the rights to independently
develop and commercialize p53-selective armed virus products other than the two
selected in the collaboration. In addition, we retain rights to all other
products derived from our therapeutic virus platform.
In addition to providing ongoing research and development support,
Warner-Lambert is obligated to make milestone payments based on product
development achievements. If all products covered by the agreement are developed
successfully, these milestone payments could exceed $100 million.
Warner-Lambert has the right to terminate this agreement, or terminate its
efforts directed at select product candidates, at any time on 90 days advance
notice. In such event, all product rights, or related product rights in the case
of termination directed at select product candidates, would revert to us. These
product rights would be royalty-free in the case of ONYX-015, and would be
royalty-bearing to Warner-Lambert in the case of the armed virus product
candidates, if such candidates had entered clinical trials prior to termination.
WARNER-LAMBERT: CELL CYCLE PROGRAM
In May 1995, we entered into a research and development collaboration
agreement with Warner-Lambert to discover and commercialize small molecule drugs
that restore control of or otherwise intervene in misregulated cell cycle
transitions in tumor cells. Under this agreement, we assume the responsibility
for developing screening assays for jointly selected targets, and have
transferred these assays to Warner-Lambert for high throughput screening of
their compound library to identify active compounds. Warner-Lambert is
responsible for subsequent medicinal chemistry and preclinical investigations on
the active compounds. We will receive milestone payments on clinical development
and registration and royalties on worldwide sales of the products.
Warner-Lambert is obligated to conduct and fund all clinical development, make
regulatory filings and manufacture for sale the collaboration compounds.
Research under this agreement has been extended through May 2001, but we do not
expect the research term under this agreement to extend beyond this date.
Thereafter, Warner-Lambert may develop products identified during the research
term and we could receive milestone payments and royalties on these marketed
products.
WARNER-LAMBERT: INFLAMMATION PROGRAM
In July 1997, we entered into a three-year research and development
collaboration agreement with Warner-Lambert to discover and commercialize small
molecule drugs for the treatment of acute and chronic inflammatory disorders.
The obligations of the parties are similar to those agreed to under the cell
cycle program and each party must dedicate a specified minimum number of
researchers to the collaboration. We would receive milestone payments based on
the development and registration of any resulting products and would receive
royalties on worldwide sales. Research under this agreement has been extended
through July 2001, but we do not expect the research term under this agreement
to extend beyond such date. Thereafter, Warner-Lambert may develop products
identified during the research term and we could receive milestone payments and
royalties on these marketed products.
BAYER
Effective February 1994, we established a research and development
collaboration with Bayer to discover, develop and market compounds that inhibit
the function, or modulate the activity, of the ras signaling pathway or that
appropriately modulate the activity of this pathway in order to treat cancer and
other diseases. Collaborative research under this agreement was concluded in
1999, and as a result, a development candidate has been identified. Currently,
Bayer is completing preclinical work, and if final
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toxicology studies are favorable, we expect Bayer to file an IND for this drug
candidate in the middle of 2000.
Bayer has paid all the costs of research and preclinical development of this
drug candidate. Under our agreement with Bayer, we have the opportunity to
co-fund 50% of clinical development costs worldwide, excluding Japan. Bayer will
fund 100% of development costs in Japan and pay us a royalty on sales. If we
co-fund and we exercise our right to co-promote in the United States, we would
share equally in profits or losses. If we do not co-promote in the United
States, Bayer would first receive a portion of the product revenues to repay
Bayer for its commercialization infrastructure, before determining our share of
profits and losses. In other parts of the world except Japan, Bayer would also
receive this preferential distribution. If we elect to share in development
costs, Bayer would pay us substantial development milestone payments based on
the product's progress through clinical trials. These milestone payments would
be repayable to Bayer from our share of profits and royalties. At any time
during product development, either company may terminate its participation in
development costs, in which case the other party would retain exclusive rights
to the product on a royalty-bearing basis. If we do not exercise our option to
bear 50% of product development costs, Bayer would retain exclusive, worldwide
rights to this product candidate and would pay royalties to us on net sales.
In addition to the development candidate referred to above, final screening
and lead evaluation is still continuing with respect to other compounds
identified in the course of the collaborative research program with Bayer. There
is no assurance that any additional development candidates will be identified.
CHIRON
Our business began in April 1992 by means of the transfer from Chiron to us
of the drug discovery program being conducted at Chiron by Dr. Frank McCormick,
our scientific founder, and his research team. Under an agreement between Chiron
and us, Chiron has an option through April 2007 to receive an exclusive or
co-exclusive royalty-bearing license to our diagnostic and vaccine product
candidates. If Chiron does not exercise its option rights with respect to a
particular product candidate, then prior to the completion of Phase II clinical
trials, we may seek a third party licensor of that product, subject to a right
of first refusal in favor of Chiron, and after the completion of Phase II
clinical trials for product candidates, the related option rights of Chiron
expire.
This agreement also includes a mechanism for our making proposals to Chiron
for future collaborations. Such proposal would require that we disclose to
Chiron the material information known to us regarding the program and propose a
set of commercial terms. If such a proposal is made, and we and Chiron do not
reach agreement within 60 days after we make the proposal, then we may, within
120 days thereafter, enter into an agreement with a third party on terms no more
favorable taken as a whole than the terms that we offered to Chiron. Chiron has
advised us that it believes the foregoing provision, in the context of the other
provisions of this agreement, requires us to offer gene therapy programs to
Chiron pursuant to this mechanism before we license any such program to a third
party. We do not agree that these provisions impose this obligation to make
proposals to Chiron. However, the resulting uncertainty about the interpretation
of this agreement may impede our ability to enter into agreements with other
companies for gene therapy products in the absence of a waiver by Chiron.
Chiron has never exercised any right to receive a product license from us.
In mid-1999, Chiron delivered a letter under which Chiron waived any rights it
has under the agreement with respect to collaborative arrangements that we may
enter into with others until the end of July 2000, based on our
selectively-replicating virus technology. We executed the agreement with
Warner-Lambert concerning ONYX-015 and two armed viruses during the period of
time covered by this letter. We understand that Chiron has recently reduced its
research activities in the field of gene therapy. However, it is possible that
Chiron will, in the future, assert rights under this agreement, which may impede
or delay our ability to enter into collaboration agreements with others.
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MARKETING AND SALES
We currently have no marketing, sales or distribution capabilities, but we
intend to build these capabilities to promote our products in the United States
and Canada. Consequently, we have retained co-promotion rights in these
territories for most of our products. We also expect to exploit relationships
with one or more pharmaceutical companies with established marketing, sales and
distribution capabilities and direct sales forces to market our products. We
have begun to build marketing capabilities in the United States by hiring an
experienced oncology marketing executive in December 1999. There can be no
assurance that we will be able to establish in-house marketing, sales and
distribution capabilities or relationships with third parties, or that we will
be successful in gaining market acceptance for our products.
MANUFACTURING
At this time, we do not have internal manufacturing capabilities to supply
small or large-scale clinical trials or commercial quantities, nor do we have
experience in such manufacturing. We expect that our collaborative partners will
manufacture our therapeutic virus products for late-stage clinical development
and commercialization. Warner-Lambert has an exclusive right to manufacture the
products that result from our collaborations with them. To manufacture our
products for clinical trials or on a commercial scale, if we are required to or
choose to do so, we will have to build or gain access to a manufacturing
facility, which will require a significant amount of funds. In our
collaborations in small molecule drug discovery, Bayer and Warner-Lambert are
obligated to manufacture all such drugs for clinical development and
commercialization.
We use a contract manufacturer, BioReliance Corporation, for the production
of ONYX-015 for use in Phase I and Phase II clinical trials. In December 1998,
we entered into an agreement with Molecular Medicine LLC to manufacture ONYX-015
for use in Phase III clinical trials using a commercially scaleable
manufacturing process. The term of this agreement expires in June 2000 and we
are currently negotiating an extension. Although Molecular Medicine has produced
viral products for Phase I and Phase II clinical trials, Molecular Medicine has
not produced Phase III clinical trial materials for us or any other parties.
Molecular Medicine has modified its facility and procedures and has adopted our
production process. Initial lots of drug material using this process have been
produced by Molecular Medicine, but have not yet been released for clinical
usage. We have also initiated efforts to increase the yield of ONYX-015 from the
new process to meet the expected Phase III patient accrual schedule. Because
Molecular Medicine has not previously produced Phase III clinical trial
material, there could be delays in the production of materials necessary to
begin or continue the Phase III trials.
We currently anticipate that Molecular Medicine will be able to produce
sufficient quantities of ONYX-015 to supply our pivotal Phase III trial for
treatment of head and neck cancer. To the extent there are other indications
that could be targeted for regulatory approval, the capacity of Molecular
Medicine could become limiting and priorities and timelines might change. We
also expect that Phase I and Phase II trials in other cancer indications can be
adequately supplied using drug materials from BioReliance. Together with
Warner-Lambert, we are currently developing plans for process scale-up and
additional facilities for commercial manufacturing of ONYX-015. While
substantial progress has been made in the development of a scaleable,
commercially feasible manufacturing process, there can be no assurance that such
a process will be successfully adapted to commercial scale in a timely manner.
We are aware of only a limited number of manufacturers who we believe would
have the ability and capacity to manufacture this product or any other
therapeutic viruses we may develop. Failure of any such third-party manufacturer
to comply with state and federal regulations and to deliver the required
quantities on a timely basis and at commercially reasonable prices would
materially adversely affect our business, financial condition and results of
operations. No assurance can be given that we, alone or with a third party, will
be able to make the transition to commercial-scale production of our potential
products successfully, if at all, or that if successful, we will be able to
maintain such production.
9
PATENTS AND PROPRIETARY RIGHTS
We believe that patent and trade secret protection is crucial to our
business and that our future will depend in part on our ability to obtain
patents, maintain trade secret protection and operate without infringing the
proprietary rights of others, both in the United States and other countries. In
October 1997, we were awarded United States Patent No. 5,677,178 for claims
covering the use of ONYX-015 for the treatment of functionally p53-deficient
cancers. In April 1999, we were awarded European patent, No. 689,447 for claims
covering the use of ONYX-015 for the treatment of functionally p53-deficient
cancers. We were also awarded United States Patent No. 5,801,029, a broad
methods of use patent, for claims covering the use of certain adenoviral mutants
that kill functionally RB-deficient tumor cells. Each of these cases' claims has
been issued covering arming these viruses with anticancer genes. Further, we
have made additional filings worldwide that claim adenoviruses that can be used
to kill functionally deficient p53 or RB cancer cells, with or without a prodrug
converting enzyme. We were also awarded United States Patent No. 5,846,945, for
claims covering compositions of matter that consist of ONYX-015 and a
chemotherapeutic. As of March 5, 2000, we owned or had licensed rights to 33
U.S. patents and 51 U.S. patent applications, and generally, foreign
counterparts of these filings. We have licensed patents and patent applications
covering formulations of viruses, prodrug activating enzymes and other
technology useful in the conduct of our business.
Our existing patent rights may not have a deterrent effect on competitors
who are conducting or desire to commence competitive research programs with
respect to the biological targets or fields of inquiry that we are pursuing. Our
ultimate patent position will depend on our ability to obtain effective patent
coverage for the compositions of matter identified in such research programs.
Because these programs are at an early stage and, except in the therapeutic
virus programs, potential products have not yet been identified, it cannot be
determined whether potential products that may be derived from our drug
discovery program may be subject to the patent rights of third parties.
Since patent applications in the United States are maintained in secrecy
until patents issue and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we cannot be certain that
we were the first to make the inventions covered by each of our pending patent
applications or that we were the first to file patent applications for such
inventions. The patent positions of biotechnology and pharmaceutical companies
are highly uncertain and involve complex legal and factual questions. Therefore,
the breadth of claims allowed in biotechnology and pharmaceutical patents, or
their enforceability, cannot be predicted. To date there has been no consistent
policy regarding the breadth of claims allowed in biotechnology patents. There
can be no assurance that any of our patents or patent applications, if issued,
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to us
against competitors with similar technology. Furthermore, there can be no
assurance that others will not independently develop similar technologies or
duplicate any technology that we have developed. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that, before any of our products can be commercialized, any
related patent may expire, or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent.
We are aware of pending patent applications that have been filed by others
that may pertain to certain aspects of our programs. If patents are issued to
others containing preclusive or conflicting claims and such claims are
ultimately determined to be valid, we may be required to obtain licenses to
these patents or to develop or obtain alternative technology. Our breach of an
existing license or failure to obtain a license to technology required to
commercialize our products may have a material adverse effect on our business,
financial condition and results of operations. Litigation, which could result in
substantial costs, may also be necessary to enforce any patents issued to us or
to determine the scope and validity of third-party proprietary rights. If our
competitors prepare and file patent applications in the United States that claim
technology also claimed by us, we may have to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in
10
substantial cost, even if the eventual outcome is favorable to us. An adverse
outcome could subject us to significant liabilities to third parties and require
us to seek licenses of the disputed rights from third parties or to cease using
such technology if such licenses are not available, and could have a material
adverse effect on our business, financial condition and results of operations.
With respect to ONYX-015 and selectively-replicating viruses, we are aware
of a patent application filed in the United States, Europe, Japan and Canada by
General Hospital Corporation, an affiliate of Massachusetts General Hospital.
This patent application is related to research involving a modified herpes
simplex virus but it also includes broader claims that, if they were to issue,
would cover ONYX-015 and other selectively-replicating viruses. We believe, and
have received an opinion from outside counsel to the effect, that such broad
claims made in the General Hospital patent application are not patentable.
Consistent with this opinion is a review of the European patent status of the
General Hospital patent application, which shows that the patent examiner is
requiring that the claims be limited to herpes viruses. However, there can be no
assurance these broad claims will not issue in one or more countries, that we
would be successful in challenging any such claims, or that a license would be
available under any such patent if it were to issue.
We have identified United States Patent No. 5,837,520 that covers methods of
purification of viral vectors. Canji, Inc. either owns or has licensed the
rights to this patent. We may seek a license under this patent from Canji.
However, if such license were not available at commercially reasonably terms, or
at all, we would develop purification methods that are not covered by the
patent. In any event, we do not believe that this patent will have a material
adverse effect on our business assets, liabilities, financial condition,
operations or prospects.
We have identified four European Patent Applications, EPA 415, 731; EPA 657,
539; EPA 657, 540; and EPA 690, 129, that claim enzymes for converting prodrugs
to their active forms for treating disease, including cancer, and methods of
delivering the enzymes using virions. Glaxo Wellcome either owns or has licensed
the rights to these patent applications. The European Applications were filed in
1989, and as yet, have not been granted. It is assumed that one or more
corresponding United States patent applications have been filed, but as yet none
have issued. The issuance of any of these patent applications in either Europe
or the United States will not prevent us from developing and commercializing
ONYX-015. However, there can be no assurance that these patent applications,
should they issue, will not adversely affect our freedom to operate in the area
of armed viruses, that is, viruses that we may develop that have incorporated
into them prodrug converting enzymes. Moreover, there can be no assurances that
we would be successful in challenging any such claims, under any such patents if
they were to issue, or that a license would be available.
We have also identified a PCT patent application, PCT/US98/04080, that
claims pegylated adenovirus. Pegylation is one of many methods we are exploring
to modify our viruses for systemic delivery. Calydon, Inc. filed this
application with a priority date of March 3, 1997. Corresponding patent
applications are also pending in the United States. There can be no assurance
that these patent applications, should they issue, will not restrict our freedom
to operate in the area of pegylated adenovirus.
In June 1997, ICT Pharmaceuticals, Inc. notified us of two issued United
States Patents, Nos. 4,980,281 and 5,266,464 that ICT believes cover the use of
a cell for the screening, testing or pharmacological characterization of new
drugs or other substances. Foreign counterparts of the U.S. patents are pending.
ICT has offered us a license to the patents. We have not determined whether to
negotiate a license. In any event, we do not believe that these patents will
have a material adverse effect on our business, assets, liabilities, financial
condition, operations or prospects.
Together with our licensors, we also rely on trade secrets to protect our
combined technology, especially where patent protection is not believed to be
appropriate or obtainable. However, trade secrets are difficult to protect. We
protect our proprietary technology and processes, in part, by confidentiality
agreements with our employees, consultants, collaborators and certain
contractors. There can be no
11
assurance that these agreements will not be breached, that we would have
adequate remedies for any breach, or that our trade secrets will not otherwise
become known or be independently discovered by competitors. To the extent that
we or our consultants or research collaborators use intellectual property owned
by others in their work for us, disputes may also arise as to the rights in
related or resulting know-how and inventions.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries will be a significant factor in the manufacturing and marketing of any
products that may be discovered or developed by us, or that may arise out of our
research. All of our products will require regulatory approval by government
agencies prior to commercialization. We anticipate that our products will be
subject to rigorous preclinical and clinical testing and premarket approval
procedures by the FDA and similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the
manufacturing, testing, labeling, storage, recordkeeping and marketing and
promotion of such products.
The steps ordinarily required before a drug or biological product may be
marketed in the United States include (a) preclinical studies, (b) the
submission to the FDA of an IND which must become effective before human
clinical trials may commence, (c) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug or biologic, (d) the
submission of a marketing application to the FDA, and (e) FDA approval of the
marketing application, including inspection and approval of the product
manufacturing facility.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practice. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of clinical
trials. Unless the FDA objects to an IND, the IND will become effective 30 days
following its receipt by the FDA. There can be no assurance that submission of
an IND will result in FDA clearance to commence clinical trials or that the lack
of an objection means that the FDA will ultimately approve an application for
marketing approval.
Clinical trials involve the administration of the investigational product to
humans under the supervision of a qualified principal investigator. In the
United States, clinical trials must be conducted in accordance with Good
Clinical Practices under protocols submitted to the FDA as part of the IND. In
addition, each clinical trial must be approved and conducted under the auspices
of an Institutional Review Board, or IRB, and with patient informed consent. The
IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution conducting the clinical
trial. The United Kingdom and certain other European and Asian countries have
similar regulations.
The goal of Phase I clinical trials is to establish initial data about
safety and tolerance of the investigational product in humans. In Phase II
clinical trials, evidence is sought about the desired therapeutic efficacy of
the investigational product in limited studies with small numbers of carefully
selected subjects. Efforts are made to evaluate the effects of various dosages
and to establish an optimal dosage level and dosage schedule. Additional safety
data are also gathered from these studies. The Phase III clinical trial program
consists of expanded, large-scale, multicenter studies in the target patient
population. The goal of these studies is to obtain definitive statistical
evidence of the efficacy and safety of the proposed product and dosage regimen.
All data obtained from this comprehensive development program are submitted
as a marketing application to the FDA and the corresponding agencies in other
countries for review and approval. FDA approval of a marketing application is
required before marketing may begin in the United States. The FDA may elect to
present data on our products to one of its advisory committees for review and
recommendation before approval is granted. Essentially all of our proposed
products will be subject to
12
demanding and time-consuming approval procedures in the countries where we
intend to commercialize our products. These regulations define not only the form
and content of the development of safety and efficacy data regarding the
proposed product, but also impose specific requirements regarding manufacture of
the product, testing, quality assurance, packaging, storage, documentation,
recordkeeping, labeling, advertising, and marketing procedures. Effective
commercialization also requires inclusion of our products in national, state,
provincial, or institutional formularies or cost reimbursement systems.
FDA approval of our products, including a review of the manufacturing
processes and facilities used to produce such products will be required before
such products may be marketed in the United States. The process of obtaining FDA
approval can be costly, time consuming and subject to unanticipated delays. The
FDA may refuse to approve an application if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require additional
testing for safety and efficacy of the drug. Moreover, if regulatory approval of
a drug product is granted, the approval will be limited to specific indications.
There can be no assurance that approvals of our proposed products, processes or
facilities will be granted on a timely basis, if at all. Any failure to obtain,
or delay in obtaining, such approvals would have a material adverse affect on
our business, financial condition and results of operations. Moreover, even if
regulatory approval is granted, such approval may include significant
limitations on indicated uses for which a product could be marketed. In some
instances, regulatory approval may be granted with the condition that
confirmatory, Phase IV, clinical studies are carried out. If these Phase IV
studies do not confirm the results of previous studies, regulatory approval for
marketing may be withdrawn. Failure to comply with FDA and other applicable
regulatory requirements may result in, among other things, warning letters,
civil penalties, criminal prosecution, injunctions, seizure or recall of
products, total or partial suspension of production, refusal of the government
to grant approval, or withdrawal of approval of our products.
In addition to regulations enforced by the FDA and by the Nuclear Regulatory
Commission, we are subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act, and other present and potential
future federal, state or local regulations. Our potential products may require
review by RAC. In other countries, similar regulations may apply. Our research
and development involves the controlled use of hazardous materials and
chemicals. Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, we
could be held liable for any damages that result and any such liability could
exceed our resources.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities will be necessary in foreign countries prior
to the commencement of marketing of the product in such countries. The approval
procedure varies among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there is now a
centralized European Union approval mechanism in place, each European country
may nonetheless impose its own procedures and requirements, many of which are
time consuming and expensive. Thus, there can be substantial delays in obtaining
required approvals from both the FDA and foreign regulatory authorities after
the relevant applications are filed. We expect to rely on corporate partners and
licensees, along with our own expertise, to obtain governmental approval in
foreign countries of drug and biological products discovered by us or arising
from our programs.
COMPETITION
We are engaged in a rapidly changing and highly competitive field. Other
products and therapies that currently exist or are being developed will compete
with the products we are seeking to develop and market. Some of these
competitive products are in clinical trials. In particular, among other trials,
Schering-Plough Corporation is conducting a Phase II clinical trial of its p53
gene therapy product in liver metastases of colorectal cancer.
Aventis Inc./Introgen Therapeutics, Inc. are also initiating a Phase III
13
clinical trial in head and neck cancer with their p53 gene therapy product.
These products would compete directly with ONYX-015. Other companies are
developing small molecule drugs which may compete with product candidates
identified in our small molecule programs.
Competition from fully integrated pharmaceutical companies and more
established biotechnology companies is intense and is expected to increase.
Substantially all of these companies have significantly greater financial
resources and expertise in research and development, manufacturing, preclinical
and clinical testing, obtaining regulatory approvals, and marketing than us.
Smaller companies may also prove to be significant competitors, particularly
through collaborations with large pharmaceutical and established biotechnology
companies. Many of these competitors have significant products that have been
approved or are in development and operate large, well-funded research and
development programs. Academic institutions, governmental agencies and other
public and private research organizations also conduct research, seek patent
protection and seek marketing and research and development collaborations that
compete with our programs. These companies and institutions also compete with us
in recruiting and retaining highly qualified scientific and management
personnel. In addition to the above factors, we will face competition based on
product efficacy and safety, the timing and scope of regulatory approvals,
availability of supply, marketing and sales capability, reimbursement coverage,
price and patent position.
EMPLOYEES
As of December 31, 1999, we had 120 full-time employees of whom 31 hold
Ph.D. or M.D. degrees. Of our employees, 94 are in research and development and
26 are in business development, finance and administration. No employee of ours
is represented by a labor union and we consider our employee relations to be
good.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board, or SAB, consists of individuals with
expertise in many aspects of molecular oncology that advise us and provide
critical review of our various development activities. The SAB meets several
times a year. In addition, the SAB members consult with and meet informally with
us on a frequent basis. Certain SAB members own shares of our common stock and
each is compensated for his services. Every member of the SAB has entered into a
consulting agreement with us covering the terms of their positions as our
consultants and as members of the SAB. The members of our SAB are as follows:
MEMBER AFFILIATION
- ------ -----------
Edward E. Harlow, Jr., Ph.D. (Chairman)...... Harvard Medical School
Allan Balmain, Ph.D., F.R.S.E................ University of California, San Francisco
Cancer Center
Eric R. Fearon, M.D., Ph.D................... University of Michigan Comprehensive Cancer
Center
Douglas Hanahan, Ph.D........................ University of California, San Francisco
Hormone Research Institute
Frank McCormick, Ph.D., F.R.S................ University of California, San Francisco
Cancer Center
Owen N. Witte, M.D........................... University of California, Los Angeles
Howard Hughes Institute
14
ADDITIONAL BUSINESS RISKS
THE DISCUSSION IN THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS DISCUSSED BELOW
AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
ANNUAL REPORT.
THE RESULTS OF CLINICAL TRIALS OF ONYX-015 ARE UNCERTAIN.
We have completed Phase II clinical trials of ONYX-015 for the treatment of
head and neck cancer, both as a single agent and in combination with
chemotherapy. Based on data from the Phase II clinical trials, we expect to
initiate a Phase III clinical trial for ONYX-015 for the treatment of head and
neck cancer in the middle of 2000. Historically, many pharmaceutical products
have failed in Phase III testing notwithstanding favorable results in Phase II
clinical trials. The results of the Phase III trials of ONYX-015 may fail to
achieve primary endpoints and may demonstrate previously unforseen side effects.
The results also may not extend the findings of previous clinical trials,
including response rates, duration of response or safety.
There can be no assurance that the FDA will accept the results of the Phase
III trials, or accept other elements of the biologics license application that
we may file for ONYX-015, as being sufficient for market approval. The FDA may
require additional clinical trials. Additional clinical trials will be
extensive, expensive and time-consuming. If ONYX-015 fails to receive regulatory
approval or regulatory approval is delayed, our business, financial condition
and results of operations will be seriously harmed. In addition, our clinical
trials are being conducted with patients who have failed conventional treatments
and who are in the most advanced stages of cancer. During the course of
treatment, these patients can die or suffer adverse medical effects for reasons
that may not be related to ONYX-015. These adverse effects may impact the
interpretation of clinical trial results.
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE SERIOUSLY
HARMED.
None of our products has received regulatory approval, and only ONYX-015 has
entered clinical trials. Accordingly, all of our products will require the
commitment of substantial resources, extensive research and development,
preclinical or animal testing, clinical or human trials, manufacturing scale-up
and regulatory approval prior to being ready for commercial sale. There can be
no assurance that commercially viable products will result from our efforts and
those of parties collaborating with us. If any of our products, even if
developed and approved, cannot be successfully commercialized, our business,
financial condition and results of operations would be seriously harmed.
WE MAY FAIL TO DEMONSTRATE THAT ONYX-015 IS EFFECTIVE FOR THE TREATMENT OF OTHER
TYPES OF CANCER EVEN IF ONYX-015 IS PROVEN EFFECTIVE FOR THE TREATMENT OF HEAD
AND NECK CANCER.
ONYX-015 is being developed initially for treatment of head and neck cancer,
using direct intratumoral injection. Even if ONYX-015 is developed successfully
for this type of cancer, there can be no assurance that we will be able to
demonstrate that it is effective in the treatment of a broader array of cancer
types. We are in the process of completing Phase I/II clinical trials for
ONYX-015 for treatment of liver metastases of colorectal cancer and for the
treatment of pancreatic cancer, both as a single agent and in combination with
chemotherapy. Clinical trial results are inherently uncertain. In addition,
there is no assurance that we will succeed in our efforts to deliver ONYX-015 to
tumors through routes of administration which are more practical for certain
cancer types and less costly than direct intra-tumoral injection. If we are not
successful in developing additional routes of administration of ONYX-015, or the
drug is
15
otherwise ineffective in the treatment of additional types of cancer, the
commercial potential of this product will be reduced, even if it does receive
marketing approval.
THE BIOLOGICAL CHARACTERISTICS OF OUR THERAPEUTIC VIRUSES, AND THEIR
INTERACTIONS WITH OTHER DRUGS AND THE HUMAN IMMUNE AND OTHER DEFENSE SYSTEMS ARE
NOT FULLY UNDERSTOOD.
The use of therapeutic replicating viruses is novel and we are still
determining the biological characteristics of these viruses. For example, in our
clinical trials to date, we have achieved the best results when ONYX-015 is used
in combination with standard chemotherapy drugs, but the reasons for and the
nature of the interaction of the virus with these other drugs is still
uncertain. In addition, the response of the human immune system to the viral
infection is still being investigated, and the immune system may play a role in
limiting the tumor-killing effect of our therapeutic viruses. It is also not
known to what extent the filtering organs of the body may clear our therapeutic
viruses from circulation and limit the tumor-killing activity of our therapeutic
viruses. Further, there is some scientific uncertainty as to whether the killing
activity of ONYX-015 is specific to cells with p53 mutations. Moreover, the
large number of factors that contribute to the formation of each individual
patient's cancer, as well as each individual's response to treatment, is largely
unknown, and each tumor is unique. These factors include not only the cancer
type, but also the pressures within the tumor, the presence of interspersed
normal cells and fibrous tissue, and other factors. These are among the reasons
why only some cancer patients respond to a particular type of cancer therapy
while others do not, even among patients with the same cancer type. The novelty
and scientific uncertainties regarding our therapeutic viruses and the
uniqueness of human cancers from patient-to-patient increases the risk that our
product candidates will not be successfully developed, or if developed will not
have a therapeutic effect in a broad patient population.
WE ARE DEPENDENT UPON COLLABORATIVE RELATIONSHIPS TO DEVELOP, MANUFACTURE AND
COMMERCIALIZE OUR PRODUCTS AND TO OBTAIN REGULATORY APPROVAL.
Our strategy for developing, manufacturing and commercializing our products
and obtaining regulatory approval depends in large part upon maintaining and
entering into collaboration agreements with pharmaceutical companies or other
collaborative parties. We have entered into a number of collaboration agreements
with different collaborative parties, including research, development and
marketing agreements with Warner-Lambert and Bayer. If we fail to maintain these
relationships or establish new collaborative relationships, we would be required
to undertake these activities at our own expense, which would significantly
increase our capital requirements and limit the programs we are able to pursue,
and we would be subject to significant delays with the development, manufacture
or sale of our products.
We are subject to a number of risks associated with our dependence upon
collaborative relationships, including:
- the amount and timing of expenditure of resources can vary for reasons
outside our control;
- business combinations and changes in a collaborative party's business
strategy may adversely affect such party's willingness or ability to
complete its obligations under the collaboration agreement with us;
- the right of the collaborative party to terminate its collaboration
agreement with us on limited notice and for reasons outside our control;
- loss of significant rights to our collaborative parties if we fail to meet
our obligations under these agreements;
- disagreements as to ownership of clinical trial results or regulatory
approvals, and the refusal of the FDA to recognize us as holding the
regulatory approvals necessary to commercialize our products;
16
- the collaborative party may develop or have rights to competing products
and withdraw support of our products; and
- disagreements may arise with a collaborative party regarding breach of the
collaboration agreement or ownership of proprietary rights.
These factors and other possible disagreements with collaborative parties
could lead to delays in the research, development or commercialization of our
products or could require or result in litigation or arbitration, which would be
time consuming and expensive. If we fail to maintain these relationships or
establish new collaborative relationships, our business, financial condition and
results of operations would be seriously harmed.
CHIRON MAY HAVE PREFERENTIAL RIGHTS TO ESTABLISH COLLABORATIONS WITH US.
We were established in April 1992 by means of a transfer from Chiron
Corporation to us of the drug discovery program being conducted at Chiron by
Dr. Frank McCormick, our scientific founder, and his research team. Under the
agreement executed at that time, we granted Chiron preferential rights to
receive product licenses in the fields of diagnostics and vaccines, and also
established a mechanism for our making proposals to Chiron for future
collaborations. Chiron has advised us that it believes that this mechanism
requires us to offer gene therapy programs to Chiron before licensing any such
program to a third party. We and Chiron have different interpretations of this
agreement as it relates to the scope of Chiron's rights. Chiron delivered a
letter to us under which Chiron waived any rights it has under the agreement
with respect to collaborative arrangements that we may enter into with others
until the end of July 2000, based on our selectively-replicating virus
technology. During the period of time covered by this letter, we executed our
agreement with Warner-Lambert for the development of ONYX-015 and two armed
virus products. If Chiron does not grant us further waivers and asserts rights
under the April 1992 agreement, or if disputes arise, our ability to enter into
future collaborations for other product candidates would be complicated and
might be delayed or interfered with. If we are unable to establish new
collaborative relationships, or if our ability to enter into future
collaborative arrangements are complicated, delayed or interfered with, our
business, financial condition and results of operations would be seriously
harmed.
WARNER-LAMBERT HAS AGREED TO BE ACQUIRED BY PFIZER, INC.
We have entered into multiple research and development and marketing
collaboration agreements with Warner-Lambert, including a collaboration
agreement related to ONYX-015. As part of our collaboration with Warner-Lambert
related to ONYX-015, Warner-Lambert has agreed to manufacture ONYX-015 for
commercial use.
In February 2000, Warner-Lambert agreed to be acquired by Pfizer, Inc. We
cannot assure you that Pfizer will be interested in continuing these
collaborative relationships with us because these collaborations address smaller
markets than Pfizer generally seeks to address. We also cannot assure you that
Pfizer is interested in the development of a virus technology platform or the
products we seek to develop. If the acquisition of Warner-Lambert by Pfizer is
consummated, then Pfizer could modify, disrupt or terminate our collaboration
agreements with Warner-Lambert currently in effect, subject to the terms of such
agreements. Pursuant to our agreement with Warner-Lambert relating to ONYX-015,
Warner-Lambert has the right to terminate this agreement for any reason with
90 days notice, in which case they would be required to return all rights to
ONYX-015 to us royalty-free. We cannot assure you that Pfizer will not modify,
disrupt or terminate one or more of our collaboration agreements with
Warner-Lambert pursuant to the terms of these agreements.
If Pfizer terminates our agreement relating to ONYX-015, a significant
portion of the $40 million Warner-Lambert is obligated to fund for the
development of ONYX-015, including the cost of clinical trials, would be lost.
In addition, because we do not have any sales and marketing capability, we are
relying
17
on Warner-Lambert's sales and marketing expertise to commericialize ONYX-015.
Further, if Pfizer terminates our agreement relating to ONYX-015 and does not
agree to continue to manufacture ONYX-015 for commercial use, we would have to
establish an alternate manufacturing source for ONYX-015 which would cause a
delay in the commercial sale of ONYX-015. Such a delay, or the modification,
disruption or termination of any of our current collaboration agreements with
Warner-Lambert, especially our collaboration related to ONYX-015, would
seriously harm our business, financial condition and results of operations.
WE DO NOT HAVE CLINICAL OR COMMERCIAL SCALE MANUFACTURING EXPERTISE OR
CAPABILITIES AND ARE DEPENDENT ON THIRD PARTIES TO FULFILL OUR MANUFACTURING
NEEDS.
We lack the resources and capabilities to manufacture our products on our
own for clinical trials or in commercial quantities, and we have no experience
in such manufacturing. It would require substantial funds to establish these
capabilities. We have generally granted our collaborative parties the exclusive
right to manufacture products resulting from our collaborations, and we expect
to grant similar manufacturing rights in future collaborations. Consequently, we
are dependent on third parties, including collaborative parties and contract
manufacturers, to manufacture our products and product candidates. These parties
may encounter difficulties in production scale-up, including problems involving
production yields, quality control and quality assurance and shortage of
qualified personnel. These third parties may not perform as agreed or may not
continue to manufacture our products for the time required by us to successfully
market our products. If these third parties fail to deliver the required
quantities of our products or product candidates for clinical or commercial use
on a timely basis and at commercially reasonable prices, and we fail to find a
replacement manufacturer or obtain resources to develop our own manufacturing
capabilities, our business will be seriously harmed.
WE CURRENTLY RELY ON A SOLE SOURCE OR LIMITED NUMBER OF SOURCES FOR THE
MANUFACTURING OF ONYX-015.
We currently rely on a sole source contract manufacturer for the supply of
ONYX-015 for Phase III clinical trials. This contract manufacturer has not
produced materials for Phase III clinical trials for us or any other parties. In
addition, there are a limited number of parties who could manufacture ONYX-015
for commercial use. If either our contract manufacturer or Warner-Lambert are
unable to deliver the required quantities of ONYX-015 or either of them
terminate our relationship, we may not be able to find a replacement
manufacturer within a reasonable amount of time or at commercially reasonable
rates. If we fail to find a replacement manufacturer or develop our own
manufacturing capabilities, our business, financial condition and results of
operations will be seriously harmed.
WE NEED TO SCALE-UP THE MANUFACTURING PROCESS OF ONYX-015 FOR COMMERCIAL USE.
To obtain regulatory approval for ONYX-015, our contract manufacturer will
need to be able to produce commercial quantities of ONYX-015. To do so, we need
to modify the manufacturing process to produce large quantities of ONYX-015 and
obtain access to a larger manufacturing facility. This could require a
significant amount of time and experimentation to meet our quality standards for
ONYX-015. This will also require a significant capital investment on our part.
In addition, if we do not treat patients in our Phase III pivotal trial with
product from the new process manufactured at the larger facility, the FDA will
most likely require a bridging study to show that the ONYX-015 produced from the
new process at the larger facility is comparable to ONYX-015 produced from our
existing manufacturing process at our contract manufacturer's existing facility.
If we encounter difficulties in modifying the manufacturing process in time to
conduct a bridging study prior to FDA review of our Phase III pivotal clinical
trial, commercial sales of ONYX-015 could be delayed and our business, financial
condition or results of operation could be seriously harmed.
18
MARKET ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN.
Even if our product development efforts are successful and even if the
requisite regulatory approvals are obtained, our products may not gain market
acceptance among physicians, patients, healthcare payers and the medical
community. A number of additional factors may limit the market acceptance of
products including the following:
- rate of adoption by healthcare practitioners;
- indications for which the product is approved;
- rate of the products' acceptance by the target population;
- timing of market entry relative to competitive products;
- availability of alternative therapies;
- price of our product relative to alternative therapies;
- availability of third-party reimbursement;
- 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.
WE DO NOT HAVE MARKETING OR SALES EXPERIENCE OR CAPABILITIES.
We intend to enter into agreements with third parties to market and sell
most of our products. We may not be able to enter into marketing and sales
agreements with others on acceptable terms, if at all. To the extent that we
enter into marketing and sales agreements with other companies, our revenues, if
any, will depend on the efforts of others. We also have the right under our
collaboration agreements to co-promote our products in conjuction with our
collaborative parties. If we are unable to enter into third-party agreements or
if we are exercising our rights to co-promote a product, then we will be
required to develop marketing and sales capabilities. We may not successfully
establish marketing and sales capabilities or have sufficient resources to do
so. If we do not develop marketing and sales capabilities, we may not be able to
meet our co-promotion obligations under our collaboration agreements, which
could result in our losing these co-promotion rights. If we do develop such
capabilities, we will compete with other companies that have experienced and
well-funded marketing and sales operations. Failure to establish marketing and
sales capabilities or failure to enter into marketing agreements with third
parties will seriously harm our business, financial condition and results of
operations.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF OUR PRODUCTS.
The recent death of a patient at the University of Pennsylvania undergoing
gene therapy using an adenoviral vector to deliver a therapeutic gene has been
widely publicized. This death and any other adverse events in the field of gene
therapy that may occur in the future may result in greater governmental
regulation of our product candidates and potential regulatory delays relating to
the testing or approval of our product candidates. As a result of this death,
the United States Senate has commenced hearings to determine whether additional
legislation is required to protect volunteers and patients who participate in
gene therapy clinical trials. Based on the adverse events reported by
investigators using adenoviral vectors, the Recombinant DNA Advisory Committee,
or RAC, which acts as an advisory body to the National Institutes of Health, or
NIH, has extensively discussed the use of adenoviral vectors in gene therapy
clinical trials. Any increased scrutiny or new government regulation could delay
or increase the costs of our product development efforts or clinical trials. In
this regard, the patient in the University of Pennsylvania trial was receiving
therapy by delivery through the hepatic artery of the liver. This route of
administration is the same as the one we are using in our current Phase I/II
clinical trial of ONYX-015 for liver metastases
19
of colorectal cancer. Concern about this route of adenovirus administration
could be a source of delay in further clinical trials or regulatory approvals
for this type of cancer treatment.
Our commercial success will depend in part on public acceptance of the use
of gene therapies for the prevention or treatment of human diseases. Public
attitudes may be influenced by claims that gene therapy is unsafe, and gene
therapy may not gain acceptance of the public or the media. Negative public
reaction to gene therapy could result in greater governmental regulation and
stricter clinical trial oversight and commercial product labeling requirements
of gene therapies and could cause a decrease in the demand for products we may
develop.
WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN.
To date, we have engaged primarily in research and development. Our research
and development and general and administrative expenses have resulted in
substantial losses from operations. As of December 31, 1999, we had an
accumulated deficit of approximately $78.1 million. We expect to incur
significant and increasing operating losses over the next several years as our
research and development efforts and preclinical testing and clinical trial
activities expand. We expect that the amount of operating losses will fluctuate
significantly from quarter to quarter as a result of increases or decreases in
our research and development efforts, the establishment or termination of
collaborations, the timing and amount of collaboration payments under the terms
of our collaborative agreements, or the initiation, success or failure of
clinical trials.
We do not expect to generate revenues from the sale of products for the
foreseeable future. We expect that substantially all of our revenues for the
foreseeable future will result from payments under our collaborative agreements.
Our ability to achieve profitability depends upon our success in completing
development of our potential products, obtaining required regulatory approvals
and manufacturing and marketing our products.
WE WILL NEED SUBSTANTIAL ADDITIONAL FUNDS.
We will require substantial additional funds to conduct the costly and
time-consuming research, preclinical testing and clinical trials necessary to
develop our technology and proposed products, and to establish or maintain
relationships with collaborative parties to bring our products to market. Our
future capital requirements will depend upon a number of factors, including
continued scientific progress in the research and development of our technology
programs, the size and complexity of these programs, our ability to establish
and maintain collaboration agreements, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the cost involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, competing technological and market developments and product
commercialization activities. If we are unable to obtain additional funds, we
may be forced to delay or terminate clinical trials, curtail operations or
obtain funds through collaborative and licensing arrangements that may require
us to relinquish commercial rights or potential markets or grant licenses that
are not favorable to us.
FAILURE TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS WILL SERIOUSLY HARM
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our success depends on our continued ability to attract, retain and motivate
highly qualified management and scientific personnel. Because of the scientific
nature of our business, we are highly dependent on principal members of our
scientific and management staff. To pursue our product development plans, we
will need to hire additional qualified scientific personnel to perform research
and development, as well as personnel with expertise in clinical testing,
government regulation and manufacturing. These requirements are also expected to
require additional management personnel and the development of additional
expertise by existing management personnel. We face competition for qualified
20
individuals from numerous pharmaceutical and biotechnology companies,
universities, and other research institutions. The failure to maintain our
management and scientific staff and to attract additional key personnel could
seriously harm our business, financial condition and results of operations.
WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE.
We are engaged in a rapidly changing and highly competitive field. Other
products and therapies that currently exist or are being developed will compete
with the products we are seeking to develop and market. Many other companies are
actively seeking to develop products that have disease targets similar to those
we are pursuing. Some of these competitive products are in clinical trials. In
particular, among other trials, Schering-Plough Corporation is conducting a
Phase II clinical trial of its p53 gene therapy product in liver metastases of
colorectal cancer. Aventis, Inc./Introgen Therapeutics, Inc. are also initiating
a Phase III clinical trial in head and neck cancer with their p53 gene therapy
products. If approved, the products of these and other competitors now in
clinical trials will compete directly with ONYX-015. Other companies are
developing small molecule drugs that may compete with product candidates
identified in our small molecule drug programs.
Many of our competitors, either alone or together with collaborative
parties, have substantially greater financial resources and larger research and
development staffs than we do. In addition, many of these competitors, either
alone or together with their collaborative parties, have significantly greater
experience than we do in:
- developing products;
- undertaking preclinical testing and human clinical trials;
- obtaining FDA and other regulatory approvals of products; and
- manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA approval or commercializing products before we do. If we commence
commercial product sales, we will be competing against companies with greater
marketing and manufacturing capabilities, areas in which we have limited or no
experience.
We also face, and will continue to face, competition from academic
institutions, government agencies and research institutions. There are numerous
competitors working on products to treat each of the diseases for which we are
seeking to develop therapeutic products. In addition, any product candidate that
we successfully develop may compete with existing therapies that have long
histories of safe and effective use. Competition may also arise from:
- other drug development technologies and methods of preventing or reducing
the incidence of disease;
- new small molecule drugs; or
- other classes of therapeutic agents.
Developments by competitors may render our product candidates or
technologies obsolete or noncompetitive. We face and will continue to face
intense competition from other companies for collaborations with pharmaceutical
and biotechnology companies for establishing relationships with academic and
research institutions, and for licenses to proprietary technology. These
competitors, either alone or with collaborative parties, may succeed with
technologies or products that are more effective than ours.
21
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND WE MAY NOT BE ABLE TO
OBTAIN REGULATORY APPROVALS.
Our product candidates under development are subject to extensive and
rigorous domestic regulation. The FDA regulates, among other things, the
development, testing, manufacture, safety, efficacy, recordkeeping, labeling,
storage, approval, advertising, promotion, sale and distribution of
biopharmaceutical products. If we market our products abroad, they also are
subject to extensive regulation by foreign governments. None of our products has
been approved for sale in the United States or any foreign market. Because our
products involve the application of new technologies and will be based on new
therapeutic approaches, our products are subject to substantial additional
review by various governmental regulatory authorities and as a result,
regulatory approvals may be obtained more slowly than for products using more
conventional technologies.
The regulatory review and approval process takes many years, requires the
expenditure of substantial resources, involves post-marketing surveillance, and
may involve ongoing requirements for post-marketing studies. Additional or more
rigorous governmental regulations may be promulgated that could delay regulatory
approval of our or a collaborative party's product candidates. Delays in
obtaining regulatory approvals may:
- adversely affect the successful commercialization of any products that we
or collaborative parties develop;
- impose costly procedures on us or our collaborative parties;
- diminish any competitive advantages that we or collaborative parties may
attain; and
- adversely affect our receipt of revenues or royalties.
We expect to rely on the parties with which we collaborate to file
investigational new drug applications and generally direct the regulatory
approval process for many of our product candidates. Such collaborative parties
may not be able to conduct clinical testing or obtain necessary approvals from
the FDA or other regulatory authorities for any product candidates. If we fail
to obtain required governmental approvals, we or our collaborative parties will
experience delays in or be precluded from marketing products developed through
our research. In addition, the commercial use of our products will be limited.
If we have disagreements as to ownership of clinical trial results or regulatory
approvals, and the FDA refuses to recognize us as holding the regulatory
approvals necessary to commercialize our products, we may experience delays in
or be precluded from marketing products developed through our research. Delays
and limitations may materially adversely affect our business, financial
condition and results of operations.
Any required approvals, once obtained, may be withdrawn. Further, if we fail
to comply with applicable FDA and other domestic or foreign regulatory
requirements at any stage during the regulatory process, we, our contract
manufacturers or our collaborative parties may be subject to sanctions,
including:
- delays;
- warning letters;
- fines;
- product recalls or seizures;
- injunctions;
- refusal of the FDA or its foreign counterparts to review pending market
approval applications or supplements to approval applications;
- total or partial suspension of production;
- civil penalties;
22
- withdrawals of previously approved marketing applications, and
- criminal prosecutions.
We and our contract manufacturers also are required to comply with the
applicable FDA current good manufacturing practice regulations, which include
requirements relating to quality control and quality assurance as well as the
corresponding maintenance of records and documentation. Further, manufacturing
facilities must be approved by the FDA before they can be used to manufacture
our products, and are subject to additional FDA inspection. We or our contract
manufacturers may not be able to comply with the applicable good manufacturing
practice requirements and other FDA regulatory requirements.
After a product has received approval from the FDA, we cannot guarantee the
FDA will permit us to market the product for applications beyond those for which
approval was granted, or that the FDA will grant us approval for separate
product applications which represent extensions of our basic technology, or that
existing approvals will not be withdrawn or modified in a significant manner.
Further, it is possible that the FDA will promulgate additional regulations
restricting the sale of our products.
Labeling and promotional activities are subject to scrutiny by the FDA and
state regulatory agencies and, in some circumstances, by the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations, and the FDA's
interpretation of them, may impair our ability to effectively market products
for which we gain approval. Failure to comply with these requirements can result
in regulatory enforcement action by the FDA.
In addition, problems or failures with the products of others, including our
competitors, could have an adverse effect on our ability to obtain or maintain
regulatory approval for any of our product candidates or products.
CLINICAL TRIALS ARE EXPENSIVE AND THEIR OUTCOMES ARE UNCERTAIN.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any of
our product candidates, we or collaborative parties must demonstrate through
preclinical testing and clinical trials that the product is safe and effective
for use in humans. We will incur substantial expense for, and devote a
significant amount of time to, preclinical and clinical testing and clinical
trials. Historically, the results from preclinical testing and early clinical
trials have not been predictive of results obtained in later clinical trials
involving large-scale testing of patients in comparison to control groups.
Clinical trials may require the enrollment of large numbers of patients and
suitable patients may be difficult to identify and recruit. A number of
companies in the pharmaceutical industry have suffered significant setbacks in
every stage of clinical trials, even in advanced clinical trials after promising
results in earlier trials.
The length of time of a clinical trial generally varies substantially
according to the type, complexity, novelty and intended use of the product
candidate. Our commencement and rate of completion of clinical trials may be
delayed by many factors, including:
- inability to acquire sufficient quantities of materials for use in
clinical trials;
- competition for and inability to enroll a sufficient number of suitable
patients for testing and inability to adequately follow patients after
treatment;
- variations in interpretation of data obtained from trials;
- failure to meet or comply with efficacy, safety or quality applicable
standards; or
- government or regulatory delays.
Our product candidates may fail to demonstrate safety and efficacy in
clinical trials. This failure may delay development of our other product
candidates, and hinder our ability to conduct related preclinical
23
testing and clinical trials. Failure to obtain regulatory approval for our
product candidates may also create difficulties in obtaining additional
financing. These failures will seriously harm our business, financial condition
and results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR OPERATE OUR BUSINESS
WITHOUT INFRINGING UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our technology will be protected from unauthorized use by others only to the
extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends 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.
We cannot be certain that our patents or patents that we license from others
will be enforceable and afford protection against competitors. The patent
positions of biotechnology and pharmaceutical companies are highly uncertain and
involve complex legal and factual questions. Therefore, we cannot predict the
breadth of claims that will be allowed under our patent applications or their
enforceability. Our patents or patent applications, issued or pending,
respectively, may be challenged, invalidated or circumvented. Our patent rights
may not provide us with proprietary protection or competitive advantages against
competitors with similar technologies. Others may independently develop
technologies similar to ours or independently duplicate our technologies. 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. This would reduce or eliminate any
advantage the patents may give us.
We cannot be certain that we were the first to make the inventions covered
by each of our issued or pending patent applications or that we were the first
to file patent applications for such inventions. We may need to license the
right to use third-party patents and intellectual property to continue
development and marketing of our products. We may not be able to acquire such
required licenses on acceptable terms, if at all. If we do not obtain such
licenses, we may need to design around other parties' patents, or we may not be
able to proceed with the development, manufacture or sale of our products. 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. Patent
litigation is costly. In addition, we may require interference proceedings
declared by the United States Patent and Trademark Office to determine the
priority of inventions relating to our patent applications. Litigation or
interference proceedings could have a material adverse effect on our business,
financial condition and results of operations, and we could be unsuccessful in
our efforts to enforce our intellectual property rights.
Specifically, we are aware of patent applications filed in the United States
and abroad that, if they were to issue, would cover ONYX-015 and other
selectively-replicating viruses, and we are aware of patent applications that
claim enzymes for converting prodrugs to their active forms for treating
disease, including cancers, and methods of delivering the enzymes using a virus.
If any of these patents are issued and we are unable to successfully challenge
any claims asserting that our product candidates or products infringe the
patent, or design around the patent or negotiate a reasonable license under the
patent, our business, financial condition and results of operations would be
seriously harmed.
24
WE FACE PRODUCT LIABILITY RISKS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE
INSURANCE.
The use of any of our product candidates in clinical trials, and the sale of
any approved products, may expose us to liability claims resulting from such use
or sale of our products. These claims might be made directly by consumers,
healthcare providers or by pharmaceutical companies or others selling such
products. We may experience financial losses in the future due to product
liability claims. We have obtained limited product liability insurance coverage
for our clinical trials. We intend to expand our insurance coverage to include
the sale of commercial products if marketing approval is obtained for product
candidates in development. However, insurance coverage is becoming increasingly
expensive. We may not be able to maintain insurance coverage at a reasonable
cost or in sufficient amounts to protect us against losses. If a successful
product liability claim or series of claims is brought against us for uninsured
liabilities or in excess of insured liabilities, our business, financial
condition and results of operations would be seriously harmed.
OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS.
Our research and process development activities involve the controlled use
of hazardous materials. We cannot eliminate the risk of accidental contamination
or injury from these materials. In the event of an accident or environmental
discharge, we may be held liable for any resulting damages, which may exceed our
financial resources and may seriously harm our business. In addition, if we
develop a manufacturing capacity, we may incur substantial costs to comply with
environmental regulations and would be subject to the risk of accidental
contamination or injury from the use of hazardous materials in our manufacturing
process.
OUR STOCK PRICE IS HIGHLY VOLATILE.
The market price of our common stock has been highly volatile and is likely
to continue to be volatile. Factors affecting our stock price include:
- results of clinical trials;
- ability to accrue patients;
- ability to manufacture sufficient supply of ONYX-015;
- success or failure in obtaining regulatory approval by us or our
competitors;
- public concern as to the safety and efficacy of our products;
- developments concerning the business of collaborative parties or their
transactions with third parties;
- developments in our relationship with collaborative parties;
- developments in patent or other proprietary rights;
- additions or departures of key personnel;
- announcements by us or our competitors of technological innovations or new
commercial therapeutic products;
- published reports by securities analysts;
- fluctuations in stock market price and volume, which are particularly
common among securities of biotechnology companies;
- fluctuations in our operating results;
- statements of governmental officials; and
- changes in healthcare reimbursement policies.
25
EXISTING STOCKHOLDERS HAVE SIGNIFICANT INFLUENCE OVER US.
Bayer, a collaborative party, has the right to have its nominee elected to
our board of directors as long as we continue to collaborate on the development
of a compound. In addition, International Biotechnology Trust plc has the right
to have its nominee elected to our board of directors as long as it continues to
own at least 66 2/3% of our common stock it purchased in January 1998. Because
of these rights and ownership and voting arrangements, our officers, directors
and principal stockholders may be able to effectively control the election of
all members of the board of directors and to determine all corporate actions.
WE DO NOT INTEND TO PAY DIVIDENDS.
We intend to retain any future earnings to finance the growth and
development of our business and we do not plan to pay cash dividends in the
foreseeable future.
SUBSTANTIAL SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR
STOCK PRICE TO FALL.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market or the
perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because biotechnology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources, and could seriously harm
our business, financial condition and results of operations.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER 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 Delaware corporations 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 where 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.
26
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 or the board; and
- no cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control, even at stock prices higher than the then current stock price.
ITEM 2. PROPERTIES
We occupy approximately 50,000 square feet of office and laboratory space in
Richmond, California. We have leased this facility for a term ending April 2005
with an option to extend the lease for an additional five years.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
27
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"ONXX." We commenced trading on the Nasdaq National Market on May 9, 1996. The
following table presents the high and low closing sales prices per share of our
common stock reported on the Nasdaq National Market.
COMMON STOCK
PRICE
-------------------
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 1998
First Quarter.............................................. $ 8.250 $6.688
Second Quarter............................................. 11.500 5.875
Third Quarter.............................................. 7.688 3.500
Fourth Quarter............................................. 8.875 5.000
YEAR ENDED DECEMBER 31, 1999
First Quarter.............................................. $ 7.969 $5.500
Second Quarter............................................. 10.375 5.500
Third Quarter.............................................. 9.750 7.750
Fourth Quarter............................................. 10.219 7.563
On March 24, 2000, the last sale price reported on the Nasdaq National
Market for Onyx's common stock was $18.375 per share.
HOLDERS
There were approximately 349 stockholders of Onyx's common stock as of
December 31, 1999.
DIVIDENDS
Onyx has not paid cash dividends on its common stock and does not plan to
pay any cash dividends in the foreseeable future.
28
ITEM 6. SELECTED FINANCIAL DATA
ONYX PHARMACEUTICALS, INC.
The following table summarizes certain selected financial data for each of
the five years ended December 31, 1999. The information presented should be read
in conjunction with the financial statements and notes included elsewhere in
this Annual Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $ 13,324 $ 11,314 $ 7,799 $ 8,302 $ 6,945
Operating expenses:
Research and development................... 23,627 25,383 20,715 14,767 13,290
General and administrative................. 5,341 5,275 5,089 3,527 2,807
-------- -------- -------- -------- --------
Loss from operations......................... (15,644) (19,344) (18,005) (9,992) (9,152)
Interest income, net......................... 842 1,685 1,980 1,575 725
-------- -------- -------- -------- --------
Net loss..................................... $(14,802) $(17,659) $(16,025) $ (8,417) $ (8,427)
======== ======== ======== ======== ========
Net loss per share........................... $ (1.29) $ (1.56) $ (1.65) $ (1.31) $ (8.92)
======== ======== ======== ======== ========
Shares used in computing net loss per
share...................................... 11,503 11,289 9,707 6,401 945
======== ======== ======== ======== ========
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $ 14,463 $ 32,160 $ 35,472 $ 40,329 $ 12,483
Total assets................................. 21,628 37,207 41,858 45,779 17,756
Working capital.............................. 6,773 19,591 27,885 36,483 9,447
Long-term debt, noncurrent portion........... 183 2,382 4,336 99 544
Accumulated deficit.......................... (78,073) (63,271) (45,612) (29,587) (21,170)
Total stockholders' equity................... $ 7,662 $ 21,619 $ 28,821 $ 40,923 $ 13,545
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS AND SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS DISCUSSED BELOW
AND IN "BUSINESS" AND "ADDITIONAL BUSINESS RISKS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
OVERVIEW
We are engaged in the discovery and development of innovative therapeutics
for treatment of cancer based on our proprietary virus technology platform. We
believe our technology platform represents a novel approach in developing
therapeutics that selectively kill cancer cells in the body, leaving healthy,
non-cancerous tissues unharmed. Our lead product candidate, ONYX-015, is
genetically engineered to selectively replicate in and destroy human tumors
based on the loss of p53 tumor suppressor gene function in cancer cells.
We have now completed Phase II clinical trials using ONYX-015 for the
treatment of head and neck cancer. Based on these results, and in collaboration
with Warner-Lambert, we expect to begin a pivotal Phase III clinical trial of
ONYX-015 by the middle of 2000. We are also evaluating ONYX-015 in clinical
trials for a number of other cancer indications. Other potential products from
our technology platform include viruses that replicate in and destroy human
tumors based on defects in the RB tumor suppressor gene function in cancer
cells. Additionally, we are developing armed viruses that increase the cancer
killing power of the virus and expand the range of human cancers sensitive to
the therapy.
Further, we are working with Bayer and Warner-Lambert to identify and
develop small molecule therapeutic compounds for a number of cancers. Together
with Bayer, we have selected an anticancer compound for clinical development.
Depending upon final results of preclinical testing of this compound, we expect
Bayer to file an IND with the FDA by the middle of 2000.
We have not been profitable since inception and expect to incur substantial
and increasing losses for the foreseeable future, primarily due to expenses
associated with the expansion of our self-funded virus research and development
programs. We expect that losses will fluctuate from quarter to quarter and that
such fluctuations may be substantial. As of December 31, 1999, our accumulated
deficit was approximately $78.1 million.
In January 2000, we sold and issued 2,000,000 shares of common stock to four
institutional investors in a private placement, at a price of $9.00 per share,
for aggregate proceeds of $18,000,000. In February 2000, we sold and issued
279,470 shares of common stock to Warner-Lambert in a private placement, at a
price of $17.891 per share, for aggregate proceeds of $5,000,000.
Our business is subject to significant risks, including the risks inherent
in our research and development efforts, the results of the ONYX-015 clinical
trials, uncertainties associated with obtaining and enforcing patents, the
lengthy and expensive regulatory approval process and competition from other
products. We do not expect to generate revenues from the sale of proposed
products in the foreseeable future. We expect that all of our revenues in the
foreseeable future will be generated from collaboration agreements.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
TOTAL REVENUES. Our total revenues in each of the last three years was
derived almost exclusively from collaborative research and development programs
with Warner-Lambert, Bayer and Eli Lilly & Company.
30
The approximate revenue from each of our programs, and other sources for each of
the past three years was as follows:
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
Warner-Lambert:
ONYX-015 and Armed Viruses............................ $ 4.0 $ -- $ --
Cell Cycle............................................ 2.7 2.8 1.8
Inflammation.......................................... 3.3 3.1 --
Bayer................................................... 1.8 3.7 4.7
Eli Lilly & Company..................................... 0.5 1.2 1.2
----- ----- ----
Total contract revenues............................... 12.3 10.8 7.7
All other sources....................................... 1.0 0.5 0.1
----- ----- ----
Total revenues........................................ $13.3 $11.3 $7.8
===== ===== ====
Total revenues increased by 18% from 1998 to 1999 and 45% from 1997 to 1998,
in each case primarily as a result of increased contract revenues. Total
contract revenues are expected to increase in 2000 from total contract revenues
realized in 1999 because we anticipate a full year of revenues under the Warner-
Lambert ONYX-015 collaborative agreement, which was in effect for only four
months of 1999. In January 1999, our collaboration with Bayer transitioned from
a research program to the co-development of a product candidate and as a result,
we will not recognize any revenue in 2000 from this program. In June 1999, the
collaboration program with Eli Lilly & Company expired pursuant to the terms of
the agreement and as a result, we will not recognize any future revenues under
this program.
RESEARCH AND DEVELOPMENT. Research and development expenses were $23.6
million in 1999, $25.4 million in 1998 and $20.7 million in 1997. The 1999
expense decrease of 7% was primarily due to a reduced level of research
activities associated with the transition of the ras program. The 1998 expense
increase of 23% was primarily due to additional costs associated with Phase I
and Phase II clinical trials of ONYX-015 and, additionally, due to higher
research expenses in our self-funded virus program. Research under our
collaboration agreements with Warner-Lambert is fully funded by them up to
specified levels. We expect to continue to expand the scope of our self-funded
virus research and development programs in future periods, which may result in
substantial increases in research and development expenses. These research and
development expenses may not be funded by collaborative parties.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.3
million in 1999, $5.3 million in 1998 and $5.1 million in 1997. General and
administrative expenses for all three years remained at essentially the same
level. It is anticipated that general and administrative expenses may increase
modestly in future periods in order to support increases in research and
development activities.
NET INTEREST INCOME. We had net interest income of $0.8 million in 1999,
$1.7 million in 1998 and $2.0 million in 1997. Net interest income decreased by
50% in 1999 primarily due to a lower average balance of cash, cash equivalents
and short-term investments. Net interest income decreased by 15% in 1998
primarily due to higher interest expense on a line of credit arrangement entered
into in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, our cash expenditures have substantially exceeded our
revenues, and we have relied primarily on the proceeds from the sale of equity
securities and revenues from collaborative research and development agreements
to fund our operations.
31
At December 31, 1999, we had cash and investments of $14.5 million, compared
to $32.2 million at December 31, 1998 and $35.5 million at December 31, 1997.
The decrease of $17.7 million in 1999 was primarily due to cash used in
operations of $14.6 million, repayment of debt of $2.2 million and capital
expenditures of $1.4 million. The decrease of $3.3 million in 1998 was primarily
due to cash used in operations of $10.5 million, repayment of debt of
$2.1 million and capital expenditures of $1.3 million primarily offset by the
issuance of 1,403,508 shares of common stock to two institutional investors,
raising $10.0 million in aggregate proceeds.
Our cash used in operations was $14.6 million in 1999, $10.5 million in 1998
and $11.8 million in 1997. The cash was used primarily to fund increasing levels
of research and development and the general and administrative expenses
necessary to support increased operations. Expenditures for capital equipment
amounted to $1.4 million in 1999, as compared to $1.3 million in 1998 and
$2.2 million in 1997. We currently expect to make expenditures for capital
equipment of approximately $2.9 million in 2000.
We recorded and amortized over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair value of our common stock at the time of grant.
Options generally vest over four years. The amortization of deferred
compensation was $194,000 in 1999 and $219,000 in both 1998 and 1997. During
1999, deferred compensation was fully amortized.
We believe that our existing capital resources and interest thereon
including equity placements of $23.0 million in early 2000 and anticipated
revenues from existing collaborations will be sufficient to fund our current and
planned operations through at least March 2001. There can be no assurance,
however, that changes in our research and development plans or other changes
affecting our operating expenses will not result in the expenditure of such
resources before such time, and in any event, we will need to raise substantial
additional capital to fund our operations in future periods. We intend to seek
such additional funding through collaborations, public and private equity or
debt financings, capital lease transactions or other financing sources that may
be available. However, there can be no assurance that additional financing will
be available on acceptable terms or 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 research or 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Reporting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS
133. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Change in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction,
and, if so, the type of hedge transaction.
In June 1999, the FASB issued Statement of Financial Reporting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," or SFAS 137, which amends
SFAS 133 to be effective for all fiscal quarters or all fiscal years beginning
after June 15, 2000. Management does not currently expect that adoption of
SFAS 137 will have a material impact on the Company's financial position or
results of operations.
32
IMPACT OF THE YEAR 2000
In our public disclosures in 1999, we discussed the nature and progress of
our plans to be Year 2000 compliant. In late 1999, we completed our remediation
and testing of computer systems and research and development software and
instrumentation. As a result of those planning and implementation efforts, we
experienced no significant disruptions in those systems applications or our
financial and information technology systems. We believe those systems
successfully responded to the Year 2000 date change. We expensed approximately
$200,000 during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from Year 2000 issues, either with our
research and development systems, other internal systems or the products and
services of our significant suppliers and other third parties. We will continue
to monitor our computer applications and those of our suppliers throughout the
year 2000 to ensure that any Year 2000 matters that may arise are addressed
promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. By policy, we place 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 classify our cash equivalents or
short-term investments as fixed rate if the rate of return on an instrument
remains fixed over its term. As of December 31, 1999, all of our cash
equivalents and short-term investments are classified as fixed rate.
The table below presents the amounts and related weighted interest rates of
our cash equivalents and short-term investments at December 31, 1999:
FAIR VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
---------- --------------- -------------
Cash equivalents, fixed rate..................... Daily 12.7 5.29%
Short-term investments, fixed rate............... 0 - 1 year 1.8 5.56%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Onyx's Financial Statements and notes thereto appear on pages 39 to 55 of
this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
33
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning Onyx's directors and
executive officers is incorporated by reference from our 2000 Definitive Proxy
Statement filed not later than 120 days following the close of the fiscal year
("the Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is hereby incorporated by reference
from Onyx's 2000 Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is hereby incorporated by reference
from Onyx's 2000 Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is hereby incorporated by reference
from Onyx's 2000 Definitive Proxy Statement.
34
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) INDEX TO FINANCIAL STATEMENTS
The Financial Statements required by this item are submitted
in a separate section beginning on page 39 of this Report.
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets
Statements of Operations
Statement of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because the
information required to be set forth therein is not
applicable.
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
3.1+ Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Stock Certificate.
4.3+ Warrant to Purchase Series C Preferred Stock issued to Lease
Management Services, Inc. on December 30, 1993.
4.4+ Amended and Restated Information and Registration Rights
Agreement dated May 30, 1994 and as amended through May 16,
1995.
4.5+ Preferred Stock Purchase Agreement between the Company and
Warner-Lambert dated May 4, 1995.
4.6+ Stock Purchase Agreement, dated January 12, 1998, among the
Company, International Biotechnology Trust plc and Lombard
Odier & Cie.
10.1+* Collaboration Agreement between Bayer Corporation (formerly
Miles, Inc.) and the Company dated April 22, 1994.
10.1(i)+* Amendment to Collaboration Agreement between Bayer
Corporation and the Company dated April 4, 1996.
10.2+* Research, Development and Marketing Collaboration Agreement
between Warner-Lambert Company and the Company, dated
May 2, 1995.
10.2(i)+ Waiver of Certain Rights under the Research, Development and
Marketing Agreement by Warner-Lambert Company dated as of
March 28, 1996.
10.3+* Compound Library Access Agreement between Warner-Lambert
Company and the Company dated May 2, 1995.
10.4+* Research and License Agreement between Eli Lilly & Company
and the Company dated May 15, 1995 and the Collaborative
Research and License Agreement between Eli Lilly and the
Company dated June 12, 1996.
35
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
10.5+* Technology Transfer Agreement dated April 24, 1992 between
Chiron Corporation and the Company, as amended in the Chiron
Onyx HPV Addendum dated December 2, 1992, in the Amendment
dated February 1, 1994, in the Letter Agreement dated
May 20, 1994 and in the Letter Agreement dated March 29,
1996.
10.6+ Scientific Advisory Board Consulting Agreement between
Dr. Frank McCormick and the Company, as of March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank
McCormick and the Company dated April 17, 1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the
Company dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the
Company dated November 1, 1993 and October 21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Company
dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Company
dated January 23, 1995.
10.11+ Credit Terms and Conditions dated October 28, 1995 between
the Company and Imperial Bank; Addendum dated October 28,
1995; and Modification Letter dated December 29, 1995.
10.12+ Equipment Financing Agreement Number 10762 between Lease
Management Services, Inc. and the Company, dated
December 30, 1993 and Addendum thereto dated December 30,
1993.
10.13+ 1996 Equity Incentive Plan.
10.14+ 1996 Non-Employee Directors' Stock Option Plan.
10.15+ 1996 Employee Stock Purchase Plan.
10.16+ Lease by and between Hall Properties, Inc. and the Company
dated September 9, 1992, the First Amendment thereto dated
April 21, 1993 and the Second Amendment thereto dated
May 11, 1996.
10.17+ Form of Indemnity Agreement to be signed by executive
officers and directors of the Company.
10.18+ Credit Terms and Conditions dated March 10, 1997 between the
Company and Imperial Bank.
10.19+ Letter Agreement between Dr. Allan Balmain and the Company
dated August 26, 1996, as amended March 13, 1997.
10.20+* Amended and restated Research, Development and Marketing
Collaboration Agreement dated May 2, 1995 between the
Company and Warner-Lambert Company.
10.21+* Research, Development and Marketing Collaboration Agreement
dated July 31, 1997 between the Company and Warner-Lambert
Company.
10.22+ Addendum to credit Terms and Conditions dated March 10, 1997
between the Company and Imperial Bank.
10.23+* Amendment to the Amended and Restated Research, Development
and Marketing Collaboration Agreement, dated December 15,
1997, between the Company and Warner-Lambert Company.
10.24+* Amendment to Collaboration Agreement between Bayer
Corporation and the Company dated February 1, 1999.
10.25+ Scientific Advisory Board Consulting Agreement effective
September 10, 1999 between Allan Balmain and the Company
including the First Amendment to Deed of Trust and Second
Amended and Restated Promissory Note.
36
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
10.26+** Collaboration Agreement between the Company and
Warner-Lambert Company dated October 13, 1999 and effective
September 1, 1999.
10.27+ Stock Put and Purchase Agreement between the Company and
Warner-Lambert Company dated October 13, 1999 and effective
September 1, 1999.
10.28+ Stock Purchase Agreement between the Company and the
investors dated January 18, 2000.
10.29 Third Amendment to Lease by and between the Metcalf Family
Living Trust and the Company effective February 24, 2000.
10.30 Employment Offer Letter between Helen Kim and the Company
dated October 26, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 38.
27.1 Financial Data Schedules.
- ------------------------
+ Filed as an exhibit to the Company's Registration Statement on Form SB-2
(No. 333-3176-LA), the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, the Company's Quarterly Reports on Form 10-Q for
the quarters ended June 30, 1996, March 31, 1997, September 30, 1997,
March 31, 1999 and September 30, 1999, the Company's Current Report on Form
8-K filed on January 26, 1998, the Company's Current Report on Form 8-K
filed on March 1, 2000, and incorporated herein by reference.
* Confidential treatment has been received for portions of this document.
** Confidential treatment has been requested for portions of this document.
(B) REPORTS ON FORM 8-K
None
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Richmond, County of Contra Costa, State of California, on the 24th day
of March, 2000.
ONYX PHARMACEUTICALS, INC.
By: /s/ HOLLINGS C. RENTON
-----------------------------------------
Hollings C. Renton
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hollings C. Renton and Marilyn E. Wortzman or
either of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K, and to file the same, with exhibits thereto
and other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HOLLINGS C. RENTON President, Chief Executive Officer and
--------------------------------- Director (Principal Executive and March 24, 2000
Hollings C. Renton Financial Officer)
/s/ MARILYN E. WORTZMAN
--------------------------------- Controller (Principal Accounting March 24, 2000
Marilyn E. Wortzman Officer)
--------------------------------- Director
Michael J. Berendt
/s/ SAMUEL D. COLELLA
--------------------------------- Director March 24, 2000
Samuel D. Colella
/s/ PAUL GODDARD
--------------------------------- Director March 24, 2000
Paul Goddard
/s/ NICOLE VITULLO
--------------------------------- Director March 24, 2000
Nicole Vitullo
--------------------------------- Director
Wendell Wierenga
38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Onyx Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Onyx Pharmaceuticals,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Onyx Pharmaceuticals, Inc.
at December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 18, 2000
39
ONYX PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
-------------------
1999 1998
-------- --------
Current Assets:
Cash and cash equivalents................................. $ 12,671 $ 21,368
Short-term investments.................................... 1,792 10,792
Receivable from related party............................. 3,300 --
Other current assets...................................... 460 609
-------- --------
Total current assets.................................... 18,223 32,769
Property and equipment, net................................. 3,000 3,730
Notes receivable from related parties....................... 386 649
Other assets................................................ 19 59
-------- --------
$ 21,628 $ 37,207
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,149 $ 2,371
Accrued liabilities....................................... 1,194 1,763
Accrued clinical trials and related expenses.............. 1,110 2,176
Accrued compensation...................................... 1,250 1,351
Deferred revenue.......................................... 3,548 3,318
Long-term debt, current portion........................... 2,199 2,199
-------- --------
Total current liabilities............................... 11,450 13,178
Long-term debt, noncurrent portion.......................... 183 2,382
Long-term deferred revenue.................................. 2,333 --
Deferred rent............................................... -- 28
Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $0.001 par value; 25,000,000 shares
authorized; 11,551,681 and 11,452,457 shares issued and
outstanding as of December 31, 1999 and 1998,
respectively............................................ 12 11
Additional paid-in capital................................ 85,723 85,073
Deferred compensation....................................... -- (194)
Accumulated deficit......................................... (78,073) (63,271)
-------- --------
Total stockholders' equity.............................. 7,662 21,619
-------- --------
$ 21,628 $ 37,207
======== ========
See accompanying notes.
40
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenue:
Contract revenue ($11,718, $9,607 and $6,491 from related
parties during 1999, 1998 and 1997, respectively)....... $ 12,262 $ 10,808 $ 7,691
Grant and other revenue................................... 1,062 506 108
-------- -------- --------
Total revenue........................................... 13,324 11,314 7,799
Operating expenses:
Research and development.................................. 23,627 25,383 20,715
General and administrative................................ 5,341 5,275 5,089
-------- -------- --------
Total operating expenses................................ 28,968 30,658 25,804
-------- -------- --------
Loss from operations........................................ (15,644) (19,344) (18,005)
Interest income............................................. 1,158 2,225 2,030
Interest expense............................................ (316) (540) (50)
-------- -------- --------
Net loss................................................ $(14,802) $(17,659) $(16,025)
======== ======== ========
Net loss per share.......................................... $ (1.29) $ (1.56) $ (1.65)
======== ======== ========
Shares used in computing net loss per share................. 11,503 11,289 9,707
======== ======== ========
See accompanying notes.
41
ONYX PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------- -------- ---------- ------------- ------------ -------------
Balances at December 31, 1996....... 9,514,285 $10 $71,132 $(632) $(29,587) $ 40,923
Exercise of stock options, net of
repurchases, at prices ranging
from $0.0071 to $10.875 per
share........................... 109,781 -- 116 -- -- 116
Issuance of common stock to
Warner-Lambert.................. 192,941 -- 3,333 -- -- 3,333
Amortization of deferred
compensation.................... -- -- -- 219 -- 219
Issuance of common stock pursuant
to employee stock purchase
plan............................ 33,511 -- 255 -- -- 255
Net loss.......................... -- -- -- -- (16,025) (16,025)
---------- --- ------- ----- -------- --------
Balances at December 31, 1997....... 9,850,518 10 74,836 (413) (45,612) 28,821
Exercise of stock options at
prices ranging from $0.0071 to
$10.875 per share............... 153,870 -- 159 -- -- 159
Issuance of common stock for
private placement (net of
issuance costs of $154)......... 1,403,508 1 9,845 -- -- 9,846
Amortization of deferred
compensation.................... -- -- -- 219 -- 219
Issuance of common stock pursuant
to employee stock purchase
plan............................ 44,561 -- 233 -- -- 233
Net loss.......................... -- -- -- -- (17,659) (17,659)
---------- --- ------- ----- -------- --------
Balances at December 31, 1998....... 11,452,457 11 85,073 (194) (63,271) 21,619
Exercise of stock options, net of
repurchases, at prices ranging
from $1.07 to $9.00 per share... 72,577 1 211 -- -- 212
Amortization of deferred
compensation.................... -- -- -- 194 -- 194
Stock-based compensation.......... -- -- 294 -- -- 294
Issuance of common stock pursuant
to employee stock purchase
plan............................ 26,647 -- 145 -- -- 145
Net loss.......................... -- -- -- -- (14,802) (14,802)
---------- --- ------- ----- -------- --------
Balances at December 31, 1999....... 11,551,681 $12 $85,723 $ -- $(78,073) $ 7,662
========== === ======= ===== ======== ========
See accompanying notes.
42
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(14,802) $(17,659) $(16,025)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 2,063 2,032 1,844
Forgiveness of notes receivable......................... 150 127 75
Amortization of deferred compensation................... 194 219 219
Stock-based compensation................................ 294 -- --
Changes in assets and liabilities:
Receivable from related party......................... (3,300) -- --
Other current assets.................................. 149 393 (364)
Other assets.......................................... 40 (49) 210
Accounts payable...................................... (222) 1,052 626
Accrued liabilities................................... (569) 283 335
Accrued clinical trials and related expenses.......... (1,066) 472 1,573
Accrued compensation.................................. (101) 605 307
Deferred revenue...................................... 2,563 2,109 (422)
Deferred rent......................................... (28) (84) (161)
-------- -------- --------
Net cash used in operating activities............... (14,635) (10,500) (11,783)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments....................... (2,783) (12,492) (35,149)
Maturities of short-term investments...................... 11,783 18,344 22,576
Capital expenditures...................................... (1,382) (1,250) (2,215)
Notes receivable from related parties..................... 113 37 (491)
Proceeds from sale of fixed assets........................ 49 49 5
-------- -------- --------
Net cash provided by (used in) investing
activities........................................ 7,780 4,688 (15,274)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt........................... -- 225 6,371
Payments on long-term debt................................ (2,199) (2,110) (448)
Net proceeds from issuances of common stock, net of
repurchases............................................. 357 10,237 3,704
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ (1,842) 8,352 9,627
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (8,697) 2,540 (17,430)
Cash and cash equivalents at beginning of year.............. 21,368 18,828 36,258
-------- -------- --------
Cash and cash equivalents at end of year............ $ 12,671 $ 21,368 $ 18,828
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the year............................. $ 324 $ 540 $ 50
======== ======== ========
See accompanying notes.
43
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Onyx Pharmaceuticals, Inc. ("Onyx" or "the Company") was incorporated on
February 14, 1992 and commenced operations on April 24, 1992. Onyx is engaged in
the discovery and development of novel cancer therapies based on a proprietary
virus technology platform. This platform enables the development of therapeutics
that selectively kill cancer cells in the human body, leaving healthy,
non-cancerous tissues unharmed.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. In
addition, certain amounts that were previously reported have been reclassified
to conform to the current period presentation.
REVENUE RECOGNITION
Revenue related to collaborative research agreements with corporate partners
is recognized ratably over the related funding periods for each contract. The
Company is required to perform research activities as specified in each
respective agreement on a best efforts basis, and the Company is reimbursed
based on the costs associated with the number of full-time equivalent employees
working on each specific contract, which is generally on a ratable basis over
the term of the agreement. Deferred revenue may result when the Company does not
incur the required level of effort during a specific period in comparison to
funds received under the respective contracts. Milestone payments are recognized
pursuant to collaborative agreements upon the achievement of specified
milestones, representing the culmination of the earnings process, for financial
accounting purposes. These milestones can include the selection of candidates
for drug development, the commencement of clinical trials or receipt of
regulatory approvals.
Revenue related to the collaborative development expenses for ONYX-015 with
Warner-Lambert Company ("Warner-Lambert") is recognized as the expenses are
incurred. Warner-Lambert is providing $40,000,000 in funding for the Phase III
clinical trials and other ongoing clinical development studies for ONYX-015. The
clinical development costs of products will be shared 75% by Warner-Lambert and
25% by Onyx, after Warner-Lambert has provided the committed funding for
ONYX-015. In addition, the Company received a $5,000,000 up-front payment, for
which revenue has been deferred, and will be recognized systematically over the
periods that the fees are earned, ranging from two to four years.
The Company receives certain revenue from United States government grants
that supports the Company's research effort in defined research projects. These
grants generally provide for reimbursement of approved costs incurred as defined
in the various grants. Revenue of $431,000, $456,000 and $108,000 was recognized
in 1999, 1998 and 1997, respectively. Revenue associated with these grants was
recognized as costs under each grant were incurred.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct and
research-related overhead expenses. Research
44
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and development expenses under the collaborative research and development
agreements approximate the revenue recognized under the collaborative
agreements, exclusive of milestone payments received.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity from the
date of purchase of three months or less to be cash equivalents. All other
liquid investments are classified as short-term investments. These instruments
consist primarily of corporate commercial paper and money market funds.
Concentration of risk is limited by diversifying investments among a variety of
industries and issuers.
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 1999 and 1998, all securities are designated
as available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in stockholders' equity. The
amortized cost of securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. The cost of securities sold is based on the specific
identification method. The estimated fair values have been determined by the
Company using available market information. Realized gains and losses and
declines in value judged to be other than temporary for available-for-sale
securities are included in the statements of operations. There were no such
gains or losses, realized or unrealized, in each of the three years ended
December 31, 1999, 1998, and 1997, respectively.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years. Leasehold
improvements are amortized over the lesser of the lease term or the estimated
useful lives of the related assets, generally three to five years.
STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees using the
intrinsic-value method and, thus, recognizes no compensation expense for options
granted to employees with exercise prices equal to the fair market value of the
Company's common stock on the date of the grant.
NET LOSS PER SHARE
Basic net loss per share and diluted net loss per share are presented in
conformity with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," for all
periods presented. In accordance with SFAS No. 128, basic and diluted net loss
per share has been computed using the weighted-average number of shares of
common stock outstanding during the period.
45
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
BASIC AND DILUTED
Weighted average shares of common stock
outstanding....................................... 11,503 11,292 9,716
Shares subject to repurchase........................ -- (3) (9)
------ ------ ------
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per
share............................................. 11,503 11,289 9,707
====== ====== ======
Basic and diluted net loss per share................ $(1.29) $(1.56) $(1.65)
====== ====== ======
The following potentially dilutive outstanding securities were not
considered in the computation of diluted net loss per share because they would
be antidilutive for each of the years ended December 31:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Stock options for the purchase of shares of common
stock................................................ 2,011 1,483 1,404
===== ===== =====
COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted FASB Statement No. 130 ("SFAS
130"), "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of SFAS 130 had no impact on the Company's net loss or
stockholders' equity. SFAS 130 requires unrealized gains or losses on
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive loss. During the
years ended December 31, 1999 and 1998, total comprehensive loss equaled net
loss.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Reporting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Change in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction,
and, if so, the type of hedge transaction.
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"), which amends SFAS 133 to be effective for all
fiscal quarters or all fiscal years beginning after June 15, 2000. Management
does not currently expect that adoption of SFAS 137 will have a material impact
on the Company's financial position or results of operations.
46
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2. COLLABORATIVE AGREEMENTS
WARNER-LAMBERT COMPANY
ONYX-015 AND TWO ARMED THERAPEUTIC VIRUSES
On October 13, 1999, the Company entered into an agreement with
Warner-Lambert, effective September 1, 1999, to develop and commercialize
ONYX-015 and two armed therapeutic viruses. Under the terms of the agreement,
the Company has the right to co-promote ONYX-015 and the two armed virus
products with Warner-Lambert in the United States and Canada. The Company also
has the right to share equally in resulting profits or losses in these
territories. Additionally, Warner-Lambert is responsible for commercializing the
products in the rest of the world and is obligated to pay the Company a royalty
on net sales in these markets.
Warner-Lambert is obligated to provide the first $40,000,000 in funding for
clinical development of ONYX-015. The Company is obligated to fund 25% of the
costs over $40,000,000 in order to retain its profit sharing and co-promotion
rights in the United States and Canada, and Warner-Lambert is obligated to fund
the remaining 75%. Warner-Lambert is also required to fully-fund the research
and preclinical development of the two armed virus product candidates. When a
product candidate is selected for clinical development, the Company will be
obligated to pay 25% of the development costs in order to retain its
profit-sharing and co-promotion rights in the United States and Canada for any
resulting product. If the Company chooses not to or is unable for any reason to:
(a) fund its portion of the development costs for ONYX-015 or an armed virus
product candidate, or (b) maintain its required co-promotion effort, the Company
would lose its co-promotion and profit-sharing rights for that product, the
product would be exclusively licensed to Warner-Lambert, and the Company would
receive a royalty on these sales on the applicable market.
Under terms of the agreement, Warner-Lambert made an up-front payment of
$5,000,000 in October 1999, and the Company has a right to require
Warner-Lambert to purchase an equity investment of $5,000,000 in both early 2000
and 2001. In February 2000, the Company exercised this right. See Note 10,
"Subsequent Events."
Revenue recognized under this agreement was $3,967,000 for the year ended
December 31, 1999. This included $3,300,000 for clinical development funding and
$667,000 related to the amortization of a $5,000,000 up-front payment received
in 1999. The up-front payment has been included in deferred revenue and is being
recognized over the related research and development period, ranging from two to
four years. Expenses related to this program were $14,433,000 for the year ended
December 31, 1999.
CELL CYCLE AGREEMENT
In May 1995, the Company entered into a research and development
collaboration agreement with Warner-Lambert to discover and commercialize small
molecule drugs that restore control of or otherwise intervene in misregulated
cell cycle transitions in tumor cells. Under this agreement, the Company assumes
responsibility for developing screening assays for jointly selected targets, and
has transferred these assays to Warner-Lambert for high throughput screening of
their compound library to identify active compounds. Warner-Lambert is
responsible for subsequent medicinal chemistry and preclinical investigations on
the active compounds. The Company will receive milestone payments on clinical
development and registration and royalties on worldwide sales of the products.
Warner-Lambert is obligated to conduct and fund all clinical development, make
regulatory filings and manufacture for sale the collaboration compounds.
47
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2. COLLABORATIVE AGREEMENTS (CONTINUED)
Research under this agreement has been extended through May 2001, but the
Company does not expect the research term under this agreement to extend beyond
this date. Thereafter, Warner-Lambert may develop products identified during the
research term and the Company could receive milestone payments and royalties on
these marketed products.
In connection with this agreement, Warner-Lambert purchased 1,500,000 shares
of Onyx's Series D preferred stock for $2.00 per share during the year ended
December 31, 1995. This stock was converted to 210,113 shares of common stock at
the time of the initial public offering. On May 4, 1996, Warner-Lambert
purchased 254,683 shares of common stock for an aggregate purchase price of
$4,000,000. Warner-Lambert also purchased 192,941 shares of common stock on
May 4, 1997 at a purchase price of $3,333,000.
Revenue recognized under these agreements was $2,701,000, $2,782,000 and
$1,805,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Expenses related to these agreements were $2,992,000, $3,092,000 and $2,951,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
INFLAMMATION AGREEMENT
In July 1997, the Company entered into a three-year research and development
collaboration agreement with Warner-Lambert to discover and commercialize small
molecule drugs for the treatment of acute and chronic inflammatory disorders.
The obligations of the parties and similar to those agreed to under the cell
cycle program agreement and each party must dedicate a specified minimum number
of researchers to the collaboration. The Company would receive milestone
payments based on the development and registration of any resulting products and
would receive royalties on worldwide sales. Research under this agreement has
been extended through July 2001, but the Company does not expect the research
term under this agreement to extend beyond such date. Thereafter, Warner-Lambert
may develop products identified during the research term and the Company could
receive milestone payments and royalties on these marketed products.
Revenue recognized under this agreement was $3,250,000 and $3,125,000 for
the years ended December 31, 1999 and 1998, respectively. No revenues were
recorded in 1997, as all related performance obligations for 1997 had not been
achieved by year-end. Expenses related to this agreement were $2,856,000,
$2,274,000 and $1,734,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
BAYER CORPORATION
In May 1994, the Company entered into a five-year research and development
collaboration with Bayer Corporation, to discover, develop and market compounds
that inhibit the function, or modulate the activity, of the ras signaling
pathway or that appropriately modulate the activity of this pathway in order to
treat cancer and other diseases. In connection with this agreement, Bayer
purchased 6,750,000 shares of Onyx's Series D preferred stock for $2.00 per
share. The preferred shares converted into 945,510 shares of common stock upon
closing of the initial public offering.
Bayer has paid all the costs of research and preclinical development of this
drug candidate. Under the agreement with Bayer, the Company has the opportunity
to co-fund 50% of clinical development costs worldwide, excluding Japan. Bayer
will fund 100% of development costs in Japan and pay the Company a royalty on
sales. If the Company co-funds and exercises its right to co-promote in the
United States, the Company would share equally in profits or losses. If the
Company does not co-promote in the United
48
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2. COLLABORATIVE AGREEMENTS (CONTINUED)
States, Bayer would first receive a portion of the product revenues to repay
Bayer for its commercialization infrastructure before determining the Company's
shares of profits and losses. In other parts of world other than Japan, Bayer
would also receive this preferential distribution. If the Company elects to
share in development costs, Bayer would pay the Company substantial development
milestone payments based on the product's progress through clinical trials.
These milestone payments would be repayable to Bayer from the Company's share of
profits and royalties. At any time during product development, either company
may terminate its participation in development costs, in which case the other
party would retain exclusive rights to the product on a royalty-bearing basis.
If the Company does not exercise its option to bear 50% of product development
costs, Bayer would retain exclusive, worldwide rights to this product candidate
and would pay royalties to the Company on net sales.
On February 1, 1999, Bayer and the Company signed an amendment to the
collaboration agreement. Based on the amendment, a development candidate was
identified. Currently, Bayer is completing preclinical work, and if final
toxicology studies are favorable, Bayer is expected to file an IND for this drug
candidate in the middle of 2000.
In December 1999, Bayer accepted the final screening assay, and the Company
received the final payment and recognized all remaining revenue under the
research portion of the agreement. Revenue recognized under this agreement was
$1,801,000, $3,700,000 and $4,686,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Expenses related to this contract were $300,000,
$4,341,000 and $5,074,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
ELI LILLY & COMPANY
On May 15, 1995, the Company entered into a one-year collaborative research
and license agreement with Eli Lilly & Company ("Eli Lilly") to discover and
develop targets for drug discovery in the modulation of the BRCA1 breast cancer
gene pathway. In connection with this agreement, Eli Lilly purchased 300,000
shares of Onyx's Series D preferred stock at $2.00 per share. The preferred
shares converted into 42,022 shares of common stock upon closing of the initial
public offering.
On June 12, 1996, the agreement with Eli Lilly was expanded and extended
through June 12, 1999. The agreement expired without being renewed in
June 1999, and no further research is being undertaken on the project.
Revenue recognized under this agreement was $543,000, $1,200,000 and
$1,200,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Expenses related to this agreement were $635,000, $1,211,000 and $1,371,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
49
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 3. INVESTMENTS
The following is a summary of available-for-sale marketable securities:
ESTIMATED FAIR VALUE
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Cash equivalents:
U.S. corporate securities--available for sale........... $ 3,952 $ --
Money market funds...................................... 8,719 21,368
------- -------
Total cash equivalents................................ $12,671 $21,368
======= =======
Short-term investments:
U.S. corporate securities............................... $ 1,792 $10,792
======= =======
As of December 31, 1999 and 1998, the difference between the fair value and
the amortized cost of available-for-sale securities was insignificant. The
average portfolio maturity is approximately three months, and the contractual
maturity of each of the investments does not exceed one year.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Machinery and equipment................................... $ 7,440 $ 6,753
Furniture and fixtures.................................... 565 548
Leasehold improvements.................................... 4,141 4,068
------- -------
12,146 11,369
Less accumulated depreciation and amortization............ (9,146) (7,639)
------- -------
$ 3,000 $ 3,730
======= =======
NOTE 5. LONG-TERM DEBT
LINE OF CREDIT
In March 1997, the Company borrowed $6,596,000 under a line of credit
arrangement with a bank that bears an interest rate of prime plus 1%. Equal
monthly payments of principal plus interest are required in order to repay the
outstanding balance by January 15, 2001. The line is secured by certain assets
of the Company and contains covenants related to maintaining debt-to-equity
ratios, tangible net worth minimums, cash and investment balances, as well as a
restriction on paying dividends or repurchasing stock. As of December 31, 1999,
the Company was not in compliance with the tangible net worth minimums and the
debt-to-equity ratio covenants. The Company received a waiver from the bank, and
in January 2000, the Company cured these deficiencies by issuing and selling
2,000,000 shares of its common stock in a private
50
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 5. LONG-TERM DEBT (CONTINUED)
placement and received $18,000,000. See Note 10, "Subsequent Events." As of
December 31, 1999, $2,382,000 was outstanding on the line of credit at an annual
interest rate of 9.5%.
NOTE 6. FACILITY LEASE
The Company leases its facility under an operating lease that expires in
April 2000, with renewal options at the end of the lease for two subsequent
five-year terms. On August 26, 1999, the Company exercised the first of its two
options to extend the lease term for five years, and on February 24, 2000, an
amendment to the lease agreement was signed. See Note 10, "Subsequent Events."
Minimum annual rental commitments at December 31, 1999 under the operating lease
as amended on February 24, 2000 are as follows (in thousands):
Year ending December 31:
2000...................................................... $ 583
2001...................................................... 647
2002...................................................... 666
2003...................................................... 686
2004...................................................... 706
Thereafter................................................ 238
------
$3,526
======
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
approximately $423,000, $408,000 and $399,000, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company has loans with certain employees and a former employee of which
$386,000 and $649,000 were outstanding at December 31, 1999 and 1998,
respectively. These loans bear interest at rates up to 6.49% per annum.
On March 15, 1996, the Company entered into a three-year Scientific Advisory
Board Consulting Agreement with a director of the Company. Under the terms of
the agreement, the Company will pay an annual retainer of $50,000 beginning
January 1, 1997, plus a daily consulting fee for services rendered. The
agreement also calls for forgiveness of debt totaling $225,000 over three years
beginning January 1, 1997, subject to the achievement of certain milestones and
the continuation of the director as a Scientific Advisor of the Company. During
1999, the remaining $75,000 of the outstanding balance was forgiven.
NOTE 8. STOCKHOLDERS' EQUITY
In March 1996, the Board amended and restated the 1992 Incentive Stock Plan,
renamed it as the 1996 Equity Incentive Plan (the "Incentive Plan") and reserved
1,725,000 shares for issuance under the Incentive Plan. At the Company's annual
meetings of stockholders in May 1999, 1998 and 1997, an additional 300,000,
300,000 and 600,000 shares, respectively, were authorized for issuance under the
Incentive Plan. The Incentive Plan provides for grants to employees and
consultants of the Company. The
51
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
exercise price of options granted under the Incentive Plan is determined by the
Board of Directors, but cannot be less than 100 percent of the fair market value
of the common stock on the date of grant.
In March 1996, the Board adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 100,000 shares of common stock. In
May 1998, at the Company's annual meeting of stockholders, an additional 75,000
shares were authorized for issuance. The Purchase Plan is designed to allow
eligible employees of the Company to purchase shares of common stock through
periodic payroll deductions. The price of common stock purchased under the
Purchase Plan will be equal to 85 percent of the lower of the fair market value
of the common stock on the commencement date of each offering period or the
specified purchase date.
In March 1996, the Board adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to non-employee directors of the
Company. The maximum number of shares of common stock that may be issued
pursuant to options granted under the Directors' Plan is 175,000.
The following table summarizes option activity under all plans:
OUTSTANDING AND EXERCISABLE STOCK
OPTIONS
--------------------------------------
WEIGHTED
SHARES NUMBER OF AVERAGE
AVAILABLE SHARES EXERCISE PRICE
--------- --------- --------------
Balances at December 31, 1996.............. 291,861 1,156,616 $ 4.52
Shares authorized........................ 600,000 -- --
Options granted.......................... (440,084) 440,084 $10.56
Options exercised........................ -- (110,049) $ 1.07
Options forfeited........................ 83,145 (83,145) $ 8.32
-------- ---------
Balances at December 31, 1997.............. 534,922 1,403,506 $ 6.46
-------- ---------
Shares authorized........................ 300,000 -- --
Options granted.......................... (350,106) 350,106 $ 7.15
Options exercised........................ -- (153,870) $ 1.03
Options forfeited........................ 116,532 (116,532) $ 6.76
-------- ---------
Balances at December 31, 1998.............. 601,348 1,483,210 $ 7.17
-------- ---------
Shares authorized........................ 300,000 -- --
Options granted.......................... (811,850) 811,850 $ 6.99
Options exercised........................ -- (74,912) $ 2.83
Options forfeited........................ 208,701 (208,701) $ 9.24
-------- ---------
Balances at December 31, 1999.............. 298,199 2,011,447 $ 7.05
======== =========
52
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
The range of exercise prices for options outstanding at December 31, 1999
was $0.0071 to $13.25. The following table summarizes information about options
outstanding and exercisable at December 31, 1999:
OUTSTANDING AND EXERCISABLE OPTIONS
-----------------------------------------------
WEIGHTED AVERAGE
CONTRACTUAL LIFE
NUMBER OF REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES SHARES (IN YEARS) EXERCISE PRICE
- ------------------------ --------- ---------------- ----------------
$ 0.01-$ 0.07....................... 80,215 3.19 $ 0.07
$ 0.71-$ 1.07....................... 219,632 5.32 $ 1.06
$ 4.00-$ 5.875...................... 166,150 9.03 $ 5.57
$ 6.00-$ 6.00....................... 204,500 9.24 $ 6.00
$ 6.125-$ 6.88...................... 252,926 8.95 $ 6.45
$ 7.00-$ 7.56....................... 202,206 6.17 $ 7.35
$ 7.63-$ 8.31....................... 213,953 8.28 $ 7.88
$ 8.38-$ 9.13....................... 210,000 8.65 $ 8.88
$ 9.38-$10.88....................... 277,268 7.31 $10.39
$10.94-$13.25....................... 184,597 7.08 $11.94
---------
Total........................... 2,011,447
=========
At December 31, 1999, there were no shares subject to repurchase. At
December 31, 1998 and 1997, 2,709 and 9,391 shares of common stock,
respectively, were subject to repurchase. The Company has reserved 3,275,000
common shares for issuance under all stock option plans and the Employee Stock
Purchase Plan.
The Company recorded deferred compensation expense for the difference
between the exercise price and the deemed fair value for financial statement
presentation purposes of the Company's common stock, as determined by the Board
of Directors, for options granted in 1995 and 1996. Such options were granted at
$1.07 per share with a deemed fair value ranging from $1.14 to $5.50 per share.
Deferred compensation of approximately $934,000 was recorded in conjunction with
the granting of these options. This compensation expense was amortized over the
vesting period of the related options, generally one to four years. Amortization
of $194,000, $219,000 and $219,000 was recorded in 1999, 1998 and 1997,
respectively.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for 1996. The statement encourages entities to
adopt the fair value based method of accounting for employee stock options, as
opposed to the method which measures compensation cost for those plans using the
intrinsic value-based accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for the stock option plans except the amortization of deferred
compensation described above. Had the compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date for
awards in 1999, 1998 and 1997
53
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net loss--as reported.......................... $(14,802) $(17,659) $(16,025)
Net loss--pro forma............................ $(16,501) $(19,194) $(17,402)
Net loss per share--as reported................ $ (1.29) $ (1.56) $ (1.65)
Net loss per share--pro forma.................. $ (1.43) $ (1.70) $ (1.79)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
Options granted at fair value:
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Risk-free interest rate....................... 5.55% 5.30% 6.31%
Expected life................................. 3.6 years 4.0 years 3.3 years
Expected volatility........................... .800 .746 .750
Expected dividends............................ None None None
Weighted average option fair value............ $4.07 $4.09 $5.74
No options were granted at below fair value for the years ended
December 31, 1999, 1998 and 1997.
NOTE 9. INCOME TAXES
The Company uses the liability method to account for income taxes as
required by FASB Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
54
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Net operating loss carryforwards........................ $ 25,600 $ 21,700
Research and development credit carryforwards........... 5,300 3,700
Capitalized research and development.................... 2,400 1,700
Other................................................... 200 100
-------- --------
Total deferred tax assets............................... 33,500 27,200
Valuation allowance..................................... (33,500) (27,200)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
Realization of deferred tax assets is dependent upon future earnings, the
timing and amount of which are uncertain. Accordingly, the net deferred tax
asset has been fully offset by a valuation allowance. The valuation allowance
increased by $8,296,000 and $7,122,000 in the fiscal years 1998 and 1997,
respectively.
At December 31, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $71,100,000 and
$24,800,000, respectively, which expire in the tax years 2000 through 2019. At
December 31, 1999, the Company has research and development credit carryforwards
for federal income tax purposes of approximately $3,800,000, which expire in the
tax years 2011 through 2019. At December 31, 1999, the Company has research and
development credit carryforwards for state income tax purposes of approximately
$2,100,000, which do not expire.
Because of the "change in ownership" provisions of the Internal Revenue
Code, a portion of the Company's net operating loss carryforwards and tax credit
carryforwards may be subject to an annual limitation regarding their utilization
against taxable income in future periods. Due to the limitation, the net
operating loss and credit carryforwards may expire before ultimately becoming
available to reduce future taxable income tax liabilities.
NOTE 10. SUBSEQUENT EVENTS (UNAUDITED)
On January 18, 2000, the Company issued and sold 2,000,000 shares of its
common stock at a purchase price of $9.00 per share in a private placement to
four institutional investors. The Company received $18,000,000 from the private
placement.
On February 24, 2000, the Company signed a Third Amendment to its facility
lease. The amendment extended the lease term to April 30, 2005. Minimum rental
commitments under this amendment include a construction allowance of $568,128.
See Note 6, "Facility Lease" for the minimum annual rental commitments under the
lease.
On February 25, 2000, the Company issued and sold 279,470 shares of its
common stock at a purchase price of $17.891 per share as the first of two stock
issuances in connection with the collaboration agreement with Warner-Lambert
dated October 13, 1999 and effective September 1, 1999. The Company received
proceeds of $5,000,000 from the exercise of its right to require Warner-Lambert
to purchase additional equity in 2000.
55
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
3.1+ Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Stock Certificate.
4.3+ Warrant to Purchase Series C Preferred Stock issued to Lease
Management Services, Inc. on December 30, 1993.
4.4+ Amended and Restated Information and Registration Rights
Agreement dated May 30, 1994 and as amended through May 16,
1995.
4.5+ Preferred Stock Purchase Agreement between the Company and
Warner-Lambert dated May 4, 1995.
4.6+ Stock Purchase Agreement, dated January 12, 1998, among the
Company, International Biotechnology Trust plc and Lombard
Odier & Cie.
10.1+* Collaboration Agreement between Bayer Corporation (formerly
Miles, Inc.) and the Company dated April 22, 1994.
10.1(i)+* Amendment to Collaboration Agreement between Bayer
Corporation and the Company dated April 4, 1996.
10.2+* Research, Development and Marketing Collaboration Agreement
between Warner-Lambert Company and the Company, dated
May 2, 1995.
10.2(i)+ Waiver of Certain Rights under the Research, Development and
Marketing Agreement by Warner-Lambert Company dated as of
March 28, 1996.
10.3+* Compound Library Access Agreement between Warner-Lambert
Company and the Company dated May 2, 1995.
10.4+* Research and License Agreement between Eli Lilly & Company
and the Company dated May 15, 1995 and the Collaborative
Research and License Agreement between Eli Lilly and the
Company dated June 12, 1996.
10.5+* Technology Transfer Agreement dated April 24, 1992 between
Chiron Corporation and the Company, as amended in the Chiron
Onyx HPV Addendum dated December 2, 1992, in the Amendment
dated February 1, 1994, in the Letter Agreement dated
May 20, 1994 and in the Letter Agreement dated March 29,
1996.
10.6+ Scientific Advisory Board Consulting Agreement between
Dr. Frank McCormick and the Company, as of March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank
McCormick and the Company dated April 17, 1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the
Company dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the
Company dated November 1, 1993 and October 21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Company
dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Company
dated January 23, 1995.
10.11+ Credit Terms and Conditions dated October 28, 1995 between
the Company and Imperial Bank; Addendum dated October 28,
1995; and Modification Letter dated December 29, 1995.
56
10.12+ Equipment Financing Agreement Number 10762 between Lease
Management Services, Inc. and the Company, dated
December 30, 1993 and Addendum thereto dated December 30,
1993.
10.13+ 1996 Equity Incentive Plan.
10.14+ 1996 Non-Employee Directors' Stock Option Plan.
10.15+ 1996 Employee Stock Purchase Plan.
10.16+ Lease by and between Hall Properties, Inc. and the Company
dated September 9, 1992, the First Amendment thereto dated
April 21, 1993 and the Second Amendment thereto dated
May 11, 1996.
10.17+ Form of Indemnity Agreement to be signed by executive
officers and directors of the Company.
10.18+ Credit Terms and Conditions dated March 10, 1997 between the
Company and Imperial Bank.
10.19+ Letter Agreement between Dr. Allan Balmain and the Company
dated August 26, 1996, as amended March 13, 1997.
10.20+* Amended and restated Research, Development and Marketing
Collaboration Agreement dated May 2, 1995 between the
Company and Warner-Lambert Company.
10.21+* Research, Development and Marketing Collaboration Agreement
dated July 31, 1997 between the Company and Warner-Lambert
Company.
10.22+ Addendum to credit Terms and Conditions dated March 10, 1997
between the Company and Imperial Bank.
10.23+* Amendment to the Amended and Restated Research, Development
and Marketing Collaboration Agreement, dated December 15,
1997, between the Company and Warner-Lambert Company.
10.24+* Amendment to Collaboration Agreement between Bayer
Corporation and the Company dated February 1, 1999.
10.25+ Scientific Advisory Board Consulting Agreement effective
September 10, 1999 between Allan Balmain and the Company
including the First Amendment to Deed of Trust and Second
Amended and Restated Promissory Note.
10.26+** Collaboration Agreement between the Company and
Warner-Lambert Company dated October 13, 1999 and effective
September 1, 1999.
10.27+ Stock Put and Purchase Agreement between the Company and
Warner-Lambert Company dated October 13, 1999 and effective
September 1, 1999.
10.28+ Stock Purchase Agreement between the Company and the
investors dated January 18, 2000.
10.29 Third Amendment to Lease by and between the Metcalf Family
Living Trust Dated June 11, 1993 and the Company effective
February 24, 2000.
10.30 Employment Offer Letter between Helen Kim and the Company
dated October 26, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 38.
27.1 Financial Data Schedule.
- ------------------------
+ Filed as an exhibit to the Company's Registration Statement on Form SB-2
(No. 333-3176-LA), the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, the Company's Quarterly Reports on Form 10-Q for
the quarters ended June 30, 1996, March 31, 1997, September 30, 1997,
March 31, 1999 and September 30, 1999, the Company's Current Report on Form
8-K filed on January 26, 1998 and the Company's Current Report on Form 8-K
filed on March 1, 2000, and incorporated herein by reference.
* Confidential treatment has been received for portions of this document.
** Confidential treatment has been requested for portions of this document.
57