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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, 1996.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 0-28298
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ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3154463
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3031 RESEARCH DRIVE
RICHMOND, CALIFORNIA 94806
(510) 222-9700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
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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 21, 1997 was approximately $56,333,000.
The number of shares of common stock outstanding as of March 21, 1997 was
9,526,187.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 1997 Annual Meeting
are incorporated herein by reference into Part III of this Report.
Certain Exhibits filed with the Registrant's Registration Statement on Form
SB-2 (Registration No. 333-3176-LA), as amended, and the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 are incorporated by
reference into Part IV of this Report.
2
PART I.
ITEM 1. BUSINESS
OVERVIEW
Onyx Pharmaceuticals, Inc. ("Onyx" or the "Company") is engaged in the
discovery and development of novel therapeutics based upon the genetics of human
disease, with an initial focus on cancer. The Company's goal is to capitalize on
the discoveries of the past decade that have established cancer as a
genetic-based disease. When certain genes are mutated, cells grow and
proliferate unchecked and become resistant to internal mechanisms that would
normally cause their death. The Company's drug discovery and development
programs focus on innovative therapies which target the most frequent mutations
causing cancer.
Onyx has defined several important pathways by which normal cells become
cancerous. Currently, the Company has five therapeutic discovery programs
focused on the following cancer mutations: p53, ras, cell cycle checkpoints,
BRCA1 and APC. The Company's lead product, ONYX-015, is an adenovirus which has
been modified to replicate in and kill cancer cells with p53 mutations. These
mutations occur in over 50% of human cancer cases. The Company's Investigational
New Drug application ("IND") for ONYX-015 has been cleared by the United States
Food and Drug Administration ("FDA") and a Clinical Trials Exemption ("CTX") has
been cleared in the United Kingdom. The Company initiated human Phase I clinical
trials for ONYX-015 in both countries in April 1996. The Company has completed
treatment at six of seven dose levels in a Phase I open-label, dose escalation
clinical trial in head and neck cancer. Additional Phase I clinical trials in
pancreatic and ovarian cancer have been initiated.
The Company's business strategy is to enter into collaborations with
corporate partners in each of its drug development programs in order to gain
complementary skills in drug development, clinical trials, regulatory affairs,
and marketing and sales operations.
CANCER
Cancer is a heterogeneous group of diseases characterized by uncontrolled
growth and proliferation of abnormal cells. Cancer accounts for 22% of all
deaths in the United States, ranking second only to cardiovascular disease.
According to estimates by the American Cancer Society, approximately 1.3 million
people in the United States were diagnosed with cancer in 1996, and
approximately 60% of these individuals will die within five years following
their diagnosis. Despite increased cancer screening and earlier diagnosis, and
notwithstanding improved surgical procedures and new therapeutic regimens, there
has been a steady rise in the overall cancer mortality rate in the United States
over the past 50 years.
Estimates for 1996 of new cancer cases and cancer deaths in the United
States are presented below for some of the solid tumors which are targeted by
the Company's drug discovery programs.
ESTIMATED DEATHS AND NEW CANCER CASES
UNITED STATES, 1996
CANCER TYPE DEATHS NEW CASES
- ----------------------------------------------------------------------- --------- -----------
Lung................................................................... 158,700 177,000
Colon and rectum....................................................... 54,900 133,500
Breast................................................................. 44,560 185,700
Prostate............................................................... 41,400 317,100
Pancreas............................................................... 27,800 26,300
Ovary.................................................................. 14,800 26,700
Head and neck*......................................................... 12,500 41,100
Kidney................................................................. 12,000 30,600
Bladder................................................................ 11,700 52,900
Melanoma............................................................... 7,300 38,300
Uterus................................................................. 6,000 34,000
Cervix................................................................. 4,900 15,700
- ------------------------------
* Includes cancers of the larynx, oral cavity and pharynx.
Source: American Cancer Society
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According to the American Cancer Society, the direct costs of cancer patient
care in the United States are estimated at $35 billion per year. The cancer drug
market in the United States was estimated to be approximately $3.7 billion in
1996 which accounts for less than 10% of the direct costs of cancer patient
care. The Company believes that the worldwide cancer drug market is
approximately $7.4 billion per year.
A major limitation in the treatment of cancer is that drug therapy at the
present time continues to be primarily cytotoxic drugs. Cytotoxic drugs are
toxic to all cells in the human body but are most lethal to faster-growing
cells, including cancer cells. These cytotoxic drugs do not discriminate between
malignant and normal cells, and therefore treatment with these drugs can have
serious adverse side effects which frequently limit therapy. Biological drugs
such as interferons have in some cases represented an improvement over classic
cytotoxic therapy, but have proven effective on a limited basis in only certain
types of cancer.
GENETIC BASIS OF CANCER
Cancer is now known to be caused by a number of genetic changes, or
mutations, which give the cancer cell a selective growth and survival advantage
over normal cells. Some of these mutations result in an increased rate of cell
division while others result in a decreased rate of cell death. The precise
mechanisms by which these mutations achieve their effects are becoming better
understood, providing opportunities for therapeutic intervention directly at the
cause of the disease.
Mutations that increase the rate of cell division affect two major pathways
in cells. One of these, the ras pathway, is normally involved in instructing
cells to divide in response to external signals, such as growth factors.
Mutations in the ras gene cause the cell to divide continuously, even in the
absence of external signals. The ras gene is thus turned on in many types of
cancer cells. Genes whose products are turned on by mutation are referred to as
oncogenes. Ras oncogenes are present in 90% of pancreatic cancers, 50% of colon
and certain lung cancers and approximately 30% of cancers of many other types.
The second pathway regulates the cell cycle, which is the process by which
all cells duplicate themselves. During the cell cycle, certain proteins act as
natural checkpoints to control orderly replication and ensure the fidelity of
the process. If cells grow too rapidly or an error occurs in the replication of
DNA, these checkpoint proteins act to stop cell growth. If mutations occur in
checkpoint genes, uncontrolled growth results. The Company believes that the
cell cycle checkpoints are turned off in approximately 90% of human cancer
cells. Genes turned off by mutation are referred to as tumor suppressor genes.
In addition, the body has a process to rid itself of damaged cells,
including cancer cells that have mutations in ras pathway or cell cycle
regulatory pathway genes. This process is referred to as apoptosis or cell
suicide. The most frequent mechanism for inactivating the apoptosis pathway is
through mutations in the p53 gene. These p53 mutations allow damaged or abnormal
cells to survive and proliferate and are observed in over 50% of human cancer
cases.
In addition to the pathways described above, there are other genes that play
a role in cancer. These include the tumor suppressor genes BRCA1 and APC, which
cause some breast, ovarian and colon cancers.
ONYX TECHNOLOGY
Onyx's research is directed toward identifying the function of genes
associated with cancer, including the p53 gene, ras oncogenes, cell cycle
checkpoint genes, the APC gene, and the BRCA1 gene. Insights into the pathways
through which these genes operate are used by Onyx to identify points which
might be targets for drug intervention.
The activities involved in assigning functions to genes are collectively
referred to as "functional genomics." Onyx scientists have identified functions
and pathways of various cancer genes through the use of a number of
technologies, including expression of recombinant proteins in different cell
systems, novel tagging methods which allow rapid purification of recombinant
proteins for functional studies, screening
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technologies which identify interactions of unknown gene products with known
proteins, and various methods for ascribing functions to proteins.
Proteins either directly encoded by cancer genes or which lie along pathways
in which the cancer genes operate are potential targets for therapeutic
intervention. Once biochemical functions are identified with these proteins,
Onyx employs various technologies, including technology known as "reverse
genetics," to interfere with these functions and assess the consequences in
cell-based systems. Potential targets are validated by confirming that
interfering with the target will modulate or reverse the cancerous process.
After a target is validated, Onyx evaluates and implements work on potential
approaches for using the target for drug discovery. One such approach is to
develop high throughput screening assays to identify small molecule drugs which
interfere with the function of the target. This approach is particularly
applicable to targets such as oncogenes, which are turned on by mutation.
Targets that are turned off by mutation, such as tumor suppressor genes,
have been more difficult to approach. Onyx has discovered and is developing a
proprietary new technology based on therapeutic viruses to target mutant tumor
suppressor genes, such as p53. The therapeutic virus technology uses genetically
engineered viruses to selectively kill cancer cells in which the target is
present.
In addition to cancer genes, functional genomics can be applied to any other
gene of unknown function, including novel genes discovered by the Human Genome
Project and other groups engaged in gene sequencing. The Company intends to
continue to apply its functional genomics technology to the discovery of new
therapeutic strategies for cancer and for other major diseases which have a
genetic component.
DRUG DISCOVERY AND DEVELOPMENT PROGRAMS
Onyx has established five drug discovery and development programs, all based
on genetic mutations in cancer. Although the focus of each of these programs is
the treatment of cancer, there may be other hyperproliferative diseases which
may be addressed by product leads discovered in these programs.
ONYX DRUG DISCOVERY AND DEVELOPMENT PROGRAMS
PROGRAM PRODUCT INDICATION STATUS PARTNER
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p53 ONYX-015 Head and neck, pancreatic and Phase I
Therapeutic virus ovarian cancers
Other cancers Preclinical
Cell Cycle Small molecule inhibitors Most cancer indications; other Preclinical Warner-Lambert
proliferative diseases
ras Small molecule inhibitors Colon, lung, pancreatic, and other Discovery Bayer
cancers; other proliferative
diseases
BRCA1 Inhibitors of BRCA1 pathways Breast and ovarian cancer Research Eli Lilly
APC Inhibitors of B-catenin Colon cancer Research
pathways
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Phase I: Initial phase of human clinical testing to determine safety and
maximum tolerated dose.
Preclinical: Pharmacological and toxicological testing in animals.
Discovery: Initiation of screening by Onyx's partner using validated assays
developed by Onyx.
Research: Initiation of research studies.
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P53 PROGRAM
Mutations in the p53 tumor suppressor gene are the most common type of
genetic abnormality in cancer and are found in over 50% of human cancer cases.
The role of normal p53 in the cells is to detect errors in DNA and to either
stop the cell cycle from proceeding until the errors are corrected or to force
destruction of the cell via apoptosis or cell suicide. Loss of p53 is associated
with decreased survival rates in breast, prostate, lung and bladder cancers.
The Company's lead product, ONYX-015, is a genetically engineered adenovirus
that preclinical studies have shown efficiently replicates in and kills tumor
cells deficient in p53 tumor suppressor activity ("p53-deficient" cells) and not
in normal cells. The specific modification of the virus prevents it from
replicating efficiently in normal cells.
Adenoviruses are common, relatively benign, viruses that are widespread in
human populations. When an unmodified adenovirus infects a normal cell, it turns
the cell into a factory for producing viral DNA and proteins. The cell is killed
and thousands of new virus particles are released to infect neighboring cells.
To take control of the cell, the virus must inactivate p53 which acts to prevent
abnormal DNA replication. To inactivate p53, the virus makes a protein called
E1B 55k which binds directly to p53 and blocks its function. Once p53 has been
inactivated, the virus can replicate its DNA and proceed through its growth
cycle.
ONYX-015 has been modified so that it cannot make E1B 55k. As a result, it
cannot disarm the p53 system when it infects normal cells, and should not
complete its growth cycle. However, in the majority of cancer cells, p53 is
already disarmed through mutation of the p53 gene or other mechanisms. When
ONYX-015 infects these cells, the virus growth cycle proceeds unchecked, and it
is expected that the cancer cells will be killed. It is also expected that new
virus particles will be produced, and neighboring cancer cells will be infected
and killed.
IN VITRO and IN VIVO tests by the Company have shown that ONYX-015
replicates in and kills tumor cells with mutant p53 gene sequence. In addition,
the Company has shown that tumor cells with normal p53 gene sequence but lacking
p53 function are also destroyed by ONYX-015. ONYX-015 replication and cell
killing effect is markedly reduced (100 to 1000 fold) in numerous normal cell
types. However, certain normal skin cells appeared to be more sensitive to
ONYX-015 than normal cells of other types tested. The p53 program includes
studies of ONYX-015 and other viruses as well as research to learn more about
their impact on normal cells and cells deficient in p53 tumor suppressor
activity.
ONYX-015 was tested in animal studies prior to the submission of
applications to regulatory authorities in the United States and the United
Kingdom. The product was shown to cause tumor shrinkage and complete tumor
regressions in immunodeficient mice in which p53-deficient human tumor cell
lines of various types were grown. ONYX-015 was found to be well-tolerated in
safety studies in animals. ONYX-015 efficacy has not been tested in animals with
a fully functioning immune system and the effect of the human immune response on
ONYX-015 efficacy continues to be uncertain. No reliable immunocompetent animal
tumor model currently exists, but the Company is attempting to develop a mouse
tumor model. Based in part on a study conducted in the 1950's with unmodified
adenovirus, the Company believes that the human immune response may reduce
anti-tumor effects of ONYX-015 that would be observed in the absence of such a
response. However, the extent of this effect cannot be predicted. If such
reduction in anti-tumor effect is substantial, the Company may be required to
develop an alternative viral strain or to include immunosuppressive drugs as
part of the clinical regimen for ONYX-015.
In January 1996 and December 1995, Onyx submitted an IND in the United
States and a CTX in the United Kingdom, respectively, for permission from the
FDA and comparable regulatory authorities in the United Kingdom to initiate
human clinical studies with ONYX-015. Both applications were cleared and the
Company initiated a Phase I open-label, dose escalation clinical trial in
recurrent or locally advanced squamous cell carcinoma of the head and neck in
April 1996. Endpoints in these studies include safety, determination of the
maximally tolerated dose, evaluation of virus replication in the tumor mass and
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assessment of the patient's immune response to the injected virus. As of March
10, 1997, treatments at six of seven dose levels have been completed. Subject to
completion of this Phase I study, the Company is planning a Phase II clinical
trial in a similar patient population, injecting ONYX-015 directly into the
tumor at the highest well-tolerated dose in order to obtain efficacy and
additional safety data.
The Company has opened two additional Phase I open-label, dose-escalation
clinical trials with ONYX-015; one in patients with pancreatic cancer, and one
in patients with ovarian cancer. Over the next twelve months, Onyx
Pharmaceuticals plans to initiate additional Phase I clinical trials of
ONYX-015.
Onyx has self-funded the development of ONYX-015 to date. The Company is
currently in discussions with several pharmaceutical companies regarding a
possible collaboration for further preclinical and clinical development and
commercialization of ONYX-015 and other potential therapeutic viruses which
selectively replicate in p53-deficient cells. However, the Company has not
reached agreement with any such company regarding this program, and there is no
assurance that any such collaboration will be established.
RAS PROGRAM
The ras family of oncogenes were the first oncogenes to be identified in
human cancer. They are present in 90% of pancreatic cancers, 50% of colon cancer
and certain lung cancers, and approximately 30% of cancers of many other types,
as well as some other proliferative diseases. Ras proteins play a central role
in transmitting signals from the extracellular environment, via growth factor
receptors on the cell surface, to the nucleus of the cell where DNA
transcription is activated and the cell cycle is initiated. This series of
signals is called the "signal transduction pathway." These signals result in
cell growth and division. In normally functioning cells, when the extracellular
signal stops, the signal transduction pathway also stops and cells stop growing.
In cancer cells, abnormal ras proteins are produced that lock the signal
transduction pathway in an active state even when extracellular signals are not
being received, and cells therefore do not stop growing.
It has been established that inhibition of ras oncogene function in cancer
cells is sufficient to reverse cancer caused by these oncogenes. Ras proteins
play crucial roles in the transmission of extracellular signals through a number
of different pathways into the nucleus of the cell. A key property of these
proteins is that they exist in two states: an inactive or off state, and an
active or on state. These two states are subject to regulation at numerous
points during this cycle of activation and deactivation. Mutations in the ras
oncogenes destroy the off switch so that the proteins stay locked in the on
state, thus resulting in uncontrolled growth.
Onyx has made significant contributions to the delineation of the components
of the ras signaling pathway and has converted these findings into drug
discovery efforts to identify small molecule inhibitors of the activated
pathways.
Effective February 1994, the Company entered into a collaboration agreement
with Bayer with respect to the ras Program. Under the terms of this agreement,
Onyx is responsible for performing research on ras signaling pathways,
identifying and validating targets for drug screening, and developing assays for
screening small molecules. Bayer is responsible for screening its compound
libraries, synthesizing chemical analogs of compounds that are identified in the
screens, and conducting preclinical and clinical testing on compounds selected
for development. Bayer is obligated, subject to certain conditions, to fund
Onyx's research under the collaboration. In April 1996, the parties amended the
agreement to add targets and programs outside ras. To date, the Company has
transferred eight assays to Bayer. Active compounds identified by screening
Onyx's and Bayer's compound libraries are undergoing further evaluation and
characterization. Preliminary chemical analoging programs have been initiated by
Bayer on several structural classes of compounds. The Company currently does not
expect to commence clinical trials of any potential products from the ras
Program for at least two to three years.
7
CELL CYCLE PROGRAM
The cell cycle is the process by which cells duplicate their DNA and then
divide into two identical cells. This cycle is strictly regulated, so that cells
only duplicate their DNA when conditions are perfectly favorable, and then only
divide into two new cells when DNA has been precisely duplicated. Before cells
commit to making DNA, they must pass through a checkpoint. If conditions appear
favorable, they pass through the checkpoint and in normal cells may then begin
DNA replication. In cancer cells, this checkpoint is defective and cancer cells
can therefore duplicate their DNA in an unregulated manner. The molecular basis
of this checkpoint is now relatively well known and understood to be a pathway
that includes cyclin dependent kinases, the retinoblastoma tumor suppressor
protein and a number of regulatory proteins such as the p16 protein. The Company
believes that mutations are found in one of these components in over 90% of all
cancers, resulting in a loss of checkpoint control.
Onyx has developed screening assays to search for small molecule inhibitors
of mutant cell cycle checkpoint genes which regulate DNA replication. The
Company also has initiated research efforts to identify pathways regulating the
second checkpoint in the cell cycle that controls the decision to begin cell
division.
In May 1995, the Company entered into a collaboration agreement with
Warner-Lambert on the Cell Cycle Program. Under the terms of this collaboration,
Onyx is responsible for performing research into cell cycle regulatory pathways,
identifying and validating targets for drug screening, and developing assays for
screening small molecules. Warner-Lambert uses these assays to screen its
compound libraries, synthesizes and tests chemical analogs of classes of
compounds which are identified in the screens, and conducts preclinical and
clinical testing of compounds selected for development. In this agreement,
Warner-Lambert is obligated, subject to certain conditions, to partially fund
Onyx's researchers. Each of the parties must commit an equivalent number of
researchers to the collaboration. From the initial two assays transferred by
Onyx, the collaboration has identified a lead compound that Warner-Lambert is
advancing into preclinical study. The Company has transferred an additional five
assays for high throughput screening at Warner-Lambert. The Company currently
does not expect to commence clinical trials of any potential products from the
Cell Cycle Program for at least one to two years.
BRCA1 PROGRAM
Breast cancer is one of the most common causes of cancer-related mortality
in women. A subset of breast cancers, representing an estimated 10% of the total
number of cases, has an inherited component. As is the case with most inherited
cancer genes, it is expected that the breast cancer genes identified to date may
play a role in non-inherited breast cancers as well. One of the breast cancer
genes, termed BRCA1, was identified through genetic studies of families
exhibiting a high frequency of disease.
Onyx has commenced a research effort to identify the function of the BRCA1
gene. This project was initiated by Eli Lilly as part of its BRCA1 research
program, and is intended to lead to a pathway that will present opportunities
for therapeutic intervention. The first objective of this project is to identify
proteins which bind directly to the BRCA1 gene product. Onyx has cloned two
novel genes of interest that express proteins which physically interact with
BRCA1. Further analysis of these genes and their associated proteins is in
progress. The Company currently does not expect to commence clinical trials of
any potential products from the BRCA1 Program for several years.
The BRCA1 Program was initiated in May 1995 with Eli Lilly as a one-year
collaborative research and license agreement. In June 1996, Onyx and Eli Lilly
agreed to extend and expand their collaboration for an additional three years.
Under the terms of this agreement, Eli Lilly is funding a specific number of
Onyx's researchers to conduct investigations into the identification of targets
and compounds reactive with the BRCA1 gene product. Each of the parties must
dedicate a specified number of researchers to the collaboration.
8
APC PROGRAM
Onyx's APC Program targets proteins which are regulated by the APC tumor
suppressor gene. This gene, first identified through genetic studies of families
exhibiting the disease familial adenomatous polyposis, is mutated in over 80% of
human colon cancers and is now considered essential for cancer progression in
this tissue. Recent studies have indicated that the APC gene may be mutated in
other cancers as well. Onyx has validated APC as a target for drug discovery by
demonstrating that reintroduction of the normal APC gene into colon cancer cells
will reverse the cancerous properties of these cells.
Onyx has shown that the loss of APC activity results in overexpression of
the B-catenin protein, which in turn promotes uncontrolled growth through its
interaction with other protein targets. These targets are now being identified
and include certain transcription factors, the epidermal growth factor receptor,
and certain kinases which have yet to be identified. The Company is evaluating
these targets as a basis for therapeutic intervention. The Company currently
does not expect to commence clinical trials of any potential products from the
APC Program for several years.
RESEARCH AND DEVELOPMENT COLLABORATIONS
Onyx intends to develop products which are discovered through the Company's
research only in partnership with pharmaceutical companies. The stage at which
the Company will seek a partner and the roles of Onyx and the partner will vary,
depending on the nature of the program:
- THERAPEUTIC VIRUSES. Onyx plans to conduct research and preclinical
studies, file for regulatory approval to initiate human clinical studies,
and conduct early clinical research on products based on therapeutic
viruses, prior to seeking partnerships for such programs. The initiation
of such partnerships, if any, could vary from the preclinical stage to
Phase II clinical trials or later. The p53 Program is an example of this
strategy.
- SMALL MOLECULE DRUGS. Onyx intends to focus its efforts on identifying
the function of novel genes, validating targets, and developing assays for
high throughput screening of small molecule compound libraries. The
Company plans to seek partners with diverse compound libraries, strong
chemistry capabilities, and established preclinical, clinical and
regulatory capabilities for small molecule drug development. The Company
intends to establish such collaborations early in the discovery stage or
in the research stage to access the partner's complementary discovery
capabilities in chemistry and its library of small molecules. The ras and
Cell Cycle Programs are examples of this strategy.
The Company's strategy for entering collaborative partnerships is to seek
partners with significant global presence and financial resources, whose
development capabilities are complementary with those of the Company. To date,
the Company has established collaborations with Bayer for the ras Program,
Warner-Lambert for the Cell Cycle Program and Eli Lilly for the BRCA1 Program.
The Company is presently pursuing collaboration discussions with a number of
major pharmaceutical companies in the United States, Europe and Japan with
respect to its p53 Program. The Company cannot predict whether or when any of
such discussions will result in completed agreements or on what terms.
The success of the Company's research and development programs is largely
dependent upon the performance of its collaborative partners with respect to
each program and the achievement of certain milestones under such collaboration,
including the clearance of IND applications, the initiation of human clinical
trials and the receipt of FDA approval to market products. No assurance can be
given that any of such milestones will be achieved, that the Company's
collaborative partners will fulfill their research, development and funding
obligations or that they will not terminate such agreements without cause. Any
such failure to achieve milestones or to perform such obligations, or any such
termination of the agreements, would have a material adverse effect on the
Company's business, financial condition and results of operations.
9
BAYER CORPORATION
Effective February 1994, Onyx established a research and development
collaboration with Bayer to discover, develop and market compounds that inhibit
the function of the ras pathway or that appropriately modulate the activity of
such pathway in order to treat cancer and other diseases. In April 1996, the
parties amended the agreement to provide that during the research term Onyx
will, and Bayer may, propose additional cancer research targets or programs
outside of ras for inclusion, by mutual agreement, in the research
collaboration. No additional targets have been proposed by either party during
the period ended December 31, 1996. In addition, Bayer agreed that the research
collaboration would continue for its full five-year scheduled term (through
January 1999), subject only to termination for breach or in the event of the
acquisition of Onyx. The Company's obligation to propose certain cancer targets
for inclusion in the collaboration may inhibit or delay the Company's ability to
establish research collaborations with third parties related to such targets.
The collaboration agreement provides for Bayer to pay Onyx an aggregate of
$25.0 million to fund Onyx's research efforts over the five-year research term,
of which $5.2 million was recorded by the Company as revenue in 1996, $5.2
million in 1995 and $5.5 million in 1994. In addition, Bayer made a $13.5
million equity investment in the Company in 1994. Bayer also has the right to
have its nominee elected to the Company's Board of Directors until the later of
(i) the end of the research term or (ii) if the parties have a Collaboration
Compound (as defined below) in clinical development, until such time as the
parties do not have a Collaboration Compound in clinical development.
Under the agreement, compounds that demonstrate the required level of
activity in collaboration assays, as established by the Joint Research and
Development Committee ("JRDC"), are deemed "Collaboration Compounds" subject to
exclusive rights under the collaboration. For Collaboration Compounds selected
by the JRDC for additional preclinical investigation, Bayer funds all such
preclinical work necessary to determine which compounds to take into clinical
development and to obtain approval for conducting clinical trials.
The JRDC selects Collaboration Compounds (but excluding compounds active
against Bayer-proposed targets) for joint development by the parties into
products ("Collaboration Products"), and upon filing of an IND, the parties will
share equally all costs of developing each Collaboration Product worldwide
(excluding Japan), subject to each party's right to elect not to pay such costs.
Under the agreement, Bayer shall make substantial payments to Onyx, based on
achievement of development milestones by Collaboration Products, which payments
are subject to repayment by Onyx out of its share of marketing profits and
royalties, subject to certain annual limitations. Bayer shall market the
Collaboration Products worldwide (excluding Japan), and Onyx has the option to
co-promote such products in the United States, provided that the Company share
equally all costs of development in which case its expenses would be paid out of
product sales. Onyx and Bayer will share equally the marketing profits or losses
from commercializing jointly developed Collaboration Products, although in the
calculation of such net profits recognition is given to Bayer's investment in
sales and marketing infrastructure. At any time during the development of a
particular Collaboration Product, either party may terminate paying its share of
such development costs, with the other party retaining exclusive,
royalty-bearing rights to such product.
Bayer has the sole and exclusive right to develop and market Collaboration
Compounds as royalty bearing products in Japan and will bear all related
development expenses. Further, Bayer has the sole and exclusive right to develop
and market any Collaboration Compounds active against Bayer-proposed targets as
royalty bearing products. In addition, either party may independently develop a
Collaboration Compound as a royalty bearing product if the JRDC declined such
party's proposal to select the compound for joint development as a Collaboration
Product, but subject to the other party's right to require the return of such
compound to the collaboration prior to commencement of clinical trials.
10
WARNER-LAMBERT COMPANY
In May 1995, Onyx entered into a research, development and marketing
collaboration agreement with Warner-Lambert to discover and commercialize
therapeutic agents that restore control of or otherwise intervene in
misregulated cell cycle transitions related to pathological conditions, such as
in tumor cells or proliferating vascular smooth muscle cells in arterial
disease. Under the research collaboration, Onyx develops screening assays for
particular targets selected by the parties, and transfers such assays to Warner-
Lambert for high-throughput screening of Warner-Lambert's compound library to
identify active compounds. Warner-Lambert is responsible for subsequent
medicinal chemistry and preclinical investigations on such active compounds.
Warner-Lambert will conduct and fund all clinical development, make
regulatory filings and manufacture for sale the collaboration compounds.
Warner-Lambert is also obligated to make additional payments for achievement of
milestones in the development of collaboration compounds and has exclusive
rights to manufacture, market and sell such products worldwide (excluding Japan)
subject to payment of royalties to Onyx and to Onyx's right to co-promote such
compounds in the United States. Moreover, Onyx's co-promotion rights terminate
if there is a change of control of Onyx or Onyx files a New Drug Application
("NDA") on a competing product or receives FDA approval to market a competing
product. Warner-Lambert and Onyx have agreed jointly to seek and negotiate with
a Japanese company to enter a collaborative agreement covering the cell cycle
field for the development and marketing of products in Japan. The Company cannot
predict whether or when any of such discussions will result in completed
agreements or on what terms.
Onyx retains the right to develop a certain number of collaboration
compounds independently, provided that Warner-Lambert does not accept Onyx's
request that Warner-Lambert commence development of such compounds. Such
compounds will be royalty bearing to Warner-Lambert, and Onyx will be obligated
to pay Warner-Lambert certain milestone payments for achievement of development
milestones.
In March 1996, Warner-Lambert agreed to waive its right to terminate the
agreement upon Dr. McCormick's commencing employment with the University of
California, San Francisco (the "University") provided that Dr. Edward Harlow
continues to serve on the Company's Scientific Advisory Board and Dr. McCormick
remains at the University and continues to be available to consult with Warner-
Lambert and the Company exclusively in connection with the collaboration through
May 2, 1997. The Company has entered into a consulting agreement with Dr.
McCormick to satisfy the requirements of the waiver in all other material
respects. However, there can be no assurance that Dr. McCormick or Dr. Harlow
will continue to serve as consultants and advisors to the Company.
Under the collaboration agreement, each party must dedicate a specified
number of scientific personnel to the collaborative research over the three-year
research period, and Warner-Lambert will provide Onyx approximately $6.2 million
of funding to support a substantial portion of Onyx's research efforts related
to the collaboration. The Company recorded revenue of $2.1 million and $1.4
million in 1996 and 1995, respectively. In addition, Warner-Lambert made equity
investments in the Company in May 1996 and May 1995 of $4.0 million and $3.0
million, respectively. Warner-Lambert also agreed to further purchase 192,941
shares of common stock on or before May 4, 1997 at a purchase price of $3.3
million, subject to the collaboration agreement remaining in force.
Onyx and Warner-Lambert also entered into the Compound Library Access
Agreement in which Warner-Lambert agreed to screen its compound library against
assays for targets outside the Cell Cycle Program selected by Onyx and approved
by Warner-Lambert, in its sole discretion. Based on the results of the
screening, Onyx may select a number of active leads for further work, and Onyx
will have exclusive rights to any products resulting from such leads for use
against the identified targets, subject to payment of royalties and development
milestone payments to Warner-Lambert on such products.
11
ELI LILLY & COMPANY
In May 1995, Onyx entered into a collaborative research and license
agreement with Eli Lilly to conduct a one-year research program to discover and
develop targets for drug discovery in the modulation of the BRCA1 breast cancer
gene pathway. Under the agreement, Onyx was obligated to dedicate a specified
number of scientists over the course of the year to identify targets and
compounds reactive with the BRCA1 gene product. Eli Lilly provided funding to
Onyx to support the costs of the researchers working on the project at Onyx, and
Eli Lilly was also obligated to dedicate several Eli Lilly scientists to work on
the research. In addition, Eli Lilly made a $600,000 equity investment in the
Company in 1995.
Under the collaboration agreement, Eli Lilly has the exclusive royalty
bearing right to market products resulting from the research provided that, if
Eli Lilly does not elect to do so, Onyx has the option to obtain an exclusive
royalty bearing license to market such products. If Onyx were to develop and
market such products, Onyx may be required to pay Myriad Genetics, Inc., Eli
Lilly's licensor of certain BRCA1 technology, royalties on such products as
well.
In June 1996, Onyx and Eli Lilly agreed to extend the collaboration to June
1999 and to expand their research and development collaboration to discover and
develop targets for drug discovery in the modulation of the BRCA1 breast cancer
gene pathway. Under the collaboration agreement, each party must dedicate a
specified number of scientific personnel to the collaborative research over the
three-year research period.
Eli Lilly will conduct and fund all clinical development, make regulatory
filings and manufacture for sale the collaboration compounds. Eli Lilly is also
obligated to make additional payments for achievement of milestones in the
development of collaboration compounds and has exclusive rights to manufacture,
market and sell such products worldwide subject to payment of royalties to Onyx.
In September 1996, Eli Lilly made a milestone payment of $685,000 for the
achievement of the collaboration's first milestone. Eli Lilly will provide Onyx
approximately $3.0 million of research funding, exclusive of milestone payments,
to support a substantial portion of Onyx's research efforts related to the
collaboration. The Company recorded revenue of $910,000 and $375,000 in 1996 and
1995, respectively, inclusive of the September 1996 milestone payment.
Either party may terminate the agreement at any time upon ninety (90) days
advance written notice provided to the other party. The agreement also provides
Eli Lilly the right to terminate the agreement upon thirty (30) days written
notice if within sixty (60) days following the departure of Dr. Paul Polakis,
Onyx is unable to select a replacement that is reasonably acceptable to Eli
Lilly.
CHIRON CORPORATION
In April 1992, the Company was established by means of the transfer from
Chiron to the Company of the drug discovery program being conducted at Chiron by
Dr. Frank McCormick, the scientific founder of Onyx, and his research team. The
work being conducted by this team at that time was primarily in the field of ras
research. As part of such transaction, Chiron and Onyx executed a Technology
Transfer Agreement dated April 24, 1992 (the "Transfer Agreement"), pursuant to
which Chiron consented to the transfer of such research program, including the
research team and its trade secrets and materials used in its research. Chiron
also granted a license to Onyx under certain patent rights held by Chiron which
are useful in such research. Such license was generally nonexclusive, although
as part of such agreement Chiron agreed not to reestablish its research program
in the field for a period of three years. In May 1994, in connection with the
formation of the collaboration between Bayer and Onyx, the Transfer Agreement
was amended to make Onyx the sole licensee under one of the research assays
transferred from Chiron until January 1, 1999, in consideration of which the
covenant against Chiron reestablishing its research program in the field was
eliminated.
In addition, through April 2007, Chiron has an option to receive a
royalty-bearing license with respect to diagnostic and vaccine products of Onyx.
Such license would be exclusive unless an arbitrator determines that Chiron does
not have the ability to commercialize the product in question so as to provide
12
Onyx with a reasonable return, in which case such license will be co-exclusive.
If Chiron does not exercise such option rights with respect to a particular
product, then prior to the completion of Phase II clinical trials of the
product, the Company may seek a third party licensee of the product in question,
subject to a right of first refusal in favor of Chiron, and after the completion
of Phase II clinical trials, the option rights of Chiron expire.
The Transfer Agreement also provides that Onyx may propose collaborations to
Chiron in the field of gene therapy. Such proposal would require that Onyx
disclose to Chiron the material information known to Onyx regarding the program
in question and also propose a set of terms. If such a proposal is made, and
Onyx and Chiron do not reach agreement within 60 days after the proposal by
Onyx, then the Company may, within 120 days thereafter, enter into an agreement
regarding such program with a third party on terms no more favorable taken as a
whole, to the third party than the terms which Onyx offered to Chiron. Chiron
has advised Onyx that it believes the foregoing provision, in the context of
other provisions of the Transfer Agreement, imposes an obligation on Onyx to
offer gene therapy programs to Chiron pursuant to this mechanism before it
licenses any such program to a third party. The Company does not agree that such
provision imposes an obligation on Onyx to make such proposals. However, Chiron
has agreed that this provision does not apply to the p53 Program for therapeutic
applications.
In addition, Chiron agreed to fund the Company's research and operating
activities up to a maximum of $3.95 million. As of December 31, 1993, all such
amounts were earned and received by the Company. Chiron also made equity
investments in the Company totalling $402,000 in 1992.
MARKETING AND SALES
The Company currently has no sales, marketing or distribution capability.
The Company intends to rely on relationships with one or more pharmaceutical
companies with established distribution systems and direct sales forces to
market its products. In the event that the Company is unable to reach agreement
with one or more pharmaceutical companies to market its products, it may be
required to market its products directly and to develop a marketing and sales
force with technical expertise and with supporting distribution capability.
There can be no assurance that the Company will be able to establish in-house
sales and distribution capabilities or relationships with third parties, or that
it will be successful in gaining market acceptance for its products. To the
extent that the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will depend upon the efforts
of third parties, and there can be no assurance that such efforts will be
successful.
MANUFACTURING
The Company expects that its collaborative partners will manufacture
products for clinical development and commercialization. Under the existing
agreements, the Company's collaborative partners have the exclusive right to
manufacture the products that result from those programs. The Company currently
does not have the facilities to manufacture products for small or large scale
clinical trials or in commercial quantities, and has no experience in such
manufacturing. To manufacture its products for clinical trials or on a
commercial scale, if the Company is required to or chooses to do so, it will
have to build or gain access to a manufacturing facility which will require a
significant amount of funds.
The Company has been employing a contract manufacturer, MAGENTA Corporation
("MAGENTA"), for the clinical trial production of ONYX-015 and intends to use
MAGENTA or other contract manufacturers for some or all of the Company's
clinical trial production. The Company is aware of only a limited number of
manufacturers who it believes would have the ability and capacity to manufacture
this product or any other therapeutic viruses the Company may develop. Failure
of any such third-party manufacturer to comply with state and federal
regulations and to deliver the required quantities on a timely basis and at
commercially reasonable prices would materially adversely affect the Company's
business, financial condition and results of operations. No assurance can be
given that the Company, alone or with a third party, will be able to make the
transition to commercial-scale production of
13
its potential products successfully, if at all, or that if successful, the
Company will be able to maintain such production.
The Company anticipates that substantial improvements in the manufacturing
process and yield would be required to produce commercial quantities of
ONYX-015. While the Company has built and expanded staffing of a process
development laboratory to investigate the feasibility of improving the
manufacturing process and yield, there can be no assurance that such
improvements will be achieved. No assurance can be given as to the ability of
the Company to produce or obtain clinical or commercial quantities of its
potential products in compliance with applicable regulations or at an acceptable
cost.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patent and trade secret protection is crucial to
its business and that its future will depend in part on its ability to obtain
patents, maintain trade secret protection and operate without infringing the
proprietary rights of others, both in the United States and other countries. In
January 1997, the Company received notice of allowance from the United States
Patent and Trademark Office for claims covering the use of ONYX-015 for the
treatment of p53-deficient cancers. As of March 21, 1997, the Company owned or
had licensed rights to 11 United States patents and 32 United States patent
applications, and generally, foreign counterparts of these filings. These
patents and patent applications cover in most cases discoveries made with
respect to biological materials and interactions of biological materials,
including research tools used by the Company in its drug discovery programs. The
Company's rights under five of the United States patents and nine of the United
States patent applications are nonexclusive rights held under a license from
Chiron that was granted to the Company in connection with its formation.
Additionally, the Company has exclusive rights to one patent application under
the Chiron license. The Company also has nonexclusive rights under one United
States patent held under license from the State University of New York--Stony
Brook.
The Company's existing patent rights may not have a deterrent effect on
competitors who are conducting or desire to commence competitive research
programs with respect to the biological targets or fields of inquiry being
pursued by the Company. In addition, with the exception of the allowed claims
described above for ONYX-015, these patents and patent applications do not cover
potential therapeutic products. The Company's ultimate patent position will
depend on the success of its drug discovery program and its ability to obtain
effective patent coverage for the compositions of matter identified in such drug
discovery programs. Because the Company's drug discovery programs are at an
early stage and, except in the p53 Program, potential products have not yet been
identified, it cannot be determined whether potential products that may be
derived from the Company's drug discovery program may be subject to the patent
rights of third parties.
Since patent applications in the United States are maintained in secrecy
until patents issue and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, the Company cannot be
certain that it was the first to make the inventions covered by each of its
pending patent applications or that it was the first to file patent applications
for such inventions. The patent positions of biotechnology and pharmaceutical
companies are highly uncertain and involve complex legal and factual questions,
and therefore the breadth of claims allowed in biotechnology and pharmaceutical
patents or their enforceability cannot be predicted. To date there has emerged
no consistent policy regarding the breadth of claims allowed in biotechnology
patents. There can be no assurance that any of the Company's patents or patent
applications, if issued, will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection or
competitive advantages to the Company against competitors with similar
technology. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company. Because of the extensive time required for development, testing
and regulatory review of a potential product, it is possible that before any of
the Company's products can be commercialized, any related patent may expire, or
remain in existence for only a short period following commercialization, thus
reducing any advantage of the patent.
14
The Company is aware of pending patent applications that have been filed by
others that may pertain to certain aspects of the Company's programs. If patents
are issued to others containing preclusive or conflicting claims and such claims
are ultimately determined to be valid, the Company may be required to obtain
licenses to these patents or to develop or obtain alternative technology. The
Company's breach of an existing license or failure to obtain a license to
technology required to commercialize its products may have a material adverse
effect on the Company's business, financial condition and results of operations.
Litigation, which could result in substantial costs to the Company, may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of third-party proprietary rights. If competitors of the Company
prepare and file patent applications in the United States that claim technology
also claimed by the Company, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to the
Company, even if the eventual outcome is favorable to the Company. An adverse
outcome could subject the Company to significant liabilities to third parties
and require the Company to seek licenses of the disputed rights from third
parties or to cease using such technology if such licenses are not available and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In respect of the foregoing, the Company is aware of a patent application
filed in the United States, Europe, Japan and Canada by General Hospital
Corporation, an affiliate of Massachusetts General Hospital. This patent
application is related to research involving a modified herpes simplex virus but
it also includes broader claims that, if they were to issue, would cover the p53
Program including ONYX-015. The Company believes, and has received an opinion
from outside counsel to the effect, that claims made in the General Hospital
patent application that may impinge on ONYX-015 and the p53 Program are not
patentable. However, there can be no assurance that broad claims applicable to
ONYX-015 or the p53 Program will not issue from the General Hospital patent
application in one or more countries, that the Company would be successful in
challenging any such claims, or that a license would be available under any such
patent if it were to issue.
The Company and its licensors also rely on trade secrets to protect its
technology, especially where patent protection is not believed to be appropriate
or obtainable. However, trade secrets are difficult to protect. The Company
protects its proprietary technology and processes, in part, by confidentiality
agreements with its employees, consultants, collaborators and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors. To the extent that Onyx or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes may also arise as to the rights in related or
resulting know-how and inventions.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries will be a significant factor in the manufacturing and marketing of any
products that may be discovered or developed by the Company, or that may arise
out of the Company's research. All of the Company's products will require
regulatory approval by government agencies prior to commercialization. The
Company anticipates that its products will be subject to rigorous preclinical
and clinical testing and premarket approval procedures by the FDA and similar
health authorities in foreign countries. Various federal statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing and promotion of such products.
The steps ordinarily required before a drug or biological product may be
marketed in the United States include (a) preclinical and clinical studies; (b)
the submission to the FDA of an IND which must become effective before human
clinical trials may commence; (c) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug or biologic; (d) the
submission to the FDA of a Product License Application and Establishment License
Application ("PLA/ELA") for a biologic or an
15
NDA for a drug; and (e) FDA approval of the PLA/ELA or NDA, 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 auspice
of an Institutional Review Board ("IRB") and with patient informed consent. The
IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution conducting the clinical
trial. The United Kingdom and certain other European and Asian countries have
similar regulations.
The goal of the 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 PLA/ELA or an NDA to the FDA and the corresponding agencies in other
countries for review and approval. FDA approval of a PLA/ELA or an NDA is
required before marketing may begin in the United States. The FDA may elect to
present data on the Company's products to one of its advisory committees for
review and recommendation before PLA/ELA or NDA approval. Essentially all
proposed products of the Company will be subject to demanding and time-consuming
PLA/ELA or NDA or similar approval procedures in the countries where the Company
intends to commercialize its products. These regulations define not only the
form and content of the development of safety and efficacy data regarding the
proposed product, but also impose specific requirements regarding manufacture of
the product, quality assurance, packaging, storage, documentation and record
keeping, labeling and advertising, and marketing procedures. Effective
commercialization also requires inclusion of the Company's products in national,
state, provincial, or institutional formularies or cost reimbursement systems.
FDA approval of the Company's products, including a review of the
manufacturing processes and facilities used to produce such products, will be
required before such products may be marketed in the United States. The process
of obtaining FDA approval can be costly, time consuming and subject to
unanticipated delays. The FDA may refuse to approve an application if it
believes that applicable regulatory criteria are not satisfied. The FDA may also
require an additional testing for safety and efficacy of the drug. Moreover, if
regulatory approval of a drug product is granted, the approval will be limited
to specific indications. There can be no assurance that approvals of the
Company's proposed products, processes or facilities will be granted on a timely
basis, if at all. Any failure to obtain, or delay in obtaining, such approvals
would have a material adverse affect on the Company's business, financial
condition and results of operations. Moreover, even if regulatory approval is
granted, such approval may include significant limitations on indicated uses for
which a product could be marketed. In some instances, regulatory approval may be
granted with the condition that confirmatory (Phase IV) clinical studies be
carried out. If these Phase IV studies do not confirm the results of previous
studies, regulatory approval for marketing may be withdrawn. Failure to comply
with FDA and other applicable regulatory requirements may result in, among other
things, warning letters, civil penalties, criminal prosecution, injunctions,
seizure or recall of products, total or partial suspension of production, or
refusal of the government to grant approval or withdraw approval of the
Company's products.
16
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Nuclear Regulatory
Commission, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local regulations, and certain of the
Company's potential products may require review by the Gene Therapy Advisory
Committee of the United States National Institutes of Health. In other
countries, similar regulations may apply. The Company's research and development
involves the controlled use of hazardous materials and chemicals. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities will be necessary in foreign countries prior
to the commencement of marketing of the product in such countries. The approval
procedure varies among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there is now a
centralized European Community approval mechanism in place, each European
country may nonetheless impose its own procedures and requirements, many of
which are time consuming and expensive. Thus, there can be substantial delays in
obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. The Company expects to
rely on corporate partners and licensees, along with Company expertise, to
obtain governmental approval in foreign countries of drug and biological
products discovered by the Company or arising from the Company's programs.
COMPETITION
Onyx is engaged in a rapidly changing and highly competitive field. Other
products and therapies that will compete directly with the products that the
Company is seeking to develop and market currently exist or are being developed.
Many other companies are actively seeking to develop products that have disease
targets similar to those being pursued by the Company. Some of these competitive
products are in clinical trials. In particular, Schering-Plough Corporation is
conducting a Phase I clinical trial in colon metastases to the liver and
Introgen Therapeutics, Inc. is conducting a Phase I clinical trial in head and
neck cancer with p53 gene therapy products, and other companies are in earlier
stages of research with small molecule drug and antisense approaches to treat
p53-deficient tumors. Such products would compete directly with ONYX-O15. Other
companies, including Merck & Co. and Genentech, Inc., are developing small
molecule drugs to inhibit targets involving the ras pathways. Such products may
compete with potential products identified in the Company's ras Program. Other
companies are in earlier stages of research with small molecule drugs, gene
therapy and antisense approaches to treat ras-related cancers. There can be no
assurance that the Company's competitors will not succeed in developing
cancer-specific therapies that are more effective than any that are being
developed or that may be developed by the Company, or that would render the
Company's technologies obsolete and noncompetitive. Moreover, there are
currently commercially available products for the treatment of certain disease
targets being pursued by the Company.
Competition from fully integrated pharmaceutical companies and more
established biotechnology companies is intense and is expected to increase.
Substantially all of these companies have significantly greater financial
resources and expertise in research and development, manufacturing, preclinical
and clinical testing, obtaining regulatory approvals and marketing than the
Company. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
established biotechnology companies. Many of these competitors have significant
products that have been approved or are in development and operate large, well
funded research and development programs. Academic institutions, governmental
agencies and other public and private research organizations also conduct
research, seek patent protection and establish collaborative arrangements for
products and clinical development and marketing that compete with the Company's
programs. These companies and institutions also compete with the Company in
recruiting and retaining highly
17
qualified scientific and management personnel. In addition to the above factors,
Onyx will face competition based on product efficacy and safety, the timing and
scope of regulatory approvals, availability of supply, marketing and sales
capability, reimbursement coverage, price and patent position. There is no
assurance that the Company's competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization than the Company.
EMPLOYEES
As of December 31, 1996, the Company had 109 full-time employees of whom 44
hold Ph.D. or M.D. degrees. Seventy-nine of the Company's employees are in
research and development, and 30 are in business development, finance and
administration. No Company employee is represented by a labor union and the
Company considers its employee relations to be good.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board ("SAB") consists of individuals with
expertise in many aspects of molecular oncology who advise the Company and
provide critical review of the various development activities of the Company.
The SAB meets several times a year. In addition, the SAB members consult with
and meet informally with the Company on a frequent basis. Certain SAB members
own shares of common stock of the Company. Each member of the SAB has entered
into a consulting agreement with the Company covering the terms of their
positions as consultants to the Company and as members of the SAB. On January 1,
1997, Dr. Frank McCormick, Vice President and Chief Scientific Officer, resigned
from the Company to become the Director of the Cancer Research Institute at the
University of California at San Francisco. He will continue as a consultant to
the Company and Chairman of the SAB through December 1999. The members of the
Company's SAB are as follows:
HENRY BOURNE, M.D. has served as Professor of Pharmacology and Medicine at
the University of California Medical Center in San Francisco since 1981. Dr.
Bourne's research focuses on the molecules that transduce hormonal and other
signals across cell membranes, with special emphasis on receptors and G
proteins. Dr. Bourne is a member of the National Academy of Sciences.
ERIC R. FEARON, M.D., PH.D. has served as the Maisel Professor of Oncology,
as an Associate Professor in the Department of Internal Medicine, Human Genetics
and Pathology, and as Associate Director for Basic Research, at the University
of Michigan Comprehensive Cancer Center since July 1995. Prior to that, Dr.
Fearon served as an Assistant Professor at Yale University School of Medicine in
the Departments of Pathology and Biology. Dr. Fearon's research focuses on the
understanding of the genetic defects that underlie the invasive and metastatic
behavior of advanced forms of human cancer, particularly cancers of the colon
and breast.
DOUGLAS HANAHAN, PH.D. has served as Associate Director of the Hormone
Research Institute since July 1992 and has served as a Professor in the
Department of Biochemistry and Biophysics at the University of California, San
Francisco since August 1988. Dr. Hanahan's laboratory is a leader in developing
genetically engineered mouse models of cancer, and applying those models to
identify key genetic and cellular changes that specify a tumor's developmental
pathway and essential characteristics, including the control of angiogenesis and
cell death, and increasingly in exploring transgenic mice as platforms for
preclinical evaluation of therapeutic strategies.
EDWARD E. HARLOW, JR., PH.D. has served as Scientific Director of the
Massachusetts General Hospital Cancer Center and has served as Professor of
Genetics at the Harvard Medical School since 1990. Dr. Harlow's research
interests include regulation of the mammalian cell cycle, biochemistry of the
retinoblastoma protein and related proteins and cdc2 kinases. Dr. Harlow is a
member of the National Academy of Sciences.
PETER M. HOWLEY, M.D. has served as Chairman of the Department of Pathology
and as a professor at Harvard Medical School since July 1993, and previously
served as Chief of the Laboratory of Tumor Virus Biology at the National Cancer
Institute from 1973 to 1993. Dr. Howley has defined the genes and
18
mechanisms by which the human papilloma viruses contribute to human cervical
cancer. Dr. Howley has won numerous awards for his research which, most
recently, includes the Paul Ehrlich-Ludwig Darmstaedter Prize. Dr. Howley was
elected to the National Academy of Sciences in 1993, the Institute of Medicine
in 1994, and to the American Academy of Arts and Sciences in 1996. Dr. Howley
serves as the Chairman of the National Cancer Policy Board of the National
Academy of Sciences.
FRANK MCCORMICK, PH.D., F.R.S., founder of the Company served as Chairman of
the SAB since March 1996, Vice President and Chief Scientific Officer of the
Company from 1995 until December 31, 1996, and as a director of the Company
since April 1992. Dr. McCormick served as Vice President of Research from April
1992 until 1995. Prior to founding the Company, Dr. McCormick served as Vice
President of Therapeutic Research at Chiron from December 1991 until April 1992.
Prior to that, Dr. McCormick was employed at Cetus in various positions from
1982 until December 1991, serving as Vice President of Discovery Research of
Cetus from 1990 until December 1991. Dr. McCormick received a Ph.D. in
biochemistry from Cambridge University in England, and completed post-doctoral
research at the State University of New York at Stony Brook and the Imperial
Cancer Research Fund in London. He is a Fellow of the Royal Society of Great
Britain.
BRUCE A.J. PONDER, PH.D. FRCP, has served as Director of the Cancer Research
Campaign's Human Cancer Genetics Research Group at Cambridge University since
June 1989. Since 1993, Dr. Ponder has been Professor of Human Cancer Genetics
and since January 1996, Dr. Ponder has also been Professor and head of the
Department of Clinical Oncology at Cambridge University. Dr. Ponder's research
focuses on hereditary syndromes predisposing individuals to cancer.
EILEEN WHITE, PH.D. has served as a resident faculty member at the Center
for Advanced Biotechnology and Medicine and has served as an Associate Professor
in the Department of Biological Sciences at Rutgers University since July 1990.
Dr. White's research focuses on the function of the adenovirus E1B oncogene and
the regulation of apoptosis by the transforming proteins of adenovirus.
OWEN N. WITTE, M.D. has served as Professor of Microbiology at the
University of California at Los Angeles since 1980 and as a Howard Hughes
Institute Investigator since 1984. Dr. Witte's research focuses on genes
associated with cancer and other diseases, including the Abelson murine leukemia
virus tyrosine kinase oncogene, the BCR-ABL oncogene, and the gene responsible
for X-linked agammaglobulinemia. Dr. Witte has been the recipient of the
Rosenthal Prize from the American Association of Cancer Research, the Dameshek
Prize of the American Society of Hematology and the Milken Family Award in
Cancer Research.
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.
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT
Onyx is at an early stage of development and must be evaluated in light of
the uncertainties present in an early-stage biotechnology company. Since its
inception in 1992, the Company has devoted substantially all of its resources to
the research and development of potential products and no revenue has been
generated from product sales. If any products result from the Company's research
and development programs, they are not expected to be commercially available for
a number of years even if they are successfully developed and proven to be safe
and effective. There can be no assurance that any of the Company's product
development efforts will be successfully completed, that any of the Company's
products will be proven to be safe and effective, that regulatory approvals will
be obtained at all or be as broad as sought, that the Company's products will be
capable of being produced in commercial quantities at reasonable cost or that
any products, if introduced, will achieve market acceptance.
19
TECHNOLOGICAL UNCERTAINTY
Drug discovery methods based upon the genetic basis of cancer are relatively
new, and there can be no assurance that the Company will be able to employ these
methods of drug discovery successfully or that these methods will lead to the
discovery of commercially viable pharmaceutical products. Only one of the
Company's compounds, the ONYX-015 therapeutic virus, has entered human clinical
trials, and there can be no assurance that any of the Company's other current or
future research and development programs will lead to additional compounds which
will be submitted for clinical testing or advance to human clinical trials. Even
if the Company's potential products are found to be safe or efficacious, or
otherwise to have utility, they will require significant additional research and
development efforts, preclinical and clinical testing, regulatory approvals, and
additional investment prior to their commercialization, and there can be no
assurance that any of these efforts will be successful.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company or its collaborative partners must
demonstrate through preclinical testing and clinical trials that the product is
safe and effective for use in each target indication. The results from
preclinical testing and early clinical trials may not be predictive of results
that will be obtained in later clinical trials and large scale testing, and
there can be no assurance that clinical trials of products identified by or
developed in collaboration with the Company will demonstrate sufficient safety
and efficacy to obtain the requisite regulatory approvals or will result in
marketable products. Clinical trials may require the enrollment of large numbers
of patients and suitable patients may be difficult to identify and recruit. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in every stage of clinical trials, even in advanced clinical trials
after promising results in earlier trials. Any delays in, or termination of, the
clinical trial efforts of the Company or its collaborative partners would have a
material adverse effect on the Company's business, financial condition and
results of operations.
NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on its corporate officers and other
principal members of its scientific and management staff, the loss of any of
whose services might significantly delay or prevent the achievement of the
Company's research, development or business objectives. In addition, the Company
relies on consultants and advisors, including the members of its Scientific
Advisory Board, to assist the Company in formulating its research and
development strategy. None of the Company's consultants and advisors are
employees of the Company and all have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to the Company.
In order to pursue its product development plans, the Company will be required
to hire additional qualified scientific personnel to perform research and
development, as well as personnel with expertise in clinical testing, government
regulation and manufacturing. These requirements are also expected to demand
additional management personnel and the development of additional expertise by
existing management personnel. The Company faces competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms,
if at all, and the failure to do so would have a material adverse effect on the
Company, including its ability to enter into additional collaborative
arrangements.
DEPENDENCE ON COLLABORATIVE AGREEMENTS
The Company's strategy for the development, clinical trials, manufacturing
and commercialization of its products includes maintaining and entering into
various collaborations with corporate partners, licensors, licensees and others.
To date, the Company has entered into collaborative arrangements with Bayer with
respect to the Company's ras Program, Warner-Lambert with respect to the
Company's Cell Cycle Program, and Eli Lilly with respect to the Company's BRCA1
Program. The Company is currently seeking a collaborative partner for the
development and commercialization of ONYX-015. There can be
20
no assurance that the Company will be able to maintain existing collaborative
agreements, negotiate collaborative arrangements in the future on acceptable
terms, if at all, or that any such collaborative arrangements will be
successful. To the extent that the Company is not able to maintain or establish
such arrangements, the Company would be required to undertake such activities at
its own expense, which would significantly increase the Company's capital
requirements and limit the programs the Company is able to pursue. In addition,
the Company may encounter significant delays in introducing its products into
certain markets or find that the development, manufacture or sale of its
products in such markets is adversely affected by the absence of such
collaborative agreements.
The Company cannot control the amount and timing of resources which its
collaborative partners devote to the Company's programs or potential products,
which can vary because of factors unrelated to the potential product. These
relationships may in some cases be terminated at the discretion of the Company's
collaborative partners with only limited notice to the Company and for reasons
outside the Company's control. If any of the Company's collaborative partners
breach or terminate their agreements with the Company or otherwise fail to
conduct their collaborative activities in a timely manner, the preclinical or
clinical development or commercialization of product candidates or research
programs will be delayed, and the Company will be required to devote additional
resources to product development and commercialization or terminate certain
development programs. There also can be no assurance that disputes will not
arise in the future with respect to the ownership of rights to any technology
developed with third parties. These and other possible disagreements between
collaborators and the Company could lead to delays in the collaborative
research, development or commercialization of certain product candidates or
could require or result in litigation or arbitration, which would be time
consuming and expensive, and would have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, the Company's collaborative partners may develop, either alone
or with others, products that compete with the development and marketing of the
Company's products. Competing products, either developed by the collaborative
partners or to which the collaborative partners have rights, may result in their
withdrawal of support with respect to all or a portion of the Company's
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF FUTURE PROFITABILITY; ACCUMULATED DEFICIT
The Company has generated no revenues from product sales and has experienced
significant operating losses since inception. As of December 31, 1996, the
Company had an accumulated deficit of approximately $29.6 million. The Company
expects to incur significant and increasing operating losses over at least the
next several years as the Company's research and development efforts and
preclinical testing and clinical trial activities expand. The Company does not
expect to generate revenues from the sale of its potential products, if any, for
the foreseeable future. The Company's ability to achieve profitability depends
in part upon its ability, alone or with others, to complete development of its
potential products, to obtain required regulatory approvals and to successfully
manufacture and market such potential products. The Company expects its
operating expenses and operating losses to increase in 1997 and beyond. There
can be no assurance that Onyx, or its collaborative partners, will successfully
develop, manufacture, commercialize and market any potential product, or that
the Company will ever achieve product revenues or profitability.
NEED FOR FUTURE FUNDING
The development of the Company's technology and proposed products will
require a commitment of substantial funds to conduct the costly and time
consuming research and preclinical testing and clinical trials necessary to
develop such technology and proposed products, and to establish relationships
with collaborative partners to bring any such products to market. The Company's
future capital requirements will depend upon a number of factors, including
continued scientific progress in the research and development of the Company's
technology programs, the size and complexity of these programs, the ability of
the Company to establish and maintain collaborative arrangements, progress with
preclinical testing and
21
clinical trials, the time and costs involved in obtaining regulatory approvals,
the cost involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, competing technological and market developments and product
commercialization activities.
SIGNIFICANT GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The Company's ongoing research and development activities and, if any
product is successfully developed and obtains regulatory approval, the
production and marketing of the Company's products are subject to extensive
regulation by numerous government authorities in the United States and other
countries. Prior to marketing in the United States, any product developed by the
Company must undergo rigorous preclinical testing and clinical trials and an
extensive regulatory approval process implemented by the FDA under the Food,
Drug and Cosmetic Act and the United States Public Health Service Act.
Satisfaction of such regulatory requirements, which includes demonstrating that
the product is both safe and effective, typically takes several years or more
depending upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Because certain of the products that may
result from the Company's research and development programs involve the
application of new technologies and will be based on new therapeutic approaches,
such products may be subject to substantial additional review by various
governmental regulatory authorities and as a result, regulatory approvals may be
obtained more slowly than for products using more conventional technologies.
There can be no assurance that FDA and other regulatory approvals will be
obtained in a timely manner, or at all. Any delay in obtaining, or the failure
to obtain, such approvals would adversely affect the Company's ability to
generate product or royalty revenues. Preclinical studies to demonstrate product
safety must be conducted in conformance with the FDA's Good Laboratory Practice
regulations. Clinical testing must meet requirements for institutional review
board oversight and informed consent, as well as FDA prior review, oversight and
Good Clinical Practice requirements. The Company has no experience in conducting
and managing the clinical trials necessary to obtain regulatory approval.
Clinical trials may require large numbers of test subjects. Furthermore, the
Company or the FDA may suspend clinical trials at any time if it believes that
the subjects participating in such trials are being exposed to unacceptable
health risks. Even if FDA and other regulatory approvals are obtained, the
marketing and manufacturing of products are subject to continuing FDA and other
regulatory review, and later discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market. Additional
governmental regulations may be promulgated that could delay regulatory approval
of the Company's or a corporate partner's potential products. The Company cannot
predict the impact of adverse governmental regulation which might arise from
future legislative or administrative action.
Accordingly, no assurance can be given that the Company will ever receive
approval from the FDA or foreign regulatory authorities for any of its products
and the failure to receive such approval, or significant delays in obtaining
such approval, could prevent the commercial development of such products and
would have a material adverse effect on the Company.
LACK OF MANUFACTURING EXPERIENCE
The Company's collaborative partners generally have the exclusive right to
manufacture products resulting from the collaborations, and the Company expects
to have similar manufacturing arrangements in its other collaborations. The
Company currently does not have the facilities to manufacture products for small
or large scale clinical trials or in commercial quantities, and has no
experience in such manufacturing. The Company is dependent on third parties,
including its collaborative partners, for the manufacturing of its products.
There can be no assurance that such parties will be able to meet the Company's
needs either with respect to timing, quantity or quality. If the Company is
unable to obtain or retain third-party manufacturing on acceptable terms, it may
be delayed in its ability to commercialize products. The Company's dependence
upon third parties, including its collaborative partners, for the manufacturing
of products may adversely affect the Company's profit margins and its ability to
develop, deliver and sell products on a timely and competitive basis. In the
event the Company undertakes to establish its own
22
commercial manufacturing capabilities, it will require substantial additional
funds, manufacturing facilities and equipment, and personnel.
UNCERTAINTY OF MARKET ACCEPTANCE
Even if the requisite regulatory approvals are obtained for the Company's
potential products or for products developed in collaboration with the Company,
uncertainty exists as to whether such products will be accepted by the market. A
number of additional factors also may limit the market acceptance of products
which may be developed by or discovered through collaboration with the Company,
including the rate of adoption by health care practitioners, the indications for
which the product is approved, the rate of the products' acceptance by the
target population, the timing of market entry relative to competitive products,
the availability of alternative therapies, the price of the Company's product
relative to alternative therapies, the availability of third-party reimbursement
and the extent of marketing efforts by the Company and third-party distributors
or agents retained by the Company. Side effects or unfavorable publicity
concerning the Company's products or any similar product could have an adverse
effect on the Company's ability to obtain physician, patient or third-party
payor acceptance and on efforts to sell the Company's products. There can be no
assurance of the Company's ability, or the length of time required, to achieve
commercialization of the Company's products or that physicians, patients or
third-party payors will accept any of the Company's products as readily as
alternative therapies or at all.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
The Company currently has no sales, marketing or distribution capability.
The Company intends to rely on relationships with one or more pharmaceutical
companies with established distribution systems and direct sales forces to
market its products. In the event that the Company is unable to reach agreement
with one or more pharmaceutical companies to market its products, it may be
required to market its products directly and to develop a marketing and sales
force with technical expertise and supporting distribution capability. There can
be no assurance that the Company will be able to establish in-house sales and
distribution capabilities or relationships with third parties, or that it will
be successful in gaining market acceptance for its products. To the extent that
the Company enters into co-promotion or other licensing arrangements, the
Company must develop its own sales, marketing or distribution capability, and
there can be no assurance that such efforts will be successful.
RISK OF PRODUCT LIABILITY; UNCERTAINTY OF AVAILABILITY OF INSURANCE
The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
therapeutic products. The Company has obtained clinical trial liability
insurance but there can be no assurance that it will be able to maintain such
insurance for any of its clinical trials. In addition, there can be no assurance
that the Company will be able to obtain or maintain product liability insurance
in the future on acceptable terms or with adequate coverage against potential
liabilities.
UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
private health insurers and other organizations. In addition, other third-party
payors are increasingly challenging the price and cost effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of newly approved health care products. There can be no assurance that
the Company's potential products or products discovered in collaboration with
the Company will be considered cost-effective or that adequate third-party
reimbursement will be available to enable Onyx to maintain price levels
sufficient to realize an appropriate return on its investment in product
research, discovery and development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products are
approved for marketing. Adoption of such
23
legislation could further limit reimbursement for medical products. If adequate
coverage and reimbursement levels are not provided by the government and
third-party payors for the Company's products, the market acceptance of these
products would be adversely affected, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops manufacturing capacity.
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of pharmaceutical and biotechnology
companies, including Onyx, have historically been highly volatile. The market
has from time to time experienced significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. In addition,
factors such as fluctuations in the Company's operating results, future sales of
common stock, announcements of technological innovations or new therapeutic
products by the Company or its competitors, announcements of collaborative
partners, clinical trial results, government regulation, developments in patent
or other proprietary rights, public concern as to the safety of drugs developed
by the Company or others, comments made, including changes in recommendations,
by securities analysts, and general market conditions can have a significant
adverse effect on the market price of the common stock. In particular, the
realization of any of the risks described in these "Additional Business Risks"
could have a significant adverse impact on such market price.
CONTROL BY EXISTING STOCKHOLDERS
Executive officers and directors of the Company and other holders of 5% or
more of the capital stock of the Company, together with entities affiliated with
them, beneficially own approximately 43% of the common stock of the Company. In
addition, Bayer has the right to have its nominee elected to the Company's Board
of Directors until the later of (i) the end of the research term or (ii) if the
parties have a Collaboration Compound (as defined in the collaboration
agreements) in clinical development, until such time as the parties do not have
a Collaboration Compound in clinical development. Because of such ownership and
voting arrangements, these officers, directors and stockholders may be able to
effectively control the election of all members of the Board of Directors and to
determine all corporate actions.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. While the Company has no present intention to
issue shares of preferred stock, such issuance, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In addition,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 could have the effect of delaying or preventing a
change of control of the Company. The Company's Certificate of Incorporation
provides for staggered terms for
24
the members of the Board of Directors. The staggered Board of Directors and
certain other provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of delaying or preventing changes in control or
management of the Company, which could adversely affect the market price of the
Company's common stock.
ITEM 2. PROPERTIES
The Company occupies approximately 50,000 square feet of office and
laboratory space in Richmond, California. The Company has leased this facility
through April 2000 and has two options to extend the lease, each for an
additional five years. The Company currently is considering whether to construct
or lease a pilot scale manufacturing facility capable of producing clinical
trial quantities of products.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
25
PART II.
ITEM 5. MARKET FOR REGISTRANT S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol "ONXX" on May 8, 1996. Prior to that
date, there was no public market for the Company's common stock. The following
table sets forth, for the periods indicated, the high and low sales prices of
the common stock reported on the Nasdaq National Market.
1996 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
Second Quarter (from May 8)................................................ $ 14.625 $ 7.75
Third Quarter.............................................................. 11.375 7.25
Fourth Quarter............................................................. 16.625 8.75
On March 21, 1997, the last sale price reported on the Nasdaq National
Market for the Company's common stock was $10.375 per share.
HOLDERS
There were approximately 335 stockholders of the common stock of the Company
as of December 31, 1996.
DIVIDENDS
The Company has not paid cash dividends on its common stock and does not
plan to pay any cash dividends in the foreseeable future.
26
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, 1996. The information presented should be read
in conjunction with the financial statements and notes included elsewhere in
this Report.
PERIOD FROM
FEBRUARY 14,
1992
(INCEPTION)
YEAR ENDED DECEMBER 31, TO
------------------------------------------ DECEMBER 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenue.......................................... $ 8,302 $ 6,945 $ 5,616 $ 2,737 $ 3,109
Operating expenses:
Research and development............................. 14,767 13,290 10,492 6,820 2,639
General and administrative........................... 3,527 2,807 2,355 1,798 872
--------- --------- --------- --------- ------
Loss from operations................................... (9,992) (9,152) (7,231) (5,881) (402)
Interest income, net................................... 1,575 725 468 158 145
--------- --------- --------- --------- ------
Net loss............................................... $ (8,417) $ (8,427) $ (6,763) $ (5,723) $ (257)
--------- --------- --------- --------- ------
--------- --------- --------- --------- ------
Net loss per share (1)................................. $ (1.29)
---------
---------
Shares used in computing net loss per share (1)........ 6,539
---------
---------
Pro forma net loss per share (1)....................... $ (1.29)
---------
---------
Shares used in computing pro forma net loss per share
(1).................................................. 6,526
---------
---------
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 40,329 $ 12,483 $ 16,360 $ 10,383 $ 3,286
Total assets............................................. 45,779 17,756 22,800 14,753 8,503
Long-term debt, noncurrent portion....................... 99 544 906 1,017 1,068
Accumulated deficit...................................... (29,587) (21,170) (12,743) (5,980) (257)
Total stockholders' equity............................... $ 40,923 $ 13,545 $ 18,309 $ 11,553 $ 5,107
The increase in cash and total assets during the year ended December 31, 1996
was primarily a result of the Initial Public Offering that occurred in May of
1996.
The Company has never declared or paid dividends on its common stock.
- ------------------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the method
used to determine the number of shares used to compute per share amounts.
27
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 WHICH 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
Since its inception, the Company has been engaged in the research and
development of novel therapeutics including both small molecule drugs and
therapeutic viruses which are based upon the genetics of human disease. The
Company has initially chosen to focus its research in the area of cancer. The
Company intends to pursue its therapeutic discovery programs independently and
in collaboration with pharmaceutical companies, and to collaborate with such
companies on the development and commercialization of any products which may
result from the Company's discovery programs. The Company has entered into
collaborative agreements with Bayer in the area of ras oncogenes, Warner-Lambert
in the cell cycle area and Eli Lilly on the function of the BRCA1 gene in breast
cancer.
The Company has not been profitable since inception and expects to incur
substantial and increasing losses for the foreseeable future, primarily due to
the expansion of its research and development programs, including preclinical
studies and clinical trials. The Company expects that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial. As of December
31, 1996, the Company's accumulated deficit was approximately $29.6 million.
The Company's business is subject to significant risks, including the risks
inherent in its research and development efforts, uncertainties associated with
obtaining and enforcing patents, the lengthy and expensive regulatory approval
process and competition from other products. The Company does not expect to
generate revenues from the sale of proposed products in the foreseeable future.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUE
Revenue from collaborative research and development agreements ("contract
revenue") with Bayer, Warner-Lambert and Eli Lilly accounted for approximately
98% of the Company's total revenue for this three-year period. Contract revenue
for the years ended December 31, 1996, 1995 and 1994 was $8.2 million, $6.9
million and $5.5 million, respectively. Contract revenue recorded from Bayer of
$5.2 million each year accounted for approximately 64% and 75% of total contract
revenue for 1996 and 1995, respectively. Contract revenue recorded from
Warner-Lambert accounted for approximately $2.1 million or 25% of total contract
revenue in 1996, and $1.4 million or 20% of total contract revenue for 1995.
Contract revenue recorded from Eli Lilly, including the September 1996 milestone
payment, accounted for approximately $910,000 or 11% of total contract revenue
in 1996, and $375,000 or 5% of total contract revenue for 1995. Contract revenue
of $5.5 million recorded during the year ended December 31, 1994 resulted
entirely from the Bayer collaboration. The Company anticipates that its contract
revenue for 1997 will exceed the amount of such revenue recognized in 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $14.8 million, $13.3 million and
$10.5 million during the years ended December 31, 1996, 1995 and 1994,
respectively. The expense increases, 11% in 1996 and 27% in 1995, were primarily
attributable to increased payroll and personnel expenses as the Company hired
additional research and development personnel, increased purchases of laboratory
supplies, increased equipment depreciation and facilities expenses in connection
with the growth of the business, and increased expenses in connection with the
preclinical and clinical development of ONYX-015, the
28
Company's first therapeutic virus product. Pursuant to the collaboration with
Warner-Lambert, the Company is currently obligated to fund its cell cycle
research and development, net of payments from Warner-Lambert, at a level of
approximately $1.0 million annually through May 1998. Research under the
existing agreements with Bayer and Eli Lilly is fully funded by the
collaborative partners up to specified levels. The Company expects to continue
to expand the breadth of its research and development programs significantly in
future periods, which will result in substantial increases in research and
development expenses, including costs associated with clinical development of
ONYX-015 in the p53 therapeutic virus program. These research and development
expenses may not be funded by collaborative partners.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $3.5 million, $2.8 million and $2.4
million during the years ended December 31, 1996, 1995 and 1994, respectively.
The increases in each period, 26% in 1996 and 19% in 1995, were primarily due to
the increased payroll and personnel expenses of additional staff hired to lead
and support the growth of the Company.
NET INTEREST INCOME
The Company had net interest income of $1.6 million, $725,000, and $468,000
during the years ended December 31, 1996, 1995 and 1994, respectively. Interest
income increased each year from 1994 to 1996 due to a higher average balance of
cash, cash equivalents and short-term investments resulting from increased
contract revenue and the Company's initial public offering of common stock in
May 1996 (the "IPO"). Interest expense has declined as the Company has reduced
its obligations under debt financing agreements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have substantially exceeded
its revenues and the Company has relied primarily on the proceeds from the sale
of equity securities and revenue from collaborative research and development
agreements to fund its operations.
At December 31, 1996, the Company had cash and investments of $40.3 million
compared to $12.5 million and $16.4 million at December 31, 1995 and 1994,
respectively. The increase of $27.8 million in 1996 was due to $31.2 million of
net proceeds from the IPO and $4.0 million from a Warner-Lambert equity
investment offset by cash used in operations of $5.8 million. The decrease of
$3.9 million during 1995 was primarily due to cash used in operations of $6.1
million offset by net proceeds from the Warner-Lambert and Eli Lilly equity
investments of an aggregate of $3.6 million.
The Company's cash used in operations was $5.8 million in 1996, $6.1 million
in 1995, and $4.7 million in 1994. This cash was used primarily to fund
increasing levels of research and development and the general and administrative
expenses necessary to support increased operations. Capital expenditures
amounted to $1.5 million in 1996 as compared to $945,000 in 1995, and $2.7
million in 1994. The Company expects to make expenditures for capital additions
of approximately $2.6 million in 1997. As of March 1997, the Company had $7.0
million available through a line of credit collateralized by laboratory
equipment and leasehold improvements.
The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair value of its common stock at the time of grant.
Options generally vest over four years. Deferred compensation of $793,000 and
$141,000 was recorded in 1996 and 1995, respectively. The amortization of
deferred compensation was $272,000 and $30,000, respectively, for the years
ended December 31, 1996 and 1995. Amortization of deferred compensation over the
next four fiscal years, including compensation recognized to date, will
aggregate to $934,000 as such options vest.
The Company believes that its existing capital resources and anticipated
revenue from existing collaborations, together with the $3.3 million from the
sale of 192,941 shares of common stock to Warner-
29
Lambert which the Company has the contractual right to receive on May 4, 1997,
will be sufficient to fund its current and planned operations through 1998.
There can be no assurance, however, that changes in the Company's research and
development plans or other changes affecting the Company's operating expenses
will not result in the expenditure of such resources before such time, and in
any event, the Company will need to raise substantial additional capital to fund
its operations in future periods. The Company intends to seek such additional
funding through collaborative arrangements, 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, the Company may be required to
delay, reduce the scope of, or eliminate one or more of its research or
development programs or to obtain funds through collaborative arrangements with
others that are on unfavorable terms or that may require the Company to
relinquish rights to certain of its technologies, product candidates or products
that the Company would otherwise seek to develop itself.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on pages 36 to
50 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors and
executive officers is incorporated by reference from the Company's Definitive
Proxy Statement filed not later than 120 days following the close of the fiscal
year ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is hereby incorporated by reference
from the Company's 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 the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement.
31
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 36 of this Report.
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets
Statements of Operations
Statements 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 Registrant.
3.2+ Bylaws of the Registrant.
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 19, 1994 and as amended
through May 16, 1995.
4.5+ Preferred Stock Purchase Agreement between the Registrant and Warner-Lambert Company dated May 4,
1995.
10.1++ Collaboration Agreement between Bayer Corporation (formerly Miles, Inc.) and the Registrant dated
April 22, 1994.
10.1(i)++ Amendment to Collaboration Agreement between Bayer Corporation and the Registrant dated April 4,
1996.
10.2++ Research, Development and Marketing Collaboration Agreement between Warner-Lambert Company and the
Registrant, 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 Registrant, dated May 2,
1995.
10.4++ Research and License Agreement between Eli Lilly & Company and the Registrant dated May 15, 1995 and
the Collaborative Research and License Agreement between Eli Lilly and the Registrant dated June
12, 1996.
10.5++ Technology Transfer Agreement dated April 24, 1992 between Chiron and the Registrant, as amended in
the Chiron Onyx HPV Addendum dated December 2, 1992, in the Amendment dated February 1, 1994, the
Letter Agreement dated May 20, 1994 and the Letter Agreement dated March 29, 1996.
32
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
10.6+ Scientific Advisory Board Consulting Agreement between Dr. Frank McCormick and the Registrant, dated
as of March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank McCormick and the Registrant dated April
17, 1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the Registrant dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the Registrant dated May 15, 1992, November 1,
1993 and October 21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Registrant, dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Registrant, dated January 23, 1995.
10.11+ Credit Terms and Conditions dated October 28, 1995 between the Registrant 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
Registrant, 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 Registrant 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 Registrant and Imperial Bank.
11.1 Statement regarding Computation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
25.1 Power of Attorney. Reference is made to page 34.
27.1 Financial Data Schedule.
- ------------------------
+ Confidential treatment has been received for portions of this document.
+ Filed as an exhibit to Registrant's Registration Statement on Form SB-2 (No.
333-3176-LA) and the quarterly report on Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference.
(B) REPORTS ON FORM 8-K
None
33
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant 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 28th day of March, 1997.
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 Douglas L. Blankenship 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
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ HOLLINGS C. RENTON Officer and Director
- ------------------------------ (Principal Executive March 28, 1997
Hollings C. Renton Officer)
/s/ DOUGLAS L. BLANKENSHIP Director of Finance
- ------------------------------ (Principal Financial and March 28, 1997
Douglas L. Blankenship Accounting Officer)
- ------------------------------ Director , 1997
Michael J. Berendt
/s/ BROOK H. BYERS
- ------------------------------ Director March 28, 1997
Brook H. Byers
/s/ SAMUEL D. COLELLA
- ------------------------------ Director March 28, 1997
Samuel D. Colella
/s/ PAUL GODDARD
- ------------------------------ Director March 28, 1997
Paul Goddard
34
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ KEVIN J. KINSELLA
- ------------------------------ Director March 28, 1997
Kevin J. Kinsella
/s/ KATHLEEN LAPORTE
- ------------------------------ Director March 28, 1997
Kathleen LaPorte
- ------------------------------ Director , 1997
Frank McCormick
/s/ RALPH H. THURMAN
- ------------------------------ Director March 28, 1997
Ralph H. Thurman
/s/ WENDELL WIERENGA
- ------------------------------ Director March 28, 1997
Wendell Wierenga
35
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, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 28, 1997
except as to Note 10
as to which the date is
March 21, 1997
36
ONYX PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Current Assets:
Cash and cash equivalents............................................................... $ 36,258 $ 3,779
Short-term investments.................................................................. 4,071 8,704
Other current assets.................................................................... 638 400
---------- ----------
Total current assets.................................................................. 40,967 12,883
Property and equipment, net............................................................... 4,196 4,221
Notes receivable from related parties..................................................... 396 419
Other assets.............................................................................. 220 233
---------- ----------
$ 45,779 $ 17,756
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................................ $ 693 $ 487
Accrued liabilities..................................................................... 1,277 826
Accrued compensation.................................................................... 439 342
Deferred revenue........................................................................ 1,631 1,373
Long-term debt, current portion......................................................... 444 408
---------- ----------
Total current liabilities............................................................. 4,484 3,436
Long-term debt, noncurrent portion........................................................ 99 544
Deferred rent............................................................................. 273 231
Commitments...............................................................................
Stockholders' Equity:
Preferred stock, $0.001 par value: 5,000,000 shares authorized, none issued and
outstanding........................................................................... -- --
Convertible preferred stock, $0.001 par value, issuable in series; 92,000,000 shares
authorized, 37,408,880 shares issued and outstanding as of December 31, 1995, none
authorized or outstanding at December 31, 1996........................................ -- 37
Common stock, $0.001 par value; 25,000,000 shares authorized 9,514,285 and 957,823
shares issued and outstanding as of December 31, 1996 and 1995, respectively.......... 10 1
Additional paid-in capital.............................................................. 71,132 34,788
Deferred compensation..................................................................... (632) (111)
Accumulated deficit....................................................................... (29,587) (21,170)
---------- ----------
Total stockholders' equity............................................................ 40,923 13,545
---------- ----------
$ 45,779 $ 17,756
---------- ----------
---------- ----------
See accompanying notes.
37
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Revenue:
Contract revenue ($7,250, $6,566 and $5,500 from related parties during 1996,
1995 and 1994, respectively)................................................. $ 8,160 $ 6,924 $ 5,500
Grant and other revenue........................................................ 142 21 116
--------- --------- ---------
Total revenue................................................................ 8,302 6,945 5,616
Operating expenses:
Research and development....................................................... 14,767 13,290 10,492
General and administrative..................................................... 3,527 2,807 2,355
--------- --------- ---------
Total operating expenses..................................................... 18,294 16,097 12,847
--------- --------- ---------
Loss from operations............................................................. (9,992) (9,152) (7,231)
Interest income................................................................ 1,685 921 670
Interest expense............................................................... (110) (196) (202)
--------- --------- ---------
Net loss..................................................................... $ (8,417) $ (8,427) $ (6,763)
--------- --------- ---------
--------- --------- ---------
Net loss per share............................................................... $ (1.29)
---------
---------
Shares used in computing net loss per share...................................... 6,539
---------
---------
Pro forma net loss per share..................................................... $ (1.29)
---------
---------
Shares used in computing pro forma net loss per share............................ 6,526
---------
---------
See accompanying notes.
38
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL TOTAL
---------------------- ------------------------ PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
--------- ----------- --------- ------------- ----------- --------------- ------------ -------------
Balances at December
31, 1993.......... 28,858,880 $ 29 703,890 $ 1 $ 17,503 $ -- $ (5,980) $ 11,553
Issuance of Series
D convertible
preferred stock
to investors for
cash (net of
issuance costs
of $10)......... 6,750,000 7 -- -- 13,483 -- -- 13,490
Exercise of stock
options at
prices ranging
from $0.007 to
$1.07 per
share........... -- -- 217,753 -- 29 -- -- 29
Repurchase of
common stock
from founders
and employees at
$0.007 to $0.07
per share....... -- -- (8,229) -- -- -- -- --
Net loss.......... -- -- -- -- -- -- (6,763) (6,763)
--
--------- --- --------- ----------- ----- ------------ -------------
Balances at December
31, 1994.......... 35,608,880 36 913,414 1 31,015 -- (12,743) 18,309
Issuance of Series
D convertible
preferred stock
to investors for
cash............ 1,800,000 1 -- -- 3,599 -- -- 3,600
Exercise of stock
options at
prices ranging
from $0.007 to
$1.07 per
share........... -- -- 52,317 -- 36 -- -- 36
Repurchase of
common stock
from employees
at $0.07 to
$1.07 per
share........... -- -- (7,908) -- (3) -- -- (3)
Deferred
compensation
related to grant
of certain stock
options......... -- -- -- -- 141 (141) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 30 -- 30
Net loss.......... -- -- -- -- -- -- (8,427) (8,427)
--
--------- --- --------- ----------- ----- ------------ -------------
Balances at December
31, 1995 (carried
forward).......... 37,408,880 $ 37 957,823 $ 1 $ 34,788 $ (111) $ (21,170) $ 13,545
See accompanying notes.
39
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
----------------------- ---------------------- PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------- ----------- --------- ----------- ----------- --------------- ------------ -------------
Balances at December
31, 1995 (brought
forward).......... 37,408,880 $ 37 957,823 $ 1 $ 34,788 $ (111) $ (21,170) $ 13,545
Conversion of
preferred stock
at 7.139 shares
of preferred for
1 share of
common
stock........... (37,408,880) (37) 5,240,065 5 32 -- -- --
Exercise of stock
options at
prices ranging
from $0.0071 to
$10.20.......... -- -- 176,844 0 158 -- -- 158
Repurchase of
common stock
from employees
at $0.07 to
$1.07 per
share........... -- -- (14,133) -- (5) -- -- (5)
Issuance of common
stock in
connection with
initial public
offering (net of
issuance costs
of $3,341)...... -- -- 2,875,000 3 31,156 -- -- 31,159
Net exercise of
warrants........ -- -- 1,801 -- -- -- -- --
Issuance of common
stock for
cash............ -- -- 254,683 1 4,000 -- 4,001
Deferred
compensation
related to grant
of certain stock
options......... -- -- -- -- 793 (793) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 272 -- 272
Issuance of common
stock pursuant
to employee
stock purchase
plan............ -- -- 22,202 -- 210 -- -- 210
Net loss.......... -- -- -- -- -- -- (8,417) (8,417)
---------- ----- --------- --- ----------- ----- ------------ -------------
Balances at December
31, 1996.......... -- $ -- 9,514,285 $ 10 $ 71,132 $ (632) $ (29,587) $ 40,923
---------- ----- --------- --- ----------- ----- ------------ -------------
---------- ----- --------- --- ----------- ----- ------------ -------------
See accompanying notes.
40
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................................... $ (8,417) $ (8,427) $ (6,763)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 1,536 1,352 924
Loss on sale of fixed assets.............................................. 3 127 --
Forgiveness of notes receivable........................................... 41 40 40
Amortization of deferred compensation..................................... 272 30 --
Change in assets and liabilities:
Other current assets.................................................... (238) (155) 78
Other assets............................................................ (5) 409 (193)
Accounts payable........................................................ 206 113 (25)
Accrued liabilities..................................................... 451 352 (163)
Accrued compensation.................................................... 97 75 19
Deferred rent........................................................... 42 (29) 56
Deferred revenue........................................................ 258 21 1,315
---------- ---------- ----------
Net cash used in operating activities................................. (5,754) (6,092) (4,712)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments......................................... (74,769) (21,837) (10,897)
Sales and maturities of short-term investments.............................. 79,402 20,184 3,846
Capital expenditures........................................................ (1,515) (945) (2,696)
Notes receivable from related parties....................................... -- 238 (223)
Proceeds from sale of fixed assets.......................................... 1 101 --
---------- ---------- ----------
Net cash provided by (used in) investing activities................... 3,119 (2,259) (9,970)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt............................................. -- -- 844
Payments on long-term debt.................................................. (409) (812) (755)
Net proceeds from issuances of preferred stock.............................. -- 3,600 13,490
Net proceeds from issuances of common stock................................. 35,528 33 29
Repurchase of common stock.................................................. (5) -- --
---------- ---------- ----------
Net cash provided by financing activities............................. 35,114 2,821 13,608
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 32,479 (5,530) (1,074)
Cash and cash equivalents at beginning of year................................ 3,779 9,309 10,383
---------- ---------- ----------
Cash and cash equivalents at end of year.............................. $ 36,258 $ 3,779 $ 9,309
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the year............................................... $ 110 $ 196 $ 202
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
41
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Onyx Pharmaceuticals, Inc. (the "Company" or "Onyx"), was incorporated in
the State of California on February 14, 1992 and commenced operations on April
24, 1992. On May 14, 1996, the Company reincorporated in the State of Delaware.
Onyx is engaged in the discovery and development of novel therapeutics including
both small molecule drugs and therapeutic viruses which are based upon the
genetics of human disease.
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.
Certain amounts in the 1995 and 1994 statements of operations have been
reclassified to conform with the classifications utilized in reporting at
December 31, 1996. There was no effect on net loss or loss per share.
REVENUE RECOGNITION
Revenue related to collaborative research agreements with corporate partners
are 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, such as selection of candidates for drug development, the
commencement of clinical trials or receipt of regulatory approvals.
The Company receives certain revenue from United States government grants
which 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 $130,000 and $112,000 was recognized in 1996
and 1994, respectively. No revenue was recognized in 1995. 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 and development expenses under the
collaborative research 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. The
Company limits its concentration of risk by diversifying its investments among a
variety of industries and issuers.
42
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 1996 and 1995, all debt 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 debt 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 value amounts
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 at December 31, 1996, 1995 and 1994.
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 five to six years.
STOCK-BASED COMPENSATION
In 1996, the Company implemented the disclosure requirements of Financial
Accounting Standards 123, "Accounting for Stock-Based Compensation" ("FAS 123").
Under FAS 123, the Company will continue to account for stock-based compensation
under the intrinsic value method prescribed by Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" and will provide pro
forma disclosures of net income and earnings per share as if the fair value
basis method prescribed in FAS 123 had been applied in measuring compensation
expense.
NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares issued during the 12-month period prior to
the initial filing of the Company's initial public offering at prices below the
public offering price of $12.00 have been included in the calculation as if they
were outstanding for all periods presented through March 31, 1996 (using the
treasury stock method for stock options).
Net loss per share information not provided on the statements of operations
is as follows (in thousands, except per share data):
YEAR ENDED DECEMBER
31,
--------------------
1995 1994
--------- ---------
Net loss per share......................................................... $ (6.14) $ (5.60)
--------- ---------
--------- ---------
Shares used in computing net loss per share................................ 1,372 1,207
--------- ---------
--------- ---------
Pro forma per share data is provided to show the calculation on a consistent
basis for the periods presented. It has been computed as described above, and
also gives retroactive effect from the date of issuance to the conversion of
preferred stock which automatically converted to common stock upon the closing
of the Company's initial public offering.
43
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro forma net loss per share information not provided on the statement of
operations is as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 1996
-----------------------------
Pro forma net loss per share..................................... $ (1.00)
------
------
Shares used in computing pro forma net loss per share............ 8,414
------
------
NOTE 2. COLLABORATIVE AGREEMENTS
BAYER CORPORATION
In May 1994, the Company entered into a five year collaborative agreement
with Bayer Corporation, formerly Miles, Inc. ("Bayer"), a wholly owned
subsidiary of Bayer AG, to fund research and development in a specified field of
oncology. In connection with this agreement, Bayer purchased 6,750,000 shares of
the Company's Series D preferred stock for $2.00 per share. The preferred shares
converted into 945,510 shares of common upon closing of the initial public
offering.
Under the terms of the agreement, Bayer has the worldwide right to market
products developed pursuant to the agreement. In consideration for the research
and development efforts and licensing rights, Bayer has committed to pay Onyx
$25,000,000 for the five-year research term beginning February 1,1994. In
addition, Bayer may pay royalties and milestone payments upon the occurrence of
specified events as set forth in the agreement, and Onyx also has certain
options to co-fund product development (outside of Japan) and share profits.
Revenue recognized under this agreement was $5,194,000, $5,196,000 and
$5,500,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Deferred revenue of $1,331,000 as of December 31, 1996 represents payment for
research to be performed in the first quarter of 1997.
WARNER-LAMBERT COMPANY
In May 1995, the Company entered into a three year research, development and
marketing collaborative agreement with Warner-Lambert Company ("Warner-Lambert")
in the field of cell cycle regulation. In connection with this agreement,
Warner-Lambert purchased 1,500,000 shares of the Company'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
agreed to further purchase 192,941 shares of common stock on or before May 4,
1997 at a purchase price of $3.3 million.
Under the terms of the agreement, the Company will develop screening assays
for particular targets selected by the parties and transfer them to
Warner-Lambert for screening to identify active compounds. Warner-Lambert has
exclusive rights to manufacture, market and sell products developed under the
agreement, excluding Japan. In consideration for these research and development
efforts and licensing rights, Warner-Lambert will pay the Company $6,166,667
over the period May 4, 1995 to May 3, 1998. Warner-Lambert agrees to pay
royalties and milestone payments dependent upon the occurrence of specified
events as set forth in the agreement. If a product is identified as a result of
the collaboration, the Company may elect to co-promote such a product in the
U.S. Costs incurred will be funded by Warner-Lambert dependent upon the level of
co-promotion.
44
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. COLLABORATIVE AGREEMENTS (CONTINUED)
Revenue recognized under this agreement was $2,056,000 and $1,370,000 for
the years ended December 31, 1996 and 1995, 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. Research focused around the BRCA1 gene licensed by Eli Lilly from
Myriad Genetics, Inc. Eli Lilly retains exclusive rights to the BRCA1 gene. In
connection with this agreement, Eli Lilly purchased 300,000 shares of the
Company'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. During 1996 a scientific milestone was achieved for which
Onyx received and recorded revenue of $685,000.
Revenue recognized under this agreement was $910,000 and $375,000 for the
years ended December 31, 1996 and 1995, respectively. Deferred revenue of
$300,000 as of December 31, 1996, represents payment for research to be
performed in the first quarter of 1997.
NOTE 3. INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
ESTIMATED FAIR VALUE
--------------------
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Cash equivalents
U.S. corporate securities.............................................. $ -- $ 987
Money market funds..................................................... 34,757 2,756
--------- ---------
34,757 3,743
Short-term investments:
U.S. corporate securities.............................................. 1,998 762
Foreign corporate securities........................................... 997 2,960
--------- ---------
2,995 3,722
--------- ---------
Total available-for-sale securities.................................. $ 37,752 $ 7,465
--------- ---------
--------- ---------
As of December 31, 1996 and 1995, the difference between the fair value and
the amortized cost of available-for-sale securities was insignificant. The
average portfolio duration is approximately three to six months, and the
contractual maturity of each of the investments does not exceed one year.
Excluded from short-term investments above is $1,500,000 and $4,982,000 of
certificates of deposit held at December 31, 1996 and 1995, respectively.
45
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Machinery and equipment.................................................. $ 4,971 $ 4,049
Furniture and fixtures................................................... 372 325
Leasehold improvements................................................... 3,212 2,681
--------- ---------
8,555 7,055
Less accumulated depreciation and amortization........................... (4,359) (2,834)
--------- ---------
$ 4,196 $ 4,221
--------- ---------
--------- ---------
NOTE 5. LONG-TERM DEBT
TERM LOAN
As of December 31, 1995, the Company had a bank term loan which bore
interest at the prime rate plus 2.5% (11.25% at December 31, 1995). The loan was
originally secured by leasehold improvements, property and equipment and
fixtures, plus a pledged certificate of deposit in the amount of $375,000. The
term loan required the Company to comply with certain covenants relating to
minimum net worth, minimum cash balances, restriction on dividend payment and
minimum subsequent equity issuances. As of December 31, 1995, the loan balance
was $45,455 and the security interest on the loan was released. There was no
outstanding balance at December 31, 1996.
FINANCING AGREEMENT
The Company has an equipment financing agreement with a financing company
which is to be repaid in monthly installments at an interest rate of 14.8%. The
agreement is secured by equipment with a cost of $1,240,000. In conjunction with
the agreement, the Company issued the financing company a warrant to purchase up
to 45,000 shares of Series C preferred stock. The warrant was exercised and
converted into 1,801 shares of common stock following the closing of the initial
public offering.
Following is a schedule of future minimum payments at December 31, 1996 (in
thousands):
Year ending December 31,
1997............................................................... $ 494
1998............................................................... 102
---------
Total minimum lease payments....................................... 596
Less amount representing interest.................................. (53)
---------
Present value of future payments................................... 543
Less current portion............................................... (444)
---------
$ 99
---------
---------
NOTE 6. FACILITY LEASE
The Company leases its facility under an operating lease which expires in
April 2000, with renewal options at the end of the lease for two subsequent
five-year terms. In April 1996, the Company increased
46
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. FACILITY LEASE (CONTINUED)
the size of the facility under lease from 40,000 square feet to 50,000 square
feet. Minimum annual rental commitments under the operating lease at December
31, 1996 are as follows (in thousands).
Year ending December 31:
1997.............................................................. $ 475
1998.............................................................. 477
1999.............................................................. 480
2000.............................................................. 160
---------
$ 1,592
---------
---------
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $370,000, $313,000 and $292,000, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company has loans with certain employees and a director of which
$396,000 and $419,000 were outstanding at December 31, 1996 and 1995,
respectively. These loans bear interest at rates ranging from 6.0% to 8.0% 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.
NOTE 8. STOCKHOLDERS' EQUITY
In March 1996, the Board of Directors of the Company approved a
one-for-7.139 reverse stock split of its common stock. Following stockholder
approval, the stock split was effected on April 1, 1996. All share and per share
amounts in the accompanying financial statements have been retroactively
adjusted to reflect this event.
On May 14, 1996, the Company completed an initial public offering of
2,500,000 shares of common stock to the public at a price of $12.00 per share.
In addition, the Company granted the underwriters an option to purchase up to
375,000 additional shares of common stock, which the underwriters exercised in
full. The proceeds to the Company from the sale of 2,875,000 shares, net of the
underwriters' discount and offering expenses payable by Onyx, was approximately
$31.2 million. In conjunction with the offering all previously issued
convertible preferred stock was converted to common stock at a rate of 1 share
of common stock for 7.139 shares of preferred stock.
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. The Incentive Plan
provides for grants to employees and consultants of the Company. The exercise
price of options granted under the Incentive Plan is determined by the Board of
Directors, but cannot be less than 100% of the fair market value of the common
stock on the date of grant.
In January 1996, the Compensation Committee adopted a plan to grant every
employee an annual stock option based on the Company meeting certain milestones
set by the Compensation Committee.
47
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
Under such program, each employee is eligible to receive a stock option equal to
up to 10% of the standard initial stock option grant for such employee's job
position at the Company.
In March 1996, the Board adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 100,000 shares of common stock. 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% 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
------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE NUMBER OF SHARES EXERCISE PRICE
--------------- ----------------- -----------------
Balances at December 31, 1993........... 186,858 412,739 $ 0.08
Shares authorized..................... 700,378 --
Options granted....................... (546,871) 546,871 $ 0.98
Options exercised..................... -- (217,753) $ 0.13
Options canceled...................... 83,828 (83,828) $ 0.63
--------------- -----------------
Balances at December 31, 1994........... 424,193 658,029 $ 0.77
Options granted....................... (359,693) 359,693 $ 1.07
Options exercised..................... -- (52,317) $ 0.68
Options canceled...................... 136,415 (136,415) $ 0.89
--------------- -----------------
Balances at December 31, 1995........... 200,915 828,990 $ 0.89
Shares authorized..................... 595,416 --
Options granted....................... (627,215) 627,215 $ 7.65
Options exercised..................... -- (176,844) $ 0.97
Options canceled...................... 122,745 (122,745) $ 1.16
--------------- -----------------
Balances at December 31, 1996........... 291,861 1,156,616 $ 4.52
--------------- -----------------
--------------- -----------------
The range of exercise prices for options outstanding at December 31, 1996
was $0.0071 to $13.75. The following table summarizes information about options
outstanding and exercisable at December 31, 1996:
OUTSTANDING AND EXERCISABLE OPTIONS
--------------------------------------------------
WEIGHTED AVERAGE
CONTRACTUAL LIFE
NUMBER OF REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE SHARES (IN YEARS) EXERCISE PRICE
- --------------------------------------------- ---------- ------------------- -----------------
$0.01-$0.71.................................. 124,074 6.26 $ 0.20
$1.07........................................ 563,036 8.29 $ 1.07
$7.50-$13.75................................. 469,506 9.63 $ 10.18
----------
Total.................................... 1,156,616
----------
48
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1996 and 1995, 30,862 and 8,958 shares of common stock,
respectively, were subject to repurchase. The Company has reserved 2,000,000
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 for these options.
This compensation expense is being amortized over the vesting period of the
related options, generally one to four years. Amortization of $272,000 and
$30,000 was recorded in 1996 and 1995, respectively.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
FAS 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 FAS 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 1996 and 1995 consistent with the
provisions of FAS No. 123, the Company's net loss and net loss per share would
have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
Net loss--as reported.............................................. $ (8,417) $ (8,427)
Net loss--pro forma................................................ $ (8,797) $ (8,446)
Net loss per share--as reported.................................... $ (1.29) $ (1.29)
Net loss per share--pro forma...................................... $ (1.35) $ (1.29)
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,
----------------------
1996 1995
---------- ----------
Risk-free interest rate............................................. 6.27% 6.82%
Expected life....................................................... 3.7 years 4.7 years
Expected volatility................................................. .807 N/A
Expected dividends.................................................. None None
Weighted average fair value......................................... $9.77 $2.21
49
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
Options granted at below fair value:
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
Risk-free interest rate............................................. 5.14% 6.55%
Expected life....................................................... 3.6 years 4.4 years
Expected volatility................................................. N/A N/A
Expected dividends.................................................. None None
Weighted average fair value......................................... $5.53 $1.07
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 and are
measured using enacted tax rules and laws that will be in effect when the
differences are expected to reverse.
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31,
---------------------
1996 1995
---------- ---------
(IN THOUSANDS)
Net operating loss carryforward......................................... $ 9,478 $ 6,797
Research and development credit carryforward............................ 1,236 943
Capitalized research and development.................................... 1,068 753
---------- ---------
Gross deferred tax assets............................................... 11,782 8,493
Valuation allowance..................................................... (11,782) (8,493)
---------- ---------
Net deferred tax assets................................................. $ -- $ --
---------- ---------
---------- ---------
The valuation allowance increased by $3,793,000 in 1995.
At December 31, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $27,000,000 and
$3,000,000, respectively, which expire in the years 1998 through 2011. At
December 31, 1996, the Company has research and development credit carryforwards
for federal income tax purposes of approximately $961,000 which expire in the
years 2008 through 2011.
Because of the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's tax net operating loss carryforwards and tax
credit carryforwards may be subject to an annual limitation in future periods.
As a result of the annual limitation, a portion of these carryforwards may
expire before ultimately becoming available to reduce future income tax
liabilities.
NOTE 10. SUBSEQUENT EVENTS
In March 1997, the Company entered into a $7 million line of credit
arrangement with a bank. The line bears interest at prime plus 1% and expires
October 15, 1997. 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.
50
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- --------------------------------------------------------------------------------------------- ---------
3.1+ Restated Certificate of Incorporation of the Registrant.
3.2+ Bylaws of the Registrant.
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 19, 1994 and as
amended through May 16, 1995.
4.5+ Preferred Stock Purchase Agreement between the Registrant and Warner-Lambert Company dated
May 4, 1995.
10.1++ Collaboration Agreement between Bayer Corporation (formerly Miles, Inc.) and the Registrant
dated April 22, 1994.
10.1(i)++ Amendment to Collaboration Agreement between Bayer Corporation and the Registrant dated April
4, 1996.
10.2++ Research, Development and Marketing Collaboration Agreement between Warner-Lambert Company
and the Registrant, 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 Registrant, dated
May 2, 1995.
10.4++ Research and License Agreement between Eli Lilly & Company and the Registrant dated May 15,
1995 and the Collaborative Research and License Agreement between Eli Lilly and the
Registrant dated June 12, 1996.
10.5++ Technology Transfer Agreement dated April 24, 1992 between Chiron and the Registrant, as
amended in the Chiron Onyx HPV Addendum dated December 2, 1992, in the Amendment dated
February 1, 1994, the Letter Agreement dated May 20, 1994 and the Letter Agreement dated
March 29, 1996.
10.6+ Scientific Advisory Board Consulting Agreement between Dr. Frank McCormick and the
Registrant, dated as of March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank McCormick and the Registrant dated
April 17, 1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the Registrant dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the Registrant dated May 15, 1992,
November 1, 1993 and October 21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Registrant, dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Registrant, dated January 23, 1995.
10.11+ Credit Terms and Conditions dated October 28, 1995 between the Registrant 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
Registrant, dated December 30, 1993 and Addendum thereto dated December 30, 1993.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- --------------------------------------------------------------------------------------------- ---------
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 Registrant 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 Registrant and Imperial Bank.
11.1 Statement regarding Computation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
25.1 Power of Attorney. Reference is made to page 34.
27.1 Financial Data Schedule.
- ------------------------
+ Confidential treatment has been received for portions of this document.
+ Filed as an exhibit to Registrant's Registration Statement on Form SB-2 (No.
333-3176-LA ) and the quarterly report on Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference.