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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2003

or

For the transition period from _________________to______________

Commission File Number: 0-28298

ONYX PHARMACEUTICALS, INC.

3031 Research Drive
Richmond, California 94806
(Address of principal executive offices)

(510) 222-9700
(Registrant’s telephone number including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 29,390,343 as of November 6, 2003.

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INDEX

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

CONDENSED BALANCE SHEETS
(In thousands)

See accompanying notes.

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CONDENSED STATEMENTS OF OPERATIONS

See accompanying notes.

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CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

     See accompanying notes.

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NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)

Note 1. Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003, or for any other future operating periods.

     The condensed balance sheet at December 31, 2002 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

     For further information, refer to the financial statements and footnotes thereto included in the Onyx Pharmaceuticals, Inc. (the “Company” or “Onyx”) Annual Report on Form 10-K for the year ended December 31, 2002.

     Note 2. Stock-Based Compensation

     The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), to account for employee stock options because the alternative fair value method of accounting prescribed by Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant.

     The pro forma information regarding net loss and loss per share prepared in accordance with SFAS 123, as amended by SFAS 148, has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS 123. The fair value of options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

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     The following table summarizes the pro forma effects assuming compensation cost for such awards had been recorded based upon the estimated fair value:

Note 3. Net Loss Per Share

     Basic and diluted net loss per share are presented in conformity with SFAS 128, “Earnings Per Share,” for all periods presented. Basic net loss per share and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. Potentially dilutive outstanding securities of 3,384,417 stock options and warrants for the three and nine months ended September 30, 2003 and 3,387,166 stock options and warrants for the three and nine months ended September 30, 2002 were not considered in the computation of diluted net loss per share because they would be antidilutive.

Note 4. Comprehensive Loss

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

     Note 5. Recently Issued Accounting Standards

     In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring, discontinued operations, plant closing, or other exit or disposal activities. SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred. Previous guidance in Emerging Issues Task Force, (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” required that a liability for an exit cost be recognized at the date of a company’s commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003 and recorded its January and June 2003 restructurings in accordance with the provisions of SFAS 146.

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     In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial position or results of operations.

     In November 2002, the FASB issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The provisions of EITF 00-21 applies to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material effect on the Company’s financial position or results of operations.

     In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46, as amended, requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities at the end of the first interim or annual period ending after December 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company’s adoption of the disclosure requirements in January 2003 did not have an impact on the Company’s financial position or results of operations. The adoption of the recognition requirements of FIN 46 on December 31, 2003 is not expected to have a material impact on the Company’s financial position or results of operations.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” as amended, effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 is not expected to have a material impact on the Company’s financial position or results of operations.

Note 6. Restructuring

     In June 2003, the Company announced the discontinuation of its therapeutic virus program and the termination of all internal research activities. The decision was part of a business realignment that placed an increased priority on the development of BAY 43-9006, Onyx’s lead product candidate that is being developed jointly with Bayer Pharmaceuticals Corporation. As a first step in the realignment, in January 2003, the Company suspended Phase II and Phase III clinical trials of ONYX-015 for head and neck cancer, canceled plans to initiate a Phase II trial in metastatic colorectal cancer and suspended all manufacturing activities. In the quarter ended March 31, 2003, the Company reduced staff levels by approximately 25 positions and recognized $0.4 million of employee termination costs. In the quarter ended June 30, 2003, the Company announced it would further reduce staff levels by approximately 50 positions, the majority of which were associated with research and development for the therapeutic virus program and the remainder of which were general and administrative staff. Certain of the approximately 50 terminated employees provided services to the Company beyond the

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minimum retention period of 60 days in order to receive severance-related benefits. For those employees, the Company measured the fair value of the severance-related benefits at the communication date and amortized the amount over the expected service period, ranging from 80 days to six months. The fair value of the severance-related benefits associated with the 50 employees terminated in June 2003 was $1.3 million, of which $0.3 million was amortized to restructuring expenses during the three months ended June 30, 2003 and $0.9 million was amortized to restructuring expenses during the three months ended September 30, 2003. The Company expects to record the remaining severance charges of $0.1 million in the quarter ending December 31, 2003. In addition to the $1.6 million of severance-related benefits recorded by the Company for the nine-month period ended September 30, 2003, restructuring charges of $2.5 million were also recognized as a result of the termination of the process development and manufacturing agreement with XOMA (US) LLC, including a termination fee of $1.0 million, a $1.0 million write-off of the unamortized up-front payment originally made in 2001, and $0.5 million of other obligations under the contract.

     Of the $4.1 million restructuring expenses recognized during the nine-month period ended September 30, 2003, $1.4 million was accrued at September 30, 2003, which amounts to $1.1 million for the termination of the XOMA agreement and $0.3 million for severance-related benefits.

     The Company may also incur charges of up to $3.3 million related to the expected early termination of its facility lease and the abandonment of certain property and equipment. These estimated charges will be recorded when a loss has been incurred or at the cease use date. At this time, the Company is not certain when this loss or the cease use date will occur or the amount of the loss, if any. The Company anticipates that the restructuring activities in January and June 2003 will reduce its quarterly operating expenses; however, these savings are expected to be fully offset by the Company’s share of the increased codevelopment costs for BAY 43-9006 as the compound advances through clinical trials.

Note 7. Sale of Equity Securities

     In February 2003, the Company received net cash proceeds of $9.9 million in connection with the completion of a private placement of 2,105,263 shares of its common stock at $4.75 per share, primarily to entities affiliated with Deerfield Management Company. These shares were registered for resale in June 2003.

     In July 2003, the Company sold 5.0 million shares of its common stock at a price of $15.25 per share in an underwritten public offering pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. In August 2003, the underwriters for the offering exercised their over-allotment option and thereby purchased an additional 179,000 shares of the Company’s common stock to cover over-allotments at a price of $15.25 per share. The Company received aggregate net cash proceeds of approximately $73.8 million from this public offering.

Note 8. Related Party Transaction

     In November 2001, the Company sold and licensed to Syrrx, Inc. assets from the Company’s small molecules discovery program in exchange for Syrrx preferred stock valued at $750,000. The entire amount was recorded as “Other income” on the date of sale. The value of the preferred stock was initially determined based on similar sales of Syrrx preferred stock for cash. In December 2002, the Company recorded a $100,000 charge to reduce the carrying value of its Syrrx investment to reflect an impairment in the value of the stock. In the quarter ended June 30, 2003, based on a further round of financing completed by Syrrx in April 2003, the Company recorded an additional write-down of $275,000 as “Other expense-related party” to further reduce the carrying value of the investment. Management considers the reduction in carrying value of the investment to be other-than-temporary. At the time of the transactions mentioned above, a member of the board of directors of Onyx was a director and officer of Syrrx. This board member is no longer an officer of Syrrx.

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

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

Overview

     We are a biopharmaceutical company dedicated to developing innovative therapies targeting the molecular mechanisms that cause cancer. A common feature of cancer cells is the abnormal activation of signaling pathways, in particular, those that cause tumor growth. Applying our scientific expertise in the fields of oncology and small molecule drug discovery, our product candidates are designed to inhibit proteins that signal excess cancer cell growth. By exploiting the genetic differences between cancer cells and normal cells, we focus on creating anticancer therapies that inhibit the growth of malignant cells but minimize damage to healthy tissue. Our lead product candidate, BAY 43-9006, which has emerged from our long-standing collaboration with Bayer Pharmaceuticals Corporation, or Bayer, is one of a new class of anticancer treatments. Several U.S. Food and Drug Administration, or FDA, approved drugs developed and owned by others validate the targeting of growth signaling pathways to treat cancer, but ours is the first small molecule to enter clinical trials that targets the enzyme, RAF kinase.

     BAY 43-9006 is an orally available agent designed to inhibit the enzyme RAF kinase and thereby selectively block a cascade of biochemical signals known as the RAS pathway. The RAS pathway plays an important role in tumor growth and is abnormally activated in many human cancers by various mechanisms. In approximately 20 percent of human cancers, a RAS gene is activated by mutation. In addition, researchers recently found that a specific RAF kinase, BRAF, is activated by mutation in two-thirds of melanomas and is also involved in several other cancers.

     Together with Bayer, we are conducting multiple clinical trials of BAY 43-9006. Under our collaboration with Bayer, we are jointly developing and intend to commercialize BAY 43-9006, except in Japan where Bayer funds all development costs, and we will receive a royalty on any marketed product. To date, over 800 patients have been enrolled in our various clinical trials. On October 25, 2003, Onyx and Bayer announced that we have begun a Phase III clinical trial to evaluate BAY 43-9006 in the treatment of kidney cancer. This decision was based on promising interim Phase II data, which showed encouraging signs of tumor shrinkage and disease stabilization. Phase II clinical trials of BAY 43-9006 are underway for the treatment of liver, melanoma, kidney and other cancers. These trials were initiated in August 2002 based on preliminary Phase I data which showed that the compound was well tolerated and provided early evidence of antitumor activity. In addition, a Phase I clinical trial in Canada is being conducted in patients with acute myelogenous leukemia, or AML, and myelodysplastic syndrome, or MDS.

     In collaboration with Warner-Lambert Company, now a subsidiary of Pfizer Inc, we have identified a number of other lead compounds that modulate the activity of key enzymes that regulate the process whereby a single cell replicates itself and divides into two identical new cells, a process known as the cell cycle. Mutations in genes that regulate the cell cycle are present in a majority of human cancers. Pfizer is currently advancing a lead candidate from that collaboration, a small molecule cell cycle inhibitor targeting a cyclin-dependent kinase. We believe Pfizer expects to enter Phase I clinical trials with its candidate in early 2004.

     Prior to June 2003, in addition to our small molecule program, we were developing therapeutic viruses that selectively replicate in cells with cancer-causing genetic mutations. In June 2003, we announced the discontinuation of our therapeutic virus program and the termination of all internal research activities. The decision was part of a business realignment that placed an increased priority on the development of BAY 43-9006. As a first step in the realignment, in January 2003, we

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suspended Phase II and Phase III clinical trials of ONYX-015 for head and neck cancer, canceled plans to initiate a Phase II trial in metastatic colorectal cancer and suspended all manufacturing activities. In the quarter ended March 31, 2003, we reduced staff levels by approximately 25 positions and recognized $0.4 million of employee termination costs. In the quarter ended June 30, 2003, we announced we would further reduce staff levels by approximately 50 positions, the majority of which were associated with research and development for the therapeutic virus program and the remainder of which were general and administrative staff. Certain of the approximately 50 terminated employees provided services to Onyx beyond the minimum retention period of 60 days to receive severance-related benefits. For those employees, we measured the fair value of the severance-related benefits at the communication date and amortized the amount over the expected service period, ranging from 80 days to six months. The fair value of the severance-related benefits associated with the 50 employees terminated in June 2003 was $1.3 million, of which $0.3 million was amortized to restructuring expenses during the three months ended June 30, 2003 and $0.9 million was amortized to restructuring expenses during the three months ended September 30, 2003. We expect to record the remaining severance charges of $0.1 million in the quarter ending December 31, 2003. In addition to the $1.6 million of severance-related benefits we recorded for the nine-month period ended September 30, 2003, restructuring charges of $2.5 million were also recognized as a result of the termination of our process development and manufacturing agreement with XOMA (US) LLC, or XOMA, including a termination fee of $1.0 million, a $1.0 million write-off of the unamortized up-front payment originally made in 2001, and $0.5 million of other obligations under the contract.

     Of the $4.1 million restructuring expenses recognized during the nine-month period ended September 30, 2003, $1.4 million was accrued at September 30, 2003, including $1.1 million for the termination of the XOMA agreement and $0.3 million for severance-related benefits.

     We may also incur charges of up to $3.3 million related to the expected early termination of our facility lease and the abandonment of certain property and equipment. These estimated charges will be recorded when a loss has been incurred or at the cease use date. At this time, we are not certain when this loss or the cease use date will occur or the amount of the loss, if any. We anticipate that the restructuring activities in January and June 2003 will reduce our quarterly operating expenses; however, these savings are expected to be fully offset by our share of the increased codevelopment costs for BAY 43-9006 as the compound advances through clinical trials.

     In February 2003, we received net cash proceeds of $9.9 million in connection with the completion of a private placement of 2,105,263 shares of common stock at $4.75 per share, primarily to entities affiliated with Deerfield Management Company. These shares were registered for resale in June 2003.

     In July 2003, we sold 5.0 million shares of our common stock at $15.25 per share in an underwritten public offering pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. In August 2003, the underwriters for the offering exercised their over-allotment option and thereby purchased an additional 179,000 shares of our common stock to cover over-allotments at a price of $15.25 per share. We received aggregate net cash proceeds of approximately $73.8 million from this public offering.

     We have not been profitable since inception and expect to incur substantial and increasing losses for the foreseeable future, primarily due to expenses associated with the development and commercialization of BAY 43-9006. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. As of September 30, 2003, our accumulated deficit was approximately $192.1 million.

     Our business is subject to significant risks, including the risks inherent in our development efforts, the results of the BAY 43-9006 clinical trials, our dependence on collaborative parties, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. We currently have no products that have received marketing approval, and we have generated no revenues from the sale of products. We do not expect to generate revenues from the sale of proposed products in the foreseeable future. We expect that all of our revenues in the foreseeable future will be generated from collaboration agreements.

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Results of Operations

Three and nine months ended September 30, 2003 and 2002

Revenues

     We did not recognize any revenue for the three and nine months ended September 30, 2003 as compared to $1.2 million for the three months ended September 30, 2002, and $2.7 million for the nine months ended September 30, 2002. Revenues for the three and nine months ended September 30, 2002 reflected research funding received from Warner-Lambert, a subsidiary of Pfizer Inc, for the therapeutic virus collaboration that concluded in September 2002. We currently do not expect to recognize any revenue in 2003.

Research and Development Expenses

     Research and development expenses decreased 17 percent to $9.0 million for the three months ended September 30, 2003 and decreased 22 percent to $25.1 million for the nine months ended September 30, 2003, as compared with $10.9 million and $32.0 million for the same periods in 2002. These results reflect a decrease of $4.8 million in the current quarter and $12.4 million for the nine months ended September 30, 2003 as compared to the same periods in 2002 for research and development expenses associated with our therapeutic virus program. In January 2003, we restructured our operations to reflect an increased priority on the development of BAY 43-9006 and suspended the development of ONYX-015, including clinical trials and manufacturing activities. This initial action was followed in June 2003 by an announcement that we discontinued the entire therapeutic virus program and terminated all other internal research activities. These two actions resulted in a reduction in force of approximately 75 positions, most of which were associated with the therapeutic virus program. The decrease in the therapeutic virus expenses was partially offset by increased expenses related to Onyx’s share of the codevelopment costs with Bayer for BAY 43-9006. The increases amounted to $2.9 million in the current quarter and $5.5 million for the nine months ended September 30, 2003 as compared to the same periods in 2002. BAY 43-9006 development costs reflect multiple ongoing Phase I clinical trials and Phase II clinical trials initiated in the second half of 2002. Future cost savings from the discontinuation of our therapeutic virus program are expected to be offset by increased costs associated with advancing the clinical development of BAY 43-9006. At September 30, 2003, we recorded a $0.8 million receivable from our collaboration partner, Bayer, related to reimbursement for our 50 percent share of codevelopment costs for BAY 43-9006 incurred by us during the nine months ended September 30, 2003.

     The major components of research and development costs include salaries and employee benefits, process and analytical development, clinical manufacturing, preclinical testing, clinical trial expenses, consulting and other third-party costs, supplies and materials, equipment depreciation and allocations of various overhead and occupancy costs. The scope and magnitude of future research and development expenses are difficult to predict at this time given the number of studies that will need to be conducted for any of our potential product candidates. In general, biopharmaceutical development involves a series of steps beginning with identification of a potential target and includes proof of concept in animals and Phase I, II and III clinical studies in humans, each of which is typically more expensive than the previous step. Success in development results in increasing expenditures, and the timing for completion of these steps is uncertain.

     The following table summarizes our principal product development initiatives, including the related stages of development for each product in development and the research and development expenses recognized in connection with each product. The information in the column labeled “Phase of Development - - Estimated Completion” is only our estimate of the timing of completion of the current in-process development phases. The actual timing of completion of those phases could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see our “Business Risks” section below.

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     The overall completion dates of our major research and development programs are estimates based on current information. The clinical development portion of these programs may span as many as seven to ten years, and estimation of completion dates or costs to complete would be highly speculative and subjective due to the numerous risks and uncertainties associated with developing biopharmaceutical products, including significant and changing government regulation, the uncertainty of future preclinical and clinical study results and uncertainties associated with process development and manufacturing as well as marketing. These risks and uncertainties make the reliable estimate of overall completion dates and total costs to complete development highly speculative. For additional discussion of factors affecting overall completion dates and total costs, see the “Business Risks” section below.

General and Administrative Expenses

     General and administrative expenses consist primarily of salaries and employee benefits and corporate functional expenses. General and administrative expenses remained stable at approximately $1.4 million for the three months ended September 30, 2003 and $4.2 million for the nine months ended September 30, 2003, as compared with $1.4 million and $4.3 million for the corresponding periods in 2002. It is anticipated that general and administrative expenses will decrease in future periods due to the reduction in force announced in June 2003.

Restructuring

     In June 2003, we announced the discontinuation of our therapeutic virus program and the termination of all internal research activities. The decision was part of a business realignment that placed an increased priority on the development of BAY 43-9006. As a first step in the realignment, in January 2003, we suspended Phase II and Phase III clinical trials of

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ONYX-015 for head and neck cancer, canceled plans to initiate a Phase II trial in metastatic colorectal cancer and suspended all manufacturing activities. In the quarter ended March 31, 2003, we reduced staff levels by approximately 25 positions and recognized $0.4 million of employee termination costs. In the quarter ended June 30, 2003, we announced we were further reducing staff levels by approximately 50 positions, the majority of which were associated with research and development for the therapeutic virus program and the remainder of which were general and administrative staff. Certain of the terminated employees provided services to Onyx beyond the minimum retention period of 60 days to receive severance-related benefits. For those employees, we measured the fair value of the severance-related benefits at the communication date and amortized the amount over the expected service period, ranging from 80 days to six months. The fair value of the severance-related benefits associated with the 50 employees terminated in June 2003 was $1.3 million, of which $0.3 million was amortized to restructuring expenses during the three months ended June 30, 2003 and $0.9 million was amortized to restructuring expenses during the three months ended September 30, 2003. We expect to record the remaining severance charges of $0.1 million in the quarter ending December 31, 2003. In addition to the $1.6 million of severance-related benefits we recorded for the nine month period ended September 30, 2003, restructuring charges of $2.5 million were recognized as a result of the termination of our process development and manufacturing agreement with XOMA (US) LLC, or XOMA, including a termination fee of $1.0 million, a $1.0 million write-off of the unamortized up-front payment originally made in 2001, and $0.5 million of other obligations under the contract.

     Of the $4.1 million restructuring expenses recognized during the nine-month period ended September 30, 2003, $1.4 million was accrued at September 30, 2003, including $1.1 million for the termination of the XOMA agreement and $0.3 million for severance-related benefits.

     We may also incur charges of up to $3.3 million related to the expected early termination of our facility lease and the abandonment of certain property and equipment. These estimated charges will be recorded when a loss has been incurred or at the cease use date. At this time, we are not certain when this loss or the cease use date will occur or the amount of the loss, if any. We anticipate that the restructuring activities in January and June 2003 will reduce our quarterly operating expenses; however, these savings are expected to be fully offset by our share of the increased codevelopment costs for BAY 43-9006 as the compound advances through clinical trials.

Interest Income, Other Income and Other Expense

     We had interest income of $254,000 for the three months ended September 30, 2003, and $562,000 for the nine months ended September 30, 2003, as compared with $272,000 and $936,000 for the same periods in 2002. The decrease in interest income in 2003 as compared with 2002 primarily was due to lower average interest rates.

     In November 2001, we sold and licensed to Syrrx, Inc. assets from our small molecules discovery program in exchange for Syrrx preferred stock valued at $750,000. The entire amount was recorded as “Other income” on the date of sale. The value of the preferred stock was initially determined based on similar sales of Syrrx preferred stock for cash. In December 2002, we recorded a $100,000 charge to reduce the carrying value of our Syrrx investment to reflect an impairment in the value of the stock. In the three months ended June 30, 2003, based on a further round of financing completed by Syrrx in April 2003, we recorded an additional write-down of $275,000 as “Other expense-related party” to further reduce the carrying value of the investment. We consider the reduction in carrying value of the investment to be other-than-temporary. We did not incur similar write-downs in the three months ended September 30, 2003 or in the three and nine months ended September 30, 2002.

     We licensed to Rigel Pharmaceuticals, Inc. assets from our small molecules discovery program for $175,000 in January 2002 and $60,000 in August 2002, both of which we recorded as “Other income.” No similar items were recorded in the three months or nine months ended September 30, 2003.

Liquidity and Capital Resources

     Since our inception, our cash expenditures have substantially exceeded our revenues, and we have relied primarily on the proceeds from the sale of equity securities and revenue from collaborative research and development agreements to fund our operations.

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     At September 30, 2003, we had cash, cash equivalents and marketable securities of $94.9 million, compared to $39.8 million at December 31, 2002. The increase of $55.1 million was attributable to our public offering completed in July and August 2003, which raised aggregate net cash proceeds of $73.8 million; the private placement financing that we completed in February 2003, which raised net cash proceeds of $9.9 million, as well as $1.9 million received from the exercise of stock options. These sources of cash were partially offset by cash used in operating activities of $30.5 million. The cash was used primarily for cofunding the clinical development program with Bayer for BAY 43-9006 and to fund our therapeutic virus program.

     Total capital expenditures for equipment and leasehold improvements for the nine-month period ended September 30, 2003, were $0.1 million. We currently expect to make expenditures for capital equipment and leasehold improvements of up to $0.2 million for the remainder of 2003.

     We believe that our existing capital resources and interest thereon will be sufficient to fund our current and planned operations through the end of 2005. In addition, we announced in October 2003 with our collaborator, Bayer, the initiation of a Phase III clinical trial for BAY 43-9006. The start of the Phase III clinical trial will result in a $15.0 million creditable milestone-based payment to us from Bayer under our collaboration agreement that we anticipate receiving in the fourth quarter of 2003. Pursuant to our collaboration agreement, this amount is repayable to Bayer from a portion of any of our future profits and royalties, if any, from any products. We anticipate that our codevelopment costs for the BAY 43-9006 program will increase over the next several years as the Phase III clinical trial program advances. While these costs are unknown at the current time, we expect that we will need to raise additional capital to continue the cofunding of the program in future periods beyond 2005.

     Changes in our research and development plans or other changes affecting our operating expenses may result in the expenditure of our resources before the end of 2005, and in any event, we will need to raise additional capital to fund our operations beyond 2005. We intend to seek this additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or to obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.

Business Risks

     BAY 43-9006 is our only product candidate currently in clinical development, and our ability to discover and promote additional candidates to clinical development is constrained. If BAY 43-9006 is not successfully commercialized, we may be unable to identify and promote alternative product candidates and our business would fail.

     BAY 43-9006 is our only product candidate in clinical development. In June 2003, following an unsuccessful search for new collaboration partners for our therapeutic virus product candidates, including ONYX-015 and ONYX-411, we announced that we were discontinuing the development of all therapeutic virus product candidates, eliminating all employee positions related to these candidates, and terminating all related manufacturing capabilities. As a result, we do not have internal research and development capabilities. Our remaining scientific and administrative employees are dedicated to managing our relationship with Bayer Pharmaceuticals Corporation, and the development of BAY 43-9006, but are not actively discovering or developing new product candidates. As a result of the termination of our therapeutic virus program and drug discovery programs, we do not have a functional product development pipeline. If BAY 43-9006 is not successful in clinical trials, does not receive marketing approval, or is not successfully commercialized, we may be unable to identify and promote alternative product candidates to clinical development, which would cause our business to fail.

     We have begun an initial Phase III clinical trial with BAY 43-9006. If our clinical trial fails to demonstrate the safety and effectiveness of this product candidate, we will be unable to commercialize BAY 43-9006, and our business may fail.

     In collaboration with Bayer, we are conducting multiple clinical trials of BAY 43-9006. We have completed Phase I single-agent clinical trials of BAY 43-9006. We are currently conducting a number of Phase I clinical trials of BAY 43-

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9006 in combination with standard chemotherapeutic agents. Phase I trials are not designed to test the efficacy of a drug candidate but rather to test safety, to study pharmacokinetics, or how the body processes the drug candidate, to study pharmacodynamics, or how the drug candidate acts on the body over a period of time, and to understand the drug candidate’s side effects at various doses and schedules.

     With Bayer, we are currently conducting single-agent, open label Phase II clinical trials of BAY 43-9006 in liver, melanoma, kidney and other cancers. Phase II trials are designed to explore the efficacy of a product candidate in several different types of cancers and are normally randomized and double-blinded to ensure that the results are due to the effects of the drug. We and Bayer have initiated a Phase III clinical trial without randomized Phase II clinical trial data. We believe that any clinical trial designed to test the efficacy of BAY 43-9006, whether Phase II or Phase III, will likely involve a large number of patients to achieve statistical significance and will be expensive. We may conduct a lengthy and expensive clinical trial of BAY 43-9006 only to learn that this drug candidate is not an effective treatment. Historically, many companies have failed to demonstrate the effectiveness of pharmaceutical product candidates in Phase III clinical trials notwithstanding favorable results in Phase I or Phase II clinical trials. In addition, we may observe previously unforeseen adverse side effects.

     If efficacy of BAY 43-9006 is not demonstrated, or if previously unforeseen and unacceptable side effects are observed, we may not proceed with further clinical trials of BAY 43-9006. If we do not proceed with additional clinical trials of BAY 43-9006, we cannot seek regulatory approval of BAY 43-9006 with the U.S. Food and Drug Administration, or FDA, which may cause our business to fail.

     In our clinical trials, we treat patients who have failed conventional treatments and who are in advanced stages of cancer. During the course of treatment, these patients may die or suffer adverse medical effects for reasons unrelated to BAY 43-9006. These adverse effects may impact the interpretation of clinical trial results, which could lead to an erroneous conclusion regarding the toxicity or efficacy of BAY 43-9006.

     We are dependent upon our collaborative relationship with Bayer to develop, manufacture and commercialize BAY 43-9006 and to obtain regulatory approval, which could delay or prevent the development and commercialization of BAY 43-9006.

     Our strategy for developing, manufacturing and commercializing BAY 43-9006 and obtaining regulatory approval depends in large part upon our relationship with Bayer. If we are unable to maintain our collaborative relationship with Bayer, we would need to undertake these development, manufacturing and marketing activities at our own expense, which would significantly increase our capital requirements and limit the indications we are able to pursue and could prevent us from commercializing BAY 43-9006.

     Under the terms of the collaboration agreement, we and Bayer are conducting multiple clinical trials of BAY 43-9006. We and Bayer must agree on the development plan for BAY 43-9006. If we and Bayer cannot agree, clinical trial progress could be significantly delayed or halted.

     Under our agreement with Bayer, we have the opportunity to fund 50 percent of clinical development costs worldwide except in Japan, where Bayer will fund 100 percent of development costs and pay us a royalty on sales. We are currently funding 50 percent of development costs for BAY 43-9006, and depend on Bayer to fund the balance of these costs. Our collaboration agreement with Bayer does not, however, create an obligation for either us or Bayer to fund the development of BAY 43-9006, or any other product candidate. If a party declines to fund development or ceases to fund development of a product candidate under the collaboration agreement, then that party will be entitled to receive a royalty on any product which is ultimately commercialized, but not to share in profits. Bayer could, upon 60 days notice, elect at any time to terminate its cofunding of the development of BAY 43-9006. If Bayer terminates its cofunding of BAY 43-9006 development, Onyx may be unable to fund the development costs on its own and may be unable to find a new collaborator, since Bayer would receive a royalty on any product that is ultimately commercialized.

     Bayer manages the development of BAY 43-9006, including the FDA regulatory process and scope, size and schedule of clinical development. We are dependent on Bayer’s experience in filing and pursuing applications necessary to gain regulatory approvals. Bayer has limited experience in developing drugs for the treatment of cancer.

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     Our collaboration agreement with Bayer calls for Bayer to advance us creditable milestone-based payments. Based on our continued cofunding of development costs, Bayer will advance us $15 million upon initiation of Phase III clinical trials. We expect to receive this payment in the fourth quarter of 2003. In addition, any funds advanced under the agreement are repayable out of our future profits and royalties, if any, from any products.

     Our collaboration agreement with Bayer terminates when patents expire that were issued in connection with product candidates discovered under that agreement, or upon the time when neither we nor Bayer are entitled to profit sharing under that agreement, whichever is later. The patent application related to BAY 43-9006 is held by Bayer and, if issued, will expire in 2019, subject to possible patent-term extension, the entitlement for which and the term of which we cannot predict.

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

	•		the amount and timing of expenditure of resources can vary because of decisions by Bayer;
	•		disagreements as to development plans, including clinical trials or regulatory approval strategy;
	•		the right of Bayer to terminate its collaboration agreement with us on limited notice and for reasons outside our control;
	•		loss of significant rights if we fail to meet our obligations under the collaboration agreement;
	•		withdrawal of support by Bayer following the development or acquisition by it of competing products; and
	•		disagreements with Bayer regarding the collaboration agreement or ownership of proprietary rights.

     Due to these factors and other possible disagreements with Bayer, we may be delayed or prevented from developing or commercializing BAY 43-9006, or we may become involved in litigation or arbitration, which would be time consuming and expensive.

     If Bayer is involved in a business combination, or Bayer’s business strategy changes, it may adversely affect our collaborative relationship.

     If Bayer is involved in a business combination, such as a merger, or is otherwise acquired, the newly combined entity may have different priorities for drug development and discovery than did the original collaborator. Bayer recently announced its intentions to retain its pharmaceutical business. However, a combination or sale of assets is still possible.

     Similarly, Bayer may change its business strategy even in the absence of a business combination. Any change in Bayer’s business strategy may adversely affect its willingness or ability to complete its obligations under its collaboration agreement with us, which could cause us to suffer significant delays and funding shortfalls, seriously harming our business.

     Provisions in our collaboration agreement with Bayer may prevent or delay a change in control.

     Our collaboration agreement with Bayer provides that if Onyx is acquired by another entity by reason of merger, consolidation or sale of all or substantially all of our assets, and Bayer does not consent to the transaction, then for 60 days following the transaction Bayer may elect to terminate Onyx’s codevelopment, copromotion and comarketing rights under the collaboration agreement. If Bayer were to exercise this right, Bayer would gain exclusive development and marketing rights to the product candidates being developed under the collaboration agreement, including BAY 43-9006. If this happened, Onyx, or the successor to Onyx, would receive a royalty based on any sales of BAY 43-9006 and other collaboration products, rather than a share of any profits. In this case, Onyx or its successor would be permitted to continue cofunding development, and the royalty rate would be adjusted to reflect this continued risk-sharing by Onyx or its successor. These provisions of our collaboration agreement with Bayer may have the effect of delaying or preventing a change in control, or a sale of all or substantially all of our assets, or may reduce the number of companies interested in acquiring Onyx.

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     Our clinical trials could take longer to complete than we project or may not be completed at all.

     Although for planning purposes we project the commencement, continuation and completion of clinical trials for BAY 43-9006, the actual timing of these events may be subject to significant delays relating to various causes, including actions by Bayer, scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, and shortages of available drug supply. We may not complete clinical trials involving BAY 43-9006 as projected.

     We rely on Bayer, academic institutions or clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving BAY 43-9006. We will have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. In addition, we may suffer a delay in the completion of any one of our clinical trials because of requests from the FDA to revise the size or scope of the clinical trial. Failure to commence or complete, or delays in, any of our planned clinical trials would prevent us from commercializing BAY 43-9006, and thus seriously harm our business.

     We will need substantial additional funds, and our future access to capital is uncertain.

     We will require substantial additional funds to conduct the costly and time-consuming clinical trials necessary to develop BAY 43-9006, pursue regulatory approval and commercialize this product candidate. Our future capital requirements will depend upon a number of factors, including:

	•		the size and complexity of our BAY 43-9006 program;
	•		decisions made by Bayer to alter the size, scope and schedule of clinical development;
	•		our receipt of milestone-based payments;
	•		the ability to manufacture sufficient drug supply to complete clinical trials;
	•		progress with preclinical testing and clinical trials;
	•		the time and costs involved in obtaining regulatory approvals;
	•		the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
	•		competing technological and market developments; and
	•		product commercialization activities.

     We may not be able to raise additional financing on favorable terms, or at all. If we are unable to obtain additional funds, we may not be able to fund our share of clinical trials. We may also have to curtail operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets or grant licenses that are unfavorable to us.

     We believe that our existing capital resources and interest thereon, including the net cash proceeds of approximately $73.8 million raised in the underwritten public offering in July 2003 and the expected $15 million payment from Bayer, will be sufficient to fund our current and planned operations through the end of 2005. We anticipate that Bayer will advance us $15 million under our collaboration agreement during the fourth quarter of 2003 for the initiation of Phase III clinical trials for BAY 43-9006 based on our continued cofunding of development costs. We also anticipate that our codevelopment costs for the BAY 43-9006 program will increase over the next several years as the Phase III clinical trial program advances. While these costs are unknown at the current time, we expect that we will need to raise substantial additional capital to continue the cofunding of the BAY 43-9006 program in future periods. We may have to curtail our funding of BAY 43-9006 if we cannot raise sufficient capital. If we do not cofund development of BAY 43-9006, we will receive a royalty on future sales of any product that is ultimately commercialized, instead of a share of profits.

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     The efficacy of RAF inhibition in the treatment of human cancer has not been established.

     BAY 43-9006 is designed to act as a RAF inhibitor, blocking inappropriate growth signals in tumor cells by inhibiting RAF kinase, an enzyme that induces cancer cell growth. BAY 43-9006 is the first small molecule RAF inhibitor to reach the stage of clinical testing, and there is currently no direct evidence that the inhibition of RAF is an effective treatment for cancer in humans. The anticancer activity of BAY 43-9006 was studied using preclinical models. However, preclinical models to study anticancer activity of compounds are not necessarily predictive of sufficient clinical efficacy of these compounds in the treatment of human cancer to warrant a full commercial development program. BAY 43-9006 has also been tested in Phase I and Phase II human clinical trials, but the number of patients in these trials was insufficient to draw statistically significant conclusions as to clinical efficacy of the compound. RAF inhibition, the method of action of BAY 43-9006, may ultimately fail as an effective treatment of cancer in humans, or BAY 43-9006 may not inhibit RAF sufficiently to be effective. If RAF inhibition is not an effective treatment of cancer in humans, BAY 43-9006 may have no commercial value as a drug candidate, which could seriously harm our business.

     We have a history of losses, and we expect to continue to incur losses.

     Our net loss for the year ended December 31, 2000 was $7.5 million, for the year ended December 31, 2001 was $27.6 million, and for the year ended December 31, 2002 was $45.8 million. Our net loss for the nine months ended September 30, 2003 was $33.2 million. As of September 30, 2003, we had an accumulated deficit of approximately $192.1 million. We have incurred these losses principally from costs incurred in our research and development programs and from our general and administrative costs. We derived no revenues from product sales or royalties. We expect to incur significant and increasing operating losses over the next several years as we expand our clinical trial activities. We expect our operating losses to increase with our cofunding of ongoing BAY 43-9006 clinical trial costs under our collaboration agreement with Bayer.

     We do not expect to generate revenues from the sale of products for the foreseeable future, and we must repay the milestone-based advances we receive from Bayer from our future profits and royalties, if any. We expect that substantially all of our revenues for the foreseeable future will result from payments under our agreement with Bayer. Our ability to achieve profitability depends upon success by us and Bayer in completing development of BAY 43-9006, obtaining required regulatory approvals and manufacturing and marketing the approved product.

     We do not have manufacturing expertise or capabilities and are dependent on third parties to fulfill our manufacturing needs, which could result in the delay of clinical trials or regulatory approval.

     We lack the resources, experience and capabilities to manufacture BAY 43-9006 or any future product candidates on our own. We would require substantial funds to establish these capabilities. Consequently, we are dependent on third parties, including collaborative parties and contract manufacturers, to manufacture our product candidates and products, if any. These parties may encounter difficulties in production scale-up, including problems involving production yields, quality control and quality assurance and shortage of qualified personnel. These third parties may not perform as agreed or may not continue to manufacture our products for the time required by us to successfully market our products. These third parties may fail to deliver the required quantities of our products, if any, or product candidates on a timely basis and at commercially reasonable prices. Failure by these third parties could delay our clinical trials and our applications for regulatory approval. If these third parties do not adequately perform, we may be forced to incur additional expenses to pay for the manufacture of products or to develop our own manufacturing capabilities.

     We have the right to copromote BAY 43-9006, but we do not have marketing or sales experience or capabilities.

     We have the right under our collaboration agreement with Bayer to copromote BAY 43-9006 in the United States in conjunction with Bayer. If we exercise our rights to copromote BAY 43-9006, we will need to develop marketing and sales capabilities. We may not successfully establish marketing and sales capabilities or have sufficient resources to do so. If we do not develop marketing and sales capabilities, we may not meet our copromotion obligations under our collaboration agreement, which could result in our losing these copromotion rights. If we do develop such capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations, and we will incur additional expenses.

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     If we lose our key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.

     Our future success will depend in large part on the continued services of our management personnel, including Hollings C. Renton, our Chairman, President and Chief Executive Officer, and each of our other executive officers. The loss of the services of one or more of our key employees could have an adverse impact on our business. We do not maintain key person life insurance on any of our officers, employees or consultants, other than for our chief executive officer. Any of our key personnel could terminate their employment with us at any time and without notice. We depend on our continued ability to attract, retain and motivate highly qualified personnel. We face competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, and other research institutions.

     In January 2003, we restructured our operations to reflect an increased priority on the development of BAY 43-9006 and, in June 2003, announced that we discontinued our therapeutic virus program. As a result of these restructurings, we eliminated approximately 75 positions, including our entire scientific team associated with the therapeutic virus program. Our remaining scientific and administrative employees are engaged in managing our collaboration with Bayer to develop BAY 43-9006, but are not actively involved in new product candidate discovery. If we resume our research and development of other product candidates, we will either need to re-hire these individuals or hire individuals with similar skill sets. If we cannot re-hire these individuals or others with similar skill sets in a timely fashion, we will be unable to resume these activities.

     Even if our product candidates are approved, the market may not accept these products.

     Even if our product development efforts are successful and even if the requisite regulatory approvals are obtained, BAY 43-9006 or any future product candidates that we may develop may not gain market acceptance among physicians, patients, healthcare payers and the medical community. A number of additional factors may limit the market acceptance of products including the following:

	•		rate of adoption by healthcare practitioners;
	•		types of cancer for which the product is approved;
	•		rate of a product’s acceptance by the target population;
	•		timing of market entry relative to competitive products;
	•		availability of alternative therapies;
	•		price of our product relative to alternative therapies;
	•		availability of third-party reimbursement;
	•		extent of marketing efforts by us and third-party distributors or agents retained by us; and
	•		side effects or unfavorable publicity concerning our products or similar products.

     If BAY 43-9006 or any future product candidates that we may develop do not achieve market acceptance, we may lose our investment in that product candidate, which may cause our stock price to decline.

     We face intense competition and rapid technological change, and many of our competitors have substantially greater managerial resources than we have.

     We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market product candidates that will compete with other products and therapies that currently exist or are being developed. Many other companies are actively seeking to develop products that have disease targets similar to those we are pursuing. Some of these

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competitive product candidates are in clinical trials. Competitors that target the same tumor types as our BAY 43-9006 program and that have product candidates in clinical development include Pfizer, AstraZeneca PLC, OSI Pharmaceuticals, Inc., Genentech, Inc. and Abgenix, Inc., among others. We believe Pfizer has a small molecule compound in preclinical development that targets MEK, an enzyme that is also involved in the RAS signaling pathway. In addition, potential competition may come from agents that target Epidermal Growth Factor, or EGF, receptors and Vascular Endothelial Growth Factor, or VEGF, receptors. These agents include antibodies and small molecules. In particular, OSI Pharmaceuticals with Tarceva™ and AstraZeneca with IRESSA™ are developing small molecule inhibitors of EGF receptor tyrosine kinase. Companies working on developing antibody approaches include ImClone Systems, Inc. with Erbitux and Abgenix with antibodies targeting EGF receptors. Genentech has an antibody targeting VEGF (Avastin), and Novartis is developing a small molecule targeting VEGF. In addition, many other pharmaceutical companies are developing novel cancer therapies that, if successful, would also provide competition for or be used in combination with BAY 43-9006. We believe that other companies have RAF kinase inhibitors in preclinical development.

     If approved, the product candidates of these and other competitors now in clinical trials will compete directly with BAY 43-9006. Many of our competitors, either alone or together with collaborators, have substantially greater financial resources and research and development staffs. In addition, many of these competitors, either alone or together with their collaborators, have significantly greater experience than we do in:

	•		developing products;
	•		undertaking preclinical testing and human clinical trials;
	•		obtaining FDA and other regulatory approvals of products; and
	•		manufacturing and marketing products.

     Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing product candidates before we do. If we commence commercial product sales, we will compete against companies with greater marketing and manufacturing capabilities, areas in which we have limited or no experience.

     We also face, and will continue to face, competition from academic institutions, government agencies and research institutions. Further, we face numerous competitors working on product candidates to treat each of the diseases for which we are seeking to develop therapeutic products. In addition, our product candidates, if approved, will compete with existing therapies that have long histories of safe and effective use. We may also face competition from other drug development technologies and methods of preventing or reducing the incidence of disease and other classes of therapeutic agents.

     Developments by competitors may render our product candidates obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborations with pharmaceutical and biotechnology companies for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These competitors, either alone or with collaborative parties, may succeed with technologies or products that are more effective than ours.

     We anticipate that we will face increased competition in the future as new companies enter our markets and as scientific developments surrounding other cancer therapies continue to accelerate. If BAY 43-9006 receives regulatory approval but cannot compete effectively in the marketplace, our business will suffer.

     We are subject to extensive government regulation, which can be costly, time consuming and subject us to unanticipated delays.

     Drug candidates under development are subject to extensive and rigorous domestic and foreign regulation. We have not received regulatory approval in the United States or any foreign market for BAY 43-9006 or any other product candidate.

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     We expect to rely on Bayer to file investigational new drug applications and generally direct the regulatory approval process for BAY 43-9006, which may not obtain necessary approvals from the FDA or other regulatory authorities. If we fail to obtain required governmental approvals, we will experience delays in or be precluded from marketing BAY 43-9006. If we have disagreements as to ownership of clinical trial results or regulatory approvals, and the FDA refuses to recognize us as holding, or having access to, the regulatory approvals necessary to commercialize our product candidates, we may experience delays in or be precluded from marketing products.

     The regulatory review and approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for post-marketing studies. Additional or more rigorous governmental regulations may be promulgated that could delay regulatory approval of BAY 43-9006. Delays in obtaining regulatory approvals may:

	•		adversely affect the successful commercialization of BAY 43-9006;
	•		impose costly procedures on us;
	•		diminish any competitive advantages that we may attain; and
	•		adversely affect our receipt of revenues or royalties.

     In addition, problems or failures with the products of others, including our competitors, could have an adverse effect on our ability to obtain or maintain regulatory approval for BAY 43-9006.

     We may not be able to protect our intellectual property or operate our business without infringing upon the intellectual property rights of others.

     We can protect our technology from unauthorized use by others only to the extent that our technology is covered by valid and enforceable patents or effectively maintained as trade secrets. As a result, we depend in part on our ability to:

	•		obtain patents;
	•		license technology rights from others;
	•		protect trade secrets;
	•		operate without infringing upon the proprietary rights of others; and
	•		prevent others from infringing on our proprietary rights.

     In the case of BAY 43-9006, the patent application covering this product candidate is held by Bayer, but licensed to us in conjunction with our collaboration agreement with Bayer. If the BAY 43-9006 patent is issued, it will expire in 2019, subject to possible patent-term extension, the entitlement for which and the term of which we cannot predict. Patent applications for BAY 43-9006 are also pending throughout the world. As of September 30, 2003, we held 38 United States patents and had more than 26 patent applications pending before the United States Patent and Trademark Office. Most of these patents or patent applications cover protein targets used to identify product candidates during the research phase of our collaborative agreements with Warner-Lambert or Bayer, or aspects of our now discontinued virus program. Additionally, we have corresponding patents or patent applications pending or granted in certain foreign jurisdictions.

     We are a party to various license agreements that give us rights to use specified technologies in our development processes. If we are not able to continue to license this technology on commercially reasonable terms, our product development may be delayed. In addition, we generally do not control the patent prosecution of in-licensed technology and, accordingly, are unable to exercise the same degree of control over this intellectual property as we exercise over our internally developed technology.

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     Our existing patent rights may not have a deterrent effect on competitors who are conducting or desire to commence competitive research programs with respect to the biological targets or fields of inquiry that we are pursuing. Although third parties may challenge our rights to, or the scope or validity of our patents, to date, we have not received any communications from third parties challenging our patents or patent applications covering our product candidates.

     The patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. Our patents, or patents that we license from others, may not provide us with proprietary protection or competitive advantages against competitors with similar technologies. Competitors may challenge or circumvent our patents or patent applications. Courts may find our patents invalid. Due to the extensive time required for development, testing and regulatory review of our potential products, our patents may expire or remain in existence for only a short period following commercialization, which would reduce or eliminate any advantage the patents may give us.

     We may not have been the first to make the inventions covered by each of our issued or pending patent applications, or we may not have been the first to file patent applications for these inventions. Competitors may have independently developed technologies similar to ours. We may need to license the right to use third-party patents and intellectual property to develop and market our product candidates. We may not acquire required licenses on acceptable terms, if at all. If we do not obtain these required licenses, we may need to design around other parties’ patents, or we may not be able to proceed with the development, manufacture or, if approved, sale of our product candidates. We may face litigation to defend against claims of infringement, assert claims of infringement, enforce our patents, protect our trade secrets or know-how, or determine the scope and validity of others’ proprietary rights. In addition, we may require interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions relating to our patent applications. These activities, and especially patent litigation, are costly.

     Bayer may have rights to publish data and information in which we have rights. In addition, we sometimes engage individuals, entities or consultants to conduct research that may be relevant to our business. The ability of these individuals, entities or consultants to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. The nature of the limitations depends on various factors, including the type of research being conducted, the ownership of the data and information and the nature of the individual, entity or consultant. In most cases, these individuals, entities or consultants are, at the least, precluded from publicly disclosing our confidential information and are only allowed to disclose other data or information generated during the course of the research after we have been afforded an opportunity to consider whether patent and/or other proprietary protection should be sought. If we do not apply for patent protection prior to publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information will be harmed.

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

     The use of BAY 43-9006 in clinical trials, and the sale of any approved products, exposes us to liability claims. Although we are not aware of any historical or anticipated product liability claims against us, if we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of BAY 43-9006.

     We believe that we have obtained reasonably adequate product liability insurance coverage for our clinical trials. We intend to expand our insurance coverage to include the commercial sale of BAY 43-9006 if marketing approval is obtained. However, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. We may not be able to obtain additional insurance coverage that will be adequate to cover product liability risks that may arise should one of our product candidates receive marketing approval. Regardless of merit or eventual outcome, product liability claims may result in:

	•		decreased demand for a product;
	•		injury to our reputation;
	•		withdrawal of clinical trial volunteers; and

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•

loss of revenues.

     Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material.

     We deal with hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

     Our activities involve the controlled storage, use, and disposal of hazardous materials, including infectious agents, corrosive, explosive and flammable chemicals and various radioactive compounds. We are subject to federal, state, and local laws and regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials.

     In the event of an accident, state or federal authorities may curtail our use of these materials and we could be liable for any civil damages that result, which may exceed our financial resources and may seriously harm our business. While we believe that the amount of insurance we carry is sufficient for typical risks regarding our handling of these materials, it may not be sufficient to cover pollution conditions or other extraordinary or unanticipated events. Additionally, an accident could damage, or force us to shut down, our research facilities and operations. In addition, if we develop a manufacturing capacity, we may incur substantial costs to comply with environmental regulations and would be subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process.

     Our stock price is highly volatile.

     The market price of our common stock has been highly volatile and is likely to continue to be volatile. For example, during the period beginning January 1, 2001 and ending September 30, 2003, the closing sales price for one share of our common stock reached a high of $23.92 and a low of $3.50. Factors affecting our stock price include:

	•		results of clinical trials from BAY 43-9006;
	•		ability to accrue patients into clinical trials;
	•		success or failure in obtaining regulatory approval by us or our competitors;
	•		public concern as to the safety and efficacy of our product candidates;
	•		developments in our relationship with Bayer;
	•		developments in patent or other proprietary rights;
	•		additions or departures of key personnel;
	•		announcements by us or our competitors of technological innovations or new commercial therapeutic products;
	•		published reports by securities analysts;
	•		statements of governmental officials; and
	•		changes in healthcare reimbursement policies.

     Existing stockholders have significant influence over us.

     Our executive officers, directors and five percent stockholders own, in the aggregate, approximately 29 percent of our outstanding common stock. As a result, these stockholders will be able to exercise substantial influence over all matters

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requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change in control of our company and will make some transactions difficult or impossible to accomplish without the support of these stockholders.

     Bayer, a collaborative party, has the right to have its nominee elected to our board of directors as long as we continue to collaborate on the development of a compound. Because of these rights and ownership and voting arrangements, our officers, directors and principal stockholders may be able to effectively control the election of all members of the board of directors and to determine all corporate actions.

     We are at risk of securities class action litigation due to our expected stock price volatility.

     In the past, stockholders have often brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us, because biotechnology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs, could divert management’s attention and resources, and could seriously harm our business, financial condition and results of operations.

     Provisions in Delaware law, our charter and executive change of control agreements we have entered into may prevent or delay a change of control.

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

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

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

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

	•		our board is classified into three classes of directors as nearly equal in size as possible with staggered three-year terms;
	•		the authority of our board to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of these shares, without stockholder approval;
	•		all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;
	•		special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer, the board or 10 percent or more of the stockholders entitled to vote at the meeting; and

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•

no cumulative voting.

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

     We have entered into change of control severance agreements with each of our executive officers. These agreements provide for the payment of severance benefits and the acceleration of stock option vesting if the executive officer’s employment is terminated within 13 months of a change in control of Onyx. These change of control severance agreements may have the effect of preventing a change of control.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. By policy, we place our investments with high quality debt security issuers, limit the amount of credit exposure to any one issuer, limit duration by restricting the term, and hold investments to maturity except under rare circumstances. We classify our cash equivalents or marketable securities as fixed rate if the rate of return on an instrument remains fixed over its term. As of September 30, 2003, all of our cash equivalents and marketable securities were classified as fixed rate. There were no significant changes in our market risk exposures during the three months ended September 30, 2003. For further discussion of our market risk exposures, refer to Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

     Evaluation of disclosure controls and procedures: The Company’s principal executive and financial officer reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s principal executive and financial officer concluded that the Company’s disclosure controls and procedures were sufficiently effective as of September 30, 2003 to ensure that information required to be disclosed by the Company in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and Form 10-Q.

     Changes in internal controls over financial reporting: There were no changes in the Company’s internal controls over financial reporting during the three months ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Limitation on the effectiveness of controls: A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

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PART II: OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

     a) Exhibits

     b) Reports on Form 8-K

			On July 14, 2003, the Company filed a Current Report on Form 8-K, reporting under Item 5 that on July 14, 2003 the Company announced plans to publicly offer 4,000,000 shares of its common stock pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. In addition, the Company announced plans to grant to the underwriters in connection with the offering an option to purchase up to an additional 600,000 shares of common stock.
			On July 22, 2003, the Company filed a Current Report on Form 8-K, reporting under Item 5 that on July 21, 2003 the Company entered into an Underwriting Agreement with Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and SG Cowen Securities Corporation relating to the sale of 5,000,000 shares of the Company’s common stock at an offering price to the public of $15.25 per share.
			On August 4, 2003, the Company filed a Current Report on Form 8-K, to furnish under Item 12 its July 31, 2003 public announcement of financial results for the second quarter and six months ended June 30, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ONYX PHARMACEUTICALS, INC.

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EXHIBIT INDEX

(1)		Filed as an exhibit to the registrant’s Registration Statement on Form SB-2 (No. 333-3176-LA).
(2)		Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(3)		This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Onyx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

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