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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, 1997.
[ ] 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK $.001 PAR VALUE NASDAQ NATIONAL MARKET
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant based upon the last trade price of the common stock reported
on the Nasdaq National Market on March 18, 1998 was approximately $49,891,000.
The number of shares of common stock outstanding as of March 18, 1998 was
11,262,569.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 1998 Annual
Meeting are incorporated herein by reference into Part III of this Report.
Certain Exhibits filed with the Company's Registration Statement on
Form SB-2 (Registration No. 333-3176-LA), as amended, the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1997 and September 30,
1997 and the Company's Current Report on Form 8-K filed on January 26, 1998,
are incorporated by reference into Part IV of this Report.
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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 emphasis 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 is pursuing 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 completed
treatment at all dose levels in a Phase I open-label, dose escalation clinical
trial in head and neck cancer and reported the results in the second and third
quarters of 1997. ONYX-015 was found to be safe and well-tolerated, as well as
biologically active. Based upon this data, in July the Company initiated a
Phase II efficacy trial with ONYX-015 in the same patient population and later
in the year opened another Phase II clinical trial testing the virus in
combination with two standard chemotherapies. In March 1998, the Company
initiated a third Phase II clinical trial in head and neck cancer patients with
a different, more aggressive, dosing regimen than the single-agent trial that
was already underway. Additional Phase I clinical trials are ongoing in
pancreatic and ovarian cancer and gastrointestinal cancer that has metastasized
to the liver.
In addition to the Company's cancer programs, Onyx initiated a
collaboration with Warner-Lambert Company ("Warner-Lambert") in July 1997 in the
area of inflammation and autoimmune diseases. Additionally, the Company has
developed a cancer genomics program focusing on the use of murine model systems.
The Company's overall 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.
The Company is engaged in collaborative research with corporate partners in
three of its cancer programs -- Bayer Corporation ("Bayer") in the ras program,
Warner-Lambert in the cell cycle program, and Eli Lilly & Company ("Eli Lilly")
in the BRCA1 program.
CANCER
Cancer is a heterogeneous group of diseases characterized by uncontrolled
growth and proliferation of abnormal cells. Cancer accounts for 25% of all
deaths in the United States, ranking second only to cardiovascular disease.
According to estimates by the American Cancer Society, approximately 1.4 million
people in the United States were diagnosed with cancer in 1997, 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. However, recent studies have reported a decline in the
incidence and death rates for cancer between 1990 and 1995.
Estimates for 1997 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.
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ESTIMATED DEATHS AND NEW CANCER CASES
UNITED STATES, 1997
CANCER TYPE DEATHS NEW CASES
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Lung................................................... 160,400 178,100
Colon and rectum....................................... 54,900 131,200
Breast................................................. 44,190 181,600
Prostate............................................... 41,800 334,500
Pancreas............................................... 28,100 27,600
Ovary.................................................. 14,200 26,800
Head and neck*......................................... 12,560 44,050
Kidney................................................. 11,300 28,800
Bladder................................................ 11,700 54,500
Melanoma............................................... 7,300 40,300
Uterus................................................. 6,000 34,900
Cervix................................................. 4,800 14,500
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* Includes cancers of the larynx, oral cavity and pharynx.
Source: American Cancer Society
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
$4 billion in 1997, which accounts for slightly more than 10% of the direct
costs of cancer patient care. The Company believes that the worldwide cancer
drug market is approximately $7.5 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 many other cancers.
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. These genes are referred to as tumor suppressor genes.
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In addition, the body has a process for ridding 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 gene BRCA1, which
causes some breast and ovarian cancers, and the APC gene, which is implicated in
nearly all 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 technologies which identify
interactions of unknown gene products with known proteins, and various methods
for ascribing functions to proteins.
Proteins, that are either directly encoded by cancer genes or situated
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 "reverse genetics," to
interfere with these functions and assess the consequences in cell-based
systems. Potential targets are validated by confirming that interference with
the target either modulates or reverses 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
that interfere with the function of the target. This approach is particularly
applicable to targets such as oncogenes, which are turned on by mutation.
Targets which involve loss of function through 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 tumor suppressor gene is nonfunctional.
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 that have a
genetic component.
In 1997, the Company entered into a corporate collaboration with
Warner-Lambert to apply this functional genomics technology beyond the field
of cancer in a program that targets inflammation and autoimmune disorders.
DRUG DISCOVERY AND DEVELOPMENT PROGRAMS
Onyx has established six drug discovery and development programs based on
genetic mutations in cancer and an additional program focused on genetic
mutations playing a role in inflammatory disorders. Although the
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focus of the initial six programs is the treatment of cancer, there may be other
hyperproliferative diseases addressed by product leads discovered in these
programs, as evidenced by the inflammation discovery.
ONYX DRUG DISCOVERY AND DEVELOPMENT PROGRAMS
PROGRAM PRODUCT INDICATION STATUS PARTNER
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p53 ONYX-015 Head and neck cancer Phase II
therapeutic virus Pancreatic and ovarian Phase I
cancers; gastrointestinal
metastases to the liver
Other cancers Preclinical
Cell Cycle Small molecule inhibitors Most cancer indications; Preclinical Warner-
other proliferative Lambert
diseases
ras Small molecule inhibitors Colon, lung, pancreatic, Preclinical Bayer
and other cancers; other
proliferative diseases
BRCA1 Inhibitors of BRCA1 pathways Breast and ovarian cancer Research Eli Lilly
APC Inhibitors of Beta-catenin Colon cancer Research
pathways
Cancer Diagnostic or therapeutic Cancer Research
Genomics
Inflammation Small molecule inhibitors Inflammation and autoimmunity Discovery Warner-
Lambert
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Phase II: Second phase of human clinical testing to obtain additional
safety data and to determine an optimal treatment protocol for
potential use in a pivotal trial.
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: Identifying and validating mutated genes and protein targets
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 (cell suicide). Loss of p53 function 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 when tested in preclinical studies, IN VITRO and in
immunodeficient mice, has replicated in and killed tumor cells deficient in p53
tumor suppressor activity ("p53-deficient" cells), and not replicated
efficiently in or killed 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
should not 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
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cells lacking p53 function, the virus growth cycle should proceed unchecked. It
is expected that the cancer cells will be killed, new virus particles will be
produced, and neighboring cancer cells will be infected and killed.
IN VITRO and IN VIVO animal 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. The ONYX-015 replication and cell
killing effect is markedly reduced (100 to 1000 fold) in numerous normal cell
types. However, certain normal skin cells, when tested IN VITRO, appeared to be
more sensitive to ONYX-015 than normal cells of other types tested, despite the
presence of p53 in these cells. This, however, has not been seen in patients
enrolled in the clinical trials. The p53 program includes a research program
which studies ONYX-015, and other viruses as well, to learn more about their
impact on normal cells and cells deficient in p53 tumor suppressor activity.
In animal studies, ONYX-015 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. However, 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. The Company has a project
underway to develop such 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 engineer additional genes into the
virus, to explore alternative viral strains, or to include immunosuppressive
drugs as part of the clinical regimen for ONYX-015.
Initial research and clinical development of ONYX-015 in the p53 program
was focused on direct intratumoral dosing of the virus. The next step was to
introduce the virus regionally, as has been done in the ovarian cancer Phase I
trial, by delivering the virus into the peritoneal cavity via indwelling
catheter. In order to meet the needs of a wider spectrum of cancer patients and
to treat metastatic cancers, the virus must be delivered systemically. The
prospect of systemic delivery of the virus raises two challenges for the Onyx
research team. First, the presence of antibodies and other immune response
factors may require a virus which has additional capabilities beyond those of
ONYX-015. Second, it is known that the liver is very effective in clearing
adenovirus from the bloodstream. To overcome these potential obstacles,
research is underway to formulate or modify the virus for systemic delivery.
Onyx is collaborating with a third party which has proprietary technology for
coating adenovirus with polyethylene glycol ("PEG"), a process called
pegylation. Preclinical studies have shown that with increasing levels of PEG
per adenovirus particle, the virus maintains infectivity even in the presence
of neutralizing antibodies. Pegylation of the virus may increase the
circulating lifetime of the virus in the bloodstream by reducing the clearing
efficiency of the liver with consequential increased uptake of the virus by
tumors. If pegylation is not successful, other modifications to the virus to
improve targeting to specific tumor types or reduce inherent immunogenicity
of the virus may be required. Since fewer virus particles are likely to reach
the target tumor cells, a number of enhancements to the virus may be
desirable. One area of research focuses on engineering changes to the viral
genome. The virus may be modified to enhance potency by increasing
replication or cell lysis efficiencies. In addition to these possible
modifications, Onyx may add a prodrug converting enzyme which could activate
a small molecule chemotherapeutic, specifically at the tumor site.
In April 1996, 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 conducted in both the United States and the United Kingdom. The
primary objectives of this Phase I study were to determine the safety of
directly injecting ONYX-015 into tumors of the head and neck; to determine the
maximum tolerated dose; and to assess the safety of repeat treatment. Patients
in this study had previously received a range of treatments including surgery,
radiation and chemotherapy, individually or in combination.
Two dosing regimens were utilized. The first 19 patients received a
single, direct intratumoral injection, that could be repeated every 28 days for
patients whose tumors did not progress after the first injection. Later, an
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additional nine patients received direct intratumoral injections daily over five
days, also with the option of repeat treatment. A final cohort of four patients
received a single direct intratumoral injection at the highest feasible dose
level to confirm that the desired dose level for Phase II trials is within an
acceptable safety margin for virus dosing. A total of 32 patients were treated
in the Phase I trial, of which 13 patients received repeat treatments. ONYX-015
was well-tolerated, and investigators observed no dose-limiting toxicities.
Mild, transient flu-like symptoms were observed in approximately 30% of the
single dose patients and in approximately 60% of the multiple dose patients.
While the focus of this study was safety, the effect of injection on tumor
growth was a secondary objective of the study. Of the 23 patients receiving
single injection treatment, three experienced more than 50% reduction in the
size of their injected tumors, with one patient experiencing a greater than 70%
decrease. An additional three patients had significant necrosis (> 30%) of
their injected tumors. Several patients experienced lesser degrees of tumor
necrosis, including six whose tumors were stable and non-progressive following
treatment. In comparison, of the nine patients treated with the virus daily for
five days, three experienced more than 50% reduction in the size of their
injected tumors, with one patient experiencing a greater than 70% decrease
lasting over six months. An additional three patients had significant necrosis
of their injected tumors, and one patient's tumor was non-progressive following
treatment. In some patients, tumor necrosis was associated with clinical
benefit, including decreased pain, improved ability to swallow and improved
speech.
Researchers also studied the ability of ONYX-015 to replicate in tumors, as
well as the local and systemic immune response to the virus. Viral replication
was detected in two of 13 patients with evaluable biopsies on the single dose
regimen, and in four of four patients with evaluable biopsies on the multiple
dose regimen, six or seven days following the patient's first ONYX-015
injection. Viral replication was less pronounced than was the case in animal
studies. While approximately 70 percent of the 28 patients tested entered the
study with neutralizing antibodies to the adenovirus; after treatment, all
patients in the study had neutralizing antibodies, including those patients who
experienced tumor necrosis. Additional clinical research is planned to
determine if other immune and inflammatory factors may be enhancing tumor
necrosis.
The Company opened three additional Phase I open-label, dose-escalation
clinical trials with ONYX-015 in 1997. Two of these trials utilized direct
intratumoral dosing regimens; one in patients with pancreatic cancer, and one in
patients with gastrointestinal metastases to the liver. The Company also opened
a Phase I trial in patients with ovarian cancer -- the first trial to test use
of ONYX-015 in a regional administration by intraperitoneal injection. Over the
next twelve months, Onyx may initiate additional Phase I clinical trials of
ONYX-015. The Phase I study in patients with gastrointestinal metastases to the
liver has completed enrollment of patients after advancing through all cohorts
of a dose-escalation trial. These patients will be evaluated and the results of
this trial will be reported during the second quarter of 1998. The Company is
preparing to move into a Phase I/II clinical trial using hepatic artery infusion
later this year. Each of the remaining Phase I studies begun in 1997,
pancreatic and ovarian, continues to progress with escalating doses. It is
expected that enrollment in the Phase I clinical trial in patients with
pancreatic cancer will be completed in the second quarter of 1998, and that data
from the majority of evaluable patients will be reported on during such quarter.
The Company is also preparing to advance trials in this indication into a Phase
I/II study using endoscopic ultrasound delivery. The Phase I trial for ovarian
cancer will likely be completed, and the results reported, during the second
half of 1998.
During 1997, the Company initiated two Phase II efficacy trials with
ONYX-015 in patients with head and neck cancer. The first trial, initiated in
July, will treat approximately 30 head and neck cancer patients with recurrent
and refractory tumors utilizing the highest multiday dosing regimen used in the
Phase I safety trial. The second trial, initiated in November, utilizes the
virus in combination with two chemotherapeutic drugs, Cisplatin-TM- and
5-Fluorouracil ("5-FU"). This clinical trial will include approximately 30 head
and neck cancer patients with recurrent disease whose recurrent tumor scheduled
for treatment must not have been treated with Cisplatin-TM- or 5-FU. The dosing
regimen provides for five daily direct intratumoral injections of ONYX-015 on
days 1-5; intravenous dosing of Cisplatin-TM- on day 1 and intravenous dosing of
5-FU on days 1-5. Onyx is conducting the Phase II trials at 10 sites in the
United States, the United Kingdom and Canada. The participating patients will
initially receive injections of ONYX-015 directly into the target tumor and then
into additional tumors, if present, after the second cycle of treatment.
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In March 1998, the Company announced the commencement of a third Phase II
clinical trial of ONYX-015 in head and neck cancer. This third trial involves
the administration of ONYX-015 as a single agent with a more aggressive dosing
regimen than in the trial that commenced in July 1997. This trial will treat
patients with ONYX-015 daily for five days for two consecutive weeks. After a
third week with no treatment, patients will be evaluated and may continue for
another intensive two-week treatment cycle or receive maintenance treatment.
The Company expects to release the results of its first Phase II clinical
trial in the second quarter of 1998. The results of the second and the third
Phase II clinical trials would be available later in the year. There is no
assurance regarding the results of any of these trials. See Additional Business
Risks - "Uncertainty Regarding Clinical Trials of ONYX-015."
The Company believes that it is unlikely to partner this program prior to
the release of Phase II data. Onyx has self-funded the development of ONYX-015
to date. The Company seeks a large pharmaceutical company for a possible
collaboration for further preclinical and clinical development and
commercialization of ONYX-015 and other potential therapeutic viruses that
selectively replicate in p53-deficient cells. The Company is engaged in ongoing
discussions with potential partners. 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 in preclinical studies that inhibition of ras
oncogene function in cancer cells is sufficient to reverse the cancerous changes
caused by these oncogenes. Ras proteins play a crucial role 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 the assays with
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 ten assays to Bayer. Active compounds identified by
screening Onyx's and Bayer's compound libraries are undergoing further
evaluation and characterization. Chemical analoging programs have been initiated
by Bayer on several structural classes of compounds.
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In June 1997, Bayer identified a lead compound, which it deemed a
strategic project, from one of the assays transferred by Onyx. Bayer chemists
are performing preclinical studies to optimize the lead candidate and to test
for efficacy in animal models. There can be no assurance that the results of
these efforts will yield a clinical development compound, and if so, the Company
does not expect that Bayer will commence clinical trials of such compound prior
to the year 2000.
Efforts are underway to extend the Bayer collaboration on the ras Program
which currently is scheduled to expire in January 1999, or to identify other
pharmaceutical partners to fund ongoing research and drug discovery in this
area. However, the Company has not yet reached an agreement with any such
collaborator regarding this program, and there is no assurance that any such
collaboration will be established.
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 may then begin DNA replication.
In cancer cells, however, 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 (i) uses these assays to screen its
compound libraries, (ii) synthesizes and tests chemical analogs of classes of
compounds which are identified in the screens, and (iii) 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. In December 1997, Onyx and Warner-Lambert
extended the Cell Cycle collaboration through 2001. Warner-Lambert will
increase its funding to the full complement of 15 staff working on this
project in return for expanded worldwide rights to products arising out of
the collaboration.
From the initial two assays transferred by Onyx, the collaboration
identified a lead compound that Warner-Lambert is advancing into preclinical
study, and additional compounds have been identified from other assays
transferred for high-throughput screening at Warner-Lambert. These compounds are
undergoing early analoging for consideration as potential leads or additional
product candidates. The Company cannot predict whether the results of these
efforts will yield a clinical development compound, and if so, the Company does
not expect that Warner-Lambert will commence clinical trials of a compound from
the Cell Cycle Program prior to the year 2000.
BRCA1 PROGRAM
Breast cancer is the most common cause 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
10
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 that Eli Lilly will commence
clinical trials of any potential products from the BRCA1 Program for at least
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 drug
targets and compounds relevant to the BRCA1 signaling pathway. Each of the
parties must dedicate a specified number of researchers to the collaboration.
APC PROGRAM
Onyx's APC Program targets proteins that 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 Beta-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 and is creating assays for
high-throughput screening. The Company currently does not expect to commence
clinical trials of any potential products from the APC Program for at least
several years.
The APC Program has been funded by the Company with support from Federal
government funding in the form of a Phase I and a Phase II Small Business
Innovation Research (SBIR) Grant.
INFLAMMATION PROGRAM
Onyx's research in the area of inflammation stems from findings in the ras
program whereby molecules involved in the ras cascade play a role, outside of
cancer, in inflammation and autoimmunity. Opportunistically, the Company has
developed a research program to elucidate the molecular components of pathways
that regulate the activation of neutrophils and other phagocytes, and to develop
novel therapeutic strategies for intervention into these pathways, potentially
impacting both upstream and downstream events associated with neutrophil
activation.
In addition to the beneficial infection-fighting properties of phagocytes,
these aggressive cells can cause extensive tissue damage. These cells are
implicated in a number of acute inflammatory disorders including Adult
Respiratory Distress Syndrome (ARDS) and ischaemia-reperfusion injury; and
chronic inflammatory disorders, such as arthritis, inflammatory bowel disease,
asthma and psoriasis. Over fifty different toxins are stored in phagocyte
granules and are released into the phagocytic vacuole during active killing of
pathogens. Phagocyte-mediated tissue injury is caused by the release of
phagocyte granule components (proteolytic enzymes and cationic proteins) and
oxygen-free radicals extracellularly, rather than into the phagocytic vacuole.
All three of the tissue-damaging mechanisms -- formation of oxygen radicals,
activation of metalloproteinases and inactivation of antiproteinases -- would be
inhibited by blocking phagocyte activity. This selective inhibition of
phagocytes may decrease tissue damage while still allowing the immune system to
respond to infection.
11
Effective July 1997, the Company entered into a collaboration agreement
with Warner-Lambert on the Inflammation Program. Under the terms of this
collaboration, Onyx is responsible for performing research on the pathways that
regulate the activation of neutrophils and other phagocytes, identifying and
validating targets for drug screening, and developing assays for screening small
molecules. Warner-Lambert (i) uses these assays to screen its compound
libraries, (ii) synthesizes and tests chemical analogs of classes of
compounds that are identified in the screens, and (iii) conducts preclinical
and clinical testing of compounds selected for development. Warner-Lambert is
obligated, subject to certain conditions, to fund Onyx's researchers. Each of
the parties must commit an equivalent number of researchers to the
collaboration. As of March 1998, the Company has transferred one assay for
high-throughput screening at Warner-Lambert. The Company does not expect that
Warner-Lambert will commence clinical trials of any potential products from
the Inflammation Program for at least several years.
CANCER GENOMICS
Onyx is capitalizing on the similarities available between mouse models and
the human species as researchers work to identify genes that confer
susceptibility or resistance to cancer in certain tissues. This research effort
is focused on the discovery of important new cancer genes to provide targets for
functional genomics and drug discovery efforts (biochemical analysis and drug
screening). This program is at an early research stage.
RESEARCH AND DEVELOPMENT COLLABORATIONS
Onyx intends to develop products that 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 the Inflammation 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 a completed
agreement 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, as well as the achievement of certain milestones under such
collaboration, including the clearance of Investigational New Drug ("IND")
applications, the initiation of human clinical trials, and the receipt of United
States Food and Drug Administration ("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
12
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.
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 were proposed by either party during 1997.
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 $4.7 million was recorded by the Company as revenue in 1997,
$5.2 million in 1996 and $5.2 million in 1995. 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 shares
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 declines 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.
13
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.
The initial collaboration agreement was scheduled to expire in May 1998.
In December 1997, Onyx and Warner-Lambert extended this collaboration for
another three years through May 2001. The original agreement obligated
Warner-Lambert to make additional payments for achievement of milestones in
the development of collaboration compounds and provided Warner-Lambert with
exclusive rights to manufacture, market and sell products emerging from the
collaboration in all areas of the world except 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 if Onyx files a New Drug Application ("NDA") on
a competing product or receives FDA approval to market a competing product.
The extended agreement has been amended to expand Warner-Lambert's
development and royalty-bearing marketing rights to include Japan for all
products stemming from the collaboration. Warner-Lambert will increase its
funding to the full complement of 15 staff working on this project in return
for these worldwide rights to products arising out of the collaboration. In
addition, Onyx will receive milestone payments tied specifically to
development efforts in Japan.
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.
Under the initial 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 $1.8
million in 1997, $2.1 million in 1996 and $1.4 million in 1995. In addition,
Warner-Lambert made a $10.3 million equity investment in the Company over three
years. Under the extended agreement, each party must continue to dedicate a
specified number of scientific personnel to the collaborative research over the
three-year research period, and Warner-Lambert will provide Onyx approximately
$10.1 million of funding to support Onyx's research efforts related to the
collaboration.
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.
In July 1997, Onyx entered into its second research, development and
marketing collaboration agreement with Warner-Lambert. This collaboration will
focus on the discovery and commercialization of therapeutic agents that regulate
the activation of neutrophils and other phagocytes implicated in a number of
acute and chronic inflammatory disorders. 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
14
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,
subject to payment of royalties to Onyx.
Under the inflammation 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 Onyx's research efforts related to the
collaboration. Additionally, Warner-Lambert will make a $2.0 million license
payment over three years. No funds were received by the Company and no revenue
was recognized for the year ended December 31, 1997.
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 $1.2 million in 1997, $910,000 in
1996 and $375,000 in 1995, 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
15
"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
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. Separately,
Chiron has agreed that this provision does not apply to the p53 Program for
therapeutic applications, although the exact scope of this agreement by Chiron
beyond ONYX-015 itself remains subject to uncertainty.
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
16
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 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 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, 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
October 1997, the Company was awarded a United States patent, No. 5,677,178 from
the United States Patent and Trademark Office for claims covering the use of
ONYX-015 for the treatment of p53-deficient cancers. Additionally, the Company
has received two notices of allowance for two United States patent applications,
the first of which claims certain adenoviral mutants that kill Rb- tumor cells
and another that claims compositions of matter that consist of ONYX-015 and a
chemotherapeutic. As of March 5, 1998, the Company owned or had licensed rights
to 19 United States patents and 42 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. 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.
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
17
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.
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.
In June 1997, ICT Pharmaceuticals, Inc. ("ICT") notified the Company of two
issued U.S. Patents, Nos. 4,980,281 and 5,266,464 that ICT believes cover the
use of a cell for the screening, testing or pharmacological characterization of
new drugs or other substances. Foreign counterparts of the U.S. Patents are
pending. ICT has offered the Company a license to the patents. The Company has
not determined whether to negotiate a license. In any event, the Company does
not believe that these patents will have a material adverse effect on the
Company's business, assets, liabilities, financial condition, operations or
prospects.
The Company has identified two issued U.S. Patents, Nos. 5,499,755 and
5,645,999 that cover recombinant cyclin E compositions, or methods of using the
same to identify possible drug candidates, respectively. Foreign counterparts
of the U.S. Patents are pending. Mitotix Corporation ("Mitotix") either owns,
or has licensed the rights to the two patents. The Company may seek a license
under the patents from Mitotix. If such license is not available at
commercially reasonable terms, or at all, then the Company would be required to
develop assays that are not covered by the patents. In any event, the Company
does not believe that these patents will have a material adverse effect on the
Company's business, assets, liabilities, financial condition, operations or
prospects.
The Company has also identified an additional issued U.S. Patent, No.
5,691,147 that covers an assay for screening test compounds for an inhibitor of
an interaction of a cyclin-dependent kinase with a cyclin-dependent kinase 4
binding protein. Mitotix either owns or has licensed the rights to the patent.
A foreign counterpart of the U.S. Patent is pending. The Company may seek a
license under the patent from Mitotix. If such license is not available on
commercially reasonable terms, or at all, then the Company would be required to
develop assays that are not covered by the patent.
18
The Company has further identified three issued U.S. Patents, Nos.
5,441,880, 5,695,950 and 5,443,962 that cover assays and compositions for
identifying inhibitors of CDC25, respectively. Foreign counterparts of the U.S.
Patents are pending. Mitotix either owns, or has licensed the rights to these
patents. The Company has approached Mitotix for a license and the request was
denied. Consequently, should the Company wish to use the methods and
compositions covered in these patents to identify inhibitors of CDC25, it will
have to do so abroad, while the foreign applications are still pending and
before they are granted. Alternatively, the Company may be required to develop
methods and compositions that are not covered by these patents if it wishes to
identify inhibitors of CDC25.
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, testing, 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 of a marketing application to the FDA; and (e) FDA approval of the
marketing application, including inspection and approval of the product
manufacturing facility.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practice. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of clinical
trials. Unless the FDA objects to an IND, the IND will become effective 30 days
following its receipt by the FDA. There can be no assurance that submission of
an IND will result in FDA clearance to commence clinical trials or that the lack
of an objection means that the FDA will ultimately approve an application for
marketing approval.
Clinical trials involve the administration of the investigational product
to humans under the supervision of a qualified principal investigator. In the
United States, clinical trials must be conducted in accordance with Good
Clinical Practices under protocols submitted to the FDA as part of the IND. In
addition, each clinical trial must be approved and conducted under the auspices
of an Institutional Review Board ("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.
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.
The goal of Phase I clinical trials is to establish initial data about
safety and tolerance of the investigational product in humans. In Phase II
clinical trials, evidence is sought about the desired therapeutic efficacy of
the
19
investigational product, in limited studies with small numbers of carefully
selected subjects. Efforts are made to evaluate the effects of various dosages
and to establish an optimal dosage level and dosage schedule. Additional safety
data are also gathered from these studies. The Phase III clinical trial program
consists of expanded, large-scale, multicenter studies in the target patient
population. The goal of these studies is to obtain definitive statistical
evidence of the efficacy and safety of the proposed product and dosage regimen.
All data obtained from this comprehensive development program are submitted
as a marketing application to the FDA and the corresponding agencies in other
countries for review and approval. FDA approval of a marketing application is
required before marketing may begin in the United States. The FDA may elect to
present data on the Company's products to one of its advisory committees for
review and recommendation before approval is granted. Essentially all proposed
products of the Company will be subject to demanding and time-consuming 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, testing,
quality assurance, packaging, storage, documentation, record keeping, labeling,
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 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,
refusal of the government to grant approval, or withdrawal of approval of the
Company's products.
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. Certain of the Company's
potential products may require review by the Recombinant DNA Advisory Committee
(RAC) 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.
20
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 II 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. Other companies,
such as Mitotix Corporation, are developing proprietary positions including
patented reagents and assays which may require the Company to seek licenses to
the technology or may impact the Company's research by limiting the use of
certain technology. 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 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, 1997, the Company had 128 full-time employees of whom 44
hold Ph.D. or M.D. degrees. One hundred of the Company's employees are in
research and development, and 28 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
21
Company. Every 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. The members of the Company's SAB are as follows:
ERIC R. FEARON, M.D., PH.D. has served as the Maisel Professor of Oncology,
as an Associate Professor in the Departments of Internal Medicine, Human
Genetics and Pathology, and as Associate Director for Basic Research, at the
University of Michigan Comprehensive Cancer Center since 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 gastrointestinal tract 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 Chairman of the SAB since
September 1997 and previously from April 1992 to March 1996. He 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.
FRANK MCCORMICK, PH.D., F.R.S., founder of the Company served as Chairman
of the SAB from March 1996 to September 1997, Vice President and Chief
Scientific Officer of the Company from 1995 until December 31, 1996, and as a
director of the Company from April 1992 to May 1997. 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.
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. Dr. Witte is a member of the National Academy of Sciences.
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.
22
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.
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. Although the Company has demonstrated the safety of its lead
product, ONYX-015, in human clinical trials, the Company has not demonstrated
the efficacy of the Company's compounds, including ONYX-015, in human clinical
trials. The effect of the human immune response on the ONYX-015 therapeutic
virus cannot be predicted and could cause significant delays in the development
process. The Company's ras and Cell Cycle Programs are also in the early stages
of research and development, and the Company does not expect that its
collaborative partners will commence clinical trials prior to the year 2000.
The Company currently does not expect that clinical trials of any potential
products arising from its BRCA1 or APC Programs will commence for at least
several years. 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.
UNCERTAINTY REGARDING CLINICAL TRIALS OF ONYX-015
The Company is currently engaged in three self-funded Phase II clinical
trials of ONYX-015 for the treatment of head and neck cancer. The ability of
the Company to obtain a corporate partner for the p53 program and to continue to
develop ONYX-015 as a potential product will depend materially on the results of
these trials. The Company expects to present the results of the first trial in
the second quarter of 1998 and the results of the other trials later in the
year. There is no assurance that such results will be positive or, even if they
are positive,
23
that they will be sufficiently strong to support the Company's corporate
partnering or product development objectives. In this regard, while the Phase I
trials of ONYX-015 demonstrated a very favorable safety profile and, in many
patients, tumor necrosis, the observation of viral replication was less
pronounced than was the case in animal studies. If the Phase II clinical trial
results do not support the commencement of a Phase III pivotal trial, the
Company would be required to conduct additional Phase I and Phase II clinical
trials to determine an appropriate indication and treatment regimen for
ONYX-015, if it were to continue development of such product.
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 the Company's Inflammation Program, and Eli
Lilly with respect to the Company's BRCA1 Program. The Company is currently
seeking a collaborative partner for its p53 Program, including the development
and commercialization of ONYX-015. There can be 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,
24
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,
1997, the Company had an accumulated deficit of approximately $45.6 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 1998 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 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
25
oversight and informed consent, as well as FDA prior review, oversight and Good
Clinical Practice requirements. 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 commercial manufacturing
capabilities, it will require substantial additional funds, manufacturing
facilities, 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
26
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 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.
27
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 45% of the common stock of the Company.
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. In addition, International
Biotechnology Trust plc has the right to have its nominee elected to the
Company's Board of Directors as long as it continues to own more than 66 2/3% of
the Common Stock purchased by it from the Company on January 12, 1998. 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 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any significant legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
28
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) 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
1997
----
First Quarter . . . . . . . . . . . 14.250 8.750
Second Quarter. . . . . . . . . . . 14.375 10.000
Third Quarter . . . . . . . . . . . 11.125 8.375
Fourth Quarter. . . . . . . . . . . 9.875 6.125
On March 18, 1998, the last sale price reported on the Nasdaq National
Market for the Company's common stock was $8.00 per share.
HOLDERS
There were approximately 323 stockholders of the common stock of the
Company as of December 31, 1997.
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.
RECENT SALE OF UNREGISTERED SECURITIES
On May 2, 1997, the Company sold and issued 192,941 shares of common
stock to Warner-Lambert Company at $17.28 per share for an aggregate price of
approximately $3,333,000. The issuance was exempt under Section 4(2) of the
Securities Act of 1933 as amended.
(b) USE OF PROCEEDS
The effective date of the registration statement for the Company's initial
public offering was May 8, 1996. The net proceeds from this initial public
offering were $31,159,241. The Company has used the proceeds through the year
ended December 31, 1997 as follows.
Direct or Indirect Payment to Others:
Construction of plant, building and facilities $ 762,450
Purchase and installation of machinery and equipment $ 1,801,249
Repayment of indebtedness $ 583,029
Working capital $ 28,012,513
29
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, 1997. The information presented should be read
in conjunction with the financial statements and notes included elsewhere in
this Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . $ 7,799 $ 8,302 $ 6,945 $ 5,616 $ 2,737
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . 20,715 14,767 13,290 10,492 6,820
General and administrative . . . . . . . . . . . . . . . . 5,089 3,527 2,807 2,355 1,798
-------- ------- ------- ------- -------
Loss from operations . . . . . . . . . . . . . . . . . . . . (18,005) (9,992) (9,152) (7,231) (5,881)
Interest income, net . . . . . . . . . . . . . . . . . . . . 1,980 1,575 725 468 158
-------- ------- ------- ------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(16,025) $(8,417) $(8,427) $(6,763) $(5,723)
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Basic and diluted net loss per share
(pro forma in 1995) (1). . . . . . . . . . . . . . . . . . . $ (1.65) $ (1.31) $ (1.38)
-------- ------- -------
-------- ------- -------
Shares used in computing basic and diluted net loss
per share (pro forma in 1995) (1). . . . . . . . . . . . . . 9,707 6,401 6,090
-------- ------- -------
-------- ------- -------
DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments. . . $ 35,472 $ 40,329 $ 12,483 $ 16,360 $10,383
Total assets . . . . . . . . . . . . . . . . . . . . . 41,858 45,779 17,756 22,800 14,753
Long-term debt, noncurrent portion . . . . . . . . . . 4,336 99 544 906 1,017
Accumulated deficit. . . . . . . . . . . . . . . . . . (45,612) (29,587) (21,170) (12,743) (5,980)
Total stockholders' equity . . . . . . . . . . . . . . $ 28,821 $ 40,923 $ 13,545 $ 18,309 $11,553
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 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 share and per
share amounts.
30
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 discovery 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 and Eli Lilly
on the function of the BRCA1 gene in breast cancer. The Company has also
entered into two separate collaborative agreements with Warner-Lambert, one in
cell cycle mutations in cancer and a second pertaining to inflammation and
autoimmunity.
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, 1997, the Company's accumulated deficit was approximately $45.6 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, 1997, 1996 AND 1995
REVENUE
Revenue from collaborative research and development agreements ("contract
revenue") with Bayer, Eli Lilly and Warner-Lambert accounted for approximately
99% of the Company's total revenue for this three-year period. Contract revenue
for the years ended December 31, 1997, 1996 and 1995 was $7.7 million, $8.2
million and $6.9 million, respectively. Contract revenue recorded from Bayer
accounted for approximately $4.7 million or 61% of total contract revenue for
1997, $5.2 million or 64% of total contract revenue for 1996 and $5.2 million or
75% of total contract revenue for 1995. Contract revenue recorded from Eli
Lilly accounted for approximately $1.2 million or 16% of total contract revenue
in 1997, $910,000 or 11% of total contract revenue in 1996 and $375,000 or 5% of
total contract revenue in 1995. Contract revenue recorded from Warner-Lambert
for the cell cycle program accounted for approximately $1.8 million or 23% of
total contract revenue in 1997, $2.1 million or 25% of total contract revenue in
1996 and $1.4 million or 20% of total contract revenue in 1995. In 1997, no
funds were received and no revenue was recognized from Warner-Lambert for the
inflammation agreement. The Company anticipates that its contract revenue for
1998 will exceed the amount of such revenue recognized in 1997.
31
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $20.7 million, $14.8 million and
$13.3 million during the years ended December 31, 1997, 1996 and 1995,
respectively. The 1997 expense increase of 40% was primarily due to additional
clinical costs associated with Phase I and Phase II clinical trials of ONYX-015,
the lead product in the Company's p53 program. The 1996 expense increase of 11%
was due to increased payroll and personnel expenses as the Company hired
additional research and development staff and increased expenses in connection
with the preclinical and clinical development of ONYX-015. Pursuant to the cell
cycle collaboration with Warner-Lambert, the Company is currently obligated to
fund its 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, Eli Lilly and Warner-Lambert for
inflammation, is fully funded by the collaborative partners up to specified
levels. The Company expects to continue to expand the scope 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 $5.1 million, $3.5 million and
$2.8 million during the years ended December 31, 1997, 1996 and 1995,
respectively. The increases in each period, 44% in 1997 and 26% in 1996 were
primarily due to increased administrative staffing and higher expenses in
connection with the Company's reporting and other requirements associated with
operating as a publicly held company.
NET INTEREST INCOME
The Company had net interest income of $2.0 million, $1.6 million and
$725,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. Interest income increased each year from 1995 to 1997 due to a
higher average balance of cash, cash equivalents and short-term investments
resulting from the Company's initial public offering of common stock in May
1996 (the "IPO") and an equity investment of $3.3 million from Warner-Lambert
in May 1997. Interest expense has declined as the Company has reduced its
obligations under debt financing agreements. However, in December 1997, the
Company drew down $6.4 million on its line of credit which will increase the
amount of interest expense over the next three years.
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, 1997, the Company had cash and investments of $35.5 million
compared to $40.3 million and $12.5 million at December 31, 1996 and 1995,
respectively. The decrease of $4.8 million in 1997 was due to cash used in
operations of $11.8 million and capital expenditures of $2.2 million offset by
debt financing of $6.4 million and a Warner-Lambert equity investment of $3.3
million. The increase in cash and investments 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 in cash and investments 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 $11.8 million in 1997, $5.8
million in 1996, and $6.1 million in 1995. 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 $2.2 million
32
in 1997 as compared to $1.5 million in 1996, and $945,000 in 1995. The Company
expects to make expenditures for capital additions of approximately $2.7 million
in 1998.
In January 1998, the Company raised an additional $10.0 million of cash,
bringing the cash and investment balance to approximately $45.0 million, by
issuing 1,403,508 shares of common stock to two institutional investors.
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 $219,000, $272,000 and $30,000, respectively, for the
years ended December 31, 1997, 1996 and 1995. Amortization of deferred
compensation over the next two 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 interest
thereon, and anticipated revenues from existing collaborations will be
sufficient to fund its current and planned operations through 1999. 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.
IMPACT OF THE YEAR 2000
Computer programs using two rather than four digits to identify the year in
a date field may cause computer systems to malfunction in the year 2000. Any
computer programs that have time related software may determine a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to engage in specific business activities.
Based on a recent assessment, the Company has determined that it will be
required to upgrade or replace a portion of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company believes that, with upgrades of existing software
and/or conversions to new software, the year 2000 issue will not pose
significant operational problems for its business activities.
The Company anticipates that its costs associated with the upgrade and/or
conversion of existing computer software relating to the year 2000 issue is less
than $100,000. However, there can be no assurance that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
The Company has also initiated communications with its significant
suppliers to determine the extent to which the Company's operations are
vulnerable to those third parties' failure to solve their own year 2000 issues.
There can be no assurance that the systems of other companies on which the
Company relies will be converted on a timely basis and will not have an adverse
effect on the Company's operations.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on pages 39 to
55 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
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 ("the 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.
35
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) INDEX TO FINANCIAL STATEMENTS
The Financial Statements required by this item are submitted in a separate
section beginning on page 39 of this Report.
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets
Statements of Operations
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 DESCRIPTION OF DOCUMENT
NUMBER -----------------------
- -------
3.1+ Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Stock Certificate.
4.3+ Warrant to Purchase Series C Preferred Stock issued to Lease
Management Services, Inc. on December 30, 1993.
4.4+ Amended and Restated Information and Registration Rights
Agreement dated May 30, 1994 and as amended through May 16, 1995.
4.5+ Preferred Stock Purchase Agreement between the Company and
Warner-Lambert dated May 4, 1995.
4.6+ Stock Purchase Agreement, dated January 12, 1998, among the
Company, International Biotechnology Trust plc and Lombard
Odier & Cie.
10.1+* Collaboration Agreement between Bayer Corporation (formerly
Miles, Inc.) and the Company dated April 22, 1994.
10.1(i)+* Amendment to Collaboration Agreement between Bayer Corporation
and the Company dated April 4, 1996.
10.2+* Research, Development and Marketing Collaboration Agreement
between Warner-Lambert Company and the Company, dated May 2, 1995.
10.2(i)+ Waiver of Certain Rights under the Research, Development and
Marketing Agreement by Warner-Lambert Company dated as of
March 28, 1996.
10.3+* Compound Library Access Agreement between Warner-Lambert
Company and the Company, dated May 2, 1995.
10.4+* Research and License Agreement between Eli Lilly & Company and
the Company dated May 15, 1995 and the Collaborative Research
and License Agreement between Eli Lilly and the Company dated
June 12, 1996.
10.5+* Technology Transfer Agreement dated April 24, 1992 between
Chiron Corporation and the Company, as amended in the Chiron
Onyx HPV Addendum dated December 2, 1992, in the Amendment
dated February 1, 1994, in the Letter Agreement dated May 20,
1994 and in the Letter Agreement dated March 29, 1996.
10.6+ Scientific Advisory Board Consulting Agreement between
Dr. Frank McCormick and the Company as of March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank
McCormick and the Company dated April 17, 1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the Company
dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the Company
dated November 1, 1993 and October 21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Company,
dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Company,
dated January 23, 1995.
10.11+ Credit Terms and Conditions dated October 28, 1995 between the
Company and Imperial Bank; Addendum dated October 28, 1995; and
Modification Letter dated December 29, 1995.
10.12+ Equipment Financing Agreement Number 10762 between Lease
Management Services, Inc. and the Company, dated December 30,
1993 and Addendum thereto dated December 30, 1993.
10.13+ 1996 Equity Incentive Plan.
10.14+ 1996 Non-Employee Directors' Stock Option Plan.
10.15+ 1996 Employee Stock Purchase Plan.
10.16+ Lease by and between Hall Properties, Inc. and the Company
dated September 9, 1992, the First Amendment thereto dated
April 21, 1993 and the Second Amendment thereto dated May 11,
1996.
10.17+ Form of Indemnity Agreement to be signed by executive officers
and directors of the Company.
10.18+ Credit Terms and Conditions dated March 10, 1997 between the
Company and Imperial Bank.
10.19+ Letter Agreement between Dr. Allan Balmain and the Company
dated August 26, 1996, as amended March 13, 1997.
10.20+* Amended and restated Research, Development and Marketing
Collaboration Agreement dated May 2, 1995 between the Company
and Warner-Lambert Company.
10.21+* Research, Development and Marketing Collaboration Agreement
dated July 31, 1997 between the Company and Warner-Lambert
Company.
10.22+ Addendum to credit Terms and Conditions dated March 10, 1997
between the Company and Imperial Bank.
10.23++ Amendment to the Amended and Restated Research, Development and
Marketing Collaboration Agreement, dated December 15, 1997,
between the Company and Warner-Lambert Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 37.
27.1 Financial Data Schedules.
- --------------------
+ Filed as an exhibit to Company's Registration Statement on Form SB-2 (No.
333-3176-LA), the Company's Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1996, March 31, 1997 and September 30, 1997, and
the Company's Current Report on Form 8-K filed on January 26, 1998, and
incorporated herein by reference.
* Confidential treatment has been received for portions of this document.
++ Confidential treatment has been requested for portions of this document.
(b) REPORTS ON FORM 8-K
None
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, the Company has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Richmond, County of Contra Costa, State of California, on the
30th day of March, 1998.
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
Company in the capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Hollings C. Renton
- --------------------------------------------- President, Chief Executive Officer and
Hollings C. Renton Director (Principal Executive Officer) March 30, 1998
/s/ Douglas L. Blankenship
- --------------------------------------------- Treasurer (Principal Financial and
Douglas L. Blankenship Accounting Officer) March 30, 1998
- ---------------------------------------------
Michael J. Berendt Director March , 1998
/s/ Samuel D. Colella
- ---------------------------------------------
Samuel D. Colella Director March 30, 1998
/s/ Paul Goddard
- ---------------------------------------------
Paul Goddard Director March 30, 1998
/s/ Kathleen LaPorte
- ---------------------------------------------
Kathleen LaPorte Director March 30, 1998
/s/ Edward E. Penhoet
- ---------------------------------------------
Edward E. Penhoet Director March 30, 1998
/s/ Ralph H. Thurman
- ---------------------------------------------
Ralph H. Thurman Director March 30, 1998
37
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Nicole Vitullo
- ---------------------------------------------
Nicole Vitullo Director March 30, 1998
/s/ Wendell Wierenga
- ---------------------------------------------
Wendell Wierenga Director March 30, 1998
38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Onyx Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Onyx Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 20, 1998
39
ONYX PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------
1997 1996
------- -------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,828 $36,258
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,644 4,071
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002 638
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,474 40,967
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,562 4,196
Notes receivable from related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812 396
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 220
------- -------
$41,858 $45,779
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,319 $ 693
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,731 1,146
Accrued clinical trials and related expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,704 131
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496 439
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,209 1,631
Long-term debt, current portion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,130 444
------- -------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,589 4,484
Long-term debt, noncurrent portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,336 99
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 273
Commitments
Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and
outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $0.001 par value; 25,000,000 shares authorized; 9,850,518 and 9,514,285
shares issued and outstanding as of December 31, 1997 and 1996, respectively . . . . . . . 10 10
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,836 71,132
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (413) (632)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45,612) (29,587)
------- -------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,821 40,923
------- -------
$41,858 $45,779
------- -------
------- -------
See accompanying notes
40
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------- -------- --------
Revenue:
Contract revenue ($6,491, $7,250 and $6,566 from related parties
during 1997, 1996 and 1995, respectively) . . . . . . . . . . . $ 7,691 $ 8,160 $ 6,924
Grant and other revenue. . . . . . . . . . . . . . . . . . . . . 108 142 21
--------- -------- --------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . 7,799 8,302 6,945
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . 20,715 14,767 13,290
General and administrative . . . . . . . . . . . . . . . . . . . 5,089 3,527 2,807
--------- -------- --------
Total operating expenses. . . . . . . . . . . . . . . . . . . . 25,804 18,294 16,097
--------- -------- --------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . (18,005) (9,992) (9,152)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,030 1,685 921
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (50) (110) (196)
--------- -------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(16,025) $(8,417) $(8,427)
--------- -------- --------
--------- -------- --------
Basic and diluted net loss per share (pro forma in 1995) . . . . . . $ (1.65) $ (1.31) $ (1.38)
--------- -------- --------
--------- -------- --------
Shares used in computing basic and diluted net loss per share
(pro forma in 1995) . . . . . . . . . . . . . . . . . . . . . . . . 9,707 6,401 6,090
--------- -------- --------
--------- -------- --------
See accompanying notes.
41
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, 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. . . . . . . . . - - 44,409 - 33 - - 33
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. . . . . 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 $0.007 to
$10.20 . . . . . . . . . . . . . - - 162,711 - 153 - - 153
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. . . . .
(carried forward) . . . . . . . . . - $- 9,514,285 $10 $71,132 $(632) $(29,587) $40,923
See accompanying notes.
42
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, 1996
(brought forward) . . . . . . . . . - $- 9,514,285 $10 $71,132 $(632) $(29,587) $40,923
Exercise of stock options at
prices ranging from $0.0071 to
$10.875. . . . . . . . . . . . . - - 109,781 - 116 - - 116
Issuance of common stock to
Warner-Lambert . . . . . . . . . - - 192,941 - 3,333 - - 3,333
Amortization of deferred
compensation . . . . . . . . . . - - - - - 219 - 219
Issuance of common stock
pursuant to employee stock
purchase plan. . . . . . . . . . - - 33,511 - 255 - - 255
Net loss. . . . . . . . . . . . . . - - - - - - (16,025) (16,025)
---------- --- --------- --- ------- ------ -------- -------
Balances at December 31, 1997. . . . . - $- 9,850,518 $10 $74,836 $(413) $(45,612) $28,821
---------- --- --------- --- ------- ------ -------- -------
---------- --- --------- --- ------- ------ -------- -------
See accompanying notes.
43
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . $(16,025) $ (8,417) $ (8,427)
Adjustments to reconcile net loss to net
cash used in operating activities:. . . . . .
Depreciation and amortization. . . . . . . . 1,843 1,536 1,352
Loss on sale of fixed assets . . . . . . . . 1 3 127
Forgiveness of notes receivable. . . . . . . 75 41 40
Amortization of deferred compensation. . . . 219 272 30
Changes in assets and liabilities:
Other current assets. . . . . . . . . . . (364) (238) (155)
Other assets. . . . . . . . . . . . . . . 210 (5) 409
Accounts payable. . . . . . . . . . . . . 626 206 113
Accrued clinical trials and related
expenses. . . . . . . . . . . . . . . . 1,573 - -
Accrued liabilities . . . . . . . . . . . 585 451 352
Accrued compensation. . . . . . . . . . . 57 97 75
Deferred rent . . . . . . . . . . . . . . (161) 42 (29)
Deferred revenue. . . . . . . . . . . . . (422) 258 21
-------- -------- --------
Net cash used in operating activities . (11,783) (5,754) (6,092)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments . . . . . . (35,149) (74,769) (21,837)
Sales and maturities of short-term investments. 22,576 79,402 20,184
Capital expenditures. . . . . . . . . . . . . . (2,215) (1,515) (945)
Notes receivable from related parties . . . . . (491) - 238
Proceeds from sale of fixed assets. . . . . . . 5 1 101
-------- -------- --------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . (15,274) 3,119 (2,259)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES . . . . . . .
Borrowings under long-term debt . . . . . . . . 6,371 - -
Payments on long-term debt. . . . . . . . . . . (448) (409) (812)
Net proceeds from issuances of preferred stock. - - 3,600
Net proceeds from issuances of common stock . . 3,706 35,528 33
Repurchase of common stock. . . . . . . . . . . (2) (5) -
-------- -------- --------
Net cash provided by financing activities. . 9,627 35,114 2,821
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . (17,430) 32,479 (5,530)
Cash and cash equivalents at beginning of year. . 36,258 3,779 9,309
-------- -------- --------
Cash and cash equivalents at end of year . . $ 18,828 $ 36,258 $ 3,779
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION .
Interest paid during the year . . . . . . . . . $ 50 $ 110 $ 196
-------- -------- --------
-------- -------- --------
See accompanying notes
44
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 statement of operations have been reclassified
to conform with the 1996 and 1997 presentations.
REVENUE RECOGNITION
Revenue related to collaborative research agreements with corporate
partners is recognized ratably over the related funding periods for each
contract. The Company is required to perform research activities as specified in
each respective agreement on a best efforts basis, and the Company is reimbursed
based on the costs associated with the number of full time equivalent employees
working on each specific contract, which is generally on a ratable basis over
the term of the agreement. Deferred revenue may result when the Company does not
incur the required level of effort during a specific period in comparison to
funds received under the respective contracts. Milestone payments are recognized
pursuant to collaborative agreements upon the achievement of specified
milestones, 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 $108,000 and $130,000 was recognized in 1997
and 1996, 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.
45
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 1997 and 1996, all securities are designated
as available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in stockholders' equity. The
amortized cost of securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. The cost of securities sold is based on the specific
identification method. The estimated fair 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, 1997, 1996 and 1995.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years. Leasehold
improvements are amortized over the lesser of the lease term or the estimated
useful lives of the related assets, generally three to five years.
STOCK-BASED COMPENSATION
In 1996, the Company implemented the disclosure requirements of
Financial Accounting Standard No. 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
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share,"
("SFAS 128"), which requires the Company to simplify the calculation of earnings
per share and achieve comparability with the recently issued International
Accounting Standard No. 33, "Earnings Per Share." SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods presented have been restated, where appropriate, to conform to SFAS
128.
Basic and diluted net loss per share for 1995 has also been retroactively
restated to apply the requirements of Staff Accounting Bulletin No. 98, issued
by the SEC in February 1998 ("SAB 98"). Under SAB 98, certain shares of common
stock and options and warrants to purchase shares of common stock issued at
prices substantially below the per share price of shares sold in the Company's
initial public offering previously included
46
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in the computation of shares outstanding pursuant to Staff Accounting Bulletin
Nos. 55, 62 and 83 are now excluded from the computation as their effect is
antidilutive under SFAS 128.
Pro forma basic and diluted net loss per share for 1995 has been computed
as described above and also gives effect to the conversion of convertible
preferred stock which automatically converted to common shares upon closing of
the Company's initial public offering.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Net loss. . . . . . . . . . . . . . . . . . . $(16,025) $(8,417) $(8,427)
--------- -------- --------
--------- -------- --------
BASIC AND DILUTED
Weighted average shares of Common Stock
outstanding used in computing basic
and diluted net loss per share. . . . . . 9,707 6,401 936
--------- -------- --------
--------- -------- --------
Basic and diluted net loss per share. . . . . $ (1.65) $ (1.31) $ (9.00)
--------- -------- --------
--------- -------- --------
PRO FORMA BASIC AND DILUTED
Shares used in computing basic and
diluted net loss per share. . . . . . . . . 6,401 936
Adjusted to reflect the effect of the
assumed conversion of Preferred Stock
from the date of issuance . . . . . . . . 1,875 5,154
-------- --------
Shares used in computing pro forma basic
and diluted net loss per share. . . . . . 8,276 6,090
-------- --------
-------- --------
Pro forma basic and diluted net loss per
share . . . . . . . . . . . . . . . . . . $ (1.02) $ (1.38)
-------- --------
-------- --------
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 stock 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 $4,686,000, $5,194,000 and
$5,196,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Deferred revenue of $639,000 as of December 31, 1997 represents payments for
which revenue was not recognized due to fluctuating staffing levels in 1997.
47
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. COLLABORATIVE AGREEMENTS (CONTINUED)
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 purchased 192,941 shares of common stock on May 4, 1997 at a
purchase price of $3,333,000.
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 $6,167,000
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
United States. Costs incurred will be funded by Warner-Lambert dependent upon
the level of co-promotion. Revenue recognized under this agreement was
$1,805,000, $2,056,000 and $1,370,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
On December 15, 1997, the Company and Warner-Lambert signed an extension to
the collaboration agreement for an additional three years to May 2001. The
original agreement provided Warner-Lambert with exclusive rights to manufacture,
market and sell products emerging from the collaboration in all areas of the
world except Japan subject to payment of royalties to Onyx. The extended
agreement has been amended to provide Warner-Lambert with development and
royalty-bearing marketing rights in Japan for all products stemming from the
collaboration. In addition, the Company will receive milestone payments tied
specifically to development efforts in Japan. In consideration for these
research and development efforts and licensing rights, Warner-Lambert will pay
the Company $10,125,000 over the period May 4, 1998 to May 3, 2001.
Warner-Lambert will pay milestone payments dependent upon the occurrence of
specified events as set forth in the agreement.
On July 31, 1997, the Company signed a three-year research and development
agreement with Warner-Lambert aimed at discovering new therapeutics to regulate
inflammation and autoimmunity. Terms of the agreement provide for receipt by
the Company of an up-front licensing fee payable in three stages, as well as
milestone payments and royalties on eventual product sales. In return,
Warner-Lambert receives exclusive worldwide marketing rights to products
emerging from the collaboration. In consideration for the research and
development efforts and licensing rights, Warner-Lambert will pay the Company
$8,187,000 over the period July 31, 1997 to July 30, 2000. Warner-Lambert
agrees to pay royalties and milestone payments dependent upon the occurrence of
specified events as set forth in the agreement. Warner-Lambert has the option
to extend the research term from July 31, 2000 to July 31, 2001 provided that
Warner-Lambert notifies the Company of the extension by July 31, 1999.
Warner-Lambert has the right to terminate the agreement at its discretion on
January 31, 1999 upon written notice, provided that research payments to the
Company are continued through July 31, 1999. No funds were received by the
Company and no revenue was recognized for the year ended December 31, 1997.
48
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. COLLABORATIVE AGREEMENTS (CONTINUED)
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 $1,200,000, $910,000 and
$375,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Deferred revenue of $300,000 as of December 31, 1997, represents payment for
research to be performed in the first quarter of 1998.
NOTE 3. INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
ESTIMATED FAIR
VALUE
-----------------------
DECEMBER 31,
-----------------------
1997 1996
---- ----
Cash equivalents:
U.S. corporate securities . . . . . . . . . $ 6,057 $ -
Foreign corporate securities. . . . . . . . 6,038 -
-------- -------
Total available-for-sale securities. . . 12,095 -
Money market funds. . . . . . . . . . . . . 6,731 34,757
Cash. . . . . . . . . . . . . . . . . . . . 2 1,501
-------- -------
Total cash and cash equivalents. . . . . $ 18,828 $36,258
-------- -------
-------- -------
Short-term investments:
U.S. corporate securities . . . . . . . . . $ 10,137 $ 1,998
Foreign corporate securities. . . . . . . . 2,007 997
U.S. government securities. . . . . . . . . 2,000 -
-------- -------
Total available-for-sale securities. . . 14,144 2,995
Certificates of deposit.. . . . . . . . . . 2.500 1,076
-------- -------
Total short-term investments . . . . . . $ 16,644 $ 4,071
-------- -------
-------- -------
Total available-for-sale securities
included in cash, cash equivalents
and short-term investments. . . . . . . . . $ 26,239 $ 2,995
-------- -------
-------- -------
49
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENTS (CONTINUED)
As of December 31, 1997 and 1996, the difference between the fair value
and the amortized cost of available-for-sale securities was insignificant. The
average portfolio maturity is approximately one to two months, and the
contractual maturity of each of the investments does not exceed one and
one-quarter years.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
---------------------
1997 1996
---- ----
Machinery and equipment............ $6,272 $4,971
Furniture and fixtures............. 499 372
Leasehold improvements............. 3,999 3,212
------ ------
10,770 8,555
Less accumulated depreciation
and amortization................ (6,208) (4,359)
------ ------
$4,562 $4,196
------ ------
------ ------
NOTE 5. LONG-TERM DEBT
LINE OF CREDIT
In March 1997, the Company entered into a $7 million line of credit
arrangement which bears interest at prime plus 1%. The line, which originally
expired on October 15, 1997, was extended to January 15, 1998 followed by equal
monthly payments of principal plus interest in order to repay the outstanding
balance by January 15, 2001. The line is secured by certain assets of the
Company and contains covenants related to maintaining debt-to-equity ratios,
tangible net worth minimums, cash and investment balances, as well as a
restriction on paying dividends or repurchasing stock. As of December 31, 1997,
$6,371,000 was outstanding on the line of credit at an interest rate of 9.5%.
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, 1997
(in thousands):
Year ending December 31, 1998....................... $102
Less amount representing interest................... (7)
----
Present value of future payments.................... $95
----
----
50
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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, 1997 are as follows
(in thousands).
Year ending December 31:
1998.................................................... $477
1999.................................................... 480
2000.................................................... 160
------
$1,117
------
------
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $399,000, $370,000 and $313,000, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company has loans with certain employees and a former employee of
which $812,000 and $396,000 were outstanding at December 31, 1997 and 1996,
respectively. These loans bear interest at rates ranging from 0.0% to 6.27% 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. In 1997, $75,000 of the outstanding balance was forgiven.
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, were 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. In May 1997, at
the Company's annual meeting of stockholders, an additional 600,000 shares were
authorized for issuance under the Incentive Plan. The Incentive Plan provides
for grants to employees and consultants of the
51
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
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 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
----------------------------------
WEIGHTED
AVERAGE
SHARES NUMBER EXERCISE
AVAILABLE OF SHARES PRICE
--------- --------- --------
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
Shares authorized. . . . . . . . 600,000 - -
Options granted. . . . . . . . . (440,084) 440,084 $10.56
Options exercised. . . . . . . . - (110,049) $1.07
Options canceled . . . . . . . . 83,145 (83,145) $8.32
-------- ----------
Balances at December 31, 1997. . . 534,922 1,403,506 $6.46
-------- ----------
-------- ----------
52
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
The range of exercise prices for options outstanding at December 31,
1997 was $0.0071 to $13.75. The following table summarizes information about
options outstanding and exercisable at December 31, 1997:
OUTSTANDING AND EXERCISABLE OPTIONS
---------------------------------------
WEIGHTED
AVERAGE
CONTRACTUAL WEIGHTED
LIFE AVERAGE
NUMBER OF REMAINING EXERCISE
RANGE OF EXERCISE PRICE SHARES (IN YEARS) PRICE
- ----------------------- ---------- ----------- --------
$0.01-$0.71................... 98,243 5.20 $ 0.13
$1.07......................... 455,939 7.35 $ 1.07
$6.12-$10.20.................. 467,514 8.94 $ 8.93
$10.25-$13.75................. 381,810 9.03 $ 11.48
---------
Total............... 1,403,506
---------
---------
At December 31, 1997 and 1996, 9,391 and 30,862 shares of common
stock, respectively, were subject to repurchase. The Company has reserved
2,600,000 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 $219,000, $272,000
and $30,000 was recorded in 1997, 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 1997, 1996 and 1995 consistent
with the provisions of FAS No. 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Net loss-as reported............. $(16,025) $(8,417) $(8,427)
Net loss-pro forma............... $(17,402) $(8,797) $(8,446)
Net loss per share-as reported... $ (1.65) $ (1.31) $ (1.38)
Net loss per share-pro forma..... $ (1.79) $ (1.37) $ (1.39)
53
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
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,
-----------------------
1997 1996 1995
----- ----- -----
Risk-free interest rate. . . . . . . . 6.31% 6.27% 6.82%
Expected life. . . . . . . . . . . . 3.3 years 3.7 years 4.7 years
Expected volatility. . . . . . . . . .750 .807 N/A
Expected dividends . . . . . . . . . None None None
Weighted average fair value. . . . . $5.74 $9.77 $2.21
Options granted at below fair value:
YEAR ENDED DECEMBER 31,
-----------------------
1997 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 (in
thousands) are as follows at December 31, 1997 and 1996:
DECEMBER 31,
------------
1997 1996
---- ----
(in thousands)
Net operating loss carryforward................. $ 14,159 $ 9,478
Research and development credit carryforward.... 2,060 1,236
Capitalized research and development............ 2,082 1,068
Other........................................... 603 -
-------- --------
Gross deferred tax assets....................... 18,904 11,782
Valuation allowance............................. (18,904) (11,782)
-------- --------
Net deferred tax assets......................... $ - $ -
-------- --------
-------- --------
The valuation allowance increased by $7,122,000 and $3,289,000 in the
fiscal years 1997 and 1996, respectively.
54
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
At December 31, 1997, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $41,000,000 and
$1,500,000, respectively, which expire in the years 1998 through 2012. At
December 31, 1997, the Company has research and development credit carryforwards
for federal income tax purposes of approximately $1,512,000 which expire in the
years 2008 through 2012.
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
On January 12, 1998, the Company issued and sold 1,403,508 shares of
its common stock at a purchase price of $7.125 per share in a private placement
to two institutional investors. The Company received approximately $10,000,000
from the private placement.
55
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER -----------------------
- -------
3.1+ Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Stock Certificate.
4.3+ Warrant to Purchase Series C Preferred Stock issued to Lease
Management Services, Inc. on December 30, 1993.
4.4+ Amended and Restated Information and Registration Rights
Agreement dated May 30, 1994 and as amended through May 16, 1995.
4.5+ Preferred Stock Purchase Agreement between the Company and
Warner-Lambert dated May 4, 1995.
4.6+ Stock Purchase Agreement, dated January 12, 1998, among the
Company, International Biotechnology Trust plc and Lombard
Odier & Cie.
10.1+* Collaboration Agreement between Bayer Corporation (formerly
Miles, Inc.) and the Company dated April 22, 1994.
10.1(i)+* Amendment to Collaboration Agreement between Bayer Corporation
and the Company dated April 4, 1996.
10.2+* Research, Development and Marketing Collaboration Agreement
between Warner-Lambert Company and the Company, dated May 2, 1995.
10.2(i)+ Waiver of Certain Rights under the Research, Development and
Marketing Agreement by Warner-Lambert Company dated as of
March 28, 1996.
10.3+* Compound Library Access Agreement between Warner-Lambert
Company and the Company, dated May 2, 1995.
10.4+* Research and License Agreement between Eli Lilly & Company and
the Company dated May 15, 1995 and the Collaborative Research
and License Agreement between Eli Lilly and the Company dated
June 12, 1996.
10.5+* Technology Transfer Agreement dated April 24, 1992 between
Chiron Corporation and the Company, as amended in the Chiron
Onyx HPV Addendum dated December 2, 1992, in the Amendment
dated February 1, 1994, in the Letter Agreement dated May 20,
1994 and in the Letter Agreement dated March 29, 1996.
10.6+ Scientific Advisory Board Consulting Agreement between
Dr. Frank McCormick and the Company as of March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank
McCormick and the Company dated April 17, 1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the Company
dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the Company
dated November 1, 1993 and October 21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Company,
dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Company,
dated January 23, 1995.
10.11+ Credit Terms and Conditions dated October 28, 1995 between the
Company and Imperial Bank; Addendum dated October 28, 1995; and
Modification Letter dated December 29, 1995.
10.12+ Equipment Financing Agreement Number 10762 between Lease
Management Services, Inc. and the Company, dated December 30,
1993 and Addendum thereto dated December 30, 1993.
10.13+ 1996 Equity Incentive Plan.
10.14+ 1996 Non-Employee Directors' Stock Option Plan.
10.15+ 1996 Employee Stock Purchase Plan.
10.16+ Lease by and between Hall Properties, Inc. and the 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
Company and Imperial Bank.
10.19+ Letter Agreement between Dr. Allan Balmain and the Company
dated August 26, 1996, as amended March 13, 1997.
10.20+* Amended and restated Research, Development and Marketing
Collaboration Agreement dated May 2, 1995 between the Company
and Warner-Lambert Company.
10.21+* Research, Development and Marketing Collaboration Agreement
dated July 31, 1997 between the Company and Warner-Lambert
Company.
10.22+ Addendum to credit Terms and Conditions dated March 10, 1997
between the Company and Imperial Bank.
10.23++ Amendment to the Amended and Restated Research, Development and
Marketing Collaboration Agreement, dated December 15, 1997,
between the Company and Warner-Lambert Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 37.
27.1 Financial Data Schedules.
- --------------------
+ Filed as an exhibit to Company's Registration Statement on Form SB-2 (No.
333-3176-LA), the Company's Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1996, March 31, 1997 and September 30, 1997, and
the Company's Current Report on Form 8-K filed on January 26, 1998, and
incorporated herein by reference.
* Confidential treatment has been received for portions of this document.
++ Confidential treatment has been requested for portions of this document.
(b) REPORTS ON FORM 8-K
None
56