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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, 1998.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 0-28298
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ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3154463
(State or other jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
3031 RESEARCH DRIVE
RICHMOND, CALIFORNIA 94806
(510) 222-9700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK $.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 19, 1999 was approximately $44,162,000.
The number of shares of common stock outstanding as of March 19, 1999 was
11,463,012.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Company's Definitive Proxy Statement filed with the Commission
pursuant to Regulation 14A in connection with the 1999 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 Annual Report on
Form 10-K for the year ended December 31, 1997, the Company's Quarterly Reports
on Form 10-Q for the quarters ended June 30, 1996, March 31, 1997 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 strategy is to capitalize on
the discoveries that have established cancer as a genetic 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 that target the
most frequent mutations causing cancer.
The Company's lead product, ONYX-015, is an adenovirus that has been
modified to replicate in and kill cancer cells that have abnormal p53-pathway
function. Mutations in the p53 gene occur in over 50% of human cancer cases, but
it is believed that many other cancers have abnormal p53 function due to other
mutations in the p53-pathway. The Company has completed Phase II studies of
ONYX-015 as a single agent and in combination with chemotherapy in patients with
head and neck cancer, and the results will be updated in the second quarter of
1999. The Company is also currently conducting a Phase I/II human clinical trial
in pancreatic cancer designed to determine the efficacy of ONYX-015 when
administered intratumorally using endoscopic ultrasound, both as a single agent
and in combination with chemotherapy. The Company is also conducting a Phase
I/II human clinical trial in patients with colorectal cancers that have
metastasized to the liver. The trial is designed to determine the safety,
maximum tolerated dose, and efficacy of ONYX-015 when administered via the
hepatic artery, both as a single agent and in combination with chemotherapy.
Additionally, a Phase I clinical trial is ongoing in ovarian cancer.
Onyx has established six therapeutic drug discovery and development programs
based on the following genetic mutations in cancer: p53, RB, ras, cell cycle
checkpoints, BRCA1 and APC. The Company has two product development platforms to
address these mutations. The first is a proprietary therapeutic virus platform,
and the second is a small molecule drug discovery platform.
The Company's overall business strategy is to enter into collaborations with
corporate partners at different development stages depending on the platform in
each of its drug development programs in order to gain complementary resources
and skills in clinical trials, regulatory affairs, and marketing and sales
operations. Small molecule drug discovery collaborations also access chemistry
technology.
The Company is engaged in collaborative research with corporate partners in
two of its cancer programs--Warner-Lambert Company ("Warner-Lambert") in the
cell cycle program and Eli Lilly & Company ("Eli Lilly") in the BRCA1 program.
The Company also is engaged in a collaborative research partnership with
Warner-Lambert in the area of inflammation and autoimmune diseases.
Additionally, as of February 1, 1999, the Company's cancer program collaboration
with Bayer Corporation ("Bayer") in the ras program transitioned from research
activities to co-development of a clinical candidate.
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 1.2 million
new cases of cancer are expected to be diagnosed in 1999, and approximately
563,100 cancer deaths are expected to occur. 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.
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Estimates for 1999 of new cancer cases and cancer deaths in the United
States are presented below for some of the solid tumors that are targeted by the
Company's drug discovery programs.
ESTIMATED DEATHS AND NEW CANCER CASES
UNITED STATES, 1999
CANCER TYPE DEATHS NEW CASES
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Lung....................................................................................... 158,900 171,600
Colon and rectum........................................................................... 56,600 129,400
Breast..................................................................................... 43,700 176,300
Prostate................................................................................... 37,000 179,300
Pancreas................................................................................... 28,600 28,600
Ovary...................................................................................... 14,500 25,200
Head and neck*............................................................................. 12,300 40,400
Kidney..................................................................................... 11,900 30,000
Bladder.................................................................................... 12,100 54,200
Melanoma................................................................................... 7,300 44,200
Uterus..................................................................................... 6,400 37,400
Cervix..................................................................................... 4,800 12,800
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* Includes cancers of the larynx, tongue, mouth, oral cavity and pharynx.
Source: American Cancer Society
According to the National Institutes of Health, the direct costs of cancer
patient care in the United States are estimated at $37 billion per year. The
cancer drug market in the United States was estimated to be approximately $4
billion in 1998, 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 the use of chemotherapy
regimens that utilize cytotoxic drugs which discriminate poorly between
malignant tumor cells and other normal healthy cells in the human body.
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 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 result of which is
uncontrolled cell proliferation. 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 growth
control events in cells. The first 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 to 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 can result. The Company
believes that the cell cycle checkpoints are deactivated in approximately 90% of
human cancer cells. Growth regulatory genes whose loss of function results in
uncontrolled cell growth are referred to as tumor suppressor genes. Certain
tumor suppressor genes, such as p53 and RB, also act as
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checkpoint controls for cell growth and division. Mutations occur in the p53 and
RB genes themselves and in genes in the pathways that regulate their function.
The second major set of growth control events is in the ras pathway. Ras 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 activated in many types of cancer cells. Growth regulatory genes that are
activated when mutated are referred to as oncogenes. Mutations in ras are
detected in 90% of pancreatic cancers, 50% of colon and small cell lung cancers
and approximately 30% of many other cancers.
In addition, cells in the body possess a programmed cell death mechanism
that can be activated under certain conditions. This process is referred to as
apoptosis or cell suicide. Apoptosis can be triggered if uncontrolled cell
division is detected or if the cell has sustained irreparable damage to its
macromolecular components. 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. Recently, a gene known as p14ARF has been
identified that appears to regulate the activity of p53 protein in cells.
Mutations in p14ARF can also result in the apparent loss of p53 protein
function, even though the p53 gene itself is unaltered. The relationship between
p14ARF, p53 and the downstream targets of p53 is referred to as the
"p53-pathway". Alterations of the p14ARF locus have been detected in a large
percentage of human cancers of different tissue origins. Mutations in p53 or
p14ARF are shown to be exclusive, suggesting that a great majority of human
cancers may alter the p53-pathway and escape cell growth control via either p53
or p14ARF gene inactivations.
In addition to the pathways described above, there are other genes that play
a major role in human cancer. These include the tumor suppressor gene BRCA1
which is associated with hereditary breast and ovarian cancers, and the APC
gene, whose loss of function is implicated in nearly all colon cancers.
ONYX TECHNOLOGY
Onyx's research is directed toward identifying the function of genes
associated with cancer, including p53, RB, ras, cell cycle checkpoints, APC, and
BRCA1. Insights into the pathways through which these genes operate are used by
Onyx to identify components that might be targets for drug intervention.
The methodologies used to assign functions to genes are collectively
referred to as "functional genomics." Onyx scientists have been involved in this
process and have ascribed functions to a number of cancer genes and delineated
the signaling pathways by which they regulate function. This has been
accomplished 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 used to either inhibit protein expression or
function in human cells.
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 the biochemical functions of a gene are
identified, Onyx employs various technologies, including "reverse genetics," to
interfere with these functions and assess the consequences in cell-based
systems. Potential targets are then "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 activated by mutation.
Targets that 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 the use of therapeutic
viruses to target human cancer cells containing mutant tumor suppressor genes,
such
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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.
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 signaling
pathways involved in inflammatory and immune disorders. Although the focus of
the initial six programs is the treatment of cancer, there may be other diseases
addressed by product leads discovered in these programs, as evidenced by the
inflammation drug discovery program.
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 cancer; colorectal metastases Phase I/II
to the liver
Ovarian cancer Phase I
Other cancers Preclinical
RB ONYX-838 and other RB pathway mutations Preclinical
therapeutic viruses
under evaluation for
RB pathway
selectivity
Cell Cycle Small molecule Most cancer indications; other Preclinical, lead Warner-
inhibitors proliferative diseases compound Lambert
designated
Ras Small molecule Colon, lung, pancreatic, and other Development Bayer
inhibitors cancers; other proliferative diseases
BRCA1 Inhibitors of BRCA1 Breast and ovarian cancer Research Eli Lilly
pathways
APC Inhibitors of Colon cancer and other cancers with Research
-catenin pathways alterations in -catenin pathway
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PROGRAM PRODUCT INDICATION STATUS PARTNER
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Inflammation Small molecule Inflammation and autoimmunity Discovery Warner-
inhibitors 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.
Development: Formulation development, expanded efficacy and formal toxicology testing of
compound selected for IND.
Preclinical: Pharmacological and exploratory toxicological testing in animals prior to a
decision to begin IND.
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 gene occur in over 50% of human cancer cases, but it is
believed that many other cancers have abnormal p53 function due to other
mutations in the p53-pathway. In cells, p53 protein levels and activity may
increase in response to a number of stimuli including DNA damage, viral DNA
replication and protein expression. One of the functions of normal p53 in the
cells is to either stop the cell cycle from proceeding until such errors are
corrected or to induce apoptosis (cell suicide). Loss of p53-pathway function is
associated with decreased survival rates in patients afflicted with 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, in immunodeficient mice, and
in patients in human clinical studies, has replicated in and killed tumor cells
deficient in p53-pathway function.
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 and the eventual
assembly of these macromolecules into infectious viral particles in the cell's
nucleus. The infection cycle is complete when 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 infection cycle.
ONYX-015 is a serotype 5 human adenovirus that has been modified so that it
cannot make E1B 55k. As a result, it is incapable of disarming the p53 protein
when it infects normal cells. Thus the virus is attenuated in its ability to
complete its infection cycle and kill normal cells. However, in the majority of
cancer cells, the p53-pathway is already disarmed through mutation of the p53
gene or other mechanisms that control the quantities of p53 protein in normal
cells but are dysfunctional in cancer cells. For example, alterations in the
p14ARF and mdm-2 genes result in degradation of the p53 protein and, therefore,
decrease its function in the cell. When ONYX-015 infects cells lacking
p53-pathway 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 in numerous normal cell types. The p53
program
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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-pathway function.
In animal studies, ONYX-015 was shown to cause tumor shrinkage and complete
tumor regressions in some 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 is unknown. 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 1950s 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, and in the Phase I/II trial involving colorectal cancer that has
metastasized to the liver, via infusion into the hepatic artery. In order to
meet the needs of a wider spectrum of cancer patients and to treat metastatic
cancers, the virus would need to be delivered systemically. Research is underway
to attempt to formulate or modify the virus for systemic delivery. Onyx has
collaborated with a third party, which has proprietary technology for coating
adenovirus with polyethylene glycol ("PEG"), a process called PEGylation.
Preclinical studies have shown that ONYX-015 can be PEGylated and maintain
infectivity. 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 to enhance potency by increasing
replication or cell lysis efficiencies.
PHASE I HEAD & NECK CLINICAL TRIAL
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. The trial was conducted in 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.
A total of 32 patients were treated in the Phase I trial, of which 13
patients received repeat treatments. Two dosing regimens were utilized.
Twenty-three 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. An additional nine patients received direct intratumoral
injections daily over five days, also with the option of repeat treatment.
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. Several patients experienced lesser degrees of
tumor necrosis, including nine patients whose tumors were stable and
non-progressive following initial treatment.
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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. An
additional three patients were stable and non-progressive following initial
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, seven or eight days following the patient's first ONYX-015
injection. Viral replication was less pronounced than was the case in animal
studies. While approximately 70% 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 either limiting or enhancing tumor
necrosis.
OTHER PHASE I CLINICAL TRIALS
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. During 1998,
the Company reported the results of the Phase I trials in patients with
pancreatic cancer and in patients with gastrointestinal metastases to the liver.
The trial in patients with ovarian cancer is still in progress and results have
not yet been reported.
In the Phase I pancreatic cancer trials, results were reported on 18
evaluable patients of the 23 treated to date. Intratumoral injection of ONYX-015
under CT guidance was well tolerated; symptoms consisted of either mild,
transient flu-like illness, or those associated with pancreatic cancer. Eleven
of the patients received at least two cycles of therapy. One case of dose
limiting toxicity (DLT), indicative of liver toxicity, was observed at an
intermediate dose, but dose escalation to the highest planned dose was continued
following safe treatment of additional patients at that intermediate dose. Six
of the 18 patients experienced minor regressions, defined as 25% to 50%
reduction in tumor size, and some patients experienced transient amelioration of
their clinical symptoms. The median survival time of these patients, 6.2 months,
is similar to that of these patients historically.
Following this demonstration that intratumoral injection of ONYX-015 is well
tolerated and leads to demonstrable anti-tumor activity and anecdotal clinical
benefit, the Company initiated a Phase I/II study in pancreatic cancer patients
in September 1998 using a procedure that allows more intensive treatment. In
this study, being conducted at three sites, ONYX-015 is injected into pancreatic
carcinomas using endoscopic ultrasound guidance and equipment. This technique
allows for multiple injections per treatment and for multiple treatments at
lower cost and lower patient discomfort than with CT-guided injection. If
patients tolerate the initial cycles of treatment with ONYX-015 alone,
Gemzar-Registered Trademark- (gemcitabine) is added to ONYX-015 in subsequent
treatment cycles.
The results of the completed Phase I trial in 19 patients with
gastrointestinal cancer metastases to the liver were reported in May 1998.
Intratumoral injection of ONYX-015 into liver metastases was well tolerated with
no dose limiting toxicity reported. Symptoms consisted of either mild, transient
flu-like illness or those associated with gastrointestinal metastases to the
liver. Radiographic evaluation of the patients' tumors indicated non-progressive
disease or minor regressions in some of the patients. Following this
demonstration of safety and, specifically, the lack of significant liver
toxicity, in December 1998 the Company initiated a Phase I/II trial of ONYX-015
infused via the hepatic artery in patients with liver metastases of colorectal
cancer. This intra-arterial route allows delivery of ONYX-015 to multiple tumor
9
sites simultaneously. Patients who tolerate the initial cycles of treatment with
ONYX-015 alone will receive a combination of the virus plus Fluorouracil
("5-FU") and Leucovorin for subsequent treatment cycles.
PHASE II HEAD & NECK CLINICAL TRIALS
During 1997, the Company initiated two Phase II efficacy trials with
ONYX-015 in patients with head and neck cancer. The results of the first trial
in head and neck cancer patients with recurrent and refractory tumors were
reported in May 1998. For the 14 patients evaluated at that time, four had
complete or greater than 50% reduction in the size of their injected tumors.
Intratumoral injection in these patients has been well tolerated. Mild,
transient flu-like symptoms were observed in approximately 40% of the patients,
compared with 30% of the patients in the Phase I trial where single injections
were used. No toxicities were reported in cases where the virus was injected
into the adjacent normal tissue. This study has been closed with a total of 21
evaluable patients. The results will be updated in the second quarter of 1999.
The results of the second Phase II trial utilizing ONYX-015 in combination
with two chemotherapeutic drugs, Cisplatin-TM- and 5-FU were reported, in
preliminary form, in May and updated in November 1998. This clinical trial
included 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 provided 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 conducted the trial at seven sites
in the United States, the United Kingdom and Canada. The participating patients
received injections of ONYX-015 directly into the target tumor. If the patients
had more than one tumor on recurrence, only the largest, most symptomatic tumor
was injected. Among the 26 patients who were evaluable in November, 16 had
experienced tumor regressions of greater than 50% in the injected tumor,
including six patients with complete regressions. This equaled an overall
response rate of 62%, compared to approximately 35% historically with
chemotherapy alone (in randomized, multi-center studies), and a complete
response rate of 23%, compared to less than 10% with chemotherapy alone. None of
the 16 patients, who had been followed for a range of 1.5 to 11 months, had
progressed at the site of the injected tumor. In contrast to the injected
tumors, distant tumors that were not injected with ONYX-015 did progress in some
cases. The median time to progression had not yet been reached with a median
follow-up of 4.8 months. Historically, the median time to progression for
chemotherapy alone is approximately three to four months. An additional four
evaluable patients have been treated in the ONYX-015/chemotherapy study, and no
further patients will be treated. The results of the completed trial will be
presented in the second quarter of 1999.
In March 1998, the Company announced the commencement of a third Phase II
clinical trial of ONYX-015 in patients with recurrent and refractory head and
neck cancer. The trial involved the administration of ONYX-015 as a single agent
with a more aggressive dosing regimen than in the trial that commenced in July
1997. In this trial, patients were treated with ONYX-015 daily for five days for
two consecutive weeks. After a third week with no treatment, patients were
evaluated and could continue for another intensive two-week treatment cycle or
receive maintenance treatment. There are six evaluable patients in this trial.
Reports from the clinical sites indicate that this more aggressive regimen has
biological activity. However, in view of the superior activity in the Phase II
clinical trial of ONYX-015 in combination with chemotherapy as noted above, the
Company has decided not to treat any more patients in this trial.
The Company expects to release the final results of the above Phase II
clinical trials in patients with head and neck cancer in the second quarter of
1999. There is no assurance regarding the results of any of these trials. See
Additional Business Risks--"Uncertainty Regarding Clinical Trials of ONYX-015."
Onyx has self-funded the development of ONYX-015 to date. The Company is
seeking a partner for further clinical development and commercialization of
ONYX-015. The Company is engaged in ongoing
10
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 was the first 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 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
inactivation. 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 research and development
collaboration agreement with Bayer with respect to the ras Program. Bayer was
obligated, subject to certain conditions, to fund Onyx's research under the
collaboration through January 31, 1999.
In February 1999, Bayer and Onyx declared one of the lead candidates under
evaluation in the MAP kinase pathway as a development compound. This compound
has a good pharmacological profile and therapeutic index in animal models. Bayer
and Onyx expect to complete preclinical efficacy and toxicological studies with
this development compound and if merited, plan to file an IND by the second or
third quarter of 2000. In addition, Bayer and Onyx have amended their agreement
and have transitioned the program from its research stage to the co-development
phase. Under the terms of this agreement, Onyx has the opportunity to co-develop
collaboration compounds worldwide except Japan, in return for up to a 50 percent
share of profits if Onyx co-promotes the product in the United States. To assist
in funding its share of development costs, Onyx could receive up to $40 million
in advances on the achievement of clinical milestones.
CELL CYCLE PROGRAM
The cell cycle is the process by which cells progress from quiescence,
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
favorable, and then only divide into two new cells when DNA has been precisely
and completely 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, pRb, and a number of
regulatory proteins such as the p16 tumor suppressor protein. The
11
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 that regulate DNA replication. The Company
also has initiated research efforts to identify pathways regulating a 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 research costs. 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 increased its
funding to the full complement of 15 staff working on this project at Onyx in
return for expanded worldwide rights to products arising out of the
collaboration. See "Research and Development Collaborations."
From the initial set of assays transferred by Onyx, the collaboration
identified two lead compounds that Warner-Lambert is advancing into preclinical
study. Additional compounds have been identified from other assays transferred
for high throughput screening at Warner-Lambert and 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 in any event, 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 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 that bind directly to the BRCA1 gene product. Onyx has isolated novel
genes of interest. The proteins expressed from these genes physically interact
with BRCA1 in IN VITRO assays. 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, if at all.
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.
The collaboration has not been successful to date in identifying validated
targets for drug discovery.
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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 -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, such as GSK3-beta. 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 through September 1999.
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. The Company has developed a research
program to identify the molecular components of pathways that regulate the
activation of neutrophils and other phagocytes, the immune cells responsible for
destruction of pathogens and tissue debris. This knowledge would allow
development of novel therapeutic strategies for intervention into these
pathways, potentially impacting both upstream and downstream events associated
with neutrophil and other immune system cell activation.
In addition to the beneficial infection fighting properties of phagocytes,
these aggressive cells can cause extensive tissue damage. They 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.
Phagocyte mediated tissue injury is caused by the release of toxic phagocyte
granule components (proteolytic enzymes and cationic proteins) and oxygen-free
radicals extracellularly, rather than into the phagocytic vacuole, as occurs
during active killing of parasites. Inhibition of phagocyte activity would be
expected to inhibit tissue damaging mechanisms such as formation of oxygen
radicals, activation of metalloproteinases and inactivation of antiproteinases.
This selective inhibition of phagocytes may decrease tissue damage while still
allowing the immune system to respond to infection.
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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
January 1999, the Company had transferred four assays 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.
RESEARCH AND DEVELOPMENT COLLABORATIONS
Onyx continues to review its strategy for research, development and
commercialization of its development programs. The Company currently 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,
Cell Cycle and Inflammation 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 not terminate such agreements without
cause. Any such failure to achieve milestones or to perform such obligations, or
any such termination of the agreements,
14
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.
The collaboration agreement provided 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 $3.7 million was recorded as revenue in 1998, $4.7 million in 1997, and
$5.2 million in 1996. 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 compound in clinical development, until such
time as the parties do not have a compound in clinical development.
Under the agreement as amended on February 1, 1999, a lead compound was
established by the Joint Research and Development Committee ("JRDC"). Bayer will
fund the preclinical work necessary to determine whether to take this compound
into clinical development and to obtain approval for conducting clinical trials.
Upon filing of an IND, the parties will share equally all costs of
developing the product (the "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. These 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 Product worldwide and Onyx has
the option to co-promote the product in the United States, provided that the
Company shares equally all costs of development, (excluding Japan). Onyx and
Bayer will share equally the marketing profits or losses from commercializing
the jointly developed Collaboration Product, 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 the Collaboration Product,
either party may terminate paying its share of such development costs, with the
other party retaining exclusive, royalty-bearing rights to the product.
Bayer has the sole and exclusive right to develop and market the
Collaboration Compound as a royalty-bearing product in Japan and will bear all
related development expenses. Further, Bayer has the sole and exclusive right to
develop and market the Collaboration Compound active against Bayer proposed
targets as royalty-bearing products. As part of the transition from the research
to the co-development phase, Bayer's rights following the end of the research
phase have been renegotiated. The original research collaboration agreement
provided Bayer with rights to compounds with defined ras activity, which were
identified by screening against numerous molecular targets involved in ras
signaling. Such rights potentially extended for up to three years after the end
of the research phase of the agreement. The collaboration agreement has been
amended and Bayer's rights are now limited to compounds that have activity
against certain molecular targets involved in ras signaling. Therefore, Onyx now
has the ability to engage another partner to screen for drugs with ras activity
against those molecular targets that Bayer did not select.
WARNER-LAMBERT COMPANY: CELL CYCLE AGREEMENT
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-
15
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 extension expanded Warner-Lambert's
development and royalty-bearing marketing rights to include Japan for all
products stemming from the collaboration. Warner-Lambert increased 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. 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. The Company
recorded revenue of $2.8 million in 1998, $1.8 million in 1997 and $2.1 million
in 1996 under this agreement.
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.
WARNER-LAMBERT COMPANY: INFLAMMATION AGREEMENT
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 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.
16
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. The Company recorded revenue of $2.6 million for
research funding and $0.5 million for a license payment in 1998. 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 1998, $1.2
million in 1997, and $910,000 in 1996 under this agreement.
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 Corporation ("Chiron") to the Company of the drug discovery program being
conducted at Chiron by Dr. Frank McCormick, the scientific founder of Onyx, and
his research team. The work being conducted by this team at that time was
primarily in the field of ras research. As part of such transaction, Chiron and
Onyx executed a Technology Transfer Agreement dated April 24, 1992 (the
"Transfer Agreement"), pursuant to
17
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.
18
The Company has been employing a contract manufacturer, MAGENTA Corporation
("MAGENTA"), for the clinical trial production of ONYX-015 and intends to use
MAGENTA and other contract manufacturers for some or all of the Company's
clinical trial production. The Company is aware of only a limited number of
manufacturers who it believes would have the ability and capacity to manufacture
this product or any other therapeutic viruses the Company may develop. Failure
of any such third-party manufacturer to comply with state and federal
regulations and to deliver the required quantities on a timely basis and at
commercially reasonable prices would materially adversely affect the Company's
business, financial condition and results of operations. No assurance can be
given that the Company, alone or with a third party, will be able to make the
transition to commercial-scale production of its potential products
successfully, if at all, or that if successful, the Company will be able to
maintain such production.
The Company anticipated that substantial improvements in the current
manufacturing process would be required to produce commercial quantities of
ONYX-015. Therefore, the Company built and staffed a process development
laboratory to investigate the feasibility of improving the manufacturing
process. While substantial progress has been made in the development of a
scaleable, commercially feasible new process, there can be no assurance that
such a process will be achieved. In December 1998, the Company entered into an
agreement with Molecular Medicine LLC to complete development of the new process
and to manufacture Phase III grade ONYX-015. 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 functionally p53-deficient cancers. The Company
has received two additional United States patents, the first of which claims the
use of certain adenoviral mutants that kill functionally Rb-deficient tumor
cells and another that claims compositions of matter that consist of ONYX-015
and a chemotherapeutic. These are No. 5,801,029 and No. 5,846,945, respectively.
As of March 5, 1999, the Company owned or had licensed rights to 24 United
States patents and 55 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
19
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 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. Consistent with this opinion is a review of the European patent
status of the General Hospital patent application which shows that the Examiner
is requiring that the claims be limited to herpes. 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.
20
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 identified U.S. Patent No. 5,837,520 that covers methods of
purification of viral vectors. Canji, Inc. ("Canji") either owns or has licensed
the rights to this patent. The Company may seek a license under this patent from
Canji. However, if such license is not available at commercially reasonably
terms, or at all, the Company would develop methods that are not covered by the
patent. In any event, the Company does not believe that this patent will have a
material adverse effect on the Company's business assets, liabilities, financial
condition, operations or prospects.
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, recordkeeping and marketing and promotion of such products.
The steps ordinarily required before a drug or biological product may be
marketed in the United States include (a) preclinical 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.
21
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 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, recordkeeping, 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.
22
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. 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-015. 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 that 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.
23
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, 1998, the Company had 128 full-time employees of whom 48
hold Ph.D. or M.D. degrees. 103 of the Company's employees are in research and
development and 25 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.
In order to refocus the Company's resources on more near-term product
opportunities, in February 1999, the Company reduced its workforce by 14 regular
full-time employees as part of a corporate downsizing and incurred an expense of
approximately $250,000.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board ("SAB") consists of individuals with
expertise in many aspects of molecular oncology that advise the Company and
provide critical review of the various development activities of the Company.
The SAB meets several times a year. In addition, the SAB members consult with
and meet informally with the Company on a frequent basis. Certain SAB members
own shares of common stock of the Company. 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 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.
24
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 and Chair of Biological Chemistry and Molecular Pharmacology
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. He 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. Currently, Dr. McCormick serves as Director
of the UCSF Cancer Center and Cancer Research Institute, the David A. Wood
Professor of Tumor Biology and Cancer Research, and the Associate Dean of the
School of Medicine at the University of California San Francisco.
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.
OUR PRODUCTS ARE AT AN EARLY STAGE OF DEVELOPMENT AND THERE IS A HIGH RISK OF
FAILURE
We have no products that have received regulatory approval for commercial
sale. All of our products are in an early stage of development. We will have to
conduct significant additional research and preclinical (animal) and clinical
(human) testing before we can file applications with the FDA for product
approval. If any products result from our research and development programs, we
do not expect that they will be commercially available for a number of years. We
cannot assure you that any of our 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.
THERE ARE SPECIAL RISKS ASSOCIATED WITH NEW TECHNOLOGY
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
25
these methods will lead to the discovery of commercially viable pharmaceutical
products. Only one of our compounds, the ONYX-015 therapeutic virus, has entered
human clinical trials. We cannot assure you that our 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.
THE CLINICAL SUCCESS OF ONYX-015 IS UNCERTAIN
We have self-funded three Phase II clinical trials of ONYX-015 for the
treatment of head and neck cancer. Interim clinical results announced to date
represent partial unaudited information from the clinical sites and
investigators. Final data based on audited case report forms may differ from the
interim results. We expect to release the final results of these trials in the
second quarter of 1999. Our ability 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. We are currently conducting Phase
I/II human clinical trials to determine the safety, maximum tolerated dose, and
efficacy of ONYX-015 in pancreatic cancer and in colorectal cancers that have
metastasized to the liver, both as a single agent and in combination with
chemotherapy.
In addition, 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. If the human immune response causes
a substantial reduction in anti-tumor effect, we 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.
Furthermore, in order to meet the needs of a wider spectrum of cancer patients
and to treat metastatic cancers, the virus would need to be delivered
systemically. We cannot assure you that these efforts will be successful.
Although we plan to meet with the FDA to discuss the results of these
trials, we cannot be assured that agreement will be reached with the FDA
regarding design and commencement of a Phase III pivotal trial. In that case, we
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 we
were to continue development of such product at all.
CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES WILL BE EXPENSIVE AND THEIR OUTCOMES
ARE UNCERTAIN
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any of
our product candidates, we or our collaborative partners must demonstrate
through preclinical testing and clinical trials that the product is safe and
effective for use in humans. We will incur substantial expense for, and devote a
significant amount of time to, preclinical and clinical testing and clinical
trials. Historically, the results from preclinical testing and early clinical
trials have not been predictive of results obtained in later clinical trials
involving large-scale testing of patients in comparison to control groups.
Clinical trials may require the enrollment of large numbers of patients and
suitable patients may be difficult to identify and recruit. A number of
companies in the pharmaceutical industry have suffered significant setbacks in
every stage of clinical trials, even in advanced clinical trials after promising
results in earlier trials.
In addition, our other product candidates are in preclinical development,
and we have not submitted investigational new drug applications nor begun
clinical trials for such product candidates. Our preclinical or clinical
development efforts may not be successfully completed. We may not file further
investigational new drug applications. Our clinical trials may not commence as
planned.
Completion of clinical trials may take several years or more. The length of
time generally varies substantially according to the type, complexity, novelty
and intended use of the product candidate. Our commencement and rate of
completion of clinical trials may be delayed by many factors, including:
- inability to manufacture sufficient quantities of materials used for
clinical trials;
26
- inability to adequately follow patients after treatment;
- unforeseen safety issues;
- lack of efficacy during the clinical trials; or
- government or regulatory delays.
We have limited experience in conducting and managing clinical trials. We
rely on third parties, including our collaborative partners, to assist us in
managing and monitoring clinical trials. Our reliance on such third parties may
result in delays in completing, or failing to complete, such trials if they fail
to perform under our agreements with them.
Our product candidates may fail to demonstrate safety and efficacy in
clinical trials. Such failure may delay development of other product candidates,
and hinder our ability to conduct related preclinical testing and clinical
trials. As a result of such failures, we may also be unable to obtain additional
financing. Our business, financial condition and results of operations will be
materially adversely affected by any delays in, or termination of, our clinical
trials.
WE WILL NEED ADDITIONAL FUNDS
We will require substantial funds to conduct the costly and time-consuming
research and preclinical testing and clinical trials necessary to develop our
technology and proposed products, and to establish relationships with
collaborative partners to bring our product candidates to market. Our future
capital requirements will depend upon a number of factors, including continued
scientific progress in the research and development of our technology programs,
the size and complexity of these programs, our ability to establish and maintain
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.
FAILURE TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS WILL ADVERSELY
AFFECT OUR BUSINESS
Because of the scientific nature of our business, we are highly dependent on
principal members of our scientific and management staff. In addition, we rely
on consultants and advisors, including the members of our Scientific Advisory
Board, to assist us in formulating our research and development strategy. None
of our consultants or advisors are employees of the Company and all have
commitments to, or consulting or advisory contracts with, other entities that
may limit their availability. In order to pursue its product development plans,
we will also 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. We face competition
for qualified individuals from numerous pharmaceutical and biotechnology
companies, universities and other research institutions. The failure to maintain
our management and scientific staff and to attract additional key personnel
could materially adversely affect our business, financial condition and results
of operations, including our ability to enter into and maintain collaborative
arrangements. Although we intend to provide incentive compensation to attract
and retain our key personnel, we cannot guarantee these efforts will be
successful.
27
WE ARE DEPENDENT UPON COLLABORATIONS WITH PARTNERS TO COMPLETE DEVELOPMENT AND
COMMERCIALIZE OUR PRODUCTS
Our strategy for the development, clinical trials, manufacturing and
commercialization of our products depends in large part upon maintaining and
entering into various collaborations with corporate partners, licensors,
licensees and others. Such collaborations are necessary in order for us to:
- Fund our research and development activities;
- Fund preclinical testing, clinical trials and manufacturing;
- Seek and obtain regulatory approvals; and
- Successfully commercialize existing and future product candidates.
We are currently seeking a collaborative partner for the p53 Program,
including the development and commercialization of ONYX-015. If we fail to
maintain or establish such arrangements, we will be required to undertake such
activities at our own expense, which would significantly increase our capital
requirements and limit the programs we are able to pursue. In addition, we may
encounter significant delays in introducing products into certain markets or
find that the development, manufacture or sale of our products in such markets
is adversely affected by the absence of such collaborative agreements.
There are other risks associated with corporate collaborations, including:
- The amount and timing of expenditure of resources by the partner can vary
for reasons outside our control;
- Business combinations and changes in a partner's business strategy may
adversely affect a partner's willingness or ability to complete its
obligations under the agreement;
- The right of the partner to terminate the agreement on limited notice and
for reasons outside our control;
- The partner may develop or have rights to competing products and withdraw
support of our products;
- If an agreement is terminated, the program will be delayed and we will be
required to devote additional resources to the program, seek another
partner, or abandon the program; and
- Disagreements may arise with a partner regarding breach of the agreement
or ownership of proprietary rights.
These factors and other possible disagreements with partners or
collaborators could lead to delays in the collaborative research, development or
commercialization of certain product candidates or could require or result in
litigation or arbitration, which would be time consuming and expensive, and
would have a material adverse effect on our business, financial condition and
results of operations.
WE DO NOT HAVE COMMERCIAL SCALE MANUFACTURING EXPERTISE
We lack the resources and capability to manufacture our products for small
or large-scale clinical trials or in commercial quantities, and we have no
experience in such manufacturing. It would require substantial funds to
establish that capability. Our collaborative partners generally have the
exclusive right to manufacture products resulting from the collaborations, and
we expect to have similar manufacturing arrangements in future collaborations.
Consequently, we are dependent on third parties, including collaborative
partners, to manufacture our products. Contract manufacturers often encounter
difficulties in scaling up production, including problems involving production
yields, quality control and quality assurance and shortage of qualified
personnel. Our contract manufacturer may not perform as agreed or may not remain
in the contract manufacturing business for the time required by us to
successfully produce
28
and market our product candidates. If our contract manufacturer fails to deliver
the required quantities of our product candidates for clinical use on a timely
basis and at commercially reasonable prices, and we fail to find a replacement
manufacturer or develop our own manufacturing capabilities, our business,
financial condition and results of operations will be materially adversely
affected. Additional manufacturing risks include the following:
- We are dependent upon a sole source for clinical supply of ONYX-015;
- We are aware of only a limited number of manufacturers who could supply
ONYX-015 and other therapeutic viruses we may develop; and
- Substantial improvements in the current manufacturing process will be
required to produce commercial quantities of ONYX-015, and Onyx is
dependent upon a third party to develop such a process.
MARKET ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN
Our product candidates may not gain market acceptance among physicians,
patients, healthcare payers and the medical community. We may not achieve market
acceptance even if the requisite regulatory approvals are obtained for our
potential products or for products developed with collaboration partners.
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
including the following:
- Rate of adoption by healthcare practitioners;
- Indications for which the product is approved;
- Rate of the products' acceptance by the target population;
- Timing of market entry relative to competitive products;
- Availability of alternative therapies;
- Price of the Company's product relative to alternative therapies;
- Availability of third-party reimbursement;
- Extent of marketing efforts by the Company and third-party distributors or
agents retained by the Company; and
- Side effects or unfavorable publicity concerning our products or similar
products.
WE DO NOT HAVE MARKETING AND SALES EXPERIENCE
We do not have a marketing, sales or distribution capability. For certain
products, we may establish an internal marketing and sales force. We intend to
enter into arrangements with third parties to market and sell most of our
products. We may not be able to enter into marketing and sales arrangements with
others on acceptable terms, if at all. To the extent that we enter into
marketing and sales arrangements with other companies, our revenues, if any,
will depend on the efforts of others. These efforts may not be successful. If we
are unable to enter into third-party arrangements, then we must develop a
marketing and sales force, which may need to be substantial in size, in order to
achieve commercial success for any product candidate approved by the FDA. To the
extent that we enter into co-promotion or other licensing arrangements, we may
have to develop our own sales, marketing or distribution capability. We may not
successfully develop marketing and sales experience or have sufficient resources
to do so. If we do develop such capabilities, we will compete with other
companies that have experienced and well-funded marketing and sales operations.
If we fail to establish successful marketing and sales capabilities or fail to
enter into successful marketing arrangements with third parties, our business,
financial condition and results of operations will be materially adversely
affected.
29
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR OPERATE OUR BUSINESS
WITHOUT INFRINGING INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Our technology will be protected from unauthorized use by others only to the
extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends in part on our
ability to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from others
will be enforceable and afford protection against competitors. The patent
positions of biotechnology and pharmaceutical companies are highly uncertain and
involve complex legal and factual questions. Therefore, we cannot predict the
breadth of claims that will be allowed under our patent applications or their
enforceability. Our patents or patent applications, issued or pending,
respectively, may be challenged, invalidated or circumvented. Our patent rights
may not provide us with proprietary protection or competitive advantages against
competitors with similar technologies. Others may independently develop
technologies similar to ours or independently duplicate our technologies. Due to
the extensive time required for development, testing and regulatory review of
our potential products, our patents may expire or remain in existence for only a
short period following commercialization. This would reduce or eliminate any
advantage of the patents.
We cannot be certain that we were the first to make the inventions covered
by each of our issued or pending patent applications or that we were the first
to file patent applications for such inventions. We may need to license the
right to use third-party patents and intellectual property to continue
development and marketing of our products. We may not be able to acquire such
required licenses on acceptable terms, if at all. If we do not obtain such
licenses, we may need to design around other parties' patents, or we may not be
able to proceed with the development, manufacture or sale of our products. We
may face litigation to defend against claims of infringement, assert claims of
infringement, enforce our patents, protect our trade secrets or know-how, or
determine the scope and validity of others' proprietary rights. Patent
litigation is costly. In addition, we may require interference proceedings
declared by the United States Patent and Trademark Office to determine the
priority of inventions relating to our patent applications. Litigation or
interference proceedings could have a material adverse effect on our business,
financial condition and results of operations, and we could be unsuccessful in
our efforts to enforce our intellectual property rights.
WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE
We are engaged in a rapidly changing and highly competitive field. Other
products and therapies that currently exist or are being developed will compete
with the products we are seeking to develop and market. Many other companies are
actively seeking to develop products that have disease targets similar to those
we are pursuing. Some of these competitive products are in clinical trials. In
particular, 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.
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
30
Company to seek licenses to the technology or may impact the Company's research
by limiting the use of certain technology.
Many of these companies, either alone or together with their collaborative
partners, have substantially greater financial resources and larger research and
development staffs than we do. In addition, many of these competitors, either
alone or together with their collaborative partners, have significantly greater
experience than we do in:
- developing products;
- undertaking preclinical testing and human clinical trials;
- obtaining FDA and other regulatory approvals of products; and
- manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA approval or commercializing products before us. If we commence
commercial product sales, we will be competing against companies with greater
marketing and manufacturing capabilities, areas in which we have limited or no
experience.
We also face, and will continue to face, competition from academic
institutions, government agencies and research institutions. There are numerous
competitors working on products to treat each of the diseases for which we are
seeking to develop therapeutic products. In addition, any product candidate that
we successfully develop may compete with existing therapies that have long
histories of safe and effective use. Competition may also arise from:
- other drug development technologies and methods of preventing or reducing
the incidence of disease;
- new small molecules; or
- other classes of therapeutic agents.
Developments by competitors may render our product candidates or
technologies obsolete or noncompetitive. We face and will continue to face
intense competition from other companies for collaborative arrangements with
pharmaceutical and biotechnology companies for establishing relationships with
academic and research institutions, and for licenses to proprietary technology.
These competitors, either alone or with their collaborative partners, may
succeed with technologies or products that are more effective than ours.
WE HAVE A HISTORY OF LOSSES
To date we have engaged primarily in research and development. Our
development and general and administrative expenses have resulted in substantial
losses. As of December 31, 1998, we had an accumulated deficit of approximately
$63.3 million. We expect to incur significant and increasing operating losses
over at least the next several years as our research and development efforts and
preclinical testing and clinical trial activities expand. We expect that the
amount of operating losses will fluctuate significantly from quarter to quarter
as a result of increases or decreases in our research and development efforts,
the execution or termination of collaborative arrangements or the initiation,
success or failure of clinical trials.
OUR FUTURE PROFITABILITY IS UNCERTAIN
We have funded our research and development activities primarily from
private placements of preferred and common stock, the initial public offering of
our common stock, revenues generated from our collaborative arrangements and
bank loans. We expect that substantially all of our revenues for the foreseeable
future will result from payments under collaborative arrangements. To date, such
payments
31
have been in the form of reimbursement of research and development expenses,
license fees and milestone payments. Payments under our existing and any future
collaborative arrangements will be subject to significant fluctuation in both
timing and amount. Our revenues may not be indicative of our future performance
or of our ability to continue to achieve such milestones. Our revenues and
results of operations for any period may also not be comparable to the revenues
or results of operations for any other period.
We do not expect to generate revenues from the sale of products for the
foreseeable future. Our ability to achieve profitability depends upon our
success in entering into further collaborative agreements and our ability, alone
or with others, to complete development of our potential products, to obtain
required regulatory approvals and to successfully manufacture and market such
products. If a significant portion of these efforts is not successful, our
business, financial condition and results of operations will be materially
adversely affected.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS AND WE MAY NOT BE ABLE TO
OBTAIN REGULATORY APPROVALS
Our product candidates under development are subject to extensive and
rigorous domestic regulation. The FDA regulates, among other things, the
development, testing, manufacture, safety, efficacy, recordkeeping, labeling,
storage, approval, advertising, promotion, sale and distribution of
biopharmaceutical products. If our products are marketed abroad, they also are
subject to extensive regulation by foreign governments. None of our product
candidates has been approved for sale in the United States or any foreign
market. Because certain of the products that may result from our 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.
The regulatory review and approval process takes many years, requires the
expenditure of substantial resources, involves post-marketing surveillance, and
may involve ongoing requirements for post-marketing studies. Additional
governmental regulations may be promulgated that could delay regulatory approval
of the Company's or a corporate partner's potential products. Delays in
obtaining regulatory approvals may:
- adversely affect the successful commercialization of any drugs that Onyx
or our collaborative partners develop;
- impose costly procedures on Onyx or our collaborative partners;
- diminish any competitive advantages that Onyx or our collaborative
partners may attain; and
- adversely affect our receipt of revenues or royalties.
Certain material changes to an approved product such as manufacturing
changes or additional labeling claims are subject to further FDA review and
approval. Any required approvals, once obtained, may be withdrawn. Compliance
with other regulatory requirements may not be maintained. Further, if we fail to
comply with applicable FDA and other regulatory requirements at any stage during
the regulatory process, Onyx or our contract manufacturers may be subject to
sanctions, including:
- delays;
- warning letters;
- fines;
- product recalls or seizures;
- injunctions;
32
- refusal of the FDA to review pending market approval applications or
supplements to approval applications;
- total or partial suspension of production;
- civil penalties;
- withdrawals of previously approved marketing applications, and
- criminal prosecutions.
We expect to rely on our collaborative partners to file investigational new
drug applications and generally direct the regulatory approval process for many
of our products. Our collaborative partners may not be able to conduct clinical
testing or obtain necessary approvals from the FDA or other regulatory
authorities for any product candidates. If we fail to obtain required
governmental approvals, our collaborative partners will experience delays in or
be precluded from marketing products developed through our research. In
addition, the commercial use of our products will be limited. Delays and
limitations may materially adversely affect our business, financial condition
and results of operations.
We and our contract manufacturers also are required to comply with the
applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection by
the FDA. Such facilities must be approved before we can use them in commercial
manufacturing of our products. We or our contract manufacturers may not be able
to comply with the applicable good manufacturing practice requirements and other
FDA regulatory requirements. If we or our contract manufacturers fails to
comply, our business, financial condition and results of operations will be
materially adversely affected.
WE FACE PRODUCT LIABILITY RISKS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE INSURANCE
The use of any of our product candidates in clinical trials, and the sale of
any approved products, may expose us to liability claims resulting from such use
or sale of our products. These claims might be made directly by consumers,
healthcare providers or by pharmaceutical companies or others selling such
products. We may experience financial losses in the future due to product
liability claims. We have obtained limited product liability insurance coverage
for our clinical trials. We intend to expand our insurance coverage to include
the sale of commercial products if marketing approval is obtained for product
candidates in development. However, insurance coverage is becoming increasingly
expensive. We may not be able to maintain insurance coverage at a reasonable
cost or in sufficient amounts to protect us against losses. If a successful
product liability claim or series of claims is brought against us for uninsured
liabilities or in excess of insured liabilities, our business, financial
condition and results of operations may be materially adversely affected.
OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS
Our research and manufacturing activities involve the controlled use of
hazardous materials. We may incur substantial costs to comply with environmental
regulations if we develop manufacturing capacity. We cannot eliminate the risk
of accidental contamination or injury from these materials. In the event of an
accident or environmental discharge, we may be held liable for any resulting
damages, which may exceed our financial resources and may materially adversely
affect our business, financial condition and results of operations.
33
OUR STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock has been highly volatile and is likely
to continue to be volatile. Factors affecting our stock price include:
- fluctuations in our operating results;
- announcements of technological innovations or new commercial therapeutic
products by us or our competitors;
- published reports by securities analysts;
- progress with clinical trials;
- governmental regulation;
- changes in reimbursement policies;
- developments in patent or other proprietary rights;
- developments in our relationship with collaborative partners;
- public concern as to the safety and efficacy of our products; and
- general market conditions.
EXISTING STOCKHOLDERS HAVE SIGNIFICANT INFLUENCES OVER US
Executive officers and directors of the Company and other holders of 5% or
more of the capital stock of the Company, together with entities affiliated with
them, beneficially own approximately 43% of the common stock of the Company.
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.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS
Our 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 takeover attempts, including
transactions in which stockholders might receive a premium for their shares. Our
Certificate of Incorporation and Bylaws require that any action required or
permitted to be taken by our stockholders must be taken at a properly called
meeting of stockholders that may be called only by the Board of Directors, the
Chairman of the Board or the President. In addition, the Board of Directors has
the authority, without stockholder action, to fix the rights and preferences of
and issue shares of preferred stock, which may have the effect of delaying or
preventing a change in control.
WE DO NOT INTEND TO PAY DIVIDENDS
We intend to retain any future earnings to finance the growth and
development of our business and we do not plan to pay cash dividends in the
foreseeable future.
34
WE FACE UNCERTAINTY WITH YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize 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 receive
supplies from our venders, or operate our accounting and other internal systems.
If our software vendors are unable to address the Year 2000 compliance of their
products, or should our suppliers' operations be disrupted by the Year 2000
issue, then our ability to serve collaborative partners and develop products may
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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.
35
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol "ONXX" on May 9, 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.
HIGH LOW
--------- ---------
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
1998
First Quarter........................................................... 8.250 6.688
Second Quarter.......................................................... 11.500 5.875
Third Quarter........................................................... 7.688 3.500
Fourth Quarter.......................................................... 8.875 5.000
On March 19, 1999, the last sale price reported on the Nasdaq National
Market for the Company's common stock was $6.13 per share.
HOLDERS
There were approximately 330 stockholders of the common stock of the Company
as of December 31, 1998.
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.
36
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, 1998. The information presented should be read
in conjunction with the financial statements and notes included elsewhere in
this Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenue......................................... $ 11,314 $ 7,799 $ 8,302 $ 6,945 $ 5,616
Operating expenses:
Research and development............................ 25,383 20,715 14,767 13,290 10,492
General and administrative.......................... 5,275 5,089 3,527 2,807 2,355
---------- ---------- ---------- ---------- ----------
Loss from operations.................................. (19,344) (18,005) (9,992) (9,152) (7,231)
Interest income, net.................................. 1,685 1,980 1,575 725 468
---------- ---------- ---------- ---------- ----------
Net loss.............................................. $ (17,659) $ (16,025) $ (8,417) $ (8,427) $ (6,763)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic and diluted net loss per share(1)............... $ (1.56) $ (1.65) $ (1.31) $ (8.92) $ (8.67)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Shares used in computing basic and diluted net loss
per share(1)........................................ 11,289 9,707 6,401 945 780
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 32,160 $ 35,472 $ 40,329 $ 12,483 $ 16,360
Total assets.......................................... 37,207 41,858 45,779 17,756 22,800
Long-term debt, noncurrent portion.................... 2,382 4,336 99 544 906
Accumulated deficit................................... (63,271) (45,612) (29,587) (21,170) (12,743)
Total stockholders' equity............................ $ 21,619 $ 28,821 $ 40,923 $ 13,545 $ 18,309
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) Basic and diluted net loss per share for 1996, 1995 and 1994 have 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 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.
37
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 that 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 that 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. As of February 1, 1999, the collaboration with Bayer in the ras
program transitioned from research activities to co-development of a clinical
candidate.
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, 1998, the Company's accumulated deficit was approximately $63.3 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, 1998, 1997 AND 1996
REVENUE
Revenue from collaborative research and development agreements ("contract
revenue") with Bayer, Eli Lilly and Warner-Lambert accounted for approximately
96% of the Company's total revenue in 1998 and 99% of the Company's total
revenue in both 1997 and 1996. Contract revenue for the years ended December 31,
1998, 1997 and 1996 was $10.8 million, $7.7 million and $8.2 million,
respectively. Contract revenue recorded from Bayer accounted for approximately
$3.7 million or 34% of total contract revenue for 1998, $4.7 million or 61% of
total contract revenue for 1997 and $5.2 million or 64% of total contract
revenue for 1996. Contract revenue recorded from Eli Lilly accounted for
approximately $1.2 million or 11% of total contract revenue in 1998, $1.2
million or 16% of total contract revenue in 1997 and $910,000 or 11% of total
contract revenue in 1996. Contract revenue recorded from Warner-Lambert for the
cell cycle program accounted for approximately $2.8 million or 26% of total
contract revenue in 1998, $1.8 million or 23% of total contract revenue in 1997
and $2.1 million or 25% of total contract revenue in 1996. Contract revenue
recorded from Warner-Lambert for the inflammation program was $3.1 million or
29% of total contract revenue in 1998. 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
38
for 1999 will be less than 1998 due to the conclusion of the research funding
phase of the Bayer collaboration agreement on January 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $25.4 million, $20.7 million and
$14.8 million during the years ended December 31, 1998, 1997 and 1996,
respectively. The 1998 expense increase of 23% was primarily due to additional
costs associated with Phase I and Phase II clinical trials of ONYX-015, the lead
product in the Company's p53 program. Additionally, 1998 expenses increased over
the same period in 1997 due to higher research expenses in the Company's
therapeutic virus program. The 1997 expense increase of 40% 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. Research under the Company's collaboration
agreements with Bayer, Eli Lilly and Warner-Lambert 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 in future periods,
which may 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 $5.3 million, $5.1 million and $3.5
million during the years ended December 31, 1998, 1997 and 1996, respectively.
General and administrative expenses in 1998 were essentially unchanged over
1997. The 1997 expense increase of 44% over the same period in 1996 was
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 $1.7 million, $2.0 million and $1.6
million during the years ended December 31, 1998, 1997 and 1996, respectively.
Net interest income decreased by 15% in 1998 primarily due to interest expense
on a line of credit arrangement entered into in December 1997. Net interest
income increased 25% in 1997 over the same period in 1996 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.
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, 1998, the Company had cash and investments of $32.2 million
compared to $35.5 million and $40.3 million at December 31, 1997 and 1996,
respectively. The decrease of $3.3 million in 1998 was primarily due to cash
used in operations of $10.5 million, debt service of $2.1 million and capital
expenditures of $1.3 million primarily offset by the issuance of 1,403,508
shares of common stock to two institutional investors, raising an additional
$10.0 million in net proceeds. 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.
39
The Company's cash used in operations was $10.5 million in 1998, $11.8
million in 1997 and $5.8 million in 1996. This cash was used primarily to fund
increasing levels of research and development and the general and administrative
expenses necessary to support increased operations. Capital expenditures
amounted to $1.3 million in 1998, as compared to $2.2 million in 1997 and $1.5
million in 1996. The Company expects to make expenditures for capital additions
of approximately $1.5 million in 1999.
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, $219,000 and $272,000, respectively, for the
years ended December 31, 1998, 1997 and 1996. Amortization of deferred
compensation over the next fiscal year, 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 into the year 2000. 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.
The Company has appointed a task force comprised of certain members of
management to initiate and monitor a Year 2000 ("Y2K") program. The Company's
plan to resolve the Y2K issue involves the following three phases: assessment,
implementation of action plans and testing of systems to ensure compliance. The
Company has completed its assessment phase and has determined that the financial
and information technology systems of the Company are Y2K compliant. The Company
has also identified certain scientific research and development systems
applications that need to be upgraded or replaced in order to be Y2K compliant.
The Company intends to upgrade or replace the computer systems, software and
instrumentation that it deems critical to its operation by September 1, 1999.
There can be no assurance that the Company will be able to upgrade any or all of
its systems in accordance with its Y2K program or, once upgraded, that the
systems will be Y2K compliant.
The Company is gathering information about the Y2K compliance status of its
significant suppliers and other third parties with which it has relationships.
The Company is requesting that its outside suppliers and other third parties
notify the Company in writing of the status of their Y2K compliance programs. To
date, the Company is not aware of any outside supplier or other third party with
a Y2K issue that would
40
materially impact the Company's business operations. However, there can be no
assurance that the Company's outside suppliers and other third parties will be
successful in their Y2K compliance efforts.
The Company believes that its costs associated with the upgrade and/or
conversion of existing computer software and hardware relating to the Y2K issue
will be less than $400,000 based on modifications to date as well as the amount
of scientific research and development equipment that may have to be upgraded.
In the event that the Company does not upgrade its systems in a timely
manner, the Company may encounter problems with the completion of certain
scientific research and development experiments. The Company does not currently
have a contingency plan in the event that the Company's or its significant
suppliers' systems are not Y2K compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. By policy, the
Company places its investments with high quality debt security issuers, limits
the amount of credit exposure to any one issuer, limits duration by restricting
the term, and holds investments to maturity except under rare circumstances. The
Company classifies its cash equivalents or short-term investments as fixed rate
if the rate of return on an instrument remains fixed over its term. As of
December 31, 1998, all of the Company's cash equivalents and short-term
investments are classified as fixed rate.
The table below presents the amounts and related weighted interest rates of
the Company's cash equivalents and short-term investments at December 31, 1998:
FAIR VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
------------- ----------------- -------------
Cash equivalents, fixed rate......................................... Daily 21.4 5.39%
Short-term investments, fixed rate................................... 0 - 1 year 5.2 5.69%
Short-term investments, fixed rate................................... 1 - 2 years 5.6 5.83%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on pages 47 to
64 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
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.
42
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 47 of this Report.
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because the information
required to be set forth therein is not applicable.
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ ----------------------------------------------------------------------------------------------------
3.1+ Restated Certificate of Incorporation of the 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.
43
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ ----------------------------------------------------------------------------------------------------
10.5+* Technology Transfer Agreement dated April 24, 1992 between Chiron Corporation and the Company, as
amended in the Chiron Onyx HPV Addendum dated December 2, 1992, in the Amendment dated February 1,
1994, in the Letter Agreement dated May 20, 1994 and in the Letter Agreement dated March 29, 1996.
10.6+ Scientific Advisory Board Consulting Agreement between Dr. Frank McCormick and the Company, as of
March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank McCormick and the Company dated April 17,
1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the Company dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the Company dated November 1, 1993 and October
21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Company, dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Company, dated January 23, 1995.
10.11+ Credit Terms and Conditions dated October 28, 1995 between the Company and Imperial Bank; Addendum
dated October 28, 1995; and Modification Letter dated December 29, 1995.
10.12+ Equipment Financing Agreement Number 10762 between Lease Management Services, Inc. and the Company,
dated December 30, 1993 and Addendum thereto dated December 30, 1993.
10.13+ 1996 Equity Incentive Plan.
10.14+ 1996 Non-Employee Directors' Stock Option Plan.
10.15+ 1996 Employee Stock Purchase Plan.
10.16+ Lease by and between Hall Properties, Inc. and the Company dated September 9, 1992, the First
Amendment thereto dated April 21, 1993 and the Second Amendment thereto dated May 11, 1996.
10.17+ Form of Indemnity Agreement to be signed by executive officers and directors of the Company.
10.18+ Credit Terms and Conditions dated March 10, 1997 between the Company and Imperial Bank.
10.19+ Letter Agreement between Dr. Allan Balmain and the Company dated August 26, 1996, as amended March
13, 1997.
10.20+* Amended and restated Research, Development and Marketing Collaboration Agreement dated May 2, 1995
between the Company and Warner-Lambert Company.
10.21+* Research, Development and Marketing Collaboration Agreement dated July 31, 1997 between the Company
and Warner-Lambert Company.
10.22+ Addendum to credit Terms and Conditions dated March 10, 1997 between the Company and Imperial Bank.
10.23+* Amendment to the Amended and Restated Research, Development and Marketing Collaboration Agreement,
dated December 15, 1997, between the Company and Warner-Lambert Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 46.
44
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ ----------------------------------------------------------------------------------------------------
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 Annual Report on Form 10-K for the year ended
December 31, 1997, the Company's Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1996, March 31, 1997 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.
(B) REPORTS ON FORM 8-K
None
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Richmond, County of Contra Costa, State of California, on the 30(th) day
of March, 1999.
ONYX PHARMACEUTICALS, INC.
By: /s/ HOLLINGS C. RENTON
-----------------------------------------
Hollings C. Renton
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hollings C. Renton and Marilyn E. Wortzman or
either of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K, and to file the same, with exhibits thereto
and other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ HOLLINGS C. RENTON Officer and Director
- ------------------------------ (Principal Executive and March 30, 1999
Hollings C. Renton Financial Officer)
/s/ MARILYN E. WORTZMAN
- ------------------------------ Controller (Principal March 30, 1999
Marilyn E. Wortzman Accounting Officer)
/s/ MICHAEL J. BERENDT
- ------------------------------ Director March 30, 1999
Michael J. Berendt
/s/ SAMUEL D. COLELLA
- ------------------------------ Director March 30, 1999
Samuel D. Colella
/s/ PAUL GODDARD
- ------------------------------ Director March 30, 1999
Paul Goddard
- ------------------------------ Director , 1999
Edward E. Penhoet
/s/ NICOLE VITULLO
- ------------------------------ Director March 30, 1999
Nicole Vitullo
/s/ WENDELL WIERENGA
- ------------------------------ Director March 30, 1999
Wendell Wierenga
46
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, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 19, 1999
47
ONYX PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Current Assets:
Cash and cash equivalents................................................................. $ 21,368 $ 18,828
Short-term investments.................................................................... 10,792 16,644
Other current assets...................................................................... 609 1,002
--------- ---------
Total current assets.................................................................. 32,769 36,474
Property and equipment, net................................................................. 3,730 4,562
Notes receivable from related parties....................................................... 649 812
Other assets................................................................................ 59 10
--------- ---------
$ 37,207 $ 41,858
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................... $ 2,371 $ 1,319
Accrued liabilities....................................................................... 2,456 1,731
Accrued clinical trials and related expenses.............................................. 2,176 1,704
Accrued compensation...................................................................... 658 496
Deferred revenue.......................................................................... 3,318 1,209
Long-term debt, current portion........................................................... 2,199 2,130
--------- ---------
Total current liabilities............................................................. 13,178 8,589
Long-term debt, noncurrent portion.......................................................... 2,382 4,336
Deferred rent............................................................................... 28 112
Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and
outstanding............................................................................. -- --
Common stock, $0.001 par value; 25,000,000 shares authorized; 11,452,457 and 9,850,518
shares issued and outstanding as of December 31, 1998 and 1997, respectively............ 11 10
Additional paid-in capital................................................................ 85,073 74,836
Deferred compensation....................................................................... (194) (413)
Accumulated deficit......................................................................... (63,271) (45,612)
--------- ---------
Total stockholders' equity............................................................ 21,619 28,821
--------- ---------
$ 37,207 $ 41,858
--------- ---------
--------- ---------
See accompanying notes.
48
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue:
Contract revenue ($9,607, $6,491 and $7,250 from related parties during
1998, 1997 and 1996, respectively)........................................ $ 10,808 $ 7,691 $ 8,160
Grant and other revenue..................................................... 506 108 142
---------- ---------- ----------
Total revenue........................................................... 11,314 7,799 8,302
Operating expenses:
Research and development.................................................... 25,383 20,715 14,767
General and administrative.................................................. 5,275 5,089 3,527
---------- ---------- ----------
Total operating expenses................................................ 30,658 25,804 18,294
---------- ---------- ----------
Loss from operations.......................................................... (19,344) (18,005) (9,992)
Interest income............................................................... 2,225 2,030 1,685
Interest expense.............................................................. (540) (50) (110)
---------- ---------- ----------
Net loss................................................................ $ (17,659) $ (16,025) $ (8,417)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted net loss per share.......................................... $ (1.56) $ (1.65) $ (1.31)
---------- ---------- ----------
---------- ---------- ----------
Shares used in computing basic and diluted net loss per share................. 11,289 9,707 6,401
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
49
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,
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 per share......... -- -- 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........................ -- -- 9,514,285 10 71,132 (632) (29,587) 40,923
Exercise of stock options at
prices ranging from $0.0071
to $10.875 per share........ -- -- 109,781 -- 116 -- -- 116
Issuance of common stock to
Warner-Lambert.............. -- -- 192,941 -- 3,333 -- -- 3,333
Amortization of deferred
compensation................ -- -- -- -- -- 219 -- 219
Issuance of common stock
pursuant to employee stock
purchase plan............... -- -- 33,511 -- 255 -- -- 255
Net loss...................... -- -- -- -- -- -- (16,025) (16,025)
----------- ------ ---------- ------ ---------- ----- ----------- -------------
50
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, 1997
(carried forward)........... -- -- 9,850,518 10 74,836 (413) (45,612) 28,821
Balances at December 31, 1997
(brought forward)........... -- $ -- 9,850,518 $10 $74,836 $(413) $(45,612) $ 28,821
Exercise of stock options at
prices ranging from $0.0071
to $10.875 per share........ -- -- 153,870 -- 159 -- -- 159
Issuance of common stock for
private placement (net of
issuance costs of $154)..... -- -- 1,403,508 1 9,845 -- -- 9,846
Amortization of deferred
compensation................ -- -- -- -- -- 219 -- 219
Issuance of common stock
pursuant to employee stock
purchase plan............... -- -- 44,561 -- 233 -- -- 233
Net loss...................... -- -- -- -- -- -- (17,659) (17,659)
----------- ------ ---------- ------ ---------- ----- ----------- -------------
Balances at December 31,
1998........................ -- $ -- 11,452,457 $11 $85,073 $(194) $(63,271) $ 21,619
----------- ------ ---------- ------ ---------- ----- ----------- -------------
----------- ------ ---------- ------ ---------- ----- ----------- -------------
See accompanying notes.
51
ONYX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................................... $ (17,659) $ (16,025) $ (8,417)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 2,022 1,843 1,536
Loss on sale of fixed assets.............................................. 10 1 3
Forgiveness of notes receivable........................................... 127 75 41
Amortization of deferred compensation..................................... 219 219 272
Changes in assets and liabilities:
Other current assets.................................................... 393 (364) (238)
Other assets............................................................ (49) 210 (5)
Accounts payable........................................................ 1,052 626 206
Accrued clinical trials and related expenses............................ 472 1,573 --
Accrued liabilities..................................................... 726 585 451
Accrued compensation.................................................... 162 57 97
Deferred rent........................................................... (84) (161) 42
Deferred revenue........................................................ 2,109 (422) 258
---------- ---------- ----------
Net cash used in operating activities................................. (10,500) (11,783) (5,754)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments......................................... (12,492) (35,149) (74,769)
Sales and maturities of short-term investments.............................. 18,344 22,576 79,402
Capital expenditures........................................................ (1,250) (2,215) (1,515)
Notes receivable from related parties....................................... 37 (491) --
Proceeds from sale of fixed assets.......................................... 49 5 1
---------- ---------- ----------
Net cash provided by (used in) investing activities................... 4,688 (15,274) 3,119
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt............................................. 225 6,371 --
Payments on long-term debt.................................................. (2,110) (448) (409)
Net proceeds from issuances of common stock, net of repurchases............. 10,237 3,704 35,523
---------- ---------- ----------
Net cash provided by financing activities............................. 8,352 9,627 35,114
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........................ 2,540 (17,430) 32,479
Cash and cash equivalents at beginning of year.............................. 18,828 36,258 3,779
---------- ---------- ----------
Cash and cash equivalents at end of year.............................. $ 21,368 $ 18,828 $ 36,258
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the year............................................... $ 540 $ 50 $ 110
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
52
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 that 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.
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
that supports the Company's research effort in defined research projects. These
grants generally provide for reimbursement of approved costs incurred as defined
in the various grants. Revenue of $456,000, $108,000 and $130,000 was recognized
in 1998, 1997 and 1996, respectively. Revenue associated with these grants was
recognized as costs under each grant were incurred.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct and
research-related overhead expenses. Research and development expenses under the
collaborative research agreements approximate the revenue recognized under the
collaborative agreements, exclusive of milestone payments received.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity from the
date of purchase of three months or less to be cash equivalents. All other
liquid investments are classified as short-term investments. These instruments
consist primarily of corporate commercial paper and money market funds. The
Company limits its concentration of risk by diversifying its investments among a
variety of industries and issuers.
53
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 1998 and 1997, all securities are designated
as available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in stockholders' equity. The
amortized cost of securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. The cost of securities sold is based on the specific
identification method. The estimated fair values have been determined by the
Company using available market information. Realized gains and losses and
declines in value judged to be other than temporary for available-for-sale
securities are included in the statements of operations. There were no such
gains or losses in each of the three years ended at December 31, 1998.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years. Leasehold
improvements are amortized over the lesser of the lease term or the estimated
useful lives of the related assets, generally three to five years.
STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees using the
intrinsic-value method and, thus, recognizes no compensation expense for options
granted to employees with exercise prices equal to the fair market value of the
Company's common stock on the date of the grant.
NET LOSS PER SHARE
Basic net loss per share and diluted net loss per share are presented in
conformity with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," for all
periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Basic and diluted pro forma net
loss per share has been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
54
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
---------------------------------
1998 1997 1996
---------- ---------- ---------
Net loss........................................................................ $ (17,659) $ (16,025) $ (8,417)
---------- ---------- ---------
---------- ---------- ---------
BASIC AND DILUTED
Weighted average shares of common stock outstanding used in computing basic and
diluted net loss per share.................................................... 11,289 9,707 6,401
---------- ---------- ---------
---------- ---------- ---------
Basic and diluted net loss per share............................................ $ (1.56) $ (1.65) $ (1.31)
---------- ---------- ---------
---------- ---------- ---------
PRO FORMA BASIC AND DILUTED
Shares used in computing basic and diluted net loss per share................... 6,401
Adjusted to reflect the effect of the assumed conversion of preferred stock from
the date of issuance.......................................................... 1,875
---------
Shares used in computing pro forma basic and diluted net loss per share......... 8,276
---------
---------
Pro forma basic and diluted net loss per share.................................. $ (1.02)
---------
---------
The following potentially dilutive outstanding securities were not
considered in the computation of diluted net loss per share because they would
be antidilutive for each of the years ended December 31:
1998 1997 1996
--------- --------- ---------
Stock options for the purchase of shares of common stock................................. 1,483 1,404 1,157
Shares subject to repurchase............................................................. 3 9 31
--------- --------- ---------
Total.................................................................................... 1,486 1,413 1,188
--------- --------- ---------
--------- --------- ---------
COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted FASB Statement No. 130 ("SFAS No.
130"), "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of SFAS No. 130 had no impact on the Company's net loss or
stockholders' equity. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive loss.
During the years ended December 31, 1998 and 1997, total comprehensive loss
approximated net loss.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 for the year ending December 31, 1999. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities
55
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related to those instruments as well as other hedging activities. Because the
Company currently holds no derivative financial instruments and does not
currently engage in hedging activities, adoption of SFAS No. 133 is expected to
have no material impact on the Company's financial condition or results of
operations.
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 $3,700,000, $4,686,000 and
$5,194,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Expenses related to this contract were $4,341,000, $5,074,000 and $6,018,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Deferred revenue
of $1,424,000 as of December 31, 1998 represents payments for which revenue was
not recognized as the Company had not completed all of the performance
obligations related to this funding as of December 31, 1998.
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 paid 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
56
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 2. COLLABORATIVE AGREEMENTS (CONTINUED)
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.
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.
Revenue recognized under these agreements was $2,782,000, $1,805,000 and
$2,056,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Expenses related to these agreements were $3,092,000, $2,951,000 and $3,316,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
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. Revenue
recognized under this agreement was $3,125,000 for 1998. No revenues were
recorded in 1997 as all related performance obligations for 1997 had not been
achieved by year-end. Expenses related to this agreement were $2,274,000,
$1,734,000 and $1,194,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
ELI LILLY & COMPANY
On May 15, 1995, the Company entered into a one-year collaborative research
and license agreement with Eli Lilly & Company ("Eli Lilly") to discover and
develop targets for drug discovery in the modulation of the BRCA1 breast cancer
gene pathway. Research focused around the BRCA1 gene licensed by Eli Lilly from
Myriad Genetics, Inc. Eli Lilly retains exclusive rights to the BRCA1 gene. In
connection with this agreement, Eli Lilly purchased 300,000 shares of the
Company's Series D preferred stock at $2.00 per share. The preferred shares
converted into 42,022 shares of common stock upon closing of the initial public
offering.
On June 12, 1996, the agreement with Eli Lilly was expanded and extended
through June 12, 1999. During 1996 a scientific milestone was achieved for which
Onyx received and recorded revenue of $685,000.
57
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 2. COLLABORATIVE AGREEMENTS (CONTINUED)
Revenue recognized under this agreement was $1,200,000, $1,200,000 and
$910,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Expenses related to this agreement were $1,211,000, $1,371,000 and $1,034,000
for the years ended December 31, 1998, 1997 and 1996, respectively. Deferred
revenue of $300,000 as of December 31, 1998 represents payment for research to
be performed in the first quarter of 1999.
NOTE 3. INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
ESTIMATED FAIR VALUE
--------------------
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Cash equivalents:
U.S. corporate securities............................................. $ -- $ 6,057
Foreign corporate securities.......................................... -- 6,038
--------- ---------
Total available-for-sale securities................................. -- 12,095
Money market funds.................................................... 21,368 6,731
Cash.................................................................. -- 2
--------- ---------
Total cash and cash equivalents..................................... $ 21,368 $ 18,828
--------- ---------
--------- ---------
Short-term investments:
U.S. corporate securities............................................. $ 10,792 $ 10,137
Foreign corporate securities.......................................... -- 2,007
U.S. government securities............................................ -- 2,000
--------- ---------
Total available-for-sale securities................................. 10,792 14,144
Certificates of deposit............................................... -- 2,500
--------- ---------
Total short-term investments........................................ $ 10,792 $ 16,644
--------- ---------
--------- ---------
Total available-for-sale securities included in cash, cash equivalents
and short-term investments............................................ $ 10,792 $ 26,239
--------- ---------
--------- ---------
As of December 31, 1998 and 1997, the difference between the fair value and
the amortized cost of available-for-sale securities was insignificant. The
average portfolio maturity is approximately three months, and the contractual
maturity of each of the investments does not exceed one and three-quarters
years. In the short-term investment portfolio, $5.2 million has a maturity of
less than one year and $5.6 million has a maturity of one to two years.
58
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Machinery and equipment.................................................. $ 6,753 $ 6,272
Furniture and fixtures................................................... 548 499
Leasehold improvements................................................... 4,068 3,999
--------- ---------
11,369 10,770
Less accumulated depreciation and amortization........................... (7,639) (6,208)
--------- ---------
$ 3,730 $ 4,562
--------- ---------
--------- ---------
NOTE 5. LONG-TERM DEBT
LINE OF CREDIT
The Company borrowed $6,596,000 under a line of credit arrangement with a
bank that bears an interest rate of prime plus 1%. Equal monthly payments of
principal plus interest are required in order to repay the outstanding balance
by January 15, 2001. The line is secured by certain assets of the Company and
contains covenants related to maintaining debt-to-equity ratios, tangible net
worth minimums, cash and investment balances, as well as a restriction on paying
dividends or repurchasing stock. As of December 31, 1998, $4,581,000 was
outstanding on the line of credit at an interest rate of 8.75%.
NOTE 6. FACILITY LEASE
The Company leases its facility under an operating lease that expires in
April 2000, with renewal options at the end of the lease for two subsequent
five-year terms. 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, 1998 are as follows (in
thousands):
YEAR ENDING DECEMBER 31:
1999.............................................................. $ 480
2000.............................................................. 160
---------
$ 640
---------
---------
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $408,000, $399,000 and $370,000, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company has loans with certain employees and a former employee of which
$649,000 and $812,000 were outstanding at December 31, 1998 and 1997,
respectively. These loans bear interest at rates ranging from 0.0% to 6.49% per
annum.
59
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
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
1998, $75,000 of the outstanding balance was forgiven, which brings the total
forgiven to $150,000 at December 31, 1998.
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. An additional 300,000 shares
were authorized for issuance at the Company's May 1998 annual meeting of
stockholders. The Incentive Plan provides for grants to employees and
consultants of the Company. The exercise price of options granted under the
Incentive Plan is determined by the Board of Directors, but cannot be less than
100% of the fair market value of the common stock on the date of grant.
In March 1996, the Board adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 100,000 shares of common stock. In May
1998, at the Company's annual meeting of stockholders, an additional 75,000
shares were authorized for issuance. The Purchase Plan is designed to allow
eligible employees of the Company to purchase shares of common stock through
periodic payroll deductions. The price of common stock purchased under the
Purchase Plan will be equal to 85% 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.
60
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes option activity under all plans:
OUTSTANDING AND EXERCISABLE STOCK OPTIONS
-------------------------------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE
AVAILABLE NUMBER OF SHARES PRICE
--------------- ----------------- -------------
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 forfeited........................................... 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 forfeited........................................... 83,145 (83,145) $ 8.32
--------------- -----------------
Balances at December 31, 1997................................. 534,922 1,403,506 $ 6.46
Shares authorized........................................... 300,000 -- --
Options granted............................................. (350,106) 350,106 $ 7.15
Options exercised........................................... -- (153,870) $ 1.03
Options forfeited........................................... 116,532 (116,532) $ 6.76
--------------- -----------------
Balances at December 31, 1998................................. 601,348 1,483,210 $ 7.17
--------------- -----------------
--------------- -----------------
The range of exercise prices for options outstanding at December 31, 1998
was $0.0071 to $13.75. The following table summarizes information about options
outstanding and exercisable at December 31, 1998:
OUTSTANDING AND EXERCISABLE OPTIONS
------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE AVERAGE
NUMBER OF CONTRACTUAL LIFE REMAINING EXERCISE
RANGE OF EXERCISE PRICE SHARES (IN YEARS) PRICE
- ----------------------------------------- ---------- --------------------------- -------------
$0.01-$1.07.............................. 359,708 5.79 $ 0.84
$4.00-$7.38.............................. 305,331 9.29 $ 6.53
$7.5-$10.875............................. 599,253 8.04 $ 9.54
$10.94-$13.75............................ 218,918 8.07 $ 11.89
----------
Total................................ 1,483,210
----------
----------
At December 31, 1998, 1997 and 1996, 2,709, 9,391 and 30,862 shares of
common stock, respectively, were subject to repurchase. The Company has reserved
2,975,000 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
61
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
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,
$219,000 and $272,000 was recorded in 1998, 1997 and 1996, respectively.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for 1996. The statement encourages entities to
adopt the fair value based method of accounting for employee stock options, as
opposed to the method which measures compensation cost for those plans using the
intrinsic value-based accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for the stock option plans except the amortization of deferred
compensation described above. Had the compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date for
awards in 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
Net loss--as reported........................................................... $ (17,659) $ (16,025) $ (8,417)
Net loss--pro forma............................................................. $ (19,194) $ (17,402) $ (8,797)
Net loss per share--as reported................................................. $ (1.56) $ (1.65) $ (1.31)
Net loss per share--pro forma................................................... $ (1.70) $ (1.79) $ (1.37)
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,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Risk-free interest rate...................................................... 5.30% 6.31% 6.27%
Expected life................................................................ 4.0 years 3.3 years 3.7 years
Expected volatility.......................................................... .746 .750 .807
Expected dividends........................................................... None None None
Weighted average option fair value........................................... $4.09 $5.74 $9.77
Options granted at below fair value:
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Risk-free interest rate...................................................... -- -- 5.14%
Expected life................................................................ -- -- 3.6 years
Expected volatility.......................................................... -- -- N/A
Expected dividends........................................................... -- -- None
Weighted average option fair value........................................... -- -- $5.53
62
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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, 1998 and 1997:
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Net operating loss carryforward....................................... $ 21,700 $ 14,159
Research and development credit carryforward.......................... 1,700 2,060
Capitalized research and development.................................. 3,700 2,082
Other................................................................. 100 603
---------- ----------
Gross deferred tax assets............................................. 27,200 18,904
Valuation allowance................................................... (27,200) (18,904)
---------- ----------
Net deferred tax assets............................................... $ -- $ --
---------- ----------
---------- ----------
The valuation allowance increased by $8,296,000 and $7,122,000 in the fiscal
years 1998 and 1997, respectively.
At December 31, 1998, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $59,300,000 and
$25,300,000, respectively, which expire in the years 2000 through 2018. At
December 31, 1998, the Company has research and development credit carryforwards
for federal income tax purposes of approximately $2,700,000 which expire in the
years 2011 through 2018. At December 31, 1998, the Company has research and
development credit carryforwards for state income tax purposes of approximately
$1,000,000 which do not expire.
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 (UNAUDITED)
BAYER AGREEMENT
On February 1, 1999, Bayer and the Company signed an amendment to their
collaboration agreement. Based on the amendment, a lead development compound was
named, and the focus of the collaboration moved from research to co-development.
The Company has the opportunity to co-develop collaboration compounds worldwide
excluding Japan, in return for up to a 50 percent share of profits if the
Company co-promotes the product in the United States. To assist in funding part
of its share of development costs, the Company could receive up to $40,000,000
in advances on the achievement of clinical milestones.
63
ONYX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 10. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
The amendment also states that upon the completion by the Company of certain
deliverables, Bayer will pay to the Company the final payment of approximately
$376,000 due in support of the research under the research portion of the
agreement. It is anticipated this will occur in 1999.
REDUCTION IN FORCE
In order to refocus the Company's resources on more near-term product
opportunities, in February 1999, the Company reduced its workforce by 14 regular
full-time employees as part of a corporate downsizing and incurred an expense of
approximately $250,000.
64
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ ----------------------------------------------------------------------------------------------------
3.1+ Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Stock Certificate.
4.3+ Warrant to Purchase Series C Preferred Stock issued to Lease Management Services, Inc. on December
30, 1993.
4.4+ Amended and Restated Information and Registration Rights Agreement dated May 30, 1994 and as amended
through May 16, 1995.
4.5+ Preferred Stock Purchase Agreement between the Company and Warner-Lambert dated May 4, 1995.
4.6+ Stock Purchase Agreement, dated January 12, 1998, among the Company, International Biotechnology
Trust plc and Lombard Odier & Cie.
10.1+* Collaboration Agreement between Bayer Corporation (formerly Miles, Inc.) and the Company dated April
22, 1994.
10.1(i)+* Amendment to Collaboration Agreement between Bayer Corporation and the Company dated April 4, 1996.
10.2+* Research, Development and Marketing Collaboration Agreement between Warner-Lambert Company and the
Company, dated May 2, 1995.
10.2(i)+ Waiver of Certain Rights under the Research, Development and Marketing Agreement by Warner-Lambert
Company dated as of March 28, 1996.
10.3+* Compound Library Access Agreement between Warner-Lambert Company and the Company, dated May 2, 1995.
10.4+* Research and License Agreement between Eli Lilly & Company and the Company dated May 15, 1995 and
the Collaborative Research and License Agreement between Eli Lilly and the Company dated June 12,
1996.
10.5+* Technology Transfer Agreement dated April 24, 1992 between Chiron Corporation and the Company, as
amended in the Chiron Onyx HPV Addendum dated December 2, 1992, in the Amendment dated February 1,
1994, in the Letter Agreement dated May 20, 1994 and in the Letter Agreement dated March 29, 1996.
10.6+ Scientific Advisory Board Consulting Agreement between Dr. Frank McCormick and the Company, as of
March 29, 1996.
10.6(i)+ Letter Agreement for Consulting Services between Dr. Frank McCormick and the Company dated April 17,
1996.
10.7+ Promissory Note by Dr. Frank McCormick payable to the Company dated May 15, 1992.
10.8+ Promissory Notes by Dr. Frank McCormick payable to the Company dated November 1, 1993 and October
21, 1994.
10.9+ Letter Agreement between Dr. Gregory Giotta and the Company, dated May 26, 1995.
10.10+ Letter Agreement between Dr. William Gerber and the Company, dated January 23, 1995.
65
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ ----------------------------------------------------------------------------------------------------
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 46.
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 Annual Report on Form 10-K for the year ended
December 31, 1997, the Company's Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1996, March 31, 1997 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.
66