SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-28298

ONYX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware		94-3154463
(State or other jurisdiction of incorporation or organization)		(IRS Employer ID Number)

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

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.

ý Yes o No

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 21,594,876 as of August 5, 2002.

ONYX PHARACEUTICALS, INC

INDEX

PART I: FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)

	Condensed Balance Sheets – June 30, 2002 and December 31, 2001

	Condensed Statements of Operations – Three and Six Months Ended June 30, 2002 and 2001

	Condensed Statements of Cash Flows – Six Months ended June 30, 2002 and 2001

	Notes to Condensed Financial Statements – June 30, 2002

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

PART II: OTHER INFORMATION

Item 2.	Changes in Securities and Use of Proceeds

Item 4.	Submission of Matters to a Vote of Security Holders

Item 6.	Exhibits and Reports on Form 8-K

SIGNATURES

ONXY PHARMACEUTICALS, INC.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

CONDENSED BALANCE SHEETS

(In thousands)

	June 30, 2002			December 31, 2001
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	32,809		$	39,568
Marketable securities	23,066			18,898
Other current assets	1,937			900
Total current assets	57,812			59,366

Property and equipment, net	3,052			3,597
Notes receivable from related parties	275			319
Other assets	2,370			2,500
	$	63,509		$	65,782

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,058		$	671
Accrued liabilities	859			1,079
Accrued clinical trials and related expenses	7,885			6,810
Accrued compensation	503			672
Deferred revenue	552			1,465
Total current liabilities	10,857			10,697

Commitments

Stockholders’ equity:
Common stock	22			19
Additional paid-in capital	187,412			168,092
Accumulated other comprehensive income	14			98
Accumulated deficit	(134,796		)	(113,124		)
Total stockholders’ equity	52,652			55,085
	$	63,509		$	65,782

See accompanying notes.

ONXY PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Revenue:
Contract revenue from related parties	$	707		$	5,259		$	1,537		$	9,910
Contract and other revenue	—			83			—			168
Total revenue	707			5,342			1,537			10,078

Operating expenses:
Research and development	11,357			10,288			21,106			19,673
General and administrative	1,549			1,831			2,942			3,563
Total operating expenses	12,906			12,119			24,048			23,236

Loss from operations	(12,199		)	(6,777		)	(22,511		)	(13,158		)

Interest income, net	320			888			664			2,026
Other income	—			—			175			—

Net loss	$	(11,879	)	$	(5,889	)	$	(21,672	)	$	(11,132	)

Basic and diluted net loss per share	$	(0.58	)	$	(0.32	)	$	(1.11	)	$	(0.61	)

Shares used in computing basic and diluted net loss per share	20,355			18,434			19,459			18,260

See accompanying notes.

ONXY PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOW

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2002			2001
Cash flows from operating activities:
Net loss	$	(21,672	)	$	(11,132	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	723			758
Other	179			103
Changes in assets and liabilities:
Receivable from related party	—			(2,557		)
Other current assets	(1,045		)	(701		)
Other assets	130			(1,949		)
Accounts payable	387			(278		)
Accrued liabilities	(220		)	414
Accrued clinical trials and related expenses	1,075			3,759
Accrued compensation	(169		)	(249		)
Deferred revenue	(913		)	(708		)
Net cash used in operating activities	(21,525		)	(12,540		)
Cash flows from investing activities:
Purchases of marketable securities	(17,924		)	(23,952		)
Sales and maturities of marketable securities	13,672			5,357
Capital expenditures	(176		)	(1,440		)
Notes receivable from related parties	44			47
Net cash used in investing activities	(4,384		)	(19,988		)
Cash flows from financing activities:
Payments on long–term debt	—			(183		)
Net proceeds from issuances of common stock	19,150			5,276
Net cash provided by financing activities	19,150			5,093
Net decrease in cash and cash equivalents	(6,759		)	(27,435		)
Cash and cash equivalents at beginning of period	39,568			75,126
Cash and cash equivalents at end of period	$	32,809		$	47,691

See accompanying notes.

ONXY PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2002

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002, or for any other future operating periods.

The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in the Onyx Pharmaceuticals, Inc. (the "Company" or "Onyx") Annual Report on Form 10-K for the year ended December 31, 2001.

Note 2. Net Loss Per Share

Basic and diluted net loss per share are presented in conformity with Statement of Financial Accounting Standards (“SFAS”) 128, “Earnings Per Share,” for all periods presented. Basic net loss per share and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. Common stock equivalents have been excluded since their effect would be antidilutive.

Note 3. Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) is comprised of unrealized holding gains (losses) on the Company’s available-for-sale securities that are excluded from net loss and reported separately in stockholders’ equity. Comprehensive loss and its components for the three-month and six-month periods ended June 30, 2002 and 2001 are as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Net loss	$	(11,879	)	$	(5,889	)	$	(21,672	)	$	(11,132	)
Other comprehensive income (loss):
Net unrealized loss on available-for-sale securities	(6		)	—			(84		)	—
Comprehensive loss	$	(11,885	)	$	(5,889	)	$	(21,756	)	$	(11,132	)

Note 4. Restructuring

In October 2001, the Company formally adopted and announced a restructuring plan aimed at reducing future operating costs to allow the Company to focus on its highest priority products in development. Specifically, the Company plans to focus its future spending on: (1) the development of BAY 43-9006 in collaboration with Bayer; (2) the development of ONYX-015 in order to expedite the product's time to market; and (3) the selection of the next development product candidate from its novel oncolytic virus platform. The Company recognized $0.8 million of

restructuring and other charges. Of the $0.8 million, $0.4 million related to the impairment of certain long-lived assets, $0.3 million related to employee termination costs and $0.1 million related to office closure costs. The remaining accrued costs of $0.1 million at June 30, 2002 are related to office closure costs.

Note 5. Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 141, “Business Combinations.” SFAS 141 supersedes APB 16, “Business Combinations,” and SFAS 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises.” SFAS 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS 141 on January 1, 2002 did not have a material effect on the Company’s financial condition or results of operations.

In July 2001, the FASB issued SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 supersedes APB 17, “Intangible Assets,” and requires the discontinuance of goodwill amortization. In addition, SFAS 142 includes provisions regarding the reclassification of certain existing recognized intangibles as goodwill, reassessment of useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with certain early adoption permitted. The adoption of SFAS 142 on January 1, 2002 did not have a material effect on the Company’s financial condition or results of operations.

In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. However, SFAS 144 retains the fundamental provisions of SFAS 121 for: 1) recognition and measurement of the impairment of long-lived assets to be held and used; and 2) measurement of long-lived assets to be disposed of by sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 on January 1, 2002 did not have a material effect on the Company’s financial condition or results of operations.

Note 6. Sale of Equity Securities

In May 2002, the Company raised net proceeds of approximately $19.1 million in a private placement to a current shareholder and several new investors. The Company sold 2,972,925 shares of its common stock at a price of $6.75 per share. The Company also issued warrants to purchase 743,229 shares of its common stock at $9.59 per share. The fair value of the warrants were $4.4 million and was accounted for as a stock offering cost. A member of the Company’s board of directors is a managing director of Domain Associates, L.L.C., one of the participants in the private placement.

Note 7. XOMA (US) LLC Agreement

In April 2002, the Company and XOMA amended certain articles in their process development and manufacturing arrangement to include additional payments for operating expenses. The agreement was originally entered into in January 2001.

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

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

Overview

We are engaged in the discovery and development of novel cancer therapies. Based on our proprietary technologies that target the molecular basis of cancer, we are developing our two lead products, BAY 43-9006 and ONYX-015.

In collaboration with Bayer Corporation, we are conducting multiple clinical trials of BAY 43-9006, which is an orally active small molecule Raf kinase inhibitor. To date, we have reported on 163 patients with advanced cancers treated in Phase I clinical trials being conducted in Germany, Belgium, Canada and the United States. In addition, we are conducting a Phase I clinical trial in Canada in patients with acute myelogenous leukemia, or AML, and myelodysplastic syndrome, or MDS. We also initiated the first Phase I clinical trial of BAY 43-9006 in combination with chemotherapy agents. We plan to initiate additional Phase I and multiple Phase II clinical trials of BAY 43-9006 alone and in combination with chemotherapy to treat patients with various tumor types in 2002.

ONYX-015 is a human virus genetically engineered to selectively replicate in and kill cancer cells based on the mutation or loss of function of a specific tumor suppressor gene, the p53 gene. In August 2001, we amended our collaboration agreement with Warner-Lambert Company, a subsidiary of Pfizer, Inc., for the development and commercialization of ONYX-015. We regained full rights to develop and commercialize ONYX-015 in head and neck cancer and other cancers that are treated via direct injection into tumors, or intratumoral injections, and other local and regional routes of administration. We will fund all costs associated with these efforts and will retain all profit derived from worldwide sales of ONYX-015 in these indications, subject to the potential re-establishment of the original collaboration agreement. Warner-Lambert will retain development rights for ONYX-015 for cancers where the drug is administered intravenously.

To date, ONYX-015 development has experienced delays as a result of limited drug supply produced from a small-scale manufacturing process. In January 2001, we entered into a process development and manufacturing agreement for ONYX-015 with XOMA (US) LLC. The agreement calls for XOMA to develop a large-scale production process for ONYX-015, produce clinical supplies, prepare the manufacturing facility for Food and Drug Administration, or FDA, review and provide commercial supplies to us. In April 2002, we amended our agreement with XOMA to focus ongoing activity on manufacturing consistent batches of ONYX-015 at an intermediate scale, resulting in additional compensation to XOMA.

In June 2000, we initiated a 360–patient, multi-center Phase III clinical trial of ONYX-015 administered by intratumoral injection in patients with head and neck cancer that has progressed following initial treatment with surgery and/or radiation, or recurrent disease. Enrollment in this trial has proceeded very slowly. In addition, we have initiated an open-label Phase II/III clinical trial to evaluate ONYX-015 in patients with head and neck cancer that is resistant to all therapies, or refractory disease. We will treat approximately 30 patients in this study. Pending results in these patients and ongoing discussions with the FDA regarding whether this study would support registration in head and neck cancer, we may expand this study to treat additional patients.

Based on our discussions with the FDA and the status of the development of the large-scale manufacturing process, we decided in the first quarter of 2002 to modify our ONYX-015 development plan to increase the likelihood of success of commercializing ONYX-015 in head and neck cancer. Our decision was based in part on the significant investment required to support large pivotal clinical trials and the regulatory risks inherently associated with pharmaceutical development. We believe we must meet the following milestones for the ONYX-015 program in head and neck cancer to advance towards FDA approval:

• Successfully manufacture additional batches of ONYX-015 at XOMA on a consistent basis;

• Gain concurrence from the FDA of the Chemistry, Manufacturing and Control, or CMC, amendment for materials produced from XOMA; and

• Obtain full alignment with the FDA regarding requirements for an ONYX-015 registration path in head and neck cancer.

Further, on our own and as a result of our virus and small molecule collaborations, additional research and development is being conducted on potential future product candidates.

We have not been profitable since inception and expect to incur substantial and increasing losses for the foreseeable future, primarily due to expenses associated with our co-funding of the clinical development of BAY 43-9006 with Bayer and the development and commercialization of ONYX-015 in local/regional indications. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. As of June 30, 2002, our accumulated deficit was approximately $134.8 million.

Our business is subject to significant risks, including the risks inherent in our research and development efforts, the results of the BAY 43-9006 and ONYX-015 clinical trials, our dependence on collaborative parties and third parties to manufacture our products, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. We do not expect to generate revenues from the sale of proposed products in the foreseeable future. We expect that all of our revenues in the foreseeable future will be generated from collaboration agreements.

Results of Operations

Three and six months ended June 30, 2002 and 2001.

Revenues

Our revenues decreased 87 percent to $0.7 million for the three months ended June 30, 2002 and 85 percent to $1.5 million for the six months ended June 30, 2002 as compared to the same periods in 2001. Revenues for the three and six months ended June 30, 2002 were attributable to research funding for the therapeutic virus collaboration with Warner-Lambert. Revenues were significantly less than the same periods a year ago, reflecting the amended agreement with Warner-Lambert under which we reassumed control of the clinical development of ONYX-015. In addition, our small molecule research collaborations with Warner-Lambert concluded in August 2001, and we are no longer receiving funding for these programs.

Research and Development Expenses

Research and development expenses increased 10 percent to $11.4 million for the three months ended June 30, 2002 as compared with $10.3 million for the same period in 2001. $1.8 million of the increase in expenses is related to the co-development and clinical trial costs of BAY 43-9006 with Bayer, for which we pay 50% of the costs. $1.6 million of the increase in expenses is attributable to development costs of ONYX-015, including clinical trial costs and process development and manufacturing expenses incurred under the agreement with XOMA. The increase in clinical development expenses was partially offset by reductions to earlier-stage research programs, resulting in a decrease in expenses of $2.4 million.

Research and development expenses increased 7 percent to $21.1 million for the six months ended June 30, 2002 as compared with $19.7 million for the same period in 2001. $3.6 million of the increase in expenses is attributable to development costs of ONYX-015, including process development, manufacturing and clinical trial costs. $2.6 million of the increase in expenses is related to co-development and clinical trial costs of BAY 43-9006. The increase in clinical development expenses was partially offset by $4.8 million of reductions to earlier-stage research programs. Increased investments in BAY 43-9006 and ONYX-015 development programs could result in higher expenses in the future.

General and Administrative Expenses

General and administrative expenses decreased 15 percent to $1.5 million for the three months ended June 30, 2002 and decreased 17 percent to $2.9 million for the six months ended June 30, 2002 as compared with $1.8 million and $3.6 million for the same periods in 2001. The decreases for both the three-month and six-month periods were attributable to headcount reductions that impacted the administrative functions at the end of 2001. We anticipate that general and administrative expenses will remain stable or modestly increase in future periods.

Interest and Other Income, net

We had net interest income of $0.3 million for the three months ended June 30, 2002 and $0.7 million for the six months ended June 30, 2002 as compared with $0.9 million and $2.0 million for the same periods in 2001. The decrease in net interest income was principally due to a decrease in the average cash and investment balances. In January 2002, we licensed to Rigel Pharmaceuticals, Inc. assets from our small molecules discovery program for $0.2 million, which was recorded as other income.

Liquidity and Capital Resources

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

At June 30, 2002, we had cash, cash equivalents and marketable securities of $55.9 million compared with $58.5 million at December 31, 2001. The decrease in cash and marketable securities of $2.6 million at June 30, 2002, compared with December 31, 2001, is primarily due to cash used in operations of $21.5 million and investing activities of $4.4 million, which was partially offset by the equity placement of approximately $19.1 million in May 2002.

Total capital expenditures for equipment and leasehold improvements for the six-month period ended June 30, 2002, were $0.2 million. We currently expect to make expenditures for capital equipment and leasehold improvements between $0.5 million and $1.0 million for the remainder of 2002.

We believe that our existing capital resources and interest thereon, anticipated revenues from existing collaborations, cost savings from the reduction in force announced in October 2001 and the equity placement of approximately $19.1 million in May 2002 will be sufficient to fund our current and planned operations through at least mid-2003.

We anticipate that Bayer will loan us $5.0 million under our collaboration agreement during 2002 for the initiation of Phase II clinical trials for BAY 43-9006 based on our continued co-funding of development costs. Pursuant to our collaboration agreement, this amount is repayable to Bayer from our share of profits and royalties, if any. Changes in our research and development plans, revenues from collaborators or other changes affecting our operating expenses may result in the expenditure of these resources before mid-2003, and in any event, we will need to raise substantial additional capital to fund our operations in future periods. We intend to seek this additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or to obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.

Business Risks

If we are not able to demonstrate the safety and effectiveness of BAY 43-9006 in our Phase I and Phase II clinical trials or if our clinical trials are delayed, we may be unable to proceed to Phase III clinical trials and to commercialize BAY 43-9006.

In collaboration with Bayer, we are conducting multiple clinical trials of BAY 43-9006, which is an orally active small molecule Raf kinase inhibitor. We have conducted and are currently conducting a number of Phase I clinical trials of BAY 43-9006 as a single agent or in combination with chemotherapy agents. Phase I trials are not designed to test the efficacy of a treatment candidate, but rather to test the safety, pharmacokinetics and pharmacodynamics, and to understand the treatment candidate’s side effects, at various dosing regimens and schedules.

We may not demonstrate the desired effectiveness of BAY 43-9006 in Phase II clinical trials, notwithstanding initially favorable results in Phase I clinical trials. In addition, we may observe previously unforeseen side effects during Phase II clinical trials. If efficacy of BAY 43-9006 is not demonstrated, or if previously unforeseen side effects are observed, we may not proceed with further clinical trials of BAY 43-9006. If we do not proceed with additional clinical trials of BAY 43-9006, we will not seek regulatory approval of BAY 43-9006 with the FDA, which will seriously harm our business.

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

If we are not able to demonstrate the effectiveness of ONYX-015 in our clinical trials or if our clinical trials are delayed, we may be unable to commercialize ONYX-015.

In June 2000, we initiated a 360–patient, multicenter Phase III clinical trial of ONYX-015 administered by direct injection into tumors, or intratumoral injection, in patients with head and neck cancer that has progressed following

initial treatment with surgery and/or radiation, or recurrent disease. Enrollment to this trial has proceeded very slowly. In the first quarter of 2002, we decided to modify our development plan for ONYX-015 in head and neck cancer prior to advancing ONYX-015 in the FDA registration process and, therefore, we are not accelerating the Phase III clinical trial until these development modifications are complete. If we do not successfully modify this development plan, we may re-evaluate the continuation of the ONYX-015 program in head and neck cancer.

Historically, many companies have failed to demonstrate the effectiveness of pharmaceutical products in Phase III clinical trials notwithstanding favorable results in Phase II clinical trials. We may fail to demonstrate desired effectiveness levels in our Phase III clinical trial of ONYX-015. In addition, we may observe previously unforeseen side effects. We may fail to extend the findings of previous clinical trials in our Phase III clinical trial of ONYX-015, including similar tumor response rates, duration of tumor response or safety.

The process of obtaining FDA and other required regulatory approvals, including foreign approvals, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. We have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. We are currently under discussions with the FDA on the design of our clinical trials to determine whether they meet the needs of the FDA for registration. The FDA may not accept our Phase III clinical trial and our planned Phase II/III clinical trial in refractory head and neck cancer as registration trials. In addition, the FDA may not accept the results of our clinical trials or accept as sufficient for market approval other elements of the application that we may file for ONYX-015. The FDA may require changes in our current trials or may require additional clinical trials, which may be extensive, expensive and time-consuming. We cannot market ONYX-015 unless we receive regulatory approval.

In addition, in our clinical trials we treat patients who have failed conventional treatments and who are in advanced stages of cancer. During the course of treatment, these patients may die or suffer adverse medical effects for reasons that may be unrelated to ONYX-015. These adverse effects may impact the interpretation of clinical trial results.

We may fail to demonstrate that ONYX-015 is effective for the treatment of other types of cancer even if ONYX-015 is proven effective for the treatment of head and neck cancer.

We are initially developing ONYX-015 for treatment of head and neck cancer using intratumoral injection. Even if we are successful in developing ONYX-015 for this type of cancer, we may not demonstrate that ONYX-015 is effective in the treatment of a broader array of cancer types. We conducted a Phase I/II clinical trial for treatment of liver metastases of colorectal cancer with ONYX-015 administered through intrahepatic artery infusion. This clinical trial was based on a small number of patients, and we may not reproduce the results from this clinical trial in future clinical trials with additional patients. If we are not successful in establishing the effectiveness of ONYX-015 in a broad range of cancer types that are treated via direct injections to the tumors and other local and regional routes of administration or demonstrate effectiveness in metastatic cancers treated via intravenous administration, ONYX-015 may not have a broad commercial use.

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

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

We currently rely on a limited number of sources for the manufacture of ONYX-015, and if these sources are unable or unwilling to deliver the required quantities, we may not be able to find replacement manufacturers, which could result in a delay in clinical trials or in regulatory approval.

We are aware of only a limited number of manufacturers who we believe would have the ability and capacity to manufacture ONYX-015 or any other therapeutic viruses we may develop. We currently rely on XOMA as the sole source for the manufacture of ONYX-015. In our manufacturing collaboration with XOMA, we made modifications to the process to increase the scale of the manufacturing process and to minimize batch failures. We do not expect XOMA to begin supplying us with ONYX-015 for use in clinical trials until after August 2002, following approval by the FDA of the CMC amendment for material produced by XOMA. Failure to receive FDA approval or to receive sufficient supply of ONYX-015 from XOMA could delay our clinical trials and our applications for regulatory approval with the FDA. If XOMA fails to supply us with sufficient materials, we may be forced to incur additional expenses to pay for the manufacture of materials using a replacement contract manufacturer, if we can find a replacement manufacturer, or to develop our own manufacturing capabilities, which may not occur within a reasonable amount of time or at commercially reasonable rates.

Currently, we have clinical supplies produced and released for clinical trials from our previous manufacturer of ONYX-015, Molecular Medicine. During our relationship with Molecular Medicine, they experienced production problems resulting in failed batches, and we delayed final release of some of the batches from Molecular Medicine pending completion of documentation in compliance with our manufacturing standards. Our agreement with Molecular Medicine expired in June 2002.

No one has manufactured replicating human viruses at a large commercial scale; if we are unable to develop an effective process to manufacture ONYX-015 on a large scale, our clinical trials and regulatory approval would be delayed.

No one has produced replicating human viruses using a commercial-scale manufacturing process. To date, Molecular Medicine and we have experienced production problems using a small-scale process to supply our clinical trials. We are making changes to the process and operations using a larger-scale process at XOMA. However, we may need to make additional process changes and operational changes to make the manufacturing process more reliable and to make the process easier for us to develop into a larger, commercial-scale manufacturing process. If we are unable to improve the large-scale manufacturing process, we may not increase the number of clinical trials for ONYX-015 and the number of sites enrolling patients. If we are unable to expand the number of clinical trials, clinical sites enrolling patients and patients receiving ONYX-015, the results from our clinical trials will be delayed, and we will not receive regulatory approval without the results from these trials.

XOMA may not be able to produce commercial quantities of ONYX-015, which could delay regulatory approval.

To obtain regulatory approval for ONYX-015, we will need to treat a large percentage of the patients in our clinical trials for registration using ONYX-015 produced from the manufacturing process and in the same manufacturing facility that we intend to use following FDA approval. In conjunction with XOMA, we will need to modify the manufacturing process to produce large quantities of ONYX-015 and to lower the cost by improving the efficiency of the process. To modify the manufacturing process and to meet our quality standards for ONYX-015, in conjunction with XOMA, we will need to spend a significant amount of time and capital and complete a substantial amount of experimentation. In conjunction with XOMA, we will need to expand and modify existing manufacturing facilities to produce commercial quantities of ONYX-015. XOMA does not have experience in large-scale viral manufacturing.

In addition, XOMA may terminate our process development and manufacturing agreement with us for any reason by providing notice 48 months in advance. Further, if Warner-Lambert asserts its right as the sole manufacturer of ONYX-015 for commercial supply after having exercised the option to develop and commercialize ONYX-015 in intravenous indications, we will have to rely on Warner-Lambert for commercial supply of ONYX-015 rather than XOMA and the timing for the availability of the commercial supply will depend on when Warner-Lambert decides to invest in a commercial manufacturing facility.

We will need to demonstrate to the FDA that the product from the process manufactured at XOMA is comparable to ONYX-015 produced from the process at Molecular Medicine. Filing of our applications for regulatory approval may be delayed if we:

• encounter difficulties in modifying the manufacturing process;

• fail to treat patients in our clinical trials required for registration with product from the new manufacturing process; or

• fail to meet the FDA requirements for the CMC submission for the Biologics License Application, or BLA.

We are dependent upon collaborative relationships to develop, manufacture and commercialize our products and to obtain regulatory approval, which could delay the development and commercialization of our products.

Our strategy for developing, manufacturing and commercializing our products and obtaining regulatory approval depends in large part upon maintaining and entering into collaboration agreements with pharmaceutical companies or other collaborators. We have entered into a number of collaboration agreements with different parties, including research, development and marketing agreements with Bayer and Warner–Lambert. If we fail to maintain these collaborative relationships or to establish new collaborative relationships, we would need to undertake these research, development, manufacturing and marketing activities at our own expense, which would significantly increase our capital requirements and limit the programs we are able to pursue. Further, we would incur significant delays with the development, manufacture or sale of our products.

In August 2001, Onyx and Warner-Lambert amended the collaboration agreement for the development and commercialization of ONYX-015. We regained full rights to develop and commercialize ONYX-015 in head and neck cancer and other cancers that are treated via direct injections to the tumors and other local and regional routes of administration. We will fund all costs associated with these efforts and will retain all profit derived from worldwide sales of ONYX-015 in these indications, subject to the potential re-establishment of the original collaboration agreement. Warner-Lambert retains development rights for ONYX-015 for cancers where the drug is administered intravenously.

In collaboration with Bayer, we are conducting multiple clinical trials of BAY 43-9006. Bayer has paid all the costs of research and preclinical development of this drug candidate. Under our agreement with Bayer, we have the opportunity to co-fund 50% of clinical development costs worldwide except in Japan, where Bayer will fund 100% of development costs and pay us a royalty on sales. We are currently co-funding 50% of development costs, and depend on Bayer to co-fund the balance of these costs. Bayer manages the development of BAY 43-9006, including the FDA regulatory process and scope, size and schedule of clinical development. We and Bayer must agree on the development plan for BAY 43-9006. If we and Bayer cannot agree, clinical trial progress could be delayed. If Bayer changes its strategy away from the development of BAY 43-9006, we will suffer significant delays and our business will be harmed.

We are subject to a number of risks associated with our dependence upon collaborative relationships, including:

• the amount and timing of expenditure of resources can vary because of collaborator decisions;

• business combinations and changes in a collaborator's business strategy may adversely affect the party's willingness or ability to complete its obligations under the collaboration agreement with us;

• the right of the collaborator to terminate its collaboration agreement with us on limited notice and for reasons outside our control;

• loss of significant rights to our collaborative parties if we fail to meet our obligations under these agreements;

• disagreements as to ownership of clinical trial results or regulatory approvals, and the refusal of the FDA to recognize us as holding the regulatory approvals necessary to commercialize our products;

• withdrawal of support by a collaborator following the development or acquisition by the collaborator of competing products; and

• disagreements with a collaborator regarding the collaboration agreement or ownership of proprietary rights.

Due to these factors and other possible disagreements with collaborators, we could suffer delays in the research, development or commercialization of our products or we may become involved in litigation or arbitration, which would be time consuming and expensive.

Chiron may have preferential rights to establish collaborations with us, which may complicate our future collaborative arrangements.

We were established in April 1992 by means of a transfer from Chiron to us of the drug discovery program conducted at Chiron by Dr. Frank McCormick, our scientific founder, and his research team. Under the agreement executed at that time, we granted Chiron preferential rights to receive product licenses in the fields of diagnostics and vaccines, and also established a mechanism for our making proposals to Chiron for future collaborations. Chiron has advised us that it believes this mechanism requires us to offer gene therapy programs to Chiron before licensing any of these programs to a third party. We and Chiron have different interpretations of this agreement as it relates to the scope of Chiron's rights. We executed our agreement with Warner–Lambert for the development of ONYX-015 and two other virus products pursuant to a waiver letter from Chiron. If Chiron does not grant us further waivers and asserts rights under the April 1992 agreement, or if disputes arise, we may encounter difficulties or delays in entering into future collaborations for other product candidates.

We do not fully understand the biological characteristics of our therapeutic viruses, and their interactions with other drugs and the human immune and other defense systems, which may cause us to fail to demonstrate the safety and effectiveness of our products in clinical trials.

Therapeutic viruses are novel and we are still determining the biological characteristics of these viruses. For example, in our clinical trials to date, we have achieved the best results when ONYX-015 is used in combination with standard chemotherapy drugs, but we are uncertain as to the reasons for and the nature of the interaction of the virus with these drugs. In addition, we are still investigating the response of the human immune system to our therapeutic viruses, and the immune system may play a role in limiting the tumor–killing effect of our therapeutic viruses. We also do not know the extent the human body may clear our therapeutic viruses from circulation in the bloodstream and limit the tumor–killing activity of our therapeutic viruses. Further, we are uncertain as to whether the killing activity of ONYX-015 is specific to cells having the abnormal function involving the p53 gene. Moreover, we do not understand all of the many factors that contribute to the formation of each individual patient's cancer. These factors include not only the cancer type, but also the pressures within the tumor and the presence of normal cells and fibrous tissue within the tumor. These factors make each tumor unique. Because of the variety of factors, some cancer patients respond to a particular type of cancer therapy while others do not, even among patients with the same cancer type. The novelty and scientific uncertainties regarding our therapeutic viruses and the uniqueness of human cancers from patient to patient increase the risk that we will not successfully develop our product candidates or prove their safety and effectiveness in clinical trials. Even if we succeed in developing our product candidates, our product candidates may not have a therapeutic effect in a broad patient population.

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

Even if our product development efforts are successful and even if the requisite regulatory approvals are obtained, our products may not gain market acceptance among physicians, patients, healthcare payers and the medical community.

A number of additional factors may limit the market acceptance of products including the following:

• rate of adoption by healthcare practitioners;

• types of cancer for which the product is approved;

• rate of our products' acceptance by the target population;

• timing of market entry relative to competitive products;

• availability of alternative therapies;

• price of our product relative to alternative therapies;

• availability of third–party reimbursement;

• extent of marketing efforts by us and third-party distributors or agents retained by us; and

• side effects or unfavorable publicity concerning our products or similar products.

If any of our products do not achieve market acceptance, we may lose our investment in that product which may cause our stock price to decline.

We do not have marketing or sales experience or capabilities and are dependent on the efforts of others, which could limit our ability to commercialize our products.

We intend to enter into agreements with third parties to market and sell most of our products if we receive regulatory approval for a product. We may not be able to enter into marketing and sales agreements with others on acceptable terms, if at all. To the extent that we enter into marketing and sales agreements with other companies, our revenues, if any, will depend on the efforts of others. We also have the right under our collaboration agreements to co-promote our products in conjunction with our collaborators. If we are unable to enter into third-party agreements or if we are exercising our rights to co-promote a product, then we will be required to develop marketing and sales capabilities. We may not successfully establish marketing and sales capabilities or have sufficient resources to do so. If we do not develop marketing and sales capabilities, we may not meet our co-promotion obligations under our collaboration agreements, which could result in our losing these co-promotion rights. If we do develop such capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations and we will incur additional expenses.

Adverse events in the field of viral gene therapy may negatively affect regulatory approval or public perception of our products, which could delay our clinical trials.

We depend in part on public acceptance of the use of viruses as therapeutics or as delivery vehicles for gene therapy for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that these therapies are unsafe, and these therapies may not gain acceptance by the public or the media. As a result of negative public reaction to these therapies, the FDA and the Recombinant DNA Advisory Committee, which acts as an advisory body to the National Institutes of Health, may impose greater regulation, stricter clinical trial oversight and stricter commercial product labeling requirements. Any adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation of our product candidates and potential regulatory delays relating to the testing or approval of our product candidates.

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

As of June 30, 2002, we had an accumulated deficit of approximately $134.8 million. We have incurred these losses principally from costs incurred in our research and development programs and from our general and administrative

costs. We derived no significant revenues from product sales or royalties. We expect to incur significant and increasing operating losses over the next several years as we expand our research and development efforts, preclinical testing and clinical trial and manufacturing activities, including the 2001 manufacturing contract with XOMA, as amended. We expect our operating losses to increase even more dramatically with the amendment of the collaboration agreement with Warner-Lambert for the development of ONYX-015 and co-funding of ongoing BAY 43-9006 clinical trials costs under our collaboration agreement with Bayer. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the establishment or termination of collaborations, the timing and amount of collaboration payments under the terms of our collaboration agreements, or the initiation, success or failure of clinical trials.

We do not expect to generate revenues from the sale of products for the foreseeable future. We expect that substantially all of our revenues for the foreseeable future will result from payments under our collaboration agreements. Our ability to achieve profitability depends upon our success in completing development of our potential products, obtaining required regulatory approvals and manufacturing and marketing our products.

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

We will require substantial additional funds to conduct the costly and time-consuming research, preclinical testing and clinical trials necessary to develop our technology and proposed products, and to establish or maintain relationships with collaborative parties. Our future capital requirements will depend upon a number of factors, including:

• continued scientific progress in the research and development of our technology programs;

• the size and complexity of these programs;

• our ability to establish and maintain collaboration agreements;

• our ability to manufacture sufficient drug supply to complete clinical trials;

• progress with preclinical testing and clinical trials;

• the time and costs involved in obtaining regulatory approvals;

• the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

• competing technological and market developments; and

• product commercialization activities.

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

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

The loss of the services of one or more of our key employees could have an adverse impact on our business. We do not maintain key person life insurance on any of our officers, employees or consultants, other than for our chief executive officer. We depend on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We face competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, and other research institutions. Because of the scientific nature of our business, we are highly

dependent on principal members of our scientific and management staff. To pursue our product development plans, we will need to hire additional management personnel and additional qualified scientific personnel to perform research and development, as well as personnel with expertise in clinical testing, government regulation and manufacturing. We may not be successful in hiring or retaining qualified personnel.

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

We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market products that will compete with other products and therapies that currently exist or are being developed. Many other companies are actively seeking to develop products that have disease targets similar to those we are pursuing. Some of these competitive products are in clinical trials. If approved, the products of these and other competitors now in clinical trials will compete directly with BAY 43-9006 and ONYX-015. Other companies are developing drugs targeting cancer cells that may compete with our other product candidates.

Many of our competitors, either alone or together with collaborators, 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 collaborators, have significantly greater experience than we do in:

• developing products;

• undertaking preclinical testing and human clinical trials;

• obtaining FDA and other regulatory approvals of products; and

• manufacturing and marketing products.

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

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

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

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

We are subject to extensive government regulation, which can be costly, time consuming and subject us to unanticipated delays; even if we obtain regulatory approval for some of our products, those products may still face regulatory difficulties.

Our product candidates under development are subject to extensive and rigorous domestic and foreign regulation. We have not received regulatory approval in the United States or any foreign market for any of our product candidates.

We expect to rely on collaborative parties to file investigational new drug applications and generally direct the regulatory approval process for many of our product candidates. These collaborative parties may not obtain necessary approvals from the FDA or other regulatory authorities for any product candidates. If we fail to obtain required governmental approvals, we or our collaborative parties will experience delays in or be precluded from marketing products developed through our research. In addition, the commercial use of our products will be limited. If we have disagreements as to ownership of clinical trial results or regulatory approvals, and the FDA refuses to recognize us as holding, or having access to, the regulatory approvals necessary to commercialize our products, we may experience delays in or be precluded from marketing products developed through our research.

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

• adversely affect the successful commercialization of any products that we or our collaborators develop;

• impose costly procedures on us or our collaborators;

• diminish any competitive advantages that we or our collaborators may attain; and

• adversely affect our receipt of revenues or royalties.

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

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

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

We have limited experience in conducting clinical trials. We rely on academic institutions or clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our products. We will have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own.

In addition, we may suffer a delay in the completion of any one of our clinical trials because of requests from the FDA to revise the size or scope of the clinical trial. In particular, the FDA may require us to expand the number of patients in our Phase III clinical trial. Failure to commence or complete, or delays in, any of our planned clinical trials would adversely affect our stock price and prevent us from commercializing our products.

meet the following milestones for the ONYX-015 program in head and neck cancer to advance towards FDA approval:

• Successfully manufacture additional batches of ONYX-015 at XOMA;

• Gain concurrence from the FDA of the CMC amendment for materials produced from XOMA; and

• Obtain full alignment with the FDA requirements for the ONYX-015 registration path in head and neck cancer.

As a result of our decision, we expect delay in the time to market for ONYX-015. The extent of the delay will be dependent on our ongoing discussions with the FDA to gain concurrence on the CMC amendment and the time it will take to ensure that all clinical trial design and protocols fully satisfy FDA requirements for registration.

If testing of a particular product does not yield successful results, then we will be unable to commercialize that product.

If preclinical or clinical testing of one or more of our products does not yield successful results, the product will fail. To achieve the results we need, we must demonstrate our products' safety and effectiveness in humans through extensive preclinical and clinical testing. Numerous unforeseen events may arise during, or as a result of, the testing process, including the following:

• safety and effectiveness results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials;

• the results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;

• after reviewing test results, we or our collaborators may abandon projects that we previously believed to be promising;

• we, our collaborators or regulators may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks; and

• potential products may not have the desired effect or may have undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved.

Clinical testing is very expensive and can take many years. The failure to adequately demonstrate the safety and effectiveness of a product would delay or prevent regulatory approval of the product.

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

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

• obtain patents;

• license technology rights from others;

• protect trade secrets;

• operate without infringing upon the proprietary rights of others; and

• prevent others from infringing on our proprietary rights.

Our existing patent rights may not have a deterrent effect on competitors who are conducting or desire to commence competitive research programs with respect to the biological targets or fields of inquiry that we are pursuing. Our ultimate patent position will depend on our ability to obtain effective patent coverage for the compositions of matter identified in these research programs. Because these programs are at an early stage, we cannot determine whether potential products that we may derive from our drug discovery program may be subject to the patent rights of third parties.

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

We may not have been the first to make the inventions covered by each of our issued or pending patent applications, or we may not have been the first to file patent applications for such inventions. Competitors may have independently developed technologies similar to ours. We may need to license the right to use third–party patents and intellectual property to develop and market our products. We may not 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.

In addition, we may require interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions relating to our patent applications. These activities, and especially patent litigation, are costly.

Specifically, we are aware of patent applications filed in the United States and abroad that, if they were to issue, would cover ONYX-015 and other viruses that selectively replicate, including our RB-selective viruses. We are aware of patents that may affect our ability to produce and purify viruses. We are also aware of patent applications that claim enzymes for converting drugs to their active forms for treating disease, including cancers, and claim methods of delivering the enzymes using a virus. We may be unable to commercialize our products affected by these patents, if any of these patents are issued and we are unable to:

• successfully challenge any claims asserting that our product candidates or products infringe the patent;

• design around the patent; or

• negotiate a reasonable license under the patent.

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, exposes us to liability claims resulting from the use or sale of our products. 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. We may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in:

• decreased demand for a product;

• injury to our reputation;

• withdrawal of clinical trial volunteers; and

• loss of revenues.

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

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

Our research and process development activities involve the controlled use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, which may exceed our financial resources and may seriously harm our business. In addition, if we develop a manufacturing capacity, we may incur substantial costs to comply with environmental regulations and would be subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process.

Our stock price is highly volatile.

The market price of our common stock has been highly volatile and is likely to continue to be volatile. Factors affecting our stock price include:

• results of clinical trials from BAY 43-9006 and ONYX-015;

• ability to accrue patients into clinical trials;

• ability to manufacture sufficient supply of ONYX-015;

• success or failure in obtaining regulatory approval by us or our competitors;

• public concern as to the safety and efficacy of our products;

• developments concerning the business of collaborative parties or their transactions with third parties;

• developments in our relationship with collaborative parties;

• developments in patent or other proprietary rights;

• additions or departures of key personnel;

• announcements by us or our competitors of technological innovations or new commercial therapeutic products;

• published reports by securities analysts;

• fluctuations in stock market price and volume, which are particularly common among securities of biotechnology companies;

• fluctuations in our operating results;

• statements of governmental officials; and

• changes in healthcare reimbursement policies.

Existing stockholders have significant influence over us.

Our executive officers, directors and 5% stockholders own, in the aggregate, approximately 25% of our outstanding common stock. As a result, these stockholders will be able to exercise substantial influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change in control of our company and will make some transactions difficult or impossible to accomplish without the support of these stockholders.

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

Substantial sales of common stock by our existing stockholders could cause our stock price to fall.

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

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

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

Provisions in Delaware law and our charter may prevent or delay a change of control.

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

• the board of directors approved the transaction where the stockholder acquired 15% or more of the corporation's stock;

• after the transaction in which the stockholder acquired 15% or more of the corporation's stock, the stockholder owned at least 85% of the corporation's outstanding voting stock, excluding shares owned by directors, officers

and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or

• on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

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

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

• our board is classified into three classes of directors as nearly equal in size as possible with staggered three-year terms;

• the authority of our board to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of these shares, without stockholder approval;

• all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;

• special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer or the board; and

• no cumulative voting.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. By policy, we place our investments with high quality debt security issuers, limit the amount of credit exposure to any one issuer, limit duration by restricting the term, and hold investments to maturity except under rare circumstances. We classify our cash equivalents or marketable securities as fixed rate if the rate of return on an instrument remains fixed over its term. As of June 30, 2002, all of our cash equivalents and marketable securities are classified as fixed rate. There were no significant changes in our market risk exposures during the six months ended June 30, 2002. For further discussion of our market risk exposures, refer to Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2001.

PART II: OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

In May 2002, we raised net proceeds of approximately $19.1 million in a private placement to a current shareholder and several new investors. We sold 2,972,925 shares of our common stock at a price of $6.75 per share. We also issued warrants to purchase 743,229 shares of our common stock at $9.59 per share. U.S. Bancorp Piper Jaffray served as exclusive placement agent for the equity financing. Proceeds from the offering will be used primarily for working capital purposes, including clinical development of BAY 43-9006 and ONYX-015. The financing was exempt from registration under the Securities Act of 1933, as amended, pursuant to Regulation D of the Securities Act. A member of our board of directors is a managing director of Domain Associates, L.L.C., one of the participants in the private placement. On June 5, 2002, we filed an S-3 Registration Statement with the Securities and Exchange Commission to register the shares offered in this private equity financing, and the Registration Statement became effective on June 13, 2002.

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on May 30, 2002. The results of the matters voted upon at the meeting were:

(a) Each of the nominees to the Board of Directors was elected to serve until our annual meeting of stockholders in 2005. The nominees were: Hollings C. Renton, 14,319,928 common shares for and 695,592 withheld; George A. Scangos, 14,433,385 common shares for and 582,135 withheld; and Magnus Lundberg, 13,965,574 common shares for and 1,049,946 withheld.

(b) The stockholders approved the 1996 Equity Incentive Plan, as amended, to increase the aggregate number of shares of Common Stock authorized for issuance under the plan by 400,000 shares:

13,356,007 common shares for, 1,604,796 against and 54,717 abstaining.

(c) The stockholders approved the Employee Stock Purchase Plan, as amended, to increase the aggregate number of shares of Common Stock authorized for issuance under the plan by 75,000 shares:

14,652,159 common shares for, 315,716 against and 47,645 abstaining.

(d) The stockholders ratified the selection of Ernst & Young LLP as independent auditors of Onyx for the fiscal year ending December 31, 2002:

14,867,409 common shares for, 125,078 against and 23,033 abstaining.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

10.39* Amendment No. 1 to the Process Development and Manufacturing Agreement between XOMA (US) LLC and Onyx Pharmaceuticals, Inc., dated April 15, 2002.

99.1 Certification pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.

* Confidential treatment has been requested for portions of this document.

b) Reports on Form 8-K

No reports on Form 8-K were filed during the period covered by this report.

SIGNATURES

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

		ONYX PHARMACEUTICALS, INC.


Date: August 13, 2002	By:	/s/ Hollings C. Renton
			Hollings C. Renton
			Chairman of the Board,
			President and Chief Executive Officer
			(Principal Executive and Financial Officer)


Date: August 13, 2002	By:	/s/ Marilyn E. Wortzman
			Marilyn E. Wortzman
			Controller
			(Principal Accounting Officer)

EXHIBIT INDEX

10.39* Amendment No. 1 to the Process Development and Manufacturing Agreement between XOMA (US) LLC and Onyx Pharmaceuticals, Inc., dated April 15, 2002.

99.1 Certification pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.

* Confidential treatment has been requested for portions of this document.