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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 or [ ]
    
    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.  Delaware
    
    94-3154463(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer ID Number)
 3031 Research Drive
Richmond, California 94806
(Address of principal executive offices) (510) 222-9700
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes      [  ] No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes      [   ] No Indicate the number of shares outstanding of each of the issuers classes
of Common Stock, as of the latest practicable date. The number of outstanding
shares of the registrants Common Stock, $0.001 par value, was 34,660,754 as
of May 3, 2004. 1




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ONYX PHARMACEUTICALS, INC. INDEX PAGEPART I: FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Balance Sheets  March 31, 2004 and December 31, 2003
    
    
    3Condensed Statements of Operations  Three months ended March 31, 2004 and 2003
    
    
    4Condensed Statements of Cash Flows  Three months ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24PART II: OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    25Item 3.
    
    Defaults Upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    25SIGNATURES
    
    
    
    
    27Exhibit 31.1Exhibit 32.1
 2




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PART I: FINANCIAL INFORMATION 
 Item 1. Financial Statements (Unaudited) 
 ONYX PHARMACEUTICALS,
INC. CONDENSED BALANCE SHEETS  March 31,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    197,444
    
    
    $
    55,312Marketable securities
    
    
    50,821
    
    
    
    50,088Receivable from collaboration partner
    
    
    823
    
    
    
    584Other current assets
    
    
    1,963
    
    
    
    2,461Total current assets
    
    
    251,051
    
    
    
    108,445Property and equipment, net
    
    
    286
    
    
    
    285Other assets
    
    
    416
    
    
    
    408$
    251,753
    
    
    $
    109,138LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    736
    
    
    $
    299Payable to collaboration partner
    
    
    12,694
    
    
    
    13,632Accrued restructuring
    
    
    225
    
    
    
    325Accrued liabilities
    
    
    656
    
    
    
    494Accrued clinical trials and related expenses
    
    
    
    
    
    
    147Accrued compensation
    
    
    941
    
    
    
    722Total current liabilities
    
    
    15,252
    
    
    
    15,619Advance from collaboration partner
    
    
    20,000
    
    
    
    20,000Commitments and contingenciesStockholders equity:Common stock
    
    
    35
    
    
    
    30Additional paid-in capital
    
    
    428,512
    
    
    
    277,577Receivable from stock option exercises
    
    
    (40
    )
    
    
    (235
    )Accumulated other comprehensive income
    
    
    55
    
    
    
    27Accumulated deficit
    
    
    (212,061
    )
    
    
    (203,880
    )Total stockholders equity
    
    
    216,501
    
    
    
    73,519$
    251,753
    
    
    $
    109,138
 See accompanying notes. 3




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ONYX PHARMACEUTICALS, INC. 
 CONDENSED STATEMENTS OF OPERATIONS 
 Three Months EndedMarch 31,2004
    
    2003Operating expenses:Research and development
    
    $
    6,730
    
    
    $
    9,037Marketing
    
    
    289
    
    
    
    80General and administrative
    
    
    1,686
    
    
    
    1,302Restructuring
    
    
    
    
    
    
    442Total operating expenses
    
    
    8,705
    
    
    
    10,861Loss from operations
    
    
    (8,705
    )
    
    
    (10,861
    )Interest income (expense), net
    
    
    524
    
    
    
    173Net loss
    
    $
    (8,181
    )
    
    $
    (10,688
    )Basic and diluted net loss per share
    
    $
    (0.25
    )
    
    $
    (0.47
    )Shares used in computing basic and diluted net loss per share
    
    
    32,555
    
    
    
    22,697
 See accompanying notes. 4




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ONYX PHARMACEUTICALS, INC. 
 CONDENSED STATEMENTS OF CASH FLOWS 
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (8,181
    )
    
    $
    (10,688
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation, amortization and other
    
    
    45
    
    
    
    417Stock-based compensation to consultants
    
    
    660
    
    
    
    50Changes in assets and liabilities:Receivable from collaboration partner
    
    
    (239
    )
    
    
    Other current assets
    
    
    60
    
    
    
    303Other assets
    
    
    (8
    )
    
    
    27Accounts payable
    
    
    437
    
    
    
    (246
    )Accrued liabilities
    
    
    62
    
    
    
    (157
    )Accrued clinical trials and related expenses
    
    
    (1,085
    )
    
    
    (1,369
    )Accrued compensation
    
    
    219
    
    
    
    (615
    )Net cash used in operating activities
    
    
    (8,030
    )
    
    
    (12,278
    )Cash flows from investing activities:Purchases of marketable securities
    
    
    (9,176
    )
    
    
    (6,708
    )Maturities of marketable securities
    
    
    8,471
    
    
    
    11,302Capital expenditures
    
    
    (42
    )
    
    
    (88
    )Proceeds from sale of fixed assets
    
    
    434
    
    
    
    6Net cash (used in) provided by investing activities
    
    
    (313
    )
    
    
    4,512Cash flows from financing activities:Net proceeds from issuances of common stock
    
    
    150,475
    
    
    
    10,222Net cash provided by financing activities
    
    
    150,475
    
    
    
    10,222Net increase in cash and cash equivalents
    
    
    142,132
    
    
    
    2,456Cash and cash equivalents at beginning of period
    
    
    55,312
    
    
    
    11,014Cash and cash equivalents at end of period
    
    $
    197,444
    
    
    $
    13,470
 See accompanying notes. 5




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ONYX PHARMACEUTICALS, INC. 
 NOTES TO CONDENSED FINANCIAL STATEMENTS March 31, 2004
(Unaudited)
 Note 1. Basis of Presentation The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) 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 GAAP 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 ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004, or for any other future operating periods. The condensed balance sheet at December 31, 2003 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by GAAP for complete financial statements. Certain amounts have been reclassified from research and development
expenses to marketing expenses to conform to the current period presentation. 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, 2003. Note 2. Stock-Based Compensation The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), to
account for employee stock options, because the alternative fair value method
of accounting prescribed by Statement of Financial Accounting Standards
(SFAS) 123, Accounting for Stock-Based Compensation, requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, no compensation expense is recognized when the
exercise price of employee stock options equals the market price of the
underlying stock on the date of grant. The pro forma information regarding net loss and loss per share prepared
in accordance with SFAS 123, as amended, has been determined as if the Company
had accounted for its employee stock options under the fair value method
prescribed by SFAS 123. The fair value of options was estimated at the date of
grant using the Black-Scholes option valuation model with the following
weighted-average assumptions: Three Months EndedMarch 31,2004
    
    2003Risk-free interest rate
    
    
    2.51
    
    
    
    2.37Expected life
    
    3.7 years
    
    2.9 yearsExpected volatility
    
    
    0.60
    
    
    
    0.90Expected dividends
    
    None
    
    NoneWeighted average option fair value
    
    $
    17.18
    
    
    $
    2.86
 6




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ONYX PHARMACEUTICALS, INC. The following table illustrates the pro forma effects on net loss and loss
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation: Three Months EndedMarch 31,2004
    
    2003(In thousands, except pershare amounts)Net loss  as reported
    
    $
    (8,181
    )
    
    $
    (10,688
    )Deduct: Total stock-based employee compensation
determined under the fair value based method for
all awards, net of related tax effects
    
    
    (506
    )
    
    
    (379
    )Pro forma net loss
    
    $
    (8,687
    )
    
    $
    (11,067
    )Loss per share:Basic and diluted net loss per share  as reported
    
    $
    (0.25
    )
    
    $
    (0.47
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.27
    )
    
    $
    (0.49
    )
 Note 3. Net Loss Per Share Basic and diluted net loss per share have been computed using the
weighted-average number of shares of common stock outstanding during the
period. Potentially dilutive outstanding securities of 2,778,092 stock options
and warrants for the three months ended March 31, 2004 and 3,711,272 stock
options and warrants for the three months ended March 31, 2003 were not
included in the computation of diluted net loss per share because their effect
would have been antidilutive. Note 4. Comprehensive Loss Comprehensive loss is comprised of net loss and other comprehensive
income (loss). Other comprehensive income (loss) is comprised of unrealized holding gains
and losses on the Companys available-for-sale securities that are excluded
from net loss and reported separately in stockholders equity. Comprehensive
loss and its components are as follows: Three Months EndedMarch 31,2004
    
    2003(In thousands)Net loss
    
    $
    (8,181
    )
    
    $
    (10,688
    )Other comprehensive income (loss):Net unrealized gain (loss) on available-for-sale securities
    
    
    28
    
    
    
    (2
    )Comprehensive loss
    
    $
    (8,153
    )
    
    $
    (10,690
    )
 Note 5. Sale of Equity Securities In February 2004, the Company sold 4,637,000 shares of common stock at a
price of $33.75 per share in an underwritten public offering pursuant to an
effective registration statement previously filed with the Securities and
Exchange Commission. Also in February 2004, the underwriters for the offering
purchased an additional 48,693 shares of the Companys common stock to cover
over-allotments at a price of $33.75 per shares. The Company received
aggregate cash proceeds of approximately $148.4 million from this public
offering, net of issuance costs of $9.7 million. 7




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ONYX PHARMACEUTICALS, INC. Note 6. Restructuring In June 2003, the Company announced the discontinuation of its
therapeutic virus program and the termination of all internal research
activities. The decision was part of a business realignment that placed an
increased priority on the development of BAY 43-9006, Onyxs lead product
candidate that is being developed jointly with Bayer Pharmaceuticals
Corporation. As a first step in this realignment, in January 2003, the Company
suspended the development of ONYX-015, including clinical trials and
manufacturing activities. Together these actions resulted in a reduction in
force of approximately 75 positions, most of which were associated with the
therapeutic virus program. During 2003, the Company recorded an aggregate
charge of $5.5 million associated with the January and June 2003
restructurings. The Company did not record any restructuring charges in the
first quarter of 2004. At December 31, 2003, the accrual for restructuring
was $325,000. As of March 31, 2004, the accrual for restructuring was
$225,000, consisting of charges related to the discontinued use of a portion
of the Companys leased facilities and employee severance benefits. The amount
is expected to be paid during the remainder of 2004. 8




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ONYX PHARMACEUTICALS, INC. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. We use words such as may, will, expect, anticipate,
estimate, intend, plan, predict, potential, believe, should and
similar expressions to identify forward-looking statements. These statements
appearing throughout our Form 10-Q are statements regarding our intent, belief,
or current expectations, primarily regarding our operations. You should not
place undue reliance on these forward-looking statements, which apply only as
of the date of this Form 10-Q. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including those set forth under Business Risks. Overview We are a biopharmaceutical company dedicated to developing innovative
therapies that target the molecular mechanisms that cause cancer. With our
collaborators, we are developing small molecule, orally available drugs with
the goal of changing the way cancer is treated. A common feature of cancer
cells is the excessive activation of signaling pathways that cause abnormal
cell proliferation. In addition, tumors require oxygen and nutrients from newly
formed blood vessels to support their growth. The formation of these new blood
vessels is a process called angiogenesis. We are applying our expertise to
develop oral anticancer therapies designed to prevent cancer cell proliferation
and angiogenesis by inhibiting proteins that signal or support tumor growth. By
exploiting the genetic differences between cancer cells and normal cells, we
aim to create novel anticancer agents that minimize damage to healthy tissue.
Our lead drug candidate, BAY 43-9006, is currently in Phase III clinical
development with our collaborator, Bayer Pharmaceuticals Corporation. BAY
43-9006 targets both tumor cell proliferation and angiogenesis. BAY 43-9006 is a novel, orally available signal transduction inhibitor and
is one of a new class of anticancer treatments that target growth signaling in
cancer. BAY 43-9006 operates through dual mechanisms of action by inhibiting
proliferation of cancer cells and inhibiting angiogenesis. Several drugs
developed and owned by others, and approved by the U.S. Food and Drug
Administration, or FDA, validate this treatment approach. However, BAY 43-9006
is the first small molecule agent to enter clinical trials directed against the
enzyme RAF kinase to inhibit tumor cell proliferation. In addition, BAY 43-9006
displays activity that inhibits VEGFR-2 and PDGFR-ß, two key proteins involved
in angiogenesis. We and Bayer are developing and will market BAY 43-9006 under our
collaboration agreement. Together with Bayer, we are conducting multiple
clinical trials of BAY 43-9006. To date, we have treated over 1,000 patients.
In October 2003, we announced the initiation of a pivotal Phase III clinical
trial after a Special Protocol Assessment, or SPA, with the FDA, in patients
with advanced renal cell carcinoma, also known as kidney cancer. This decision
was based on interim Phase II data, which provided encouraging signs of tumor
shrinkage and disease stabilization in patients with advanced kidney cancer.
The agent is also being studied in multiple Phase II clinical trials for the
treatment of kidney, melanoma, liver and other cancers, as well as in multiple
Phase Ib trials evaluating its use in combination with standard chemotherapy
drugs. Two Phase II trials were initiated in the third quarter of 2002 based on
preliminary Phase I data indicating that BAY 43-9006 was well tolerated and
showed early evidence of antitumor activity. In addition, a Phase I clinical
trial in Canada is being conducted in patients with acute myelogenous leukemia,
or AML, and myelodysplastic syndrome, or MDS. In collaboration with Warner-Lambert Company, now a subsidiary of Pfizer
Inc, we identified a number of lead compounds that modulate the activity of key
enzymes that regulate the process whereby a single cell replicates itself and
divides into two identical new cells, a process known as the cell cycle.
Mutations in genes that regulate the cell cycle are present in a majority of
human cancers. Warner-Lambert is currently advancing a lead candidate from that
collaboration, a small molecule cell cycle inhibitor targeting a
cyclin-dependent kinase expected to enter Phase I clinical trials in 2004. Prior to June 2003, in addition to our small molecule program, we were
developing therapeutic viruses that selectively replicate in cells with
cancer-causing genetic mutations. In June 2003, we discontinued this program
and terminated all internal research activities. As a first step, in January
2003, we suspended the development of the lead product candidate in the
therapeutic virus program, ONYX-015, including clinical trials and
manufacturing activities. While we anticipate that 9




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ONYX PHARMACEUTICALS, INC. the restructuring activities in January and June 2003 will reduce our future
operating expenses, we expect that these savings will be fully offset by our
share of the increased codevelopment costs for BAY 43-9006 as the compound
progresses through Phase III clinical trials. In February 2004, we sold 4,637,000 shares of our common stock at $33.75
per share in an underwritten public offering pursuant to an effective
registration statement previously filed with the Securities and Exchange
Commission. Also in February 2004, the underwriters for the offering
exercised their over-allotment option and purchased an additional 48,693
shares of our common stock to cover over-allotments at a price of $33.75 per
share. We received aggregate net cash proceeds of approximately $148.4
million from this public offering. We have not been profitable since inception and expect to incur
substantial and increasing losses for the foreseeable future, due to expenses
associated with the development and commercialization of BAY 43-9006. We
expect that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. As of March 31, 2004, our accumulated deficit
was approximately $212.1 million. Our business is subject to significant risks, including the risks inherent
in our development efforts, the results of the BAY 43-9006 clinical trials, our
dependence on collaborative parties, uncertainties associated with obtaining
and enforcing patents, the lengthy and expensive regulatory approval process
and competition from other products. For a discussion of these and some of the
other risks and uncertainties affecting our business, see Business Risks. We
currently have no products that have received marketing approval, and we have
generated no revenues from the sale of products. We do not expect to generate
revenues from the sale of proposed products in the foreseeable future. We
expect that all of our revenues in the foreseeable future, if any, will be
generated from collaboration agreements. Critical Accounting Policies and the Use of Estimates Critical accounting policies are those that require significant estimates,
assumptions and judgments by management about matters that are inherently uncertain
at the time that the financial statements are prepared such that
materially different results might have been reported if other assumptions had
been made. These estimates form the basis for making judgments about the
carrying values of assets and liabilities. We base our estimates and judgments
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. We consider certain accounting policies
related to research and development expenses and use of estimates to be
critical policies. Significant estimations used in 2003 included estimated
charges related to our restructuring and assumptions used in the determination
of stock-based compensation related to stock options granted to non-employees.
Actual results could differ materially from these estimates. There have been no
other changes to our critical accounting policies since we filed our 2003
Annual Report on Form 10-K with the Securities and Exchange Commission on March
15, 2004. For a description of our critical accounting policies, please refer
to our 2003 Annual Report on Form 10-K. Recent Accounting Developments In March 2004, the Financial Accounting Standards Board (FASB) issued a
Proposed Statement of Financial Accounting Standards, Share-Based Payment, an
amendment of FASB Statements Nos. 123 and 95 (Exposure Draft). The Exposure
Draft would eliminate the ability to account for share-based compensation
transactions using APB Opinion No. 25, Accounting for Stock Issued to
Employees, and generally would require such transactions be accounted for using
a fair-value-based method and the resulting cost recognized in the financial
statements. We are closely monitoring developments related to the Exposure
Draft and will adopt the final standards upon issuance. Results of Operations Three months ended March 31, 2004 and 2003 Research and Development Expenses Research and development expenses were $6.7 million for the three months
ended March 31, 2004, a net decrease of $2.3 million, or 26 percent, from the
same period in 2003. In the three months ended March 31, 2004, expenses for
our 10




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ONYX PHARMACEUTICALS, INC. therapeutic virus program decreased by $4.0 million as compared to the same
period in 2003 as a result of 2003 restructuring actions that discontinued
therapeutic virus program development and terminated all internal research
activities. The decrease in the therapeutic virus program expenses was
partially offset by $1.7 million increased expenses related to Onyxs share of
the codevelopment costs with Bayer for BAY 43-9006. BAY 43-9006 development
costs reflect multiple ongoing Phase I(b) and Phase II clinical trials and a
Phase III clinical trial initiated in the fourth quarter of 2003. Future cost
savings from the discontinuation of our therapeutic virus program are expected
to be offset by increased costs associated with advancing the clinical
development of BAY 43-9006. The major components of research and development costs include clinical
manufacturing costs, clinical trial expenses, consulting and other third-party
costs, salaries and employee benefits, supplies and materials, and allocations
of various overhead and occupancy costs. The scope and magnitude of future
research and development expenses are difficult to predict at this time given
the number of studies that will need to be conducted for any of our potential
product candidates. In general, biopharmaceutical development involves a
series of steps beginning with identification of a potential target and
includes proof of concept in animals and Phase I, II and III clinical studies
in humans, each of which is typically more expensive than the previous step.
Success in development results in increasing expenditures, and the timing for
completion of these steps is uncertain. The following table summarizes our principal product development
initiatives, including the related stages of development for each product in
development and the research and development expenses recognized in connection
with each product. The information in the column labeled Phase of Development
- Estimated Completion is only our estimate of the timing of completion of the
current in-process development phases. The actual timing of completion of
those phases could differ materially from the estimates provided in the table.
For a discussion of the risks and uncertainties associated with the timing and
cost of completing a product development phase, see our Business Risks
section below. Research and Development ExpensesFor the Three Months EndedMarch 31,Phase of Development-Product
    
    Description
    
    Collaborator
    
    Estimated Completion
    
    2004
    
    2003(In thousands)BAY 43-9006
    
    Small Molecule Inhibitor of
    
    Bayer
    
    
    
    $5,616
    
    $3,945tumor cell proliferation and
    
    
    
    Phase I  2002angiogenesis, targeting RAF
    
    
    
    Phase IIUnknownKinase, VEGFR-2 and PDGFR-ß
    
    
    
    Phase III-UnknownTherapeutic Viruses
    
    
    
    
    
    
    
    1,114
    
    5,092Program:
    
    p53-Selective Replicating Virus
    
    
    
    Phase II/III  (1)RB-Selective Replicating  Virus
    
    
    
    Preclinical  (1)RB-Selective Replicating Virus
    
    
    
    Preclinical  (1)Armed with  Anticancer GenesCell Cycle
    
    Small Molecule Inhibitor of
    
    Warner-
    
    Preclinical  unknown
    
    
    
    Kinases (2)
    
    Cyclin-Dependent Kinase
    
    LambertTotal Research and Development
Expenses
    
    $6,730
    
    $9,037
   (1)
    
    Program discontinued during the second quarter of 2003. See Note 6 to our
financial statements.(2)
    
    Warner-Lambert is responsible for research and development costs. The overall completion dates of our major research and development
programs are estimates based on current information. The clinical development
portion of these programs may span as many as seven to ten years, and
estimation of completion dates or costs to complete would be highly
speculative and subjective due to the numerous risks and uncertainties
associated with developing biopharmaceutical products, including significant
and changing government regulation, the uncertainty of future preclinical and
clinical study results and uncertainties associated with process development
and manufacturing as well as marketing. These risks and uncertainties make
the reliable estimate of overall 11




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ONYX PHARMACEUTICALS, INC. completion dates and total costs to complete development highly
speculative. For additional discussion of factors affecting overall
completion dates and total costs, see the Business Risks section below. Marketing Expenses Marketing expenses consist primarily of salaries and employee benefits,
consulting and other third-party costs, and allocations for overhead and
occupancy costs. We reclassified $80,000 from research and development
expenses to marketing expenses for the three months ended March 31, 2003, to
conform to the current period presentation. Marketing expenses were $289,000
for the three months ended March 31, 2004, a net increase of $209,000, or 261
percent, from the same period in 2003. The increase was due to salaries and
employee benefits for additional resources from Bayer and Onyx working on
marketing activities and third-party costs. It is anticipated that marketing
expenses will increase in future periods as we develop our marketing
capabilities in order for us to copromote BAY 43-9006 with Bayer. General and Administrative Expenses General and administrative expenses consist primarily of salaries and
employee benefits and corporate functional expenses. General and
administrative expenses were $1.7 million for the three months ended March 31,
2004, a net increase of $384,000, or 29 percent, from the same period in 2003.
The increase was related to consulting expenses primarily for information
systems and increased overhead and occupancy expenses allocated to general and
administrative expenses. Subsequent to the reduction in force that occurred
in 2003, general and administrative expenses in the three months ended March 31,
2004 were allocated a larger portion of overhead expense compared to
the same period in 2003 prior to the restructuring. See Note 6 to the financial
statements included in this quarterly report for more description of our
restructuring activities. We anticipate that general and administrative
expenses may continue to increase modestly in the remainder of 2004 as
compared to first quarter expenses due to additional hiring to support our
Bayer collaboration activities and third-party costs. Restructuring Prior to June 2003, in addition to our small molecule program, we were
developing therapeutic viruses that selectively replicate in cells with
cancer-causing mutations. In June 2003, we announced that we were
discontinuing this program and terminating all internal research activities.
The decision was part of a business realignment that placed an increased
priority on the development of BAY 43-9006. As a first step in this
realignment, in January 2003, we suspended the development of ONYX-015,
including clinical trials and manufacturing activities. Together these actions
resulted in a reduction in force of approximately 75 positions, most of which
were associated with the therapeutic virus program. See Note 6 to the financial
statements included in this quarterly report for more description of our
restructuring activities. We did not record any restructuring charges in the
first quarter of 2004, and the remaining accrued restructuring costs will be
fully paid in 2004. We anticipate that the restructuring activities in
January and June 2003 will continue to reduce our future operating expenses;
however, these savings are expected to be fully offset by our share of the
increased codevelopment costs for BAY 43-9006 as the compound progresses
through Phase III clinical trials. Interest Income (Expense), net We had net interest income of $524,000 for the three months ended March
31, 2004, an increase of $351,000 from the same period in 2003, primarily due
to higher average cash and investment balances resulting from our February
2004 and July 2003 sale of equity securities from which we received
approximately $222.1 million in net cash proceeds. Liquidity and Capital Resources Since our inception, our cash expenditures have substantially exceeded our
revenues, and we have relied primarily on the proceeds from the sale of equity
securities and revenue from collaborative research and development agreements
to fund our operations. At March 31, 2004, we had cash, cash equivalents and marketable
securities of $248.3 million, compared to $105.4 million at December 31, 2003.
The increase of $142.9 million was attributable to our public offering
completed in February 2004, which raised aggregate net cash proceeds of $148.4
million, as well as $2.1 million received from the exercise of 12




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ONYX PHARMACEUTICALS, INC. stock options and warrants and $434,000 received from the sale of fixed
assets. These sources of cash were partially offset by cash used in operating
activities of $8.0 million. The cash was used primarily for cofunding the
clinical development program with Bayer for BAY 43-9006. Total capital expenditures for equipment and leasehold improvements for
the three-month period ended March 31, 2004, were $42,000. We currently expect
to make expenditures for capital equipment and leasehold improvements of up to
$1.0 million for the remainder of 2004. We believe that our existing capital resources and interest thereon will
be sufficient to fund our current and planned operations through the end of
2006. We anticipate that our codevelopment costs for the BAY 43-9006 program
will increase over the next several years as the Phase III clinical trial
program advances. While these costs are unknown at the current time, we expect
that we will need to raise additional capital to continue the cofunding of the
program in future periods beyond 2006. Changes in our research and development and marketing plans or other
changes affecting our operating expenses may result in the expenditure of our
resources before the end of 2006, and in any event, we will need to raise
additional capital to fund our operations beyond 2006. We intend to seek this
additional funding through collaborations, public and private equity or debt
financings, capital lease transactions or other available financing sources.
Additional financing may not be available on acceptable terms, if at all. If
additional funds are raised by issuing equity securities, substantial dilution
to existing stockholders may result. If adequate funds are not available, we
may be required to delay, reduce the scope of or eliminate one or more of our
research or development programs or to obtain funds through collaborations with
others that are on unfavorable terms or that may require us to relinquish
rights to certain of our technologies, product candidates or products that we
would otherwise seek to develop on our own. Business Risks BAY 43-9006 is our only product candidate currently in clinical
development, and our ability to discover and promote additional candidates to
clinical development is constrained. If BAY 43-9006 is not successfully
commercialized, we may be unable to identify and promote alternative product
candidates and our business would fail. BAY 43-9006 is our only product candidate in clinical development. In June
2003, following an unsuccessful search for new collaboration partners for our
therapeutic virus product candidates, including ONYX-015 and ONYX-411, we
announced that we were discontinuing the development of all therapeutic virus
product candidates, eliminating all employee positions related to these
candidates, and terminating all related manufacturing capabilities. As a
result, we do not have internal research and preclinical development
capabilities. Our remaining scientific and administrative employees are
dedicated to managing our relationship with Bayer, and the development of BAY
43-9006, but are not actively discovering or developing new product candidates.
As a result of the termination of our therapeutic virus program and drug
discovery programs, we do not have a clinical development pipeline beyond BAY
43-9006. If BAY 43-9006 is not successful in clinical trials, does not receive
marketing approval, or is not successfully commercialized, we may be unable to
identify and promote alternative product candidates to clinical development,
which would cause our business to fail. If our clinical trials fail to demonstrate the safety and effectiveness of
BAY 43-9006, we will be unable to commercialize BAY 43-9006, and our business
may fail. In collaboration with Bayer, we are conducting multiple clinical trials of
BAY 43-9006. We have completed Phase I single-agent clinical trials of BAY
43-9006. We are currently conducting a number of Phase Ib clinical trials of
BAY 43-9006 in combination with standard chemotherapeutic agents. Phase I
trials are not designed to test the efficacy of a drug candidate but rather to
test safety; to study pharmacokinetics, or how drug concentrations in the body
change over time; to study pharmacodynamics, or how the drug candidate acts on
the body over a period of time; and to understand the drug candidates side
effects at various doses and schedules. With Bayer, we are currently conducting single-agent Phase II clinical
trials of BAY 43-9006 in kidney, melanoma, liver and other cancers. Phase II
trials are designed to explore the efficacy of a product candidate in several
different types of cancers and are normally randomized and double-blinded to
ensure that the results are due to the effects of the drug. We and Bayer have
initiated a Phase III clinical trial without randomized Phase II clinical trial
data. In November 2003, we 13




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ONYX PHARMACEUTICALS, INC. announced interim investigator-reported data from 50 patients. The Phase
II trial is still in progress, early data is subject to confirmation, and final
results, including an independent review of the data, are not yet available.
Frequently, independently reviewed data is less favorable than
investigator-reported data, and our independent review could fail to confirm
the interim results. We believe that any clinical trial designed to test the
efficacy of BAY 43-9006, whether Phase II or Phase III, will involve a large
number of patients to achieve statistical significance and will be expensive.
We may conduct a lengthy and expensive clinical trial of BAY 43-9006 only to
learn that this drug candidate is not an effective treatment. Historically,
many companies have failed to demonstrate the effectiveness of pharmaceutical
product candidates in Phase III clinical trials notwithstanding favorable
results in Phase I or Phase II clinical trials. In addition, we may observe
previously unforeseen adverse side effects. If efficacy of BAY 43-9006 is not demonstrated, or if previously
unforeseen and unacceptable side effects are observed, we may not proceed with
further clinical trials of BAY 43-9006. If we do not proceed with additional
clinical trials of BAY 43-9006, we cannot seek regulatory approval of BAY
43-9006 with the FDA, which may cause our business to fail. In our clinical trials, we treat patients who have failed conventional
treatments and who are in advanced stages of cancer. During the course of
treatment, these patients may die or suffer adverse medical effects for reasons
unrelated to BAY 43-9006. These adverse effects may impact the interpretation
of clinical trial results, which could lead to an erroneous conclusion
regarding the toxicity or efficacy of BAY 43-9006. We are dependent upon our collaborative relationship with Bayer to
develop, manufacture and commercialize BAY 43-9006 and to obtain regulatory
approval. There may be circumstances which delay or prevent the development and
commercialization of BAY 43-9006. Our strategy for developing, manufacturing and commercializing BAY 43-9006
and obtaining regulatory approval depends in large part upon our relationship
with Bayer. If we are unable to maintain our collaborative relationship with
Bayer, we would need to undertake these development, manufacturing and
marketing activities at our own expense, which would significantly increase our
capital requirements and limit the indications we are able to pursue and could
prevent us from commercializing BAY 43-9006. Under the terms of the collaboration agreement, we and Bayer are
conducting multiple clinical trials of BAY 43-9006. We and Bayer must agree on
the development plan for BAY 43-9006. If we and Bayer cannot agree, clinical
trial progress could be significantly delayed or halted. Under our agreement with Bayer, we have the opportunity to fund 50 percent
of clinical development costs worldwide except in Japan, where Bayer will fund
100 percent of development costs and pay us a royalty on sales. We are
currently funding 50 percent of development costs for BAY 43-9006, and depend
on Bayer to fund the balance of these costs. Our collaboration agreement with
Bayer does not, however, create an obligation for either us or Bayer to fund
the development of BAY 43-9006, or any other product candidate. If a party
declines to fund development or ceases to fund development of a product
candidate under the collaboration agreement, then that party will be entitled
to receive a royalty on any product which is ultimately commercialized, but not
to share in profits. Bayer could, upon 60 days notice, elect at any time to
terminate its cofunding of the development of BAY 43-9006. If Bayer terminates
its cofunding of BAY 43-9006 development, Onyx may be unable to fund the
development costs on its own and may be unable to find a new collaborator. Bayer manages the development of BAY 43-9006, including the FDA regulatory
process and scope, size and schedule of clinical development. We are dependent
on Bayers experience in filing and pursuing applications necessary to gain
regulatory approvals. Bayer has limited experience in developing drugs for the
treatment of cancer. Our collaboration agreement with Bayer calls for Bayer to advance us
creditable milestone-based payments. To date, Bayer has advanced us $20 million
for achievement of specific milestones. Any funds advanced under the agreement
are repayable out of a portion of our future profits and royalties, if any,
from any products. Our collaboration agreement with Bayer terminates when patents expire that
were issued in connection with product candidates discovered under that
agreement, or upon the time when neither we nor Bayer are entitled to profit
sharing under that agreement, whichever is later. Bayer holds the global patent
applications related to BAY 43-9006. At present, it is 14




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ONYX PHARMACEUTICALS, INC. anticipated that, if issued, the last to expire of the United States
patents will expire in 2022, subject to possible patent-term extension, the
entitlement to which and the term of which cannot presently be calculated. We are subject to a number of additional risks associated with our
dependence on our collaborative relationship with Bayer, including:  
    
    the amount and timing of expenditure of resources can vary because
of decisions by Bayer;  
    
    possible disagreements as to development plans, including clinical
trials or regulatory approval strategy;  
    
    the right of Bayer to terminate its collaboration agreement with us
on limited notice and for reasons outside our control;  
    
    loss of significant rights if we fail to meet our obligations under
the collaboration agreement;  
    
    withdrawal of support by Bayer following the development or
acquisition by it of competing products; and  
    
    possible disagreements with Bayer regarding the collaboration
agreement or ownership of proprietary rights. Due to these factors and other possible disagreements with Bayer, we may
be delayed or prevented from developing or commercializing BAY 43-9006, or we
may become involved in litigation or arbitration, which would be time consuming
and expensive. If Bayers business strategy changes, it may adversely affect our
collaborative relationship. Bayer may change its business strategy. A change in Bayers business
strategy may adversely affect activities under its collaboration agreement with
us, which could cause significant delays and funding shortfalls impacting the
activities under the collaboration and seriously harming our business. Provisions in our collaboration agreement with Bayer may prevent or delay
a change in control. Our collaboration agreement with Bayer provides that, if Onyx is acquired
by another entity by reason of merger, consolidation or sale of all or
substantially all of our assets, and Bayer does not consent to the transaction,
then for 60 days following the transaction, Bayer may elect to terminate Onyxs
codevelopment and copromotion rights under the collaboration agreement. If
Bayer were to exercise this right, Bayer would gain exclusive development and
marketing rights to the product candidates being developed under the
collaboration agreement, including BAY 43-9006. If this happened, Onyx, or the
successor to Onyx, would receive a royalty based on any sales of BAY 43-9006
and other collaboration products, rather than a share of any profits. In this
case, Onyx or its successor would be permitted to continue cofunding
development, and the royalty rate would be adjusted to reflect this continued
risk-sharing by Onyx or its successor. These provisions of our collaboration
agreement with Bayer may have the effect of delaying or preventing a change in
control, or a sale of all or substantially all of our assets, or may reduce the
number of companies interested in acquiring Onyx. Our clinical trials could take longer to complete than we project or may
not be completed at all. Although for planning purposes we project the commencement, continuation
and completion of clinical trials for BAY 43-9006, the actual timing of these
events may be subject to significant delays relating to various causes,
including actions by Bayer, scheduling conflicts with participating clinicians
and clinical institutions, difficulties in identifying and enrolling patients
who meet trial eligibility criteria, and shortages of available drug supply. We
may not complete clinical trials involving BAY 43-9006 as projected or at all. We rely on Bayer, academic institutions or clinical research organizations
to conduct, supervise or monitor some or all aspects of clinical trials
involving BAY 43-9006. We will have less control over the timing and other
aspects of these clinical trials than if we conducted them entirely on our own.
In addition, we may suffer a delay in the completion of any one of our clinical
trials because of requests from the FDA to revise the size or scope of the
clinical trial. Failure to 15




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ONYX PHARMACEUTICALS, INC. commence or complete, or delays in, any of our planned clinical trials
would prevent us from commercializing BAY 43-9006, and thus seriously harm our
business. We will need substantial additional funds, and our future access to
capital is uncertain. We will require substantial additional funds to conduct the costly and
time-consuming clinical trials necessary to develop BAY 43-9006, pursue
regulatory approval and commercialize this product candidate. Our future
capital requirements will depend upon a number of factors, including:  
    
    the size and complexity of our BAY 43-9006 program;  
    
    decisions made by Bayer and Onyx to alter the size, scope and
schedule of clinical development;  
    
    our receipt of milestone-based payments;  
    
    the ability to manufacture sufficient drug supply to complete
clinical trials;  
    
    progress with clinical trials;  
    
    the time and costs involved in obtaining regulatory approvals;  
    
    the cost involved in enforcing patent claims against third parties
and defending claims by third parties (both of which are shared with
Bayer);  
    
    the costs associated with acquisitions or licenses or additional
products;  
    
    competing technological and market developments; and  
    
    product commercialization activities. We may not be able to raise additional financing on favorable terms, or at
all. If we are unable to obtain additional funds, we may not be able to fund
our share of clinical trials. We may also have to curtail operations or obtain
funds through collaborative and licensing arrangements that may require us to
relinquish commercial rights or potential markets or grant licenses that are
unfavorable to us. We believe that our existing capital resources and interest thereon will
be sufficient to fund our current development plans through 2006. However, if
we change our development plans, we may need additional funds sooner than we
expect. In addition, we anticipate that our codevelopment costs for the BAY
43-9006 program will increase over the next several years as the Phase III
clinical trial program advances, and new trials are initiated. While these
costs are unknown at the current time, we expect that we will need to raise
substantial additional capital to continue the cofunding of the BAY 43-9006
program in future periods. We may have to curtail our funding of BAY 43-9006 if
we cannot raise sufficient capital. If we do not cofund development of BAY
43-9006, we will receive a royalty on future sales of any product that is
ultimately commercialized, instead of a share of profits. The efficacy of RAF inhibition in the treatment of human cancer has not
been established. BAY 43-9006 is designed to act as a RAF inhibitor, blocking inappropriate
growth signals in tumor cells by inhibiting RAF kinase, an enzyme involved in
cancer cell growth. BAY 43-9006 is the first small molecule RAF inhibitor to
reach the stage of clinical testing, and there is currently no direct evidence
that the inhibition of RAF is an effective treatment for cancer in humans. BAY
43-9006 also inhibits VEGF and PDGF receptors, two key receptors involved in
angiogenesis. In addition, the inhibition of RAF kinase has also been shown to
have anti-angiogenic effects. BAY 43-9006 has been shown to inhibit
angiogenesis and tumor growth in preclinical models. However, preclinical
models to study anticancer activity of compounds are not necessarily predictive
of sufficient clinical efficacy of these compounds in the treatment of human
cancer to warrant a full commercial development program. BAY 43-9006 has also
been tested in Phase I and Phase II human clinical trials, but the number of
patients in these trials, and the design of the trials, were insufficient to
draw 16




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ONYX PHARMACEUTICALS, INC. statistically significant conclusions as to clinical efficacy of the
compound. RAF inhibition, a method of action of BAY 43-9006, may ultimately
fail as an effective treatment of cancer in humans, or BAY 43-9006 may not
inhibit RAF sufficiently to be effective. If RAF inhibition is not an effective
treatment of cancer in humans, BAY 43-9006 may have no commercial value as a
drug candidate, which could seriously harm our business. We have a history of losses, and we expect to continue to incur losses. Our net loss for the year ended December 31, 2001 was $27.6 million, for
the year ended December 31, 2002 was $45.8 million, and for the year ended
December 31, 2003 was $45.0 million. Our net loss for the three months ended
March 31, 2004 was $8.2 million. As of March 31, 2004, we had an accumulated
deficit of approximately $212.1 million. We have incurred these losses
principally from costs incurred in our research and development programs and
from our general and administrative costs. We derived no revenues from product
sales or royalties. We expect to incur significant and increasing operating
losses over the next several years as we expand our clinical trial activities.
We expect our operating losses to increase with our cofunding of ongoing BAY
43-9006 clinical trial costs under our collaboration agreement with Bayer. We do not expect to generate revenues from the sale of products for the
foreseeable future, and we must repay the milestone-based advances we receive
from Bayer from our future profits and royalties, if any. Our ability to
achieve profitability depends upon success by us and Bayer in completing
development of BAY 43-9006, obtaining required regulatory approvals and
manufacturing and marketing the approved product. We do not have manufacturing expertise or capabilities and are dependent
on third parties to fulfill our manufacturing needs, which could result in the
delay of clinical trials or regulatory approval. Under our collaboration agreement with Bayer, Bayer has the manufacturing
responsibility to supply BAY 43-9006 for clinical trials and to support any
commercial requirements. We lack the resources, experience and capabilities to
manufacture BAY 43-9006 or any future product candidates on our own. We would
require substantial funds to establish these capabilities. Consequently, we are
dependent on third parties to manufacture our product candidates and products,
if any. These parties may encounter difficulties in production scale-up,
including problems involving production yields, quality control and quality
assurance and shortage of qualified personnel. These third parties may not
perform as agreed or may not continue to manufacture our products for the time
required by us to successfully market our products. These third parties may
fail to deliver the required quantities of our products, if any, or product
candidates on a timely basis and at commercially reasonable prices. Failure by
these third parties could delay our clinical trials and our applications for
regulatory approval. If these third parties do not adequately perform, we may
be forced to incur additional expenses to pay for the manufacture of products
or to develop our own manufacturing capabilities. We have the right to copromote BAY 43-9006, but we do not have marketing
or sales experience or capabilities. We have the right under our collaboration agreement with Bayer to
copromote BAY 43-9006 in the United States in conjunction with Bayer. In order
to copromote BAY 43-9006, we will need to develop marketing and sales
capabilities. We may not successfully establish marketing and sales
capabilities or have sufficient resources to do so. If we do not develop
marketing and sales capabilities, we may not meet our copromotion obligations
under our collaboration agreement, which could result in our losing these
copromotion rights. If we do develop such capabilities, we will compete with
other companies that have experienced and well-funded marketing and sales
operations, and we will incur additional expenses. If we lose our key employees and consultants or are unable to attract or
retain qualified personnel, our business could suffer. Our future success will depend in large part on the continued services of
our management personnel, including Hollings C. Renton, our Chairman, President
and Chief Executive Officer, and each of our other executive officers. The loss
of the services of one or more of our key employees could have an adverse
impact on our business. We do not maintain key person life insurance on any of
our officers, employees or consultants, other than for our chief executive
officer. Any of our key personnel could terminate their employment with us at
any time and without notice. We depend on our continued ability to attract,
retain and motivate highly qualified personnel. We face competition for
qualified individuals from numerous pharmaceutical and biotechnology companies,
universities, and other research institutions. 17




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ONYX PHARMACEUTICALS, INC. In January 2003, we restructured our operations to reflect an increased
priority on the development of BAY 43-9006 and, in June 2003, announced that we
discontinued our therapeutic virus program. As a result of these
restructurings, we eliminated approximately 75 positions, including our entire
scientific team associated with the therapeutic virus program. Our remaining
scientific and administrative employees are engaged in managing our
collaboration with Bayer to develop BAY 43-9006, but are not actively involved
in new product candidate discovery. If we resume our research and development
of other product candidates, we will either need to rehire these individuals or
hire individuals with similar skills. If we cannot rehire these individuals or
others with similar skills in a timely fashion, we will be unable to resume
these activities. Even if our product candidates are approved, the market may not accept
these products. Even if our product development efforts are successful and even if the
requisite regulatory approvals are obtained, BAY 43-9006 or any future product
candidates that we may develop may not gain market acceptance among physicians,
patients, healthcare payers and the medical community. A number of additional
factors may limit the market acceptance of products including the following:  
    
    rate of adoption by healthcare practitioners;  
    
    types of cancer for which the product is approved;  
    
    rate of a products acceptance by the target population;  
    
    timing of market entry relative to competitive products;  
    
    availability of alternative therapies;  
    
    price of our product relative to alternative therapies;  
    
    availability of third-party reimbursement;  
    
    extent of marketing efforts by us and third-party distributors or
agents retained by us; and  
    
    side effects or unfavorable publicity concerning our products or
similar products. If BAY 43-9006 or any future product candidates that we may develop do not
achieve market acceptance, we may lose our investment in that product
candidate, which may cause our stock price to decline. We face intense competition and rapid technological change, and many of
our competitors have substantially greater managerial resources than we have. We are engaged in a rapidly changing and highly competitive field. We are
seeking to develop and market product candidates that will compete with other
products and therapies that currently exist or are being developed. Many other
companies are actively seeking to develop products that have disease targets
similar to those we are pursuing. Some of these competitive product candidates
are in clinical trials, and others are approved. Competitors that target the
same tumor types as our BAY 43-9006 program and that have commercial products
or product candidates in clinical development include Pfizer, Novartis,
AstraZeneca PLC, OSI Pharmaceuticals, Inc., Genentech, Inc., and Abgenix, Inc.,
among others. We believe Pfizer has a small molecule compound in clinical
development that targets MEK, an enzyme that is also involved in the RAS

signaling pathway. In addition, potential competition may come from agents that
target Epidermal Growth Factor, or EGF, receptors and Vascular Endothelial
Growth Factor, or VEGF, receptors. These agents include antibodies and small
molecules. In particular, OSI Pharmaceuticals with Tarceva and AstraZeneca
with IRESSA are developing small molecule inhibitors of the EGF receptor
tyrosine kinase. IRESSA has been approved in the United States. Companies
working on developing antibody approaches include ImClone Systems, Inc. with
Erbitux and Abgenix with antibodies targeting EGF receptors. Erbitux has been
approved in the United States. Genentech has Avastin, an antibody targeting
VEGF, which is now approved. Novartis and Pfizer, among others, are developing
small molecules targeting VEGF receptors. In addition, many other
pharmaceutical companies are developing novel cancer therapies that, if
successful, 18




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ONYX PHARMACEUTICALS, INC. would also provide competition for or be used in combination with BAY
43-9006. We believe that other companies have RAF kinase inhibitors in
preclinical development. Certain of these product candidates have recently been approved by the
FDA. These and product candidates of other competitors now in clinical trials
will compete directly with BAY 43-9006. Many of our competitors, either alone
or together with collaborators, have substantially greater financial resources
and research and development staffs. In addition, many of these competitors,
either alone or together with their collaborators, have significantly greater
experience than we do in:  
    
    developing products;  
    
    undertaking preclinical testing and human clinical trials;  
    
    obtaining FDA and other regulatory approvals of products; and  
    
    manufacturing and marketing products. Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA approval or commercializing product candidates before we do. If
we commence commercial product sales, we will compete against companies with
greater marketing and manufacturing capabilities, areas in which we have
limited or no experience. We also face, and will continue to face, competition from academic
institutions, government agencies and research institutions. Further, we face
numerous competitors working on product candidates to treat each of the
diseases for which we are seeking to develop therapeutic products. In addition,
our product candidates, if approved, will compete with existing therapies that
have long histories of safe and effective use. We may also face competition
from other drug development technologies and methods of preventing or reducing
the incidence of disease and other classes of therapeutic agents. Developments by competitors may render our product candidates obsolete or
noncompetitive. We face and will continue to face intense competition from
other companies for collaborations with pharmaceutical and biotechnology
companies for establishing relationships with academic and research
institutions, and for licenses to proprietary technology. These competitors,
either alone or with collaborative parties, may succeed with technologies or
products that are more effective than ours. We anticipate that we will face increased competition in the future as new
companies enter our markets and as scientific developments surrounding other
cancer therapies continue to accelerate. If BAY 43-9006 receives regulatory
approval but cannot compete effectively in the marketplace, our business will
suffer. We are subject to extensive government regulation, which can be costly,
time consuming and subject us to unanticipated delays. Drug candidates under development are subject to extensive and rigorous
domestic and foreign regulation. We have not received regulatory approval in
the United States or any foreign market for BAY 43-9006 or any other product
candidate. We expect to rely on Bayer to manage communications with regulatory
agencies, including filing investigational new drug applications and generally
directing the regulatory approval process for BAY 43-9006. We and Bayer may not
obtain necessary approvals from the FDA or other regulatory authorities. If we
fail to obtain required governmental approvals, we will experience delays in or
be precluded from marketing BAY 43-9006. If we have disagreements as to
ownership of clinical trial results or regulatory approvals, and the FDA
refuses to recognize us as holding, or having access to, the regulatory
approvals necessary to commercialize our product candidates, we may experience
delays in or be precluded from marketing products. The regulatory review and approval process takes many years, requires the
expenditure of substantial resources, involves post-marketing surveillance, and
may involve ongoing requirements for post-marketing studies. Additional or more
rigorous governmental regulations may be promulgated that could delay
regulatory approval of BAY 43-9006. Delays in obtaining regulatory approvals
may: 19




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ONYX PHARMACEUTICALS, INC.  
    
    adversely affect the successful commercialization of BAY 43-9006;  
    
    impose costly procedures on us;  
    
    diminish any competitive advantages that we may attain; and  
    
    adversely affect our receipt of revenues or royalties. In addition, problems or failures with the products of others, including
our competitors, could have an adverse effect on our ability to obtain or
maintain regulatory approval for BAY 43-9006. We may not be able to protect our intellectual property or operate our
business without infringing upon the intellectual property rights of others. We can protect our technology from unauthorized use by others only to the
extent that our technology is covered by valid and enforceable patents or
effectively maintained as trade secrets. As a result, we depend in part on our
ability to:  
    
    obtain patents;  
    
    license technology rights from others;  
    
    protect trade secrets;  
    
    operate without infringing upon the proprietary rights of others;
and  
    
    prevent others from infringing on our proprietary rights. In the case of BAY 43-9006, the global patent applications related to this
product candidate are held by Bayer, but licensed to us in conjunction with our
collaboration agreement with Bayer. At present, it is anticipated that, if
issued, the last to expire of the United States patents related to BAY 43-9006
will expire in 2022, subject to possible patent-term extension, the entitlement
to which and the term of which cannot presently be calculated. Patent
applications for BAY 43-9006 are also pending throughout the world. As of March
31, 2004, we owned or had licensed rights to 49 United States patents and 43
United States patent applications and, generally, foreign counterparts of these
filings. Most of these patents or patent applications cover protein targets
used to identify product candidates during the research phase of our
collaborative agreements with Warner-Lambert or Bayer, or aspects of our now
discontinued virus program. Additionally, we have corresponding patents or
patent applications pending or granted in certain foreign jurisdictions. Our existing patent rights may not have a deterrent effect on competitors
who are conducting or desire to commence competitive research programs with
respect to the biological targets or fields of inquiry that we are pursuing.
Although third parties may challenge our rights to, or the scope or validity of
our patents, to date, we have not received any communications from third
parties challenging our patents or patent applications covering our product
candidates. The patent positions of biotechnology and pharmaceutical companies are
highly uncertain and involve complex legal and factual questions. Our patents,
or patents that we license from others, may not provide us with proprietary
protection or competitive advantages against competitors with similar
technologies. Competitors may challenge or circumvent our patents or patent
applications. Courts may find our patents invalid. Due to the extensive time
required for development, testing and regulatory review of our potential
products, our patents may expire or remain in existence for only a short period
following commercialization, which would reduce or eliminate any advantage the
patents may give us. We may not have been the first to make the inventions covered by each of
our issued or pending patent applications, or we may not have been the first to
file patent applications for these inventions. Competitors may have
independently developed technologies similar to ours. We may need to license
the right to use third-party patents and intellectual property to develop and
market our product candidates. We may not acquire required licenses on
acceptable terms, if at all. If we do not obtain these required licenses, we
may need to design around other parties patents, or we may not be able to
proceed 20




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ONYX PHARMACEUTICALS, INC. with the development, manufacture or, if approved, sale of our product
candidates. We may face litigation to defend against claims of infringement,
assert claims of infringement, enforce our patents, protect our trade secrets
or know-how, or determine the scope and validity of others proprietary rights.
In addition, we may require interference proceedings declared by the United
States Patent and Trademark Office to determine the priority of inventions
relating to our patent applications. These activities, and especially patent
litigation, are costly. Bayer may have rights to publish data and information in which we have
rights. In addition, we sometimes engage individuals, entities or consultants
to conduct research that may be relevant to our business. The ability of these
individuals, entities or consultants to publish or otherwise publicly disclose
data and other information generated during the course of their research is
subject to certain contractual limitations. The nature of the limitations
depends on various factors, including the type of research being conducted, the
ownership of the data and information and the nature of the individual, entity
or consultant. In most cases, these individuals, entities or consultants are,
at the least, precluded from publicly disclosing our confidential information
and are only allowed to disclose other data or information generated during the
course of the research after we have been afforded an opportunity to consider
whether patent and/or other proprietary protection should be sought. If we do
not apply for patent protection prior to publication or if we cannot otherwise
maintain the confidentiality of our technology and other confidential
information, then our ability to receive patent protection or protect our
proprietary information will be harmed. We face product liability risks and may not be able to obtain adequate
insurance. The use of BAY 43-9006 in clinical trials, and the sale of any approved
products, exposes us to liability claims. Although we are not aware of any
historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to limit commercialization of BAY
43-9006. We believe that we have obtained reasonably adequate product liability
insurance coverage for our clinical trials. We intend to expand our insurance
coverage to include the commercial sale of BAY 43-9006 if marketing approval is
obtained. However, the cost of insurance coverage is rising. We may not be able
to maintain insurance coverage at a reasonable cost. We may not be able to
obtain additional insurance coverage that will be adequate to cover product
liability risks that may arise should one of our product candidates receive
marketing approval. Regardless of merit or eventual outcome, product liability
claims may result in:  
    

    decreased demand for a product;  
    
    injury to our reputation;  
    
    withdrawal of clinical trial volunteers; and  
    
    loss of revenues. Thus, whether or not we are insured, a product liability claim or product
recall may result in losses that could be material. We deal with hazardous materials and must comply with environmental laws
and regulations, which can be expensive and restrict how we do business. Our activities involve the controlled storage, use, and disposal of
hazardous materials, including infectious agents, corrosive, explosive and
flammable chemicals and various radioactive compounds. We are subject to
federal, state, and local laws and regulations governing the use, manufacture,
storage, handling, and disposal of these hazardous materials. Although we
believe that our safety procedures for handling and disposing of these
materials comply with the standards prescribed by these laws and regulations,
we cannot eliminate the risk of accidental contamination or injury from these
materials. In the event of an accident, state or federal authorities may curtail our
use of these materials and we could be liable for any civil damages that
result, which may exceed our financial resources and may seriously harm our
business. While we 21




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ONYX PHARMACEUTICALS, INC. believe that the amount of insurance we carry is sufficient for typical
risks regarding our handling of these materials, it may not be sufficient to
cover pollution conditions or other extraordinary or unanticipated events.
Additionally, an accident could damage, or force us to shut down, our
operations. In addition, if we develop a manufacturing capacity, we may incur
substantial costs to comply with environmental regulations and would be subject
to the risk of accidental contamination or injury from the use of hazardous
materials in our manufacturing process. Our stock price is volatile. The market price of our common stock has been volatile and is likely to
continue to be volatile. For example, during the period beginning January 1,
2001 and ending March 31, 2004, the closing sales price for one share of our
common stock reached a high of $41.53 and a low of $3.50. Factors affecting our
stock price include:  
    
    interim or final results of, or speculation about, clinical trials
from BAY 43-9006;  
    
    ability to accrue patients into clinical trials;  
    
    success or failure in, or speculation about, obtaining regulatory
approval by us or our competitors;  
    
    public concern as to the safety and efficacy of our product
candidates;  
    
    developments in our relationship with Bayer;  
    
    developments in patent or other proprietary rights;  
    
    additions or departures of key personnel;  
    
    announcements by us or our competitors of technological innovations
or new commercial therapeutic products;  
    
    published reports by securities analysts;  
    
    statements of governmental officials; and  
    
    changes in healthcare reimbursement policies. Existing stockholders have significant influence over us. Our executive officers, directors and five-percent stockholders own, in
the aggregate, approximately 30 percent 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. 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. 22




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ONYX PHARMACEUTICALS, INC. Provisions in Delaware law, our charter and executive change of control
agreements we have entered into may prevent or delay a change of control. We are subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10 percent of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15 percent
or more of the corporations outstanding voting stock, for three years
following the date that the stockholder acquired 15 percent or more of the
corporations stock unless:  
    
    the board of directors approved the transaction where the
stockholder acquired 15 percent or more of the corporations stock;  
    
    after the transaction in which the stockholder acquired 15 percent
or more of the corporations stock, the stockholder owned at least 85
percent of the corporations outstanding voting stock, excluding shares
owned by directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held under the plan will be tendered in a tender or exchange
offer; or  
    
    on or after this date, the merger or sale is approved by the board
of directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder. As such, these laws could prohibit or delay mergers or a change of control
of us and may discourage attempts by other companies to acquire us. Our certificate of incorporation and bylaws include a number of provisions
that may deter or impede hostile takeovers or changes of control or management.
These provisions include:  
    
    our board is classified into three classes of directors as nearly
equal in size as possible with staggered three-year terms;  
    
    the authority of our board to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences and
privileges of these shares, without stockholder approval;  
    
    all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;  
    
    special meetings of the stockholders may be called only by the
chairman of the board, the chief executive officer, the board or 10
percent or more of the stockholders entitled to vote at the meeting; and  
    
    no cumulative voting. These provisions may have the effect of delaying or preventing a change of
control, even at stock prices higher than the then current stock price. We have entered into change of control severance agreements with each of
our executive officers. These agreements provide for the payment of severance
benefits and the acceleration of stock option vesting if the executive
officers employment is terminated within 13 months of a change in control of
Onyx. These change of control severance agreements may have the effect of
preventing a change of control. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. By policy, we place our investments
with high quality debt security issuers, limit the amount of credit exposure to
any one issuer, limit duration by restricting the term, and hold investments to
maturity except under rare circumstances. We classify our cash equivalents or
marketable securities as fixed rate if the rate of return on an instrument
remains fixed over its term. As of March 31, 2004, all of our cash equivalents
and marketable securities were classified as fixed rate. There were no
significant changes in our market risk exposures during 23




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ONYX PHARMACEUTICALS, INC. the three months ended March 31, 2004. 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, 2003. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures:The Companys principal
executive and financial officer reviewed and evaluated the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended). Based on that evaluation, the
Companys principal executive and financial officer concluded that the
Companys disclosure controls and procedures were sufficiently effective as of
March 31, 2004 to ensure that information required to be disclosed by the
Company in this Quarterly Report on Form 10-Q was recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and Form 10-Q. Changes in internal controls over financial reporting:There were no
changes in the Companys internal controls over financial reporting during the
three months ended March 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. Limitation on the effectiveness of controls:A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues, if any, within a company
have been detected. 24




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ONYX PHARMACEUTICALS, INC. 
 PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings Not applicable. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities Not applicable. 
 Item 3. Defaults Upon Senior Securities Not applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 
 Item 5. Other Information Not applicable. 
 Item 6. Exhibits and Reports on Form 8-K a) Exhibits 3.1
    
    Restated Certification of Incorporation of the Company. (1)3.2
    
    Bylaws of the Company. (1)3.3
    
    Certificate of Amendment to Amended and Restated Certification of Incorporation. (2)3.4
    
    Specimen Stock Certificate. (1)31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1
    
    Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). (3)
 b) Reports on Form 8-K On January 27, 2004, the Company filed a Current Report on Form
8-K, reporting under Item 5 that on January 26, 2004, the Company
announced plans to publicly offer 3,500,000 shares of its common
stock pursuant to an effective registration statement previously
filed with the Securities and Exchange Commission. In addition,
the Company announced plans to grant to the underwriters in
connection with the offering an option to purchase up to an
additional 525,000 shares of common stock. On February 3, 2004, the Company filed a Current Report on Form
8-K, reporting under Item 5 that on February 2, 2004 the Company
entered into an Underwriting Agreement with Morgan Stanley & Co.
Incorporated, Piper Jaffray & Co., SG Cowen Securities Corporation
and Leerink Swann & Company relating to the sale of 4,637,000
shares of the Companys common stock at an offering price to the
public of $33.75 per share. On February 20, 2004, the Company filed a Current Report on Form
8-K, to furnish under Item 12 its February 12, 2004 public
announcement of financial results for the fourth quarter and
year-end 2003. 25




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ONYX PHARMACEUTICALS, INC.   (1)
    
    Filed as an exhibit to the registrants Registration Statement on Form
SB-2 (No. 333-3176-LA).(2)
    
    Filed as an exhibit to the registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.(3)
    
    This certification accompanies the Quarterly Report on Form 10-Q to
which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of
Onyx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended
or the Securities Exchange Act of 1934, as amended (whether made before
or after the date of the Quarterly Report on Form 10-Q), irrespective of
any general incorporation language contained in such filing. 26




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ONYX PHARMACEUTICALS, INC. 
 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: May 10, 2004
    
    By:
    /s/ Hollings C. RentonHollings C. RentonChairman of the Board,President and Chief Executive Officer(Principal Executive and Financial Officer)Date: May 10, 2004
    
    By:
    /s/ Marilyn E. WortzmanMarilyn E. WortzmanVice President, Finance and Administration(Principal Accounting Officer)
 27




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ONYX PHARMACEUTICALS, INC. 
 EXHIBIT INDEX 3.1
    
    Restated Certification of Incorporation of the Company. (1)3.2
    
    Bylaws of the Company. (1)3.3
    
    Certificate of Amendment to Amended and Restated Certification of Incorporation. (2)3.4
    
    Specimen Stock Certificate. (1)31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1
    
    Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). (3)
   (1)
    
    Filed as an exhibit to the registrants Registration Statement on Form
SB-2 (No. 333-3176-LA).(2)
    
    Filed as an exhibit to the registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.(3)
    
    This certification accompanies the Quarterly Report on Form 10-Q to
which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of
Onyx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended
or the Securities Exchange Act of 1934, as amended (whether made before
or after the date of the Quarterly Report on Form 10-Q), irrespective of
any general incorporation language contained in such filing. 28