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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 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.  Delaware
    
    94-3154463(State or other jurisdiction of
    
    (I.R.S. Employer ID Number)incorporation or organization)
 2100 Powell Street
Emeryville, California 94608
(Address of principal executive offices) (510) 597-6500
(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. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). þ o
 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 35,291,034 as of May 3, 2005.




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ONYX PHARMACEUTICALS, INC. INDEX PAGEPART I: FINANCIAL INFORMATIONItem 1.Financial Statements (Unaudited)Condensed Balance Sheets  March 31, 2005 and December 31, 2004
    
    
    3Condensed Statements of Operations  Three months ended March 31, 2005 and 2004
    
    
    4Condensed Statements of Cash Flows  Three months ended March 31, 2005 and 2004
    
    
    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
    
    
    23PART II: OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    24Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.Defaults Upon Senior Securities
    
    
    24Item 4.Submission of Matters to a Vote of Security Holders
    
    
    24Item 5.Other Information
    
    
    24Item 6.Exhibits
    
    
    24SIGNATURES
    
    
    26EXHIBIT 31.1EXHIBIT 32.1
 2




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ONYX PHARMACEUTICALS, INC. 
 PART I: FINANCIAL INFORMATION 
 Item 1. Financial Statements (Unaudited) 
 CONDENSED BALANCE SHEETS March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Note 1)(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    34,083
    
    
    $
    74,243Marketable securities
    
    
    159,511
    
    
    
    135,381Receivable from collaboration partner
    
    
    1,364
    
    
    
    1,029Other current assets
    
    
    2,843
    
    
    
    2,778Total current assets
    
    
    197,801
    
    
    
    213,431Property and equipment, net
    
    
    1,609
    
    
    
    1,623Other assets
    
    
    581
    
    
    
    492$
    199,991
    
    
    $
    215,546LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    815
    
    
    $
    1,038Payable to collaboration partner
    
    
    13,583
    
    
    
    11,520Accrued liabilities
    
    
    1,183
    
    
    
    1,895Accrued compensation
    
    
    529
    
    
    
    910Accrued restructuring
    
    
    84
    
    
    
    195Total current liabilities
    
    
    16,194
    
    
    
    15,558Advance from collaboration partner
    
    
    20,000
    
    
    
    20,000Commitments and contingenciesStockholders equity:Common stock
    
    
    35
    
    
    
    35Additional paid-in capital
    
    
    431,250
    
    
    
    430,966Accumulated other comprehensive loss
    
    
    (752
    )
    
    
    (377
    )Accumulated deficit
    
    
    (266,736
    )
    
    
    (250,636
    )Total stockholders equity
    
    
    163,797
    
    
    
    179,988$
    199,991
    
    
    $
    215,546
 See accompanying notes. 3




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ONYX PHARMACEUTICALS, INC. 
 CONDENSED STATEMENTS OF OPERATIONS
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004(In thousands, except pershare amounts)Revenue:License fee
    
    $
    1,000
    
    
    $
    Operating expenses:Research and development
    
    
    13,532
    
    
    
    6,615Marketing
    
    
    1,954
    
    
    
    289General and administrative
    
    
    2,846
    
    
    
    1,801Total operating expenses
    
    
    18,332
    
    
    
    8,705Loss from operations
    
    
    (17,332
    )
    
    
    (8,705
    )Interest income and (expense), net
    
    
    1,232
    
    
    
    524Net loss
    
    $
    (16,100
    )
    
    $
    (8,181
    )Basic and diluted net loss per share
    
    $
    (0.46
    )
    
    $
    (0.25
    )Shares used in computing basic and diluted net loss per share
    
    
    35,274
    
    
    
    32,555
 See accompanying notes. 4




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ONYX PHARMACEUTICALS, INC. 
 CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004(In thousands)Cash flows from operating activities:Net loss
    
    $
    (16,100
    )
    
    $
    (8,181
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    126
    
    
    
    45Stock-based compensation to consultants
    
    
    237
    
    
    
    660Changes in assets and liabilities:Receivable from collaboration partner
    
    
    (335
    )
    
    
    (239
    )Other current assets
    
    
    (65
    )
    
    
    60Other assets
    
    
    (89
    )
    
    
    (8
    )Accounts payable
    
    
    (223
    )
    
    
    437Accrued liabilities and accrued restructuring
    
    
    (823
    )
    
    
    (85
    )Payable to collaboration partner
    
    
    2,063
    
    
    
    (938
    )Accrued compensation
    
    
    (381
    )
    
    
    219Net cash used in operating activities
    
    
    (15,590
    )
    
    
    (8,030
    )Cash flows from investing activities:Purchases of marketable securities
    
    
    (53,210
    )
    
    
    (9,176
    )Maturities of marketable securities
    
    
    28,705
    
    
    
    8,471Capital expenditures
    
    
    (118
    )
    
    
    (42
    )Proceeds from sale of fixed assets
    
    
    6
    
    
    
    434Net cash used in investing activities
    
    
    (24,617
    )
    
    
    (313
    )Cash flows from financing activities:Net proceeds from issuances of common stock
    
    
    47
    
    
    
    150,475Net cash provided by financing activities
    
    
    47
    
    
    
    150,475Net (decrease) increase in cash and cash equivalents
    
    
    (40,160
    )
    
    
    142,132Cash and cash equivalents at beginning of period
    
    
    74,243
    
    
    
    55,312Cash and cash equivalents at end of period
    
    $
    34,083
    
    
    $
    197,444
 See accompanying notes. 5




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ONYX PHARMACEUTICALS, INC. 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (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, 2005 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005, or for any other future operating periods. The condensed balance sheet at December 31, 2004 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. 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, as amended,
for the year ended December 31, 2004. 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 because 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 net 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 and employee stock purchase plan 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 31,2005
    
    
    2004Risk-free interest rate
    
    
    3.54
    
    
    
    2.51Expected life
    
    3.8 years
    
    
    3.7 yearsExpected volatility
    
    
    0.77
    
    
    
    0.60Expected dividends
    

    None
    
    

    NoneWeighted average option fair value
    
    $
    15.02
    
    
    $
    17.18
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ONYX PHARMACEUTICALS, INC. The
following table illustrates the pro forma effects on net loss and net loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee
compensation: Three Months EndedMarch 31,2005
    
    
    2004(In thousands, except pershare amounts)Net loss  as reported
    
    $
    (16,100
    )
    
    $
    (8,181
    )Deduct: Total stock-based employee compensation
determined under the fair value based method for
all awards, net of related tax effects
    
    
    (2,551
    )
    
    
    (506
    )Pro forma net loss
    
    $
    (18,651
    )
    
    $
    (8,687
    )Loss per share:Basic and diluted net loss per share  as reported
    
    $
    (0.46
    )
    
    $
    (0.25
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.53
    )
    
    $
    (0.27
    )
 Note 3. Revenue Effective January 2005, the Company licensed exclusive rights to its p53-selective virus,
ONYX-015, to Shanghai Sunway Biotech Co., Ltd. headquartered in Shanghai, Peoples Republic of
China. Under this agreement, Shanghai Sunway is responsible for the research, development,
manufacture and commercialization of ONYX-015 worldwide. During the quarter ended March 31, 2005,
the Company received a cash payment of $1.0 million in exchange for the transfer to Shanghai Sunway
of the intellectual property and know-how to ONYX-015. As the Company
has no further obligations under the license agreement, the $1.0 million payment was recorded as
license fee revenue in the accompanying statement of operations. Note 4. 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 each period. Potentially dilutive outstanding securities
consisting of 3,048,892 stock options and warrants as of March 31, 2005 and 2,778,092 stock
options and warrants as of March 31, 2004 were not included in the computation of diluted net loss
per share because their effect would have been antidilutive. Note 5. 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 31,2005
    
    
    2004(In thousands)Net loss  as reported
    
    $
    (16,100
    )
    
    $
    (8,181
    )Other comprehensive income (loss):Net unrealized (loss) gain on available-for-sale securities
    
    
    (375
    )
    
    
    28Comprehensive loss
    
    $
    (16,475
    )
    
    $
    (8,153
    )
 7




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ONYX PHARMACEUTICALS, INC. Note 6. Restructuring In June 2003, the Company restructured its operations and discontinued its therapeutic virus
program in order to place an increased priority on the development of sorafenib, Onyxs lead
product candidate that is being developed jointly with Bayer Pharmaceuticals Corporation. During
2003, the Company recorded an aggregate charge of $5.5 million associated with the restructuring.
In the second quarter of 2004, the Company recorded an additional restructuring charge of $258,000
due to a change in estimate related to the discontinued use and inability to sublet a portion of
the Companys leased facility in Richmond, California. At March 31, 2005, the accrual
for restructuring was $84,000, consisting of charges related to the discontinued use of a portion
of the Companys leased facilities and employee severance benefits. The remaining accrued
restructuring costs are expected to be fully paid during the second quarter of 2005. Note 7. Recent Accounting
Development In
December 2004, the Financial Accounting Standards Board, (FASB) issued SFAS No. 123(R),
Share-Based Payment, (SFAS 123(R)), a revision to SFAS No. 123 Accounting for Stock-Based
Compensation, effective for reporting periods beginning after June 15, 2005. SFAS 123(R)
supersedes APB No. 25 and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in
SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options and employee stock
purchase plans to be recognized in the income statement based on their fair values. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative to financial
statement recognition. On April 14, 2005, the Securities and Exchange Commission adopted a rule
amendment that delayed the compliance dates for SFAS 123(R) such that the Company is now allowed to
adopt the new standard no later than January 1, 2006. SFAS 123(R) permits public companies to adopt
its requirements using one of two methods: 1. A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS 123 for all awards
granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the
effective date. 2. A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts
previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year of adoption. Although the Company has not determined whether the adoption of SFAS 123(R) will result in
amounts that are similar to the current pro forma disclosures under SFAS 123, the Company is
evaluating the requirements under SFAS 123(R) and expects the adoption to have a material impact
on the Companys consolidated statements of operations and net loss per share. Note 8. Subsequent Event In April 2005, the Company redeemed its investment in Syrrx Inc. as a result of the
acquisition of Syrrx by Takeda Pharmaceutical Company Limited. The Company received cash of
$750,000 as a result of the redemption and will record a gain of $375,000 as other income in the
quarter ending June 30, 2005. 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.TM Our lead drug candidate, sorafenib (formerly known as BAY 43-9006), is currently in Phase III
clinical development with our collaborator, Bayer Pharmaceuticals Corporation. Together with Bayer,
we are conducting multiple clinical trials of sorafenib. To date, we have treated approximately
2,000 patients. In October 2003, we initiated a pivotal Phase III clinical trial after reaching
written agreement via a Special Protocol Assessment, or SPA, with the Food and Drug Administration,
or FDA, in patients with advanced renal cell carcinoma, also known as kidney cancer. In March 2005, we and Bayer announced that an independent data monitoring committee, or DMC, had reviewed the
safety and efficacy data from the Phase III kidney cancer trial. Based on its analysis, the DMC concluded that
the trial met its surrogate endpoint resulting in statistically significant longer progression-free
survival in those patients administered sorafenib versus those patients administered placebo.
Progression-free survival, or PFS, is a measure of the time that a patient lives without
significant tumor growth. In April 2005, we and Bayer announced that the companies were
recommending that all patients in this Phase III kidney cancer trial be offered access to sorafenib.
This decision followed further review of data from the recent analysis of PFS, as well as
additional discussions with the principal investigators, the DMC, and with regulatory authorities.
As a result of the PFS analysis, we and Bayer are preparing a New Drug Application, or NDA, for
possible approval in the United States. In May 2005, we and Bayer announced that sorafenib has been
accepted into the FDA Pilot 1 Program for continuous marketing applications. The Pilot 1 Program
was designed for therapies that have been granted Fast Track status by the FDA and that have the
potential to provide important therapeutic benefit over available therapy. Sorafenib was granted
Fast Track status for kidney cancer in March 2004. If we receive FDA approval for sorafenib, we
would anticipate a United States commercial launch as early as the first half of 2006. In March 2005, we and Bayer announced the initiation of a Phase III clinical trial of
sorafenib in patients with advanced hepatocellular carcinoma, or liver cancer. We and Bayer also
plan to initiate an additional Phase III clinical trial of sorafenib in patients with malignant
melanoma. We and Bayer are sponsoring multiple Phase II clinical trials of sorafenib for the treatment
of breast, non-small cell lung and other cancers, as well as ten Phase Ib trials evaluating its use
in combination with other anticancer agents. Two single-agent Phase II trials of sorafenib in
patients with kidney cancer and in patients with liver cancer were completed in 2004.
There are also multiple studies underway being conducted by the Cancer
Therapy Evaluation Program, or CTEP, of the National Cancer Institute, or NCI. In a previous 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,
PD 9




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ONYX PHARMACEUTICALS, INC. 332991, a small molecule cell cycle inhibitor targeting a cyclin-dependent kinase, or CDK. In
September 2004, we announced that Pfizer initiated Phase I clinical testing of this CDK4 inhibitor. In 2003, we restructured our operations and discontinued our therapeutic virus program in
order to place an increased priority on the development of sorafenib. Effective January 2005, Onyx
licensed exclusive rights to our p53-selective virus, ONYX-015, to
Shanghai Sunway Biotech Co., Ltd.
headquartered in Shanghai, Peoples Republic of China. Under this agreement, Shanghai Sunway is
responsible for the research, development, manufacture and commercialization of ONYX-015 worldwide.
We received a payment of $1.0 million that we recorded as license fee revenue. We may
receive additional payments if Shanghai Sunway achieves certain clinical, regulatory and commercial
events. We will also receive royalties on net sales of ONYX-015, if any. 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 sorafenib. We expect that losses will fluctuate from quarter to quarter and
that such fluctuations may be substantial. As of March 31, 2005, our accumulated deficit was
approximately $266.7 million. Our business is subject to significant risks, including the risks inherent in our development
and commercialization efforts, the results of the sorafenib 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, if any, from the sale of
proposed products until at least 2006 and expect that until at least that time all of our revenues,
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 2005 included 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 changes to our critical
accounting policies since we filed our 2004 Annual Report on Form 10-K, as amended, for the year
ended December 31, 2004, with the Securities and Exchange Commission, or SEC. For a description of
our critical accounting policies, please refer to our 2004 Annual Report on Form 10-K, as amended. Recent Accounting Development In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS 123(R),
Share-Based Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation, or SFAS 123, effective for reporting periods beginning after June 15, 2005. SFAS
123(R) supersedes Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in
SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options and employee stock
purchase plans to be recognized in the income statement based on their fair values. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative to financial
statement recognition. On April 14, 2005, the SEC adopted a rule amendment that delayed the
compliance dates for SFAS 123(R) such that we are now allowed to adopt the new standard no later
than January 1, 2006. SFAS 123(R) permits public companies to adopt its requirements using one of
two methods:  1.
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments
granted after the effective date and (b) 10




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ONYX PHARMACEUTICALS, INC.  based on the requirements of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123(R) that remain unvested on the effective date.2.
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim periods of the year of adoption. Although we have not determined whether the adoption of SFAS 123(R) will result in amounts
that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the
requirements under SFAS 123(R) and expect the adoption to have a material impact on our
consolidated statements of operations and net loss per share. Results of Operations Three months ended March 31, 2005 and 2004 Revenue Effective January 2005, we licensed exclusive rights to our p53-selective virus, ONYX-015, to
Shanghai Sunway Biotech Co., Ltd. headquartered in Shanghai, Peoples Republic of China. Under this
agreement, Shanghai Sunway is responsible for the research, development, manufacture and
commercialization of ONYX-015 worldwide. We received a payment of $1.0 million, which was
recorded as license fee revenue, and may receive additional payments if Shanghai Sunway achieves
certain clinical, regulatory and commercial events. We may also receive royalties on net sales of
ONYX-015, if any. We recorded no revenue for the three months ended March 31, 2004. Research and Development Expenses Research and development expenses were $13.5 million for the three months ended March 31,
2005, a net increase of $6.9 million, or 105 percent, from $6.6 million in the same period in
2004. In the three months ended March 31, 2005, expenses related to Onyxs share of the
codevelopment costs with Bayer for sorafenib increased by $7.5 million as compared to the same
period in 2004. Sorafenib development costs reflect multiple ongoing Phase Ib and Phase II
clinical trials, a Phase III kidney cancer trial initiated in the fourth quarter of 2003 and a
Phase III trial in liver cancer initiated in the first quarter of 2005. The increase in expenses
related to Onyxs share of the codevelopment costs with Bayer for sorafenib was partially offset
by $620,000 decreased expenses related to our 2003 restructuring that discontinued our therapeutic
virus program. It is anticipated that research and development expenses will continue to increase
in future periods as the clinical trial program of sorafenib advances and new trials are
initiated. 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. 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 based on current information. The actual timing of completion
of those phases could differ materially from the estimates provided in the table. We cannot
reasonably estimate the timing of completion of each clinical phase of our development programs due
to the risks and uncertainties associated with developing pharmaceutical product candidates. 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 11




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ONYX PHARMACEUTICALS, INC. associated with process development and manufacturing as well as marketing. 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 DevelopmentExpensesFor the Three MonthsEndedMarch 31,Phase of Development Product
    
    Description
    
    Collaborator
    
    Estimated Completion
    
    2005
    
    2004(In thousands)Sorafenib
    
    Small Molecule
Inhibitor of tumor
cell proliferation
and angiogenesis,
targeting RAF
kinase, VEGFR-2 and
PDGFR-B
    
    Bayer
    
    Phase I  2004
Phase II-Unknown
Phase III-Unknown
    
    $
    13,132
    
    
    $
    5,595Therapeutic Viruses Programs
    
    Programs
discontinued during
the second quarter
of 2003.
    
    
    
    
    
    
    400
    
    
    
    1,020Total Research and Development Expenses
    
    $
    13,532
    
    
    $
    6,615
 Marketing Expenses Marketing expenses consist primarily of salaries and employee benefits, consulting and other
third-party costs, and allocations for overhead and occupancy costs. Marketing expenses were $2.0
million for the three months ended March 31, 2005, a net increase of $1.7 million from $289,000 in
the same period in 2004. The increase was due to employee related costs for additional hires as
well as third-party costs incurred by Onyx and Bayer in establishing a commercial infrastructure
in anticipation of our product launch of sorafenib. It is anticipated that marketing expenses will
increase in future periods as we develop our marketing capabilities in order for us to copromote
sorafenib with Bayer in the United States should sorafenib receive FDA approval. General and Administrative Expenses General and administrative expenses consist primarily of salaries and employee benefits, and
corporate functional expenses. General and administrative expenses were $2.8 million for the three
months ended March 31, 2005, a net increase of $1.0 million, or 58 percent, from $1.8 million in
the same period in 2004. The change was due to increased spending required to support our growing
infrastructure needs, including employee-related costs for additional headcount, as well as costs
associated with our new corporate office. In the first quarter of 2004, the lower occupancy costs
in our former facility reflected prior restructuring write downs related to the discontinued use of
a portion of that leased facility and the disposal of certain property and equipment. We anticipate
that general and administrative expenses may continue to increase in the remainder of 2005 as
compared to first quarter expenses to support our growing infrastructure needs. Interest Income and (Expense), net We had net interest income of $1.2 million for the three months ended March 31, 2005, an
increase of $708,000 from $524,000 in the same period in 2004,
primarily due to higher interest rates as well as higher average
cash and investment balances in the current quarter resulting
from our February 2004 sale of equity securities from which we received $148.3 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 to fund our operations. 12




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ONYX PHARMACEUTICALS, INC. At March 31, 2005, we had cash, cash equivalents and marketable securities of $193.6 million,
compared to $209.6 million at December 31, 2004. The decrease of $16.0 million was attributable to
net cash used in operations of $15.6 million. The cash was used primarily for cofunding the
clinical development program and the development of a commercial infrastructure with Bayer for
sorafenib. Total capital expenditures for equipment and leasehold improvements for the three-month period
ended March 31, 2005, were $118,000. We currently expect to make expenditures for capital equipment
and leasehold improvements of up to $900,000 for the remainder of 2005. We believe that our existing capital resources and interest thereon will be sufficient to fund
our current and planned operations into 2007. 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 sorafenib 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 may need to raise
additional capital to continue the cofunding of the program in future periods beyond 2007. 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 Sorafenib (formerly known as BAY 43-9006) is our only product candidate currently in Phase II and
Phase III clinical development, and our ability to promote additional candidates to
clinical development is constrained. If sorafenib is not successfully commercialized, we may be
unable to identify and promote alternative product candidates and our business would fail. Sorafenib is our only product candidate in Phase II and Phase III 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 research and 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 sorafenib, 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 sorafenib. If sorafenib 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 later
stage clinical development, which would cause our business to fail. Our clinical trial of sorafenib in kidney cancer may not yield statistically
significant overall survival data, which may negatively impact the commercialization of sorafenib. In
March 2005, an independent data monitoring committee reviewed the
safety and efficacy data from our ongoing Phase III trial of
sorafenib in kidney cancer and concluded that the trial met its
surrogate endpoint, resulting in statistically significant longer
progression-free survival in those patients administered sorafenib
versus those patients administered placebo. As a result, we and Bayer
are preparing a New Drug Application, or NDA, seeking approval of sorafenib
to treat patients with kidney cancer in the United States. We are also in discussion with regulators about possible approval in other territories. In April 2005, we and Bayer
recommended that all patients in the companies' ongoing Phase III kidney cancer trial be offered
access to sorafenib. This decision followed further review of the progression-free survival data,
as well as additional discussions with the principal investigators, an independent data monitoring
committee, and with regulatory authorities.  As a result, patients who were
previously administered placebo in the trial may now elect to receive sorafenib. This action is
expected to significantly reduce the number of patients in the trial receiving placebo, and will
negatively impact our ability to collect survival data for sorafenib in kidney cancer patients.
As a result, we believe we may not be able to obtain statistically significant data on
overall survival of patients  with kidney cancer participating in this clinical trial. We and Bayer
are planning to file for approval of sorafenib based on the
progression-free survival data. We and Bayer do not know whether
regulatory authorities, including the Food and Drug Administration, or
FDA, and its foreign counterparts, will grant full approval to sorafenib as a
treatment for kidney cancer on the basis of the surrogate endpoint and without statistically significant overall survival data.  It is possible that
in the absence of statistically significant overall survival data,
sorafenib will not receive full marketing
approval, or will not receive approval in some countries.  Lack of marketing approval in a particular
country would prevent us from selling sorafenib in that country,
which could harm our business. If sorafenib is approved as a treatment for advanced kidney cancer based on statistically significant longer progression-free survival data, it may be at a competitive disadvantage to third parties' drugs that are approved based on overall patient survival, which could impair our ability to successfully market sorafenib. 13




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ONYX PHARMACEUTICALS, INC. If our clinical trials fail to demonstrate that sorafenib
is safe and effective for cancer types other than kidney cancer, we will be unable to broadly commercialize
sorafenib as a treatment for cancer, and our business may fail. In collaboration with Bayer, we
are conducting multiple clinical trials of sorafenib. We have completed Phase I single-agent clinical
trials of sorafenib. We are currently conducting a number of Phase Ib clinical trials of sorafenib in
combination with other anticancer 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 have completed Phase II clinical
trials of sorafenib in kidney and liver cancer and are currently conducting Phase II clinical trials in breast,
non-small cell lung 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.  In October 2003 we and Bayer initiated a Phase III clinical trial to treat patients with advanced kidney cancer. We and Bayer initiated a second Phase III clinical trial of sorafenib in patients with liver cancer in March 2005 and are planning a third Phase III clinical trial of sorafenib in patients with malignant melanoma.  Phase III trials are designed to more rigorously test the efficacy of a product candidate and are also normally randomized and double-blinded. Although we believe we have demonstrated the
efficacy and tolerability of sorafenib in patients with advanced kidney cancer, in other types of cancer the efficacy
of sorafenib has not been proven.  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, if previously unforeseen and unacceptable side effects are observed,
we may not proceed with further clinical trials of sorafenib.  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 sorafenib. These adverse
effects may impact the interpretation of clinical trial results, which could lead to an erroneous conclusion
regarding the toxicity or efficacy of sorafenib. Our clinical trials may fail to demonstrate
that sorafenib is safe and effective as a treatment for types of cancer other than kidney cancer, which would
prevent us from marketing sorafenib as a treatment for those other types of cancer, limiting the potential
market for the product, which may cause our business to fail. We are dependent upon our collaborative relationship with Bayer to develop, manufacture and
commercialize sorafenib and to obtain regulatory approval. There may be circumstances that delay or
prevent the development and commercialization of sorafenib. Our strategy for developing, manufacturing and commercializing sorafenib 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 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 sorafenib. Under the terms of the collaboration agreement, we and Bayer are conducting multiple clinical
trials of sorafenib. We and Bayer must agree on the development plan for sorafenib. 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 net sales. We are currently funding 50 percent of development costs for
sorafenib 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 14




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ONYX PHARMACEUTICALS, INC. of sorafenib, 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 that 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 sorafenib. If Bayer terminates its cofunding of sorafenib
development, we may be unable to fund the development costs on our own and may be unable to find a
new collaborator, which could cause our business to fail. Bayer has been the sponsor for all regulatory filings with the FDA. As a result, we have been
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 of our 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 sorafenib. At present, it is anticipated that, if issued,
the United States patent related to sorafenib 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 sorafenib, 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 sorafenib. If this
happened, Onyx, or the successor to Onyx, would receive a royalty based on any sales of sorafenib
and other collaboration products, rather 15




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ONYX PHARMACEUTICALS, INC. 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 sorafenib, 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 sorafenib as projected or at all. We rely on Bayer, academic institutions and clinical research organizations to conduct,
supervise or monitor clinical trials involving sorafenib. 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 expect to directly supervise and monitor certain planned Phase II and Phase
III clinical trials of sorafenib for the treatment of malignant melanoma. Onyx has not conducted a
clinical trial that has led to an NDA filing. Consequently, we may not have the necessary
capabilities to successfully execute and complete these planned clinical trials in a way that leads
to approval of sorafenib for the target indication. Failure to commence or complete, or delays in,
any of our planned clinical trials would prevent us from commercializing sorafenib in melanoma, and
thus seriously harm our business. 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 sorafenib program and that have commercial products or product candidates in clinical
development include Pfizer, Novartis International AG, AstraZeneca PLC, OSI Pharmaceuticals, Inc., Genentech, Inc.,
Chiron Corporation, and Abgenix, Inc., among others. Novartis, Pfizer, Wyeth, and others have
investigational agents for advanced kidney cancer in clinical development. A number of companies
have small molecules targeting Vascular Endothelial Growth Factor, or VEGF; VEGF receptors;
Epidermal Growth Factor, or EGF; EGF receptors; and other enzymes. These agents include antibodies
and small molecules. In particular, OSI Pharmaceuticals with TarcevaTM and AstraZeneca
with IRESSATM are developing small molecule inhibitors of the EGF receptor tyrosine
kinase. Both drugs have 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
AvastinTM, an antibody targeting VEGF, which has received approvals in the United States
and the European Union. Avastin has also been reported to have
activity in kidney cancer and is
currently in a Phase III trial for kidney cancer. We believe several companies have small molecule
compounds in clinical development that target MEK, an enzyme that is also involved in the RAS
signaling pathway. Pfizer has recently announced that its multi-kinase inhibitor, SU11248, has
proven effective in treating Gleevec resistant gastrointestinal stromal tumors, or GIST, and it is
expected to file for FDA approval. SU11248 is also being tested in clinical trials to treat other
tumor types, including kidney cancer. It is possible that SU11248 will receive FDA marketing
approval for treatment of GIST and/or kidney cancer before sorafenib receives FDA marketing
approval in any indication. After its approval for treatment of GIST, medical practitioners may use
SU11248 off-label to treat other tumor types, including kidney cancer, even if the compound has not
yet received marketing approval for use in these other indications. This potential off-label use or
approved use of SU11248 may affect the sales of sorafenib if and when sorafenib receives marketing
approval. Wyeth is conducting a Phase III study of CCI-779, an mTOR inhibitor, in patients with
advanced kidney cancer. In addition, many other pharmaceutical companies are developing novel
cancer therapies that, if successful, would also provide competition for or be used in combination
with sorafenib. We believe that other companies have inhibitors of kinases in preclinical or
clinical development that could be potential competitors to sorafenib. 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 sorafenib. 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 receive FDA approval and
commence commercial product sales, we will compete against companies with greater marketing and
manufacturing capabilities, areas in which we have limited or no experience. 16




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ONYX PHARMACEUTICALS, INC. 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 sorafenib receives regulatory approval but cannot compete effectively in the marketplace, our
business will suffer. 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 sorafenib, 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 sorafenib 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 of 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 into 2007. 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 sorafenib 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 sorafenib program in future periods. We may have to curtail our funding of sorafenib if we
cannot raise sufficient capital. If we do not cofund development of sorafenib, we will receive a
royalty on future sales of any product that is ultimately commercialized, instead of a share of
profits. We have a history of losses, and we expect to continue to incur losses. Our net loss for the year ended December 31, 2002 was $45.8 million, for the year ended
December 31, 2003 was $45.0 million, and for the year ended December 31, 2004 was $46.8 million.
Our net loss for the three months ended March 31, 2005 was $16.1 million. As of March 31, 2005, we
had an accumulated deficit of approximately $266.7 million. We have incurred these losses
principally from costs incurred in our research and development programs and from our general and
administrative costs. In addition, we are incurring precommercial marketing expenses in
anticipation of our commercial launch. It is not unusual for patients to be offered access to
investigational compounds in late-stage clinical development. Such programs, if initiated, involve
substantial 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 and establish our commercial infrastructure. We expect our operating losses to
increase with our cofunding of ongoing sorafenib clinical trial costs under our collaboration
agreement with Bayer. We do not expect to generate revenues from the sale of proposed products until at least 2006,
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 sorafenib, 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. 17




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ONYX PHARMACEUTICALS, INC. Under our collaboration agreement with Bayer, Bayer has the manufacturing responsibility to
supply sorafenib for clinical trials and to support any commercial requirements. However, should
Bayer give up its right to codevelop sorafenib, we would have to manufacture sorafenib. We lack the
resources, experience and capabilities to manufacture sorafenib 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 sorafenib in the United States, but we do not have significant
marketing or sales experience or capabilities. We have the right under our collaboration agreement with Bayer to copromote sorafenib in the
United States in conjunction with Bayer. In order to copromote sorafenib, we will need to further
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 these key
employees could have an adverse impact on our business. We do not maintain key person life
insurance on any of our officers, employees or consultants, other than for our chief executive
officer. Any of our key personnel could terminate their employment with us at any time and without
notice. We depend on our continued ability to attract, retain and motivate highly qualified
personnel. We face competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. In 2003, we restructured our operations to reflect an increased priority on the development of
sorafenib and discontinued our therapeutic virus program. As a result of the restructuring, 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 sorafenib, but are not actively involved in new
product candidate discovery. If we resume our research and development of other product candidates,
we will need to hire individuals with the appropriate scientific skills. If we cannot hire these
individuals in a timely fashion, we will be unable to engage in new product candidate discovery
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, sorafenib or any future product candidates that we may develop may not gain
market acceptance among physicians, patients, healthcare payors and the medical community or the
market may not be as large as forecasted. One factor that may affect market acceptance of our
product candidates is the availability of third-party reimbursement. Our commercial success may
depend, in part, on the availability of adequate reimbursement for patients from third-party healthcare payors, such as government and private health insurers and managed care organizations.
Third-party payors are increasingly challenging the pricing of medical products and services and
their reimbursement practices may affect the price levels for our product candidates. In addition,
the market for our product candidates may be limited by third-party payors who establish lists of
approved products and do not provide reimbursement for products not listed. If our product
candidates are not on the approved lists, the sales of our product candidates may suffer. 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;
    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 sorafenib 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. 18




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ONYX PHARMACEUTICALS, INC. 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
sorafenib or any other product candidate. We expect to rely on Bayer to manage communications with regulatory agencies, including filing
new drug applications and generally directing the regulatory approval process for sorafenib. 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 sorafenib. Even if sorafenib is approved, the FDA or other regulatory authorities may
approve only limited label information for the product. The label information describes the
indications and methods of use for which the product is authorized, and if overly restrictive may
limit our and Bayers ability to successfully market any approved product. 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 sorafenib. Delays in obtaining regulatory approvals may:  
    adversely affect the successful commercialization of sorafenib;
    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, before or after regulatory
approval, including our competitors, could have an adverse effect on our ability to obtain or
maintain regulatory approval for sorafenib. 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. 19




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ONYX PHARMACEUTICALS, INC. In the case of sorafenib, 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 United States patent related to sorafenib 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 sorafenib are also pending throughout
the world. As of March 31, 2005, we owned or had licensed rights to 51 United States patents and 34
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 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 sorafenib 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 sorafenib. 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
sorafenib 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 20




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ONYX PHARMACEUTICALS, INC. 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. 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, 2002 and ending March 31, 2005, the
closing sales price for one share of our common stock reached a high of $58.75 and a low of $3.59.
Factors affecting our stock price include:  
    interim or final results of, or speculation about, clinical trials from sorafenib;
    changes in the regulatory approval requirements;
    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 42 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 21




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ONYX PHARMACEUTICALS, INC. 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. Following our announcement in
October 2004 of Phase II clinical trial data in patients with advanced kidney cancer, our stock
price declined significantly. Our closing stock price on the last trading day before the
announcement was $40.81, and our closing stock price on the day of the announcement was $27.34. We
may in the future be the target of securities class action litigation. Securities litigation could
result in substantial costs, could divert managements attention and resources, and could seriously
harm our business, financial condition and results of operations. Provisions in Delaware law, our charter and executive change of control agreements we have entered
into may prevent or delay a change of control. We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These
anti-takeover laws prevent Delaware corporations from engaging in a merger or sale of more than ten
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 ten percent or more of the stockholders entitled to
vote at the meeting; and
    no cumulative voting. 22




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ONYX PHARMACEUTICALS, INC. 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 of 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 The primary objective of our investment activities is to preserve principal while at the same
time maximize the income we receive from our investments without significantly increasing risk. Our
exposure to market rate risk for changes in interest rates relates primarily to our investment
portfolio. This means that a change in prevailing interest rates may cause the principal amount of
the investments to fluctuate. By policy, we minimize risk by placing 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 maintain our portfolio of cash equivalents and marketable securities in a variety of securities,
including commercial paper, money market funds, and investment grade government and non-government
debt securities. Through our money managers, we maintain risk management control systems to monitor
interest rate risk. The risk management control systems use analytical techniques, including
sensitivity analysis. If market interest rates were to increase by 100 basis points, or 1%, as of
March 31, 2005, the fair value of our portfolio would decline by approximately $1.1 million. The table below presents the amounts and related weighted interest rates of our cash
equivalents and marketable securities at March 31: March 31, 2005
    
    
    December 31, 2004Average
    
    
    
    
    
    
    
    
    
    
    AverageFair Value
    
    
    Interest
    
    
    
    
    
    
    Fair Value
    
    
    InterestMaturity
    
    
    (In millions)
    
    
    Rate
    
    
    Maturity
    
    
    (In millions)
    
    
    RateCash equivalents, fixed rate
    
    0 - 3 months
    
    $
    34.1
    
    
    
    2.54
    %
    
    0 - 2 months
    
    $
    74.2
    
    
    
    2.09
    %Marketable securities,
fixed rate
    
    0 - 24 months
    
    $
    159.5
    
    
    
    2.84
    %
    
    0 - 16 months
    
    $
    135.4
    
    
    
    2.18
    %
 We did not hold any derivative instruments as of March 31, 2005, and we have not held
derivative instruments in the past. However, our investment policy does allow us to use derivative
financial instruments for the purposes of hedging foreign currency denominated obligations. Our
cash flows are denominated in U.S. dollars. 
 Item 4. Controls and Procedures Inherent Limitations on Effectiveness of Controls:Internal control over financial reporting
may not prevent or detect all errors and all fraud. Also, projections of any evaluation of
effectiveness of internal control to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Evaluation of Disclosure Controls and Procedures:The Companys chief executive officer and
principal 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 chief executive officer and principal financial
officer concluded that the Companys disclosure controls and procedures were effective as of March
31, 2005 to ensure the information required to be disclosed by the Company in this Quarterly Report
on Form 10-Q is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms. Changes in Internal Control over Financial Reporting:There were no changes in the Companys
internal control over financial reporting during the quarter ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect the Companys internal control
over financial reporting. 23




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ONYX PHARMACEUTICALS, INC. 
 PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings Not applicable. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On January 3, 2005, Onyx issued an aggregate of 1,773 shares of its common stock to Edward
Hurwitz pursuant to the cashless exercise of a warrant dated May 7, 2002. The warrant was
exercisable for 2,500 shares of common stock and had an exercise price of $9.59 per share.
In connection with the exercise, the number of shares issuable pursuant to the warrant was
reduced by 727 shares pursuant to the operation of the cashless exercise provisions in the
warrant. The issuance of the shares pursuant to this warrant was exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) promulgated thereunder as a
transaction not involving any public offering. 
 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   3.1
    Restated Certificate of Incorporation of the Company. (1)3.2
    Bylaws of the Company. (1)3.3
    Certificate of Amendment to Amended and Restated Certificate of Incorporation. (2)4.1
    Reference is made to Exhibits 3.1, 3.2 and 3.3.4.2
    Specimen Stock Certificate. (1)10.44
    2005 Base Salaries for Named Executive Officers. (3)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). (4)   (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)
    
    Filed as an exhibit to the registrants Current Report on Form 8-K filed on March 14, 2005. 24




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ONYX PHARMACEUTICALS, INC.  (4)
    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. 25




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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 9, 2005
    By:
    /s/ Hollings C. RentonHollings C. RentonChairman of the Board,
     President and Chief Executive Officer
     (Principal Executive and Financial Officer) Date: May 9, 2005
    By:
    /s/ Marilyn E. WortzmanMarilyn E. WortzmanVice President, Finance and Administration
     (Principal Accounting Officer) 26




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ONYX PHARMACEUTICALS, INC. EXHIBIT INDEX  3.1
    Restated Certificate of Incorporation of the Company. (1)3.2
    Bylaws of the Company. (1)3.3
    Certificate of Amendment to Amended and Restated Certificate of Incorporation. (2)4.1
    Reference is made to Exhibits 3.1, 3.2 and 3.3.4.2
    Specimen Stock Certificate. (1)10.44
    2005 Base Salaries for Named Executive Officers. (3)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). (4)   (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)
    
    Filed as an exhibit to the registrants Current Report on Form 8-K filed on March 14,
2005.(4)
    
    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. 27