ONYX Pharmaceuticals 10Q 2001 Q1 Quarterly report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2001

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

For the transition period from to

Commission File Number: 0-28298

ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

94-3154463
(IRS Employer ID Number)

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

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(XX) Yes ( ) No

The number of outstanding shares of the registrant's Common Stock, $0.001 par value, was 18,428,394 as of May 4, 2001.

ONYX PHARMACEUTICALS, INC.

INDEX

PART I: FINANCIAL INFORMATION

		PAGE
Item 1.	Financial Statements	3
	Condensed Balance Sheets—March 31, 2001 and December 31, 2000	3
	Condensed Statements of Operations—Three months ended March 31, 2001 and 2000	4
	Condensed Statements of Cash Flows—Three months ended March 31, 2001 and 2000	5
	Notes to Condensed Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
PART II: OTHER INFORMATION
Item 2.	Changes in Securities and Use of Proceeds	24
Item 6.	Exhibits and Reports on Form 8-K	24
SIGNATURES		25
EXHIBIT INDEX		26

ONYX PHARMACEUTICALS, INC.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

CONDENSED BALANCE SHEETS
(In thousands, except share data)

			March 31, 2001			December 31, 2000
			(Unaudited)			(Note 1)
ASSETS
Current assets:
	Cash and cash equivalents		$	67,374		$	75,126
	Marketable securities			10,551			6,868
	Receivable from related party			4,300			2,254
	Other current assets			1,166			829

		Total current assets		83,391			85,077
Property and equipment, net				3,067			3,132
Notes receivable from related parties				275			322
Other assets				2,154			66

			$	88,887		$	88,597

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	1,232		$	2,056
	Accrued liabilities			1,203			1,038
	Accrued clinical trials and related expenses			5,450			3,109
	Accrued compensation			974			1,299
	Deferred revenue			2,715			3,183
	Long-term debt, current portion			—			183

		Total current liabilities		11,574			10,868
Long-term deferred revenue				708			833
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding				—			—
Common stock, $0.001 par value; 50,000,000 shares authorized; 18,428,102 and 17,962,332 shares issued and outstanding as of March 31, 2001 and December 31, 2000, respectively				18			18
Additional paid-in capital				167,382			162,430
Accumulated deficit				(90,795	)		(85,552	)

		Total stockholders' equity		76,605			76,896

			$	88,887		$	88,597

See accompanying notes.

ONYX PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

			Three Months Ended March 31,
			2001			2000
Revenue:
	Contract and other revenue		$	85		$	112
	Contract revenue from related parties			4,651			5,725

		Total revenue		4,736			5,837

Operating expenses:
	Research and development			9,385			6,070
	General and administrative			1,732			1,842

		Total operating expenses		11,117			7,912

Loss from operations				(6,381	)		(2,075	)
Interest income, net				1,138			395

Net loss			$	(5,243	)	$	(1,680	)

Basic and diluted net loss per share			$	(0.29	)	$	(0.12	)

Shares used in computing basic and diluted net loss per share				18,085			13,462

See accompanying notes.

ONYX PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)

				Three Months Ended March 31,
				2001			2000
Cash flows from operating activities:
	Net loss			$	(5,243	)	$	(1,680	)
	Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization				355			429
	Forgiveness of notes receivable				4			10
	Stock-based compensation				(83	)		662
	Changes in assets and liabilities:
		Receivable from related party			(2,046	)		1,165
		Other current assets			(341	)		(63	)
		Other assets			(2,088	)		(7	)
		Accounts payable			(824	)		(1,033	)
		Accrued liabilities			129			268
		Accrued clinical trials and related expenses			2,341			53
		Accrued compensation			(325	)		(674	)
		Deferred revenue			(593	)		(595	)
		Deferred rent			36			—

			Net cash used in operating activities		(8,678	)		(1,465	)

Cash flows from investing activities:
	Purchases of marketable securities				(6,233	)		(4,238	)
	Sales and maturities of marketable securities				2,550			1,791
	Capital expenditures				(290	)		(366	)
	Notes receivable from related parties				47			18

			Net cash used in investing activities		(3,926	)		(2,795	)

Cash flows from financing activities:
	Payments on long-term debt				(183	)		(550	)
	Net proceeds from issuances of common stock				5,035			25,057

			Net cash provided by financing activities		4,852			24,507

	Net (decrease) increase in cash and cash equivalents				(7,752	)		20,247
	Cash and cash equivalents at beginning of period				75,126			12,671

			Cash and cash equivalents at end of period	$	67,374		$	32,918

See accompanying notes.

ONYX PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2001

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001, or for any other future operating periods.

The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in the Onyx Pharmaceuticals, Inc. (the "Company" or "Onyx") Annual Report on Form 10-K for the year ended December 31, 2000.

Note 2. Net Loss Per Share

Basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. Common stock equivalents have been excluded since their effect would be antidilutive.

Note 3. Comprehensive Loss

During the three-month periods ended March 31, 2001 and March 31, 2000, total comprehensive loss equaled net loss.

Note 4. Adoption of Statement of Financial Reporting Standards No. 133

On January 1, 2001, we adopted Statement of Financial Reporting Standards No. 133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, requires that all derivative instruments be recorded on the balance sheet at their fair value. Change in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction. The adoption of SFAS 133, as amended, did not have a material impact on our financial position or results of operations.

Note 5. XOMA (US) LLC Agreement

On January 29, 2001, the Company entered into a process development and manufacturing agreement with XOMA (US) LLC. Under the terms of the agreement, XOMA will develop a large-scale manufacturing process and will manufacture CI-1042 (ONYX-015) for clinical trials and commercial production. Terms of the agreement include an initial payment of $2.0 million, payments for development work and material produced, and payments upon achieving key milestones. The initial payment was deferred and is being amortized over five years.

Note 6. Sale of Equity Securities

On March 8, 2001, the Company issued and sold 460,872 shares of its common stock at a purchase price of $10.849 per share as the second of two stock issuances in connection with the October 1999 collaboration agreement with Warner-Lambert Company, a wholly-owned subsidiary of Pfizer, Inc. The Company received aggregate proceeds of $5.0 million.

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. When used herein, the words "may," "will," "expects," "anticipates," "estimates," "intends," "plans," "predicts," "potential," "believe," "should" and similar expressions are intended to identify such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Business Risks."

Overview

We are developing innovative products for the treatment of cancer. Based on our proprietary virus technology, we are developing our lead product, CI-1042, formerly known as ONYX-015. We have completed two Phase II clinical trials evaluating CI-1042 as a treatment for head and neck cancer. Based on the data from these trials, we initiated a Phase III clinical trial of CI-1042 administered by intratumoral injection in patients with head and neck cancer. This Phase III clinical trial is being conducted in conjunction with Warner-Lambert, our collaborator for the development and commercialization of CI-1042. We are also evaluating CI-1042 in clinical trials for several additional cancer indications. In addition to CI-1042, we are conducting a number of research and development programs based on our virus technology as well as our small molecule drug discovery efforts. In collaboration with Bayer Corporation, we have initiated a Phase I clinical trial of a raf kinase inhibitor in patients with cancer. Further, we are developing human viruses that selectively replicate in and kill cancer cells based on mutations or loss of function of the retinoblastoma, or RB, tumor suppressor gene. Pending the final results of ongoing preclinical studies, we intend to file an investigational new drug application, or IND, for a product candidate from the RB program in 2002.

We have not been profitable since inception and expect to incur substantial and increasing losses for the foreseeable future, primarily due to expenses associated with the expansion of our self-funded virus research and development programs. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. As of March 31, 2001, our accumulated deficit was approximately $90.8 million.

Our business is subject to significant risks, including the risks inherent in our research and development efforts, the results of the CI-1042 clinical trials, dependence on collaborative parties, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. We do not expect to generate revenues from the sale of proposed products in the foreseeable future. We expect that all of our revenues in the foreseeable future will be generated from collaboration agreements.

In January 2001, we signed a process development and manufacturing agreement with XOMA (US) LLC. Under the terms of the agreement, XOMA will develop a large-scale manufacturing process and will manufacture CI-1042 for clinical trials and commercial production. Terms of the agreement include an initial payment of $2.0 million, payments for development work and material produced, and payments upon achieving key milestones. The initial payment was deferred and is being amortized over five years.

In March 2001, we issued and sold 460,872 shares of common stock to Warner-Lambert in a private placement, at a price of $10.849 per share, for aggregate proceeds of $5 million.

Results of Operations

Three months ended March 31, 2001 and 2000.

Revenues

Our revenues decreased 19 percent to $4.7 million for the three months ended March 31, 2001 as compared to $5.8 million for the three months ended March 31, 2000. Revenues for both periods were

primarily attributable to amounts earned under collaboration agreements with Warner-Lambert. The decrease in revenues for the three months ended March 31, 2001 as compared to the same period in 2000 is due primarily to the receipt of a payment in the first quarter of 2000 under the inflammation collaboration, and a similar payment was not received this year. Additionally, staffing on the cell cycle collaboration was lower in the three months ended March 31, 2001 as compared to the same period last year resulting in reduced revenue for these efforts.

Research and Development Expenses

Research and development expenses increased 55 percent to $9.4 million for the three months ended March 31, 2001 as compared with $6.1 million for the same period in 2000. The increase in expenses for the three months ended March 31, 2001 as compared to the same period in 2000 was primarily due to increased clinical trial expenses. In July 2000 in collaboration with Bayer Corporation, we initiated a Phase I clinical trial of a ras pathway inhibitor. We are currently co-funding 50 percent of clinical development costs. Increased contract manufacturing expenses related to the process development and manufacturing agreement signed with XOMA in January 2001 also contributed to the increase in research and development expenses for the three months ended March 31, 2001. We expect to continue to expand the scope of our self-funded virus research and development programs in future periods, which may result in substantial increases in research and development expenses. Collaborators may not fund these research and development expenses.

General and Administrative Expenses

General and administrative expenses decreased 6 percent to $1.7 million for the three months ended March 31, 2001 as compared with $1.8 million for the three months ended March 31, 2000. It is anticipated that general and administrative expenses may increase moderately in future periods to support our research and development efforts.

Net Interest Income

We had net interest income of $1.1 million for the three months ended March 31, 2001 as compared with $0.4 million for the three months ended March 31, 2000. The increase in net interest income was principally due to increased cash and investment balances from the $48.1 million follow-on public offering of common stock in October 2000 and the $5.0 million common stock issuance to Warner-Lambert in March 2001, resulting in more interest income for the current period.

Liquidity and Capital Resources

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

At March 31, 2001, we had cash, cash equivalents and marketable securities of $77.9 million compared with $82.0 million at December 31, 2000. The decrease in cash and marketable securities of $4.1 million at March 31, 2001, compared with December 31, 2000, is due to cash used in operations of $8.7 million, offset by the sale of our common stock to Warner-Lambert in March 2001, which raised $5.0 million.

Total capital expenditures for equipment and leasehold improvements for the three-month period ended March 31, 2001, were $0.3 million. We currently expect to make expenditures for capital equipment of approximately $4.0 million for the remainder of 2001.

We believe that our existing capital resources and interest thereon including the $5.0 million received from Warner-Lambert in March 2001 and anticipated revenues from existing collaborations will be sufficient to fund our current and planned operations through mid-2002. Changes in our research and development plans, revenues from collaborators or other changes affecting our operating

expenses may result in the expenditure of these resources before mid-2002, and in any event, we will need to raise substantial additional capital to fund our operations in future periods. We intend to seek this additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other financing sources. Additional financing may not be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or to obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.

Business Risks

If we are not able to demonstrate the effectiveness of CI-1042 in our clinical trials or if our clinical trials are delayed, we may be unable to commercialize CI-1042.

We have completed Phase II clinical trials designed to obtain safety and effectiveness trend information for CI-1042 for the treatment of head and neck cancer, both as a single agent and in combination with chemotherapy. Based on data from these Phase II clinical trials, we, together with Warner-Lambert, have initiated a Phase III clinical trial designed to obtain effectiveness information for CI-1042 for the treatment of recurrent disease. Historically, many companies have failed to demonstrate the effectiveness of pharmaceutical products in Phase III clinical trials notwithstanding favorable results in Phase II clinical trials. We may fail to demonstrate desired effectiveness levels in our Phase III clinical trial of CI-1042. In addition, we may observe previously unforeseen side effects. We may fail to extend the findings of previous clinical trials in our Phase III clinical trial of CI-1042, including similar tumor response rates, duration of tumor response or safety.

The process of obtaining FDA and other required regulatory approvals, including foreign approvals, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. We have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. The FDA may not accept the results of our Phase III clinical trial, or accept as sufficient for market approval other elements of the application that we may file for CI-1042. The FDA may require changes in our current trials or may require additional clinical trials, which may be extensive, expensive and time-consuming. We cannot market CI-1042 unless we receive regulatory approval.

In addition, in our clinical trials we treat patients who have failed conventional treatments and who are in advanced stages of cancer. During the course of treatment, these patients may die or suffer adverse medical effects for reasons that may be unrelated to CI-1042. These adverse effects may impact the interpretation of clinical trial results.

We may fail to demonstrate that CI-1042 is effective for the treatment of other types of cancer even if CI-1042 is proven effective for the treatment of head and neck cancer.

We are initially developing CI-1042 for treatment of head and neck cancer, using intratumoral injection. Even if we are successful in developing CI-1042 for this type of cancer, we may not demonstrate that CI-1042 is effective in the treatment of a broader array of cancer types. We have conducted a Phase I/II clinical trial for treatment of liver metastases of colorectal cancer with CI-1042 administered through intrahepatic artery infusion. In addition, we are in the process of completing Phase I/II clinical trials of CI-1042 for treatment of pancreatic cancer. The Phase I/II clinical trial in liver metastases of colorectal cancer is based on a small number of patients, and we may not reproduce the results from these clinical trials in future clinical trials with additional patients. In addition, we may not succeed in our efforts to deliver CI-1042 to tumors through routes other than intratumoral injection. If we are not successful in developing additional routes of administration for CI-1042, or

establishing its effectiveness in a broad range of cancer types, CI-1042 may not have a broad commercial use.

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

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

We currently rely on a sole source or limited number of sources for the manufacturing of CI-1042, and if these sources are unable or unwilling to deliver the required quantities, we may not be able to find replacement manufacturers, which could result in a delay in clinical trials or in regulatory approval.

We currently rely on a sole source contract manufacturer for the supply of CI-1042 for our Phase III clinical trial. We are aware of only a limited number of manufacturers who we believe would have the ability and capacity to manufacture this product or any other therapeutic viruses we may develop. Our contract manufacturer has produced multiple batches of material for our Phase III clinical trial, however, our contract manufacturer has experienced production problems resulting in failed batches. We may need to modify the current process to minimize batch failures. In addition, we and Warner-Lambert have held up final release of some of the batches until the manufacturer completes documentation that complies with Warner-Lambert's and our manufacturing standards. As a result, we have limited the number of clinical trial sites that are enrolling patients including sites in the Phase III clinical trial. Ten clinical sites for the Phase III trial have been open for enrollment, however, to date only two sites have been supplied with CI-1042. We will continue to limit the number of clinical sites that are enrolling patients for the Phase III clinical trial until product release is occurring on a routine basis.

If our current sole source contract manufacturer is unable or unwilling to deliver the required quantities of CI-1042 on a regular basis or terminates our relationship, we will have to rely on XOMA to manufacture CI-1042. We do not expect XOMA to begin supplying us with CI-1042 before the first quarter of 2002. This could delay our clinical trials and our applications for regulatory approval with the FDA. If XOMA fails to supply us with sufficient materials, we may be forced to incur additional expenses to pay for the manufacture of materials using a replacement contract manufacturer, if we can find a replacement manufacturer, or to develop our own manufacturing capabilities which may not occur within a reasonable amount of time or at commercially reasonable rates.

No one has manufactured replicating human viruses on a large scale; if we are unable to develop an effective process to manufacture CI-1042 on a large scale, our clinical trials and regulatory approval would be delayed.

To date, our contract manufacturers have produced CI-1042 using small-scale processes. No one has produced replicating human viruses using a commercial-scale manufacturing process. We have developed a process that we believe will be scaleable; however, we and our contract manufacturer for our Phase III clinical trial have experienced production problems using this process that have resulted in failed batches. We may need to make additional process changes and operational changes to make the manufacturing process more reliable and to make the process easier for us to develop into a larger

commercial-scale manufacturing process. If we are unable to improve the large scale manufacturing process, we may not increase the number of clinical trials for CI-1042 and the number of sites enrolling patients. If we are unable to expand the number of clinical trials, clinical sites enrolling patients and patients receiving CI-1042, the results from our clinical trials, in particular our Phase III clinical trial, will be delayed and we will not receive regulatory approval without the results from these trials.

XOMA or Warner-Lambert may not be able to produce commercial quantities of CI-1042, which could delay regulatory approval.

To obtain regulatory approval for CI-1042, we will need to treat a percentage of the patients in our Phase III clinical trial using CI-1042 produced from the same manufacturing process and in the same manufacturing facility that we intend to use following FDA approval. We have recently executed a process development and manufacturing agreement with XOMA to modify the process and to produce large quantities of CI-1042. Under our collaboration agreement with Warner-Lambert, Warner-Lambert has the sole right and responsibility to manufacture or have manufactured all supplies of CI-1042 for all commercial sales. Warner-Lambert has delayed investment in the manufacturing capacity needed to supply clinical trials and the potential commercial supply of CI-1042.

In conjunction with Warner-Lambert or XOMA, we will need to modify the manufacturing process to produce large quantities of CI-1042 and to lower the cost by improving the efficiency of the process. To modify the manufacturing process and to meet our quality standards for CI-1042, in conjunction with Warner-Lambert or XOMA, we will need to spend a significant amount of time and capital and complete a substantial amount of experimentation. In conjunction with Warner-Lambert or XOMA, we will need to expand and modify existing manufacturing facilities to produce commercial quantities of CI-1042. XOMA does not have experience in large-scale viral manufacturing.

In addition, XOMA may terminate our process development and manufacturing agreement with us for any reason by providing notice 48 months in advance. Further, if Warner-Lambert asserts its right as the sole manufacturer of CI-1042 for commercial supply, we will have to rely on Warner-Lambert for commercial supply of CI-1042 rather than XOMA and the timing for the availability of the commercial supply will depend on Warner-Lambert's decision to invest in a commercial manufacturing facility.

If we do not treat patients in our Phase III clinical trial with product from the process manufactured at the new facility, the FDA will most likely require a bridging study to show that the CI-1042 produced from the new process is comparable to CI-1042 produced from our existing manufacturing process at our contract manufacturer's existing facility. Filing of our applications for regulatory approval may be delayed if we:

•: encounter difficulties in modifying the manufacturing process;
•: fail to treat patients in our Phase III clinical trial with product from the new manufacturing process; or
•: fail to conduct a bridging study prior to FDA review of our Phase III clinical trial.

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

Our strategy for developing, manufacturing and commercializing our products and obtaining regulatory approval depends in large part upon maintaining and entering into collaborative agreements with pharmaceutical companies or other collaborators. We have entered into a number of collaborative agreements with different parties, including research, development and marketing agreements with Warner-Lambert and Bayer. Our agreements with Warner-Lambert also give Warner-Lambert the responsibility of providing commercial manufacturing of our potential products.

If we fail to maintain these collaborative relationships or to establish new collaborative relationships, we would need to undertake these research, development, manufacturing and marketing activities at our own expense, which would significantly increase our capital requirements and limit the programs we are able to pursue. Further, we would incur significant delays with the development, manufacture or sale of our products.

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

•: the amount and timing of expenditure of resources can vary because of collaborator decisions;
•: business combinations and changes in a collaborator's business strategy may adversely affect the party's willingness or ability to complete its obligations under the collaboration agreement with us;
•: the right of the collaborator to terminate its collaboration agreement with us on limited notice and for reasons outside our control;
•: loss of significant rights to our collaborative parties if we fail to meet our obligations under these agreements;
•: disagreements as to ownership of clinical trial results or regulatory approvals, and the refusal of the FDA to recognize us as holding the regulatory approvals necessary to commercialize our products;
•: withdrawal of support by a collaborator following the development or acquisition by the collaborator of competing products; and
•: disagreements with a collaborator regarding the collaboration agreement or ownership of proprietary rights.

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

Pfizer has acquired Warner-Lambert, which could result in the modification, disruption or termination of our collaborative relationship with Warner-Lambert.

In June 2000, Pfizer acquired Warner-Lambert. As the parent of Warner-Lambert, Pfizer may not be interested in continuing the multiple research and development and marketing collaboration agreements we have with Warner-Lambert, including the collaboration agreement related to CI-1042, in part because these collaborations may address smaller markets than Pfizer generally seeks to address. Warner-Lambert is focusing on commercializing CI-1042 for indications where CI-1042 is administered intravenously to treat tumors systemically over indications where CI-1042 is administered locally or regionally, such as intratumoral injections or intrahepatic artery infusions. As a result, Warner-Lambert has initiated Phase II clinical trials where CI-1042 is administered intravenously, and these trials have placed increased demands on the available supply of CI-1042 competing for supplies that were intended for the Phase III clinical trial for head and neck cancer. To date, we have allocated the limited CI-1042 supply produced from our sole source supplier to support the Phase II intravenous clinical trials and the pivotal Phase III clinical trial, thereby impeding the progress of all of these clinical trials and limiting the number of patients enrolled in these trials. If the Phase II intravenous clinical trials do not generate sufficient evidence of antitumor activity or Warner-Lambert is unable to conduct intravenous clinical trials because of a limited supply of CI-1042, Warner-Lambert may discontinue our collaboration regarding CI-1042 and other products pursuant to the terms of these agreements.

Under our collaboration agreement with Warner-Lambert, Warner-Lambert has the sole right and responsibility to manufacture or have manufactured all supplies of CI-1042 for all commercial sales. Warner-Lambert has delayed investment in the manufacturing capacity needed to supply clinical trials and the potential commercial supply of CI-1042. To avoid delays in the development of CI-1042 for this indication, we have entered into an agreement with XOMA to supply CI-1042 for potential commercial use.

We are currently discussing with Warner-Lambert amending the collaboration agreement to include using XOMA as a commercial manufacturer of CI-1042. If we are unsuccessful in amending the collaboration agreement, we may have to bear the full manufacturing costs from XOMA, including any up-front payments. Further, if Warner-Lambert asserts its right as the sole manufacturer of CI-1042 for commercial supply, we may have to rely on Warner-Lambert for commercial supply of CI-1042 rather than XOMA and the timing for the availability of the commercial supply will depend on Warner-Lambert's decision to invest in a commercial manufacturing facility. Depending on the timing and the nature of the investment, we may experience a delay in completing our Phase III clinical trial and submitting applications to the FDA for regulatory approval.

As the parent of Warner-Lambert, Pfizer could cause Warner-Lambert to modify, disrupt or terminate the collaborative agreements we originally entered into with Warner-Lambert, subject to the terms of these agreements. Under the agreement relating to CI-1042, Warner-Lambert has the right to terminate the agreement for any reason with 90 days notice, in which case Warner-Lambert is required to return all rights to CI-1042 to us royalty-free.

If Warner-Lambert terminates our agreement relating to CI-1042, we would lose a significant portion of the $40 million of funding for the development of CI-1042, including the cost of clinical trials, which Warner-Lambert had agreed to provide under the agreement. In addition, we would not have access to Warner-Lambert's sales and marketing capabilities and expertise to commercialize CI-1042 as provided in the agreement. We currently intend to rely on the sales and marketing services provided to us under the agreement. Further, if Warner-Lambert terminates our agreement relating to CI-1042 and does not agree to manufacture CI-1042 for commercial use, we would rely solely on XOMA to provide commercial supply of CI-1042. XOMA has not manufactured large-scale viral products in the past and, together with us, may not successfully establish a commercially feasible manufacturing process.

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

We were established in April 1992 by means of a transfer from Chiron Corporation to us of the drug discovery program conducted at Chiron by Dr. Frank McCormick, our scientific founder, and his research team. Under the agreement executed at that time, we granted Chiron preferential rights to receive product licenses in the fields of diagnostics and vaccines, and also established a mechanism for our making proposals to Chiron for future collaborations. Chiron has advised us that it believes this mechanism requires us to offer gene therapy programs to Chiron before licensing any of these programs to a third party. We and Chiron have different interpretations of this agreement as it relates to the scope of Chiron's rights. We executed our agreement with Warner-Lambert for the development of CI-1042 and two other virus products pursuant to a waiver letter from Chiron. If Chiron does not grant us further waivers and asserts rights under the April 1992 agreement, or if disputes arise, we may encounter difficulties or delays in entering into future collaborations for other product candidates.

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

Therapeutic viruses are novel and we are still determining the biological characteristics of these viruses. For example, in our clinical trials to date, we have achieved the best results when CI-1042 is used in combination with standard chemotherapy drugs, but we are uncertain as to the reasons for and the nature of the interaction of the virus with these drugs. In addition, we are still investigating the response of the human immune system to our therapeutic viruses, and the immune system may play a role in limiting the tumor-killing effect of our therapeutic viruses. We also do not know the extent the human body may clear our therapeutic viruses from circulation in the bloodstream and limit the tumor-killing activity of our therapeutic viruses. Further, we are uncertain as to whether the killing activity of CI-1042 is specific to cells having the abnormal function involving the p53 gene. Moreover, we do not understand all of the many factors that contribute to the formation of each individual patient's cancer. These factors include not only the cancer type, but also the pressures within the tumor and the presence of normal cells and fibrous tissue within the tumor. These factors make each tumor unique. Because of the variety of factors, some cancer patients respond to a particular type of cancer therapy while others do not, even among patients with the same cancer type. The novelty and scientific uncertainties regarding our therapeutic viruses and the uniqueness of human cancers from patient-to-patient increase the risk that we will not successfully develop our product candidates or prove their safety and effectiveness in clinical trials. Even if we succeed in developing our product candidates, our product candidates may not have a therapeutic effect in a broad patient population.

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

Even if our product development efforts are successful and even if the requisite regulatory approvals are obtained, our products may not gain market acceptance among physicians, patients, healthcare payers and the medical community. A number of additional factors may limit the market acceptance of products including the following:

•: rate of adoption by healthcare practitioners;
•: types of cancer for which the product is approved;
•: rate of the products' acceptance by the target population;
•: timing of market entry relative to competitive products;
•: availability of alternative therapies;
•: price of our product relative to alternative therapies;
•: availability of third-party reimbursement;
•: extent of marketing efforts by us and third-party distributors or agents retained by us; and
•: side effects or unfavorable publicity concerning our products or similar products.

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

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

We intend to enter into agreements with third parties to market and sell most of our products if we receive regulatory approval for a product. We may not be able to enter into marketing and sales agreements with others on acceptable terms, if at all. To the extent that we enter into marketing and

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

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

We depend in part on public acceptance of the use of viruses as therapeutics or as delivery vehicles for gene therapy for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that these therapies are unsafe, and these therapies may not gain acceptance by the public or the media. As a result of negative public reaction to these therapies, the FDA may impose greater regulation, stricter clinical trial oversight and stricter commercial product labeling requirements.

The media has widely publicized the recent death of a patient at the University of Pennsylvania undergoing viral gene therapy. As a result of this death, the United States Senate held hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. The Recombinant DNA Advisory Committee, which acts as an advisory body to the National Institutes of Health, has extensively discussed gene therapy clinical trials. This death and any other adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation of our product candidates and potential regulatory delays relating to the testing or approval of our product candidates.

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

As of March 31, 2001, we had an accumulated deficit of approximately $90.8 million. We have incurred these losses principally from costs incurred in our research and development programs and from our general and administrative costs. We have derived no significant revenues from product sales or royalties. We expect to incur significant and increasing operating losses over the next several years as we expand our research and development efforts, preclinical testing and clinical trial and manufacturing activities, including the 2001 manufacturing contract with XOMA. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the establishment or termination of collaborations, the timing and amount of collaboration payments under the terms of our collaborative agreements, or the initiation, success or failure of clinical trials.

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

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

We will require substantial additional funds to conduct the costly and time-consuming research, preclinical testing and clinical trials necessary to develop our technology and proposed products, and to

establish or maintain relationships with collaborative parties. Our future capital requirements will depend upon a number of factors, including:

•: continued scientific progress in the research and development of our technology programs;
•: the size and complexity of these programs;
•: our ability to establish and maintain collaboration agreements;
•: our ability to manufacture sufficient drug supply for complete clinical trials;
•: progress with preclinical testing and clinical trials;
•: the time and costs involved in obtaining regulatory approvals;
•: the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
•: competing technological and market developments; and
•: product commercialization activities.

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

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

The loss of the services of one or more of our key employees could have an adverse impact on our business. We do not maintain key person life insurance on any of our officers, employees or consultants, other than for our chief executive officer. We depend on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We face competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, and other research institutions. Because of the scientific nature of our business, we are highly dependent on principal members of our scientific and management staff. To pursue our product development plans, we will need to hire additional management personnel and additional qualified scientific personnel to perform research and development, as well as personnel with expertise in clinical testing, government regulation and manufacturing. We may not be successful in hiring or retaining qualified personnel.

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

We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market products that will compete with other products and therapies that currently exist or are being developed. Many other companies are actively seeking to develop products that have disease targets similar to those we are pursuing. Some of these competitive products are in clinical trials. If approved, the products of these and other competitors now in clinical trials will compete directly with CI-1042. Other companies are developing drugs targeting other abnormal functions in cancer cells that may compete with our other product candidates.

Many of our competitors, either alone or together with collaborators, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their collaborators, have significantly greater experience than we do in:

•: developing products;

•: undertaking preclinical testing and human clinical trials;
•: obtaining FDA and other regulatory approvals of products; and
•: manufacturing and marketing products.

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

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

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

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

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

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

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

The regulatory review and approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for post-marketing studies. Additional or more rigorous governmental regulations may be promulgated that

could delay regulatory approval of our or a collaborator's product candidates. Delays in obtaining regulatory approvals may:

•: adversely affect the successful commercialization of any products that we or our collaborators develop;
•: impose costly procedures on us or our collaborators;
•: diminish any competitive advantages that we or our collaborators may attain; and
•: adversely affect our receipt of revenues or royalties.

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

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

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

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

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

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

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

•: safety and effectiveness results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials;
•: the results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;
•: after reviewing test results, we or our collaborators may abandon projects that we previously believed to be promising;
•: we, our collaborators or regulators, may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks; and
•: potential products may not have the desired effect or may have undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved.

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

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

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

•: obtain patents;
•: license technology rights from others;
•: protect trade secrets;
•: operate without infringing upon the proprietary rights of others; and
•: prevent others from infringing on our proprietary rights.

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. We may not have been the first to make the inventions covered by each of our issued or pending applications or we may not have been the first to file patent applications for such inventions. Competitors may have independently developed technologies similar to ours. 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 need to license the right to use third-party patents and intellectual property to develop and market our products. We may not acquire such required licenses on acceptable terms, if at all. If we do not obtain such licenses, we may need to design around other parties' patents, or we may not be able to proceed with the development, manufacture or sale of our products. We may face litigation to defend against claims of infringements, assert claims of infringement, enforce our patents, protect our trade secrets or know-how, or determine the scope and validity of others' proprietary rights.

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

Specifically, we are aware of patent applications filed in the United States and abroad that, if they were to issue, would cover CI-1042 and other viruses that selectively replicate. We are aware of patents that might cover our RB selective viruses and may cover our method for producing and purifying viruses. We are also aware of patent applications that claim enzymes for converting drugs to their active forms for treating disease, including cancers, and claim methods of delivering the enzymes using a virus. We may be unable to commercialize our products affected by these patents, if any of these patents are issued and we are unable to:

•: successfully challenge any claims asserting that our product candidates or products infringe the patent;
•: design around the patent; or
•: negotiate a reasonable license under the patent.

We face product liability risks and may not be able to obtain adequate insurance.

The use of any of our product candidates in clinical trials, and the sale of any approved products, exposes us to liability claims resulting from the use or sale of our products. We have obtained limited product liability insurance coverage for our clinical trials. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for product candidates in development. However, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. We may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in:

•: decreased demand for a product;
•: injury to our reputation;
•: withdrawal of clinical trial volunteers; and
•: loss of revenues.

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

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

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

Our stock price is highly volatile.

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

•: results of clinical trials;
•: ability to accrue patients;
•: ability to manufacture sufficient supply of CI-1042;
•: success or failure in obtaining regulatory approval by us or our competitors;
•: public concern as to the safety and efficacy of our products;
•: developments concerning the business of collaborative parties or their transactions with third parties;
•: developments in our relationship with collaborative parties;
•: developments in patent or other proprietary rights;
•: additions or departures of key personnel;
•: announcements by us or our competitors of technological innovations or new commercial therapeutic products;

•: published reports by securities analysts;
•: fluctuations in stock market price and volume, which are particularly common among securities of biotechnology companies;
•: fluctuations in our operating results;
•: statements of governmental officials; and
•: changes in healthcare reimbursement policies.

Existing stockholders have significant influence over us.

Our executive officers, directors and 5 percent stockholders own, in the aggregate, approximately 23 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. In addition, International Biotechnology Trust plc has the right to have its nominee elected to our board of directors as long as it continues to own at least 66²/3 percent of our common stock it purchased in January 1998. Because of these rights and ownership and voting arrangements, our officers, directors and principal stockholders may be able to effectively control the election of all members of the board of directors and to determine all corporate actions.

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

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

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

In the past, stockholders have often brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us because biotechnology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and 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 in control severance benefits agreements may prevent or delay a change of control.

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

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

•: after the transaction where the stockholder acquired 15% or more of the corporation's stock, the stockholder owned at least 85% of the corporation's outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
•: on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

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

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

•: our board is classified into three classes of directors as nearly equal in size as possible with staggered three year-terms;
•: the authority of our board to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of these shares, without stockholder approval;
•: all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;
•: special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer or the board; and
•: no cumulative voting.

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

In February 2001, we entered into change of control severance agreements with each of our executive officers. Under these agreements, in the event an executive officer's employment is terminated within 13 months of the effective date of a change in control, he or she would be entitled to severance benefits, including the vesting of stock options held by him or her.

The provisions of these change of control severance agreements may have the effect of delaying or preventing a change of control.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. By policy, we place our investments with high quality debt security issuers, limit the amount of credit exposure to any one issuer, limit duration by restricting the term, and hold investments to maturity except under rare circumstances. We classify our cash equivalents or marketable securities as fixed rate if the rate of return on an instrument remains fixed over its term. As of March 31, 2001, all of our cash equivalents and marketable securities are classified as fixed rate. There were no significant changes in our market risk exposures during the three months ended March 31, 2001. For further discussion of our market risk exposures, refer to Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2000.

PART II: OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

On March 8, 2001, the Company issued and sold to Warner-Lambert 460,872 shares of its Common Stock at a purchase price of $10.849 per share pursuant to the exercise of the Second Put contained in the Stock Put and Purchase Agreement dated October 13, 1999 and effective September 1, 1999. The Company received an aggregate of $5.0 million from the exercise of the Second Put. The issuance and sale of the Company's Common Stock was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Rule 506 of Regulation D.

Item 6. Exhibits and Reports on Form 8-K

a): Exhibits

Exhibit 10.35 Form of Executive Change in Control Severance Benefits Agreement

b): Reports on Form 8-K

On January 16, 2001, the Company filed a Current Report on Form 8-K, reporting under Item 9 that pursuant to Regulation FD that the Company is furnishing information with respect to presentations made by scientists and clinical investigators at the EORTC/NCI/AACR meeting on November 7, 2000.

On February 23, 2001, the Company filed a Current Report on Form 8-K, reporting under Item 5 that on January 29, 2001, the Company entered into a strategic process development and manufacturing relationship with XOMA (US) LLC in which XOMA will develop a large-scale process and will manufacture CI-1042 for clinical trials and large-scale production.

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 15, 2001	By:	/s/ HOLLINGS C. RENTON Hollings C. Renton Chairman of the Board, President and Chief Executive Officer (Principal Executive and Financial Officer)
Date: May 15, 2001	By:	/s/ MARILYN E. WORTZMAN Marilyn E. Wortzman Controller (Principal Accounting Officer)

EXHIBIT INDEX

Exhibit Number		Description of Exhibits
10.35		Form of Executive Change in Control Severance Benefits Agreement

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INDEX
PART I: FINANCIAL INFORMATION
PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II: OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

Item 6. Exhibits and Reports on Form 8-K

EXHIBIT INDEX

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Good

ONYX Pharmaceuticals Inactive 10-Q2001 Q1 Quarterly report

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