ONYX Pharmaceuticals 10-Q 2013 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

Or

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

For the transition period from              to

Commission File Number: 0-28298

ONYX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3154463
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer ID Number)

249 East Grand Avenue

South San Francisco California, 94080

(Address of principal executive offices)

(650) 266-0000

(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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerx	Accelerated filero
Non-accelerated filero	Smaller Reporting Companyo
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

Indicate the number of shares outstanding of each of the registrant’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 73,338,780 as of August 5, 2013.

INDEX

	Page
PART I: FINANCIAL INFORMATION	3
Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets — June 30, 2013 and December 31, 2012	3
Condensed Consolidated Statements of Operations — Three months and six months ended June 30, 2013 and 2012	4
Condensed Consolidated Statement of Comprehensive Income (Loss) — Three months and six months ended June 30, 2013 and 2012	5
Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2013 and 2012	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	33
PART II: OTHER INFORMATION	34
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3. Defaults Upon Senior Securities	56
Item 4. Mine Safety Disclosures	56
Item 5. Other Information	56
Item 6. Exhibits	57
SIGNATURES	58
EX-31.1
EX-31.2
EX-32.1

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ONYX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2013			2012
	(Unaudited)			(Note 1)
	(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	323,068		$	153,244
Marketable securities, current	427,388			331,192
Accounts receivable, net	131,311			79,117
Receivable from collaboration partners	80,190			68,209
Inventory	28,768			14,563
Deferred tax asset	3,416			3,416
Prepaid expenses and other current assets	27,584			38,215
Total current assets	1,021,725			687,956
Marketable securities, non-current	5,451			8,323
Property and equipment, net	32,331			25,933
Finite - lived intangible assets, net	247,528			257,969
Intangible assets - in-process research and development	171,500			171,500
Goodwill	193,675			193,675
Other assets	7,032			6,215
Total assets	$	1,679,242		$	1,351,571
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,833		$	275
Accrued liabilities	44,325			48,252
Accrued clinical trials and related expenses	37,859			39,684
Accrued compensation	22,491			29,575
Deferred revenue	10,027			9,811
Other current liabilities	4,816			3,772
Total current liabilities	122,351			131,369
Convertible senior notes due 2016	180,700			174,404
Liability for contingent consideration, non-current	155,115			149,163
Deferred tax liability	51,940			51,940
Other liabilities	25,537			24,576
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and oustanding	—			—
Common stock, $0.001 par value; 200,000,000 shares authorized; 73,056,158 and 67,479,518 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively	73			67
Additional paid-in capital	1,882,131			1,471,585
Receivable from stock option exercises	(53		)	(534		)
Accumulated other comprehensive income (loss)	(640		)	74
Accumulated deficit	(737,912		)	(651,073		)
Total stockholders’ equity	1,143,599			820,119
Total liabilities and stockholders’ equity	$	1,679,242		$	1,351,571

See accompanying notes

3

ONYX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months endedJune 30,						Six months endedJune 30,
	2013			2012			2013			2012
	(in thousands, except per share amounts)
Revenue:
Revenue from collaboration agreement	$	81,828		$	72,704		$	152,135		$	144,736
Product revenue	61,037			—			125,045			—
Royalty revenue	10,161			—			19,338			—
Contract revenue from collaborations	—			—			2,000			—
Total revenue	153,026			72,704			298,518			144,736
Operating expenses:
Cost of goods sold (excludes amortization of intangible assets)	2,043			—			4,011			—
Research and development	102,761			76,356			194,063			157,017
Selling, general and administrative	87,512			48,907			160,057			87,851
Contingent consideration expense	3,022			53,214			5,952			56,392
Intangible asset amortization	5,221			—			10,441			—
Total operating expenses	200,559			178,477			374,524			301,260
Income (loss) from operations	(47,533		)	(105,773		)	(76,006		)	(156,524		)
Investment income, net	558			619			1,160			1,377
Interest expense	(5,712		)	(5,374		)	(11,338		)	(10,670		)
Other income (expense)	(464		)	4,464			(620		)	3,559
Income (loss) before provision (benefit) for income taxes	(53,151		)	(106,064		)	(86,804		)	(162,258		)
Provision (benefit) for income taxes	17			(15		)	35			3
Net income (loss)	$	(53,168	)	$	(106,049	)	$	(86,839	)	$	(162,261	)
Basic and diluted net income (loss) per share	$	(0.73	)	$	(1.65	)	$	(1.20	)	$	(2.54	)
Shares used in computing basic and diluted net loss per share	72,951			64,209			72,113			63,953

See accompanying notes

4

ONYX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

	Three months ended, June 30,						Six months ended June 30,
	2013			2012			2013			2012
	(in thousands)
Net income (loss)	$	(53,168	)	$	(106,049	)	$	(86,839	)	$	(162,261	)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on available for sale securities, net	(682		)	649			(714		)	1,399
Comprehensive income (loss)	$	(53,850	)	$	(105,400	)	$	(87,553	)	$	(160,862	)

See accompanying notes

5

ONYX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months ended June 30,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(86,839	)	$	(162,261	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	4,298			2,492
Stock-based compensation	21,853			18,573
Amortization of convertible senior notes discount and debt issuance costs	6,300			5,581
Amortization of finite-lived intangible assets	10,441			—
Changes in fair value of liability for contingent consideration	5,952			56,392
Non-cash milestone payment received	—			(1,462		)
Realized losses on sale of marketable securities	94			—
Changes in operating assets and liabilities:
Accounts receivable	(52,194		)	—
Receivable from collaboration partners	(11,981		)	(3,780		)
Inventory	(14,205		)	—
Prepaid expenses and other current assets	10,631			25
Other assets	(817		)	(3,029		)
Accounts payable	2,558			84
Accrued liabilities	(3,927		)	(10,119		)
Accrued clinical trials and related expenses	(1,825		)	5,886
Accrued compensation	(7,084		)	(3,190		)
Deferred revenue	216			—
Lease termination exit costs liability	—			(3,177		)
Other current liabilities	1,044			—
Other liabilities	961			11,008
Net cash (used in) provided by operating activities	(114,524		)	(86,977		)
Cash flows from investing activities:
Purchases of marketable securities	(276,270		)	(124,070		)
Sales of marketable securities	16,182			104,764
Maturities of marketable securities	165,956			131,516
Capital expenditures	(10,696		)	(16,063		)
Net cash (used in) provided by investing activities	(104,828		)	96,147
Cash flows from financing activities:
Repurchases of restricted stock awards	(417		)	(124		)
Net proceeds from issuances of common stock	389,602			25,608
Payment for redemption of convertible senior notes	(9		)	—
Net cash provided by financing activities	389,176			25,484
Net increase (decrease) in cash and cash equivalents	169,824			34,654
Cash and cash equivalents at beginning of period	153,244			171,552
Cash and cash equivalents at end of period	$	323,068		$	206,206
Supplemental cash flow data
Cash paid during the period for income taxes	$	34		$	42
Cash paid during the period for interest	$	4,600		$	4,600

See accompanying notes

6

ONYX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited Condensed Consolidated 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. The unaudited financial statements furnished herein include all adjustments necessary for a fair presentation of Onyx Pharmaceuticals, Inc.’s (“Onyx” or the “Company”) financial position at June 30, 2013, and the results of its operations for the three months and six months ended June 30, 2013 and 2012, and cash flows for the six months ended June 30, 2013 and 2012. These interim financial statements have been prepared on a basis consistent with the Company’s annual financial statements. The Condensed Consolidated Balance Sheet at December 31, 2012 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. This Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain prior period amounts have been reclassified to conform to current year presentation. There was no effect on net income (loss) or equity related to these reclassifications.

Significant Accounting Policies

As of June 30, 2013, there have been no material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Thus, actual results could differ from those estimates. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or for any other future operating periods.

Principles of Consolidation

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

The Company operates in one segment — the discovery and development of novel cancer therapies.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable, cash equivalents and marketable securities.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” Under this standard, entities will be required to disclose additional information with respect to changes in accumulated other comprehensive income (AOCI) balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income (for example, unrealized gains or losses on available for sale marketable securities) as well as presenting separately for each such component the portion of the change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts reclassified into income, disclosure in one location would be required, based upon each specific AOCI component, of the amounts impacting individual income statement line items. Disclosure of the income statement line item impacts will be required only for components of AOCI reclassified into income in their entirety. Therefore, disclosure of the income statement line items affected by AOCI components such as net periodic benefit costs would not be included. The disclosures required with respect to income statement line item impacts would be made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. This ASU is effective beginning January 1, 2013. Because this standard only impacts presentation and disclosure requirements, its adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.

7

Note 2. Revenue from Collaboration Agreement

Collaboration Agreement with Bayer

Revenue from collaboration agreement consists of: the Company’s share of the pre-tax commercial profit generated from its collaboration with Bayer HealthCare Pharmaceuticals, Inc., or Bayer; reimbursement of the Company’s shared marketing costs related to Nexavar; and royalty revenue. Under the collaboration, Bayer recognizes all sales of Nexavar worldwide. The Company records revenue from collaboration agreement on a quarterly basis. Revenue from collaboration agreement is derived by calculating net sales of Nexavar to third-party customers and deducting the cost of goods sold, distribution costs, marketing costs (including, without limitation, advertising and education expenses, selling and promotion expenses, marketing personnel expenses and Bayer marketing services expenses), Phase 4 clinical trial costs and allocable overhead costs. Reimbursement by Bayer of the Company’s shared marketing costs related to Nexavar and royalty revenue is also included in the “Revenue from collaboration agreement” line item in the accompanying statement of operations.

Nexavar is currently marketed and sold in more than 100 countries around the world for the treatment of unresectable liver cancer and advanced kidney cancer. Outside of the United States, excluding Japan, Bayer incurs all of the sales and marketing expenditures, and the Company reimburses Bayer for half of those expenditures. In addition, for sales generated outside of the United States, excluding Japan, the Company reimburses Bayer a fixed percentage of sales for their marketing infrastructure. Research and development expenditures on a worldwide basis, excluding Japan, are equally shared by both companies regardless of whether the Company or Bayer incurs the expense. Bayer has no obligation to pay royalties to the Company for sales of Nexavar in Japan.

The Company’s collaboration agreement with Bayer will terminate when patents expire that were issued in connection with product candidates discovered under the agreement, or at the time when neither the Company nor Bayer is entitled to profit sharing under the agreement, whichever is latest. The Company’s co-promotion agreement with Bayer will terminate upon the earlier of the termination of the Company’s collaboration agreement with Bayer or the date products subject to the co-promotion agreement are no longer sold by either party in the United States due to a permanent product withdrawal or recall or a voluntary decision by the parties to abandon the co-promotion of such products in the United States. Either party may also terminate the co-promotion agreement upon failure to cure a material breach of the agreement within a specified cure period. The Company’s agreement regarding regorafenib will terminate on a country-by-country basis when the Company is no longer entitled to receive royalties in a particular country. Refer to Note 4 “Royalty Revenue from Stivarga” for further details.

Revenue from collaboration agreement was $81.8 million and $152.1 million for the three months and six months ended June 30, 2013, respectively, compared to $72.7 million and $144.7 million for the same periods in the prior year, calculated as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)
Onyx’s share of collaboration commercial profit	$	77,126	$	65,913	$	143,318	$	132,605
Reimbursement of Onyx’s shared marketing expenses	4,702		6,791		8,817		12,131
Revenue from collaboration agreement	$	81,828	$	72,704	$	152,135	$	144,736

Note 3. Product Revenue

Product revenue consists of revenue recorded on the sale of Kyprolis which was launched in the U.S. during the third quarter of 2012. The Company records revenue on the sale of Kyprolis once its distributors sell the product to the end customers. Product revenue is derived by calculating the net sales of Kyprolis by its distributors to the end customers and deducting the estimated government rebates, chargebacks, returns reserve and distribution costs.

8

Product revenue was $61.0 million and $125.0 million for the three months and six months ended June 30, 2013, respectively, compared to no product revenue for the same periods in the prior year, calculated as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
	(In thousands)
Product revenue, gross	$	69,269		$	—	$	134,728		$	—
Government rebates, chargebacks and other	(4,952		)	—		(3,301		)	—
Returns reserves and distribution fees	(3,280		)	—		(6,382		)	—
Product revenue, net	$	61,037		$	—	$	125,045		$	—

Government rebates, chargebacks and other include a credit of $5.9 million, during the three months ended March 31, 2013, related to a change in an accounting estimate following the completion of a product replacement program, as discussed below.

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the nature of the fee charged for products or services delivered and the collectability of those fees. Where the revenue recognition criteria are not met, the Company defers the recognition of revenue until such time that all criteria under the provision are met. The Company sells Kyprolis through a limited number of distributors, and title and risk of loss transfer upon receipt by these distributors. Health care providers order Kyprolis through these distributors. Since launching Kyprolis, the Company has deferred the recognition of revenue until the product is sold to end users such as health care providers, due to the inherent uncertainties in estimating normal channel inventory at distributor locations. As of June 30, 2013, deferred revenue related to sales of Kyprolis was $10.0 million.

Product sales are recorded net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions.

	Chargebacks			Rebates and Other			Distribution Fees and Returns			Total
	(In thousands)
Balance as of December 31, 2012	$	5,708		$	1,946		$	2,286		$	9,940
Provision related to current period sales	8,345			843			6,382			15,570
Credits/ Payments	(8,675		)	(116		)	(5,600		)	(14,391		)
Other	(5,088		)	(800		)	—			(5,888		)
Balance as of June 30, 2013	$	290		$	1,873		$	3,068		$	5,231

Chargebacks, Government Rebates and Other Deductions: For Kyprolis sales in the U.S., the Company estimates reductions to product sales for qualifying federal and state government programs including discounted pricing offered to Public Health Services, or PHS, as well as government-managed Medicaid programs. The Company’s reserve for PHS is based on actual chargebacks that distributors have claimed for reduced pricing offered to such health care providers. The Company’s reserve for Medicaid is based upon statutorily-defined discounts, estimated payer mix, expected sales to qualified healthcare providers, and the Company’s expectation about future utilization. Government rebates that are invoiced directly to the Company are recorded in accrued liabilities on its Condensed Consolidated Balance Sheet. For qualified programs that can purchase the Company’s products through distributors at a lower contractual government price, the distributors charge back to the Company the difference between their acquisition cost and the lower contractual government price, which the Company records as allowances against accounts receivable on its Condensed Consolidated Balance Sheet. The Company also provided financial assistance to qualifying patients that are underinsured, or cannot cover the cost of commercial coinsurance amounts, through its patient assistance program, Onyx 360. Onyx 360 is available to patients in the U.S. and its territories who meet various financial need criteria.

In connection with the launch of Kyprolis, the Company offered a product replacement program under which certain sales could qualify for the shipment of a free second vial. This program was in effect for sales made through November 30, 2012, and all free replacement vials were required to be authorized by the Company prior to March 23, 2013. Based on historical program utilization rates for similar products, management estimated that this program would be utilized and adjusted its government rebate and chargeback calculations accordingly for the quarters ended September 30, 2012 and December 31, 2012. During March 2013, the product replacement program came to an end. Since no product replacement claims which met the requirements of the program were received, the Company reduced its Medicaid rebate and PHS chargeback accrual by $5.9 million, which increased product revenue by the same amount, or $0.08 per share, during the six months ended June 30, 2013.

9

Distribution Fees and Product Returns: The Company has written contracts with its customers that include terms for distribution-related fees. The Company records distribution fees due to its customers based on the number of units sold to health care providers. Consistent with industry practice, the Company offers its U.S. customers a limited right to return product purchased directly from the Company, which is principally based upon the product’s expiration date. The Company will accept returns for expired product during the three months prior to and after the product expiration date, on product that had been sold to the health care providers. Product returned is generally not resalable given the nature of the Company’s products and method of administration. The Company has developed estimates for Kyprolis product returns based upon: historical industry information regarding product return rates of comparable products, including Nexavar, the Company’s other oncology product; inventory levels in the distribution channel; and other relevant factors. To date, actual Kyprolis product returns have been negligible.

Note 4. Royalty Revenue from Stivarga

In September 2012, Bayer HealthCare received approval in the United States for Stivarga® (regorafenib) tablets. Stivarga royalty revenue was $10.2 million and $19.3 million for the three months and six months ended June 30, 2013, respectively, or 20% of global net sales in jurisdictions that have received commercial marketing approval. In October 2011, Onyx and Bayer entered into an agreement regarding regorafenib under which the parties agreed that Bayer would pay Onyx a royalty of 20% of any future worldwide net sales in jurisdictions that have received commercial marketing approval. Onyx and Bayer also agreed that Onyx will have no obligation to pay past or future development and commercialization costs of regorafenib. Onyx has opted to co-promote regorafenib in the United States with Bayer, and to provide related medical science liaisons, under a fee-for-service arrangement, and recorded approximately $2.1 million and $3.7 million during the three months and six months ended June 30, 2013, respectively, which was classified net of selling, general and administrative expense on the Consolidated Statements of Operations. Development of regorafenib is managed by the same joint governance bodies that manage development of Nexavar; however, in the event of disagreement Bayer has the right to make final decisions for regorafenib.

Note 5. Contract Revenue from Collaboration

In May 1995, the Company entered into a research and development collaboration agreement with Warner-Lambert Company (formerly Parke Davis), now a subsidiary of Pfizer, Inc., or Pfizer, to discover and commercialize small molecule drugs that restore control of, or otherwise intervene in, the misregulated cell cycle in tumor cells. Under this agreement, the Company developed screening tests, or assays, for jointly selected targets, and transferred these assays to Pfizer for screening of its compound library. The discovery research term ended in August 2001. Because Pfizer is developing a compound identified through this collaboration, the Company is entitled to receive payments upon achievement of certain clinical development and regulatory milestones and is entitled to receive royalties on worldwide sales.

As a result of the collaboration, Pfizer identified palbociclib (formerly known as PD-0332991), a selective inhibitor of cyclin-dependent kinase 4/6, or CDK 4/6. Pfizer began clinical testing with this drug candidate in late 2004. During the six months ended June 30, 2013, the Company earned $2.0 million in clinical development milestone fees from Pfizer and since the inception of this agreement, the Company has earned $5.0 million in clinical development milestone fees relating to this drug candidate. Milestone payments earned under this agreement are classified as “Contract revenue from collaboration” on the Consolidated Statements of Operations. Under this agreement, remaining additional potential milestones payable by Pfizer to Onyx are, in aggregate, up to approximately $9.5 million and royalty payments will be based on 8% of net sales, if any. The remaining milestone payments may only become payable based on the efforts of Pfizer and therefore do not meet the definition of a substantive milestone. Since the Company does not have any remaining performance obligations under this agreement, such milestone payments would be recognized as revenue if and when received.

The milestone and royalty provisions of the May 1995 collaboration agreement with Pfizer will remain in effect during the terms of the patents that cover palbociclib and will continue until the expiration of all licenses granted pursuant to the agreement. The patents that cover palbociclib will expire in January 2023, in both the United States and Europe. However, in both regions the patents may be extended up to 5 years under the statutes that provide for patent term extensions. There can be, though, no assurance that such extensions will be secured. Either party may terminate the agreement for the uncured material breach of the other party.

10

Note 6. Acquisition of Proteolix

On November 16, 2009, or the Acquisition Date, the Company acquired Proteolix under the terms of an Agreement and Plan of Merger, or the Merger Agreement, entered into in October 2009. Under the Merger Agreement, the aggregate consideration payable by the Company to former Proteolix stockholders consisted of $276.0 million in cash at closing, and several earn-out payments. The three remaining earn-out payments, that potentially total $365.0 million, are contingent upon the achievement of certain regulatory approvals for Kyprolis in the U.S. and Europe within pre-specified timeframes, as follows:

·$65.0 million would be triggered by specified marketing approval on or before December 31, 2013 in the European Union for relapsed/refractory multiple myeloma;

·$150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the United States for relapsed multiple myeloma; and

·$150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the European Union for relapsed multiple myeloma.

Under certain circumstances, including if the Company fails to satisfy regulatory approval-related diligence obligations under the Merger Agreement, the Company may be required to make one or more earn-out payments even if the associated regulatory approvals are not received. Subject to the terms and conditions set forth in the Merger Agreement, the Company may, in its sole discretion, make any of the remaining earn-out payments that become payable to former holders of Proteolix preferred stock in the form of cash, shares of the Company’s common stock or a combination thereof.

The range of the undiscounted amounts the Company could be required to pay for the remaining earn-out payments is between zero and $365.0 million. The liability for contingent consideration is recorded at fair value at each reporting date based on a probability-weighted discounted cash flow analysis that includes significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. These inputs include the probability of technical and regulatory success (“PTRS”) for unapproved product candidates considering their stages of development. As of June 30, 2013, the liability for contingent consideration was $155.1 million.

Contingent consideration expense/(benefit) is recognized for any changes in the fair value of the liability for contingent consideration. Changes to the estimates and assumptions used to estimate this liability could result in significant fluctuations to contingent consideration expense/(benefit) recognized in the Company’s Consolidated Statements of Operations.

During the three months and six months ended June 30, 2013, the Company recognized a contingent consideration expense of $3.0 million and $6.0 million, respectively, compared to $53.2 million and $56.4 million for the same periods in the prior year. For the three months and six months ended June 30, 2012, the increase in the fair value of the contingent consideration liability was primarily a result of changes made to the PTRS and reflects the expense recorded for the period following the June 20, 2012 vote by the U.S. Food and Drug Administration (FDA) Oncology Drug Advisory Committee (CDAC) in favor of the approval of Kyprolis. The expense recorded for the three and six month periods ended June 30, 2013 relate to the time value of the liability.

Note 7.  Derivative Instruments

The Company has established a foreign currency hedging program to mitigate the foreign exchange risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. Dollar denominated currencies and reduce volatility in the Company’s cash flow and earnings. The Company hedges a certain portion of anticipated cash flows with foreign currency exchange forward and option contracts, typically no more than one year into the future. The underlying exposures, both revenue and expenses, are denominated in currencies other than the U.S. Dollar, primarily euro, British Pound, Japanese Yen and Swiss Franc. The Company does not enter into derivative financial contracts for speculative purposes. As of June 30, 2013, foreign currency derivative contracts that were not settled were recorded at fair value on the Condensed Consolidated Balance Sheet.

The fair values of the Company’s derivative instruments are estimated taking into consideration current market rates and the current creditworthiness of the counterparties or the Company, as applicable. The Company’s foreign currency forwards and options used to hedge anticipated cash flows, where the underlying exposure of revenues and expenses are denominated in the euro, British Pound and Swiss Franc, have not been designated as hedging instruments under ASC 815. The changes in the fair value of these foreign currency options are included in the “Other income (expense)” line item in the accompanying Condensed Consolidated Statements of Operations.

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At June 30, 2013 and December 31, 2012, the Company had the following outstanding derivative instruments:

	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Fair Value				Balance Sheet Location	Fair Value
		June 30, 2013		December 31, 2012			June 30, 2013		December 31, 2012
		(In thousands)					(In thousands)
Derivatives not designated as hedges:
Foreign currency option contracts	Prepaid expenses and other current assets	$	216	$	—	Accrued liabilities	$	62	$	—
Total derivatives not designated as hedges		216		—			62		—
Total derivatives		$	216	$	—		$	62	$	—

The effect of derivative instruments on the Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2013 were as follows:

	Foreign Currency Contracts					Foreign Currency Contracts
	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013		2012
	(In thousands)
Derivatives not designated as hedges:
Net gain (loss) recognized in net income (loss)	$	56	$	(40	)	$	56	$	309

The Company is exposed to counterparty credit risk on all of its derivative financial instruments. The Company has established and maintained strict counterparty credit guidelines and enters into derivative instruments only with financial institutions that are investment grade to minimize the Company’s exposure to potential defaults. The Company does not generally require collateral to be pledged under these agreements.

Note 8. Fair Value Measurements

In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company measures certain assets and liabilities at fair value on a recurring basis using the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers include:

·Level 1, defined as observable inputs such as quoted prices for identical assets in active markets;

·Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

·Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring management to develop its own assumptions based on best estimates of what market participants would use in pricing an asset or liability at the reporting date.

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The Company’s financial assets and liabilities (cash equivalents, current and non-current marketable securities, derivative instruments, convertible senior notes and current and non-current liabilities for contingent consideration), which require fair value measurement on a recurring basis, are classified within the fair value hierarchy as follows:

	As of June 30, 2013
	(In thousands)
	As reflected on the balance sheet		Level 1		Level 2		Level 3		Total
Assets:
Money market	$	24,029	$	24,029	$	—	$	—	$	24,029
Corporate and financial institutions debt	299,863		—		299,863		—		$	299,863
Auction rate securities	5,451		—		—		5,451		$	5,451
Asset-backed securities	6,945		—		6,945		—		$	6,945
Municipal bonds	61,693		—		61,693		—		$	61,693
U.S. government agencies	76,189		—		76,189		—		$	76,189
U.S. treasury bills	49,224		49,224		—		—		$	49,224
Total	$	523,394	$	73,253	$	444,690	$	5,451	$	523,394
Liabilities:
Liability for contingent consideration, current and non-current	$	155,115	$	—	$	—	$	155,115	$	155,115
Convertible senior notes due 2016 (face value $230,000)	180,700		—		520,456		—		520,456
Total	$	335,815	$	—	$	520,456	$	155,115	$	675,571

	As of December 31, 2012
	(In thousands)
	As reflected on the balance sheet		Level 1		Level 2		Level 3		Total
Assets:
Money market	$	19,297	$	19,297	$	—	$	—	$	19,297
Corporate and financial institutions debt	229,053		—		229,053		—		229,053
Auction rate securities	8,323		—		—		8,323		8,323
U.S. government agencies	88,514		—		88,514		—		88,514
U.S. treasury bills	29,222		29,222		—		—		29,222
Total	$	374,409	$	48,519	$	317,567	$	8,323	$	374,409
Liabilities:
Liability for contingent consideration, current and non-current	$	149,163	$	—	$	—	$	149,163	$	149,163
Convertible senior notes due 2016 (face value $230,000)	174,404		—		468,533		—		468,533
Total	$	323,567	$	—	$	468,533	$	149,163	$	617,696

Marketable Securities

Level 2 assets consist of debt securities issued by corporate and financial institutions, U.S. government and municipal agencies and asset-backed securities. The fair value of these securities is estimated using a weighted average price based on market prices from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources. There were no transfers between level 1 and level 2 assets during the periods presented.

Level 3 assets include securities with an auction reset feature (“auction rate securities”), which are classified as available-for-sale securities and reflected at estimated fair value. In February 2008, auctions began to fail for these securities and each auction for the majority of these securities since then has failed. As of June 30, 2013, the fair value of each of these securities is estimated utilizing a discounted cash flow analysis that considers interest rates, the timing and amount of cash flows, credit and liquidity premiums, and the expected holding periods of these securities. The unobservable inputs for these securities are the liquidity premium and expected holding period. The discount rates used in the cash flow analysis that includes the liquidity premium was 2.1%. An increase or decrease of 1% in the discount rate would have a $0.3 million change in the auction rate securities valuation. The expected holding period was 4.9 years. An increase or decrease of 1 year in the expected holding period would have a less than $0.1 million change in the auction rate securities valuation. The following table provides a summary of changes in fair value of the Company’s auction rate securities:

	Auction Rate Securities					Auction Rate Securities
	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
	(In thousands)
Fair value at beginning of period	$	8,178		$	22,384	$	8,323		$	22,102
Redemptions	(2,700		)	—		(2,900		)	—
Change in valuation	(27		)	565		28			847
Fair value at end of period	$	5,451		$	22,949	$	5,451		$	22,949

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As of June 30, 2013, as a result of the decline in fair value of the Company’s auction rate securities, which the Company believes is temporary and attributes to liquidity rather than credit issues, the Company has recorded an unrealized loss of $0.2 million included in the accumulated other comprehensive income, or OCI, line of stockholders’ equity. All of the auction rate securities held by the Company as June 30, 2013 consist of securities collateralized by student loan portfolios, which are substantially guaranteed by the United States government. Any future fluctuation in fair value related to the auction rate securities that the Company deems to be temporary, including any recoveries of previous write-downs, will be recorded in accumulated other comprehensive income (loss). If the Company determines that any decline in fair value is other than temporary, it will record a charge to earnings as appropriate. The Company does not intend to sell these securities and management believes it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost bases. The securities redeemed during the three months and six months ended June 30, 2013 were all redeemed at par. Refer to Note 9 “Marketable Securities” for further details.

Liability for Contingent Consideration

Level 3 liabilities include the acquisition-related liability for contingent consideration the Company recorded representing the amounts payable to former Proteolix stockholders upon the achievement of specified regulatory approvals for Kyprolis in the U.S. and Europe within pre-specified timeframes. The range of the undiscounted amounts the Company could be required to pay for the remaining earn-out payments is between zero and $365.0 million. The fair value of this Level 3 liability is estimated using a probability-weighted discounted cash flow analysis and a discount rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption. Subsequent changes in the fair value of this liability are recorded to the “Contingent consideration” expense line item in the Condensed Consolidated Statements of Operations under operating expenses. The unobservable input for this liability is the probability of occurrence by the contractual milestone dates primarily based on PTRS. The range in PTRS is consistent with industry standards of other oncology compounds. A 1% change in the probability of occurrence of each milestone would have a $2.5 million change in the contingent consideration liability. During the three months and six months ended June 30, 2013, the Company recognized contingent consideration expense of $3.0 million and $6.0 million, respectively, compared to $53.2 million and $56.4 million for the same periods last year.

The following table provides a summary of the changes in the fair value of the liability for contingent consideration:

	Liability for Contingent Consideration				Liability for Contingent Consideration
	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)
Fair value at beginning of period	$	152,093	$	163,168	$	149,163	$	159,990
Change in valuation	3,022		53,214		5,952		56,392
Fair value at end of period	$	155,115	$	216,382	$	155,115	$	216,382

Convertible Senior Notes due 2016

Level 2 liabilities consist of the Company’s convertible senior notes due 2016. The fair value of these convertible senior notes is estimated based on directly and indirectly observable inputs. In accordance with ASC 825-10, Financial Instruments, the estimated market value of the Company’s convertible senior notes as of June 30, 2013 was $520.5 million. The Company’s convertible senior notes due 2016 are not marked-to-market and are carried at face value less the unamortized portion of the original issue discount, which resulted from issuance costs and the bifurcation of the fair value of the conversion feature. The portion of the value allocated to the conversion option is included in stockholders’ equity in the accompanying unaudited Condensed Consolidated Balance Sheet June 30, 2013.

Note 9. Marketable Securities

Marketable securities consist primarily of corporate debt securities, corporate commercial paper, debt securities of United States government agencies, auction rate notes and money market funds and are classified as “available for sale.” Available for sale securities are reported at fair value based on quoted market prices, with unrealized gains and losses reported in accumulated other comprehensive income (loss) within stockholders’ equity. The cost of a security sold or the amount reclassified out of accumulated other comprehensive income (loss) into earnings is determined using specific identification. The Company may pay a premium or receive a discount upon the purchase of marketable securities. Interest earned and gains/losses realized on marketable securities and amortization of discounts received and accretion of premiums paid on the purchase of marketable securities are included in investment income/expense. The weighted-average maturity of the Company’s current marketable securities as of June 30, 2013 was approximately 12 months.

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Available-for-sale marketable securities consisted of the following:

	June 30, 2013
	Adjusted		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(In thousands)
Government/agency bond investments:
Current	$	159,648	$	51	$	(110	)	$	159,589
Total Government/agency bond investments		159,648		51		(110	)		159,589
Corporate debt and other investments:
Current		268,157		88		(445	)		267,800
Non-current	5,675		—		(224		)	5,451
Total corporate debt and other investments		273,832		88		(669	)		273,251
Total available-for-sale marketable securities	$	433,480	$	139	$	(779	)	$	432,840

	December 31, 2012
	Adjusted		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(In thousands)
Government/agency bond investments:
Current	$	107,673	$	65	$	—		$	107,738
Total Government/agency bond investments		107,673		65		—			107,738
Corporate debt and other investments:
Current		223,192		269		(7	)		223,454
Non-current	8,575		—		(252		)	8,323
Total corporate debt and other investments		231,767		269		(259	)		231,777
Total available-for-sale marketable securities	$	339,440	$	334	$	(259	)	$	339,515

Government and agency bond investments include: agency bonds; municipal bonds; and U.S. government treasury bills. Corporate debt and other investments include: corporate and financial institution debt investments; asset-backed securities; and auction rate securities. Estimated fair value was determined for each individual security in the investment portfolio. At June 30, 2013, the Company’s investment portfolio included $5.7 million of AAA rated securities with an auction reset feature (“auction rate securities”) that are collateralized by student loans, which are substantially guaranteed by the United States government. The Company attributes the unrealized losses in its auction rate securities portfolio to liquidity issues rather than credit issues. The estimated fair value of auction rate securities was based on a discounted cash flow model and classified as non-current marketable securities on the accompanying Condensed Consolidated Balance Sheet. The Company recorded a $0.2 million unrealized loss through accumulated other comprehensive income or loss instead of earnings because the Company has deemed the impairment of these securities to be temporary. Refer to Note 8 “Fair Value Measurements” for further details.

Note 10. Inventory

Inventories at June 30, 2013 and December 31, 2012 are summarized below:

	June 30,		December 31,
	2013		2012
	(In thousands)
Raw materials	$	18,841	$	10,889
Work-in-process	7,805		3,466
Finished goods	2,122		208
Total	$	28,768	$	14,563

Inventories are stated at the lower of cost or market. Cost is determined by the actual cost method. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, reserves are recorded for the difference between cost and market value, less cost to sell.

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Note 11. Convertible Senior Notes due 2016

In August 2009, the Company issued $230.0 million aggregate principal amount of 4.0% convertible senior notes due 2016, or the 2016 Notes. The 2016 Notes will mature on August 15, 2016 unless earlier redeemed or repurchased by the Company or converted. The 2016 Notes bear interest at a rate of 4.0% per year, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2010.

The 2016 Notes are general unsecured senior obligations of the Company and rank equally in right of payment with all of the Company’s future senior unsecured indebtedness, if any, and senior in right of payment to the Company’s future subordinated debt, if any.

Under certain circumstances and during certain periods, the 2016 Notes may be convertible, at an initial conversion rate of 25.2207 shares of common stock per $1,000 principal amount of the 2016 Notes, which is equivalent to an initial conversion price of approximately $39.65 per share of common stock. The conversion rate is subject to adjustment in certain circumstances. Upon conversion of a 2016 Note, the Company may deliver, at its election, shares of common stock, cash or a combination of cash and shares of common stock.

Upon the occurrence of certain fundamental changes involving the Company, holders of the 2016 Notes may require the Company to repurchase all or a portion of their 2016 Notes for cash at a price equal to 100% of the principal amount of the 2016 Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Beginning August 20, 2013, the Company may redeem all or part of the outstanding 2016 Notes, provided that the last reported sale price of the common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day prior to the date the Company provides the notice of redemption to holders of the 2016 Notes exceeds 130% of the conversion price in effect on each such trading day. The redemption price will equal 100% of the principal amount of the 2016 Notes to be redeemed, plus all accrued and unpaid interest, plus a “make-whole premium” payment. The Company must make the make-whole premium payments on all 2016 Notes called for redemption prior to August 15, 2016, including the 2016 Notes converted after the date the Company delivered the notice of redemption.

The 2016 Notes are accounted for in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options. Under ASC Subtopic 470-20, issuers of certain convertible debt instruments that have a net settlement feature and may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of any outstanding debt instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument.

The following is a summary of the equity and liability components of the 2016 Notes as of June 30, 2013:

	June 30, 2013
	(In thousands)
Carrying amount of the equity component	$	89,468
Net carrying amount of the liability component	$	91,232
Unamortized discount of the liability component	$	49,295

The effective interest rate used in determining the liability component of the 2016 Notes was 12.5%. The application of ASC 470-20 resulted in an initial recognition of $89.5 million as the debt discount with a corresponding increase to paid-in capital, the equity component, for the 2016 Notes. The debt discount and debt issuance costs are amortized as interest expense through August 2016. For the three months and six months ended June 30, 2013, interest expense was $2.3 million and $4.6 million, respectively, compared to $2.3 million and $4.6 million for the same periods in 2012, relating to the 4.0% stated coupon rate. The non-cash interest expense relating to the amortization of the debt discount for the three months and six months ended June 30, 2013 was $3.2 million and $6.3 million, respectively, compared to $2.8 million and $5.6 million for the same periods in 2012. The estimated fair value of the Company’s senior notes as of June 30, 2013 was $520.5 million.

As a result of the Company stock price meeting certain criteria, the 2016 Notes were convertible for the period of January 1, 2013 to June 30, 2013. As of June 30, 2013, requests for five of the 2016 Notes had been submitted and settled for conversion with a face value of $5,000.

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Note 12. Commitments and Contingencies

Commitments

During 2012, the Company entered into commercial manufacturing and supply agreements for the production of Kyprolis. As of June 30, 2013, the Company is committed to purchase products and services of approximately $10.7 million in 2013 under these agreements.

Since May 2011, the Company’s corporate headquarters, including its principal offices, are located in South San Francisco, California. In July 2010, the Company entered into arrangements to lease and sublease a total of approximately 126,493 square feet for its corporate headquarters in South San Francisco, California. The sublease and the lease expire in 2015 and 2024, respectively. Upon expiration of the sublease, the lease will be automatically expanded to include the premises subject to the sublease. The lease includes two successive five-year options to extend the term of the lease to 2034. In November 2011, the Company entered into an arrangement to lease up 170,618 square feet in a building adjacent to its corporate headquarters in South San Francisco, California, and this lease expires in 2024. The construction on this building was completed in December 2012. The lease includes two successive five-year options to extend the term of the lease to 2034. In March 2013, the Company entered into an agreement to lease 107,000 square feet in a building to be constructed adjacent to its corporate headquarters. The lease is expected to expire in approximately 2024. For accounting purposes, due to the nature of the Company’s involvement with the construction of the buildings subject to the lease agreement, the Company is considered to be the owner of the assets during the construction period through the lease commencement date, even though the lessor is responsible for funding and constructing the building shell. Construction to this building commenced in April 2013 and as of June 30, 2013, the Company has capitalized $1.4 million of construction cost in property, plant and equipment, and has also recognized a corresponding amount in long-term debt in the accompanying condensed consolidated balance sheet. The Company expects at the time of completion of the project, if all the building and infrastructure were completed by the lessor, its construction asset and related obligation will be in excess of $22.1 million, excluding costs related to leasehold improvements.

Rent expense for the three months and six months ended June 30, 2013 was $3.2 million and $7.0 million, respectively, compared to $1.2 million and $2.2 million for the same periods in 2012. The Company received no sublease income during these periods.

Contingencies

From time to time, the Company may become involved in claims and other legal matters arising in the ordinary course of business. Management is not currently aware of any matters that could have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Note 13. Stock-Based Compensation

The Company accounts for stock-based compensation to consultants, employees and directors by estimating the fair value of stock-based awards using the Black-Scholes option-pricing model and amortizing the fair value of the stock-based awards granted over the applicable vesting period. Total employee stock-based compensation expenses were $12.7 million and $21.4 million for the three months and six months ended June 30, 2013, respectively, compared to $10.9 million and $17.7 million for the same periods in the prior year.

Note 14. Income Taxes

The Company calculates its quarterly income tax provision in accordance with ASC 740-270, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company has established and continues to maintain a valuation allowance against the majority of its deferred tax assets as the Company does not currently believe that realization of those assets is more likely than not.

The Company recorded income tax expense of $17,000 and $35,000 for the three and six months ended June 30, 2013, primarily related to state and foreign income taxes. For the three and six months ended June 30, 2012, the Company recorded an income tax benefit of $15,000 and an income tax expense of $3,000, primarily related to state and foreign income taxes.

There were no changes to the Company’s unrecognized tax benefits for the three and six months ended June 30, 2013. As of June 30, 2013, the total unrecognized tax benefit was $11.9 million. The Company does not expect to have any significant changes to unrecognized tax benefits over the next twelve months other than a potential adjustment resulting from completion of a tax credit analysis, which will have no impact on its net loss. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items as a component of income tax expense. No interest or penalties have been recorded for the three and six months ended June 30, 2013.

The federal research and development tax credit expired on December 31, 2011, and was retroactively reinstated and extended to December 31, 2013, during the first quarter of 2013. Due to the Company’s full valuation allowance against its deferred tax assets, this tax law change did not impact the Company’s income tax provision as the increase in the gross deferred tax asset was offset by a corresponding increase in its valuation allowance.

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The tax years from 1993 and forward remain open to examination by the federal and state taxing authorities due to net operating loss and credit carryforwards. The Company is currently under examination by the California Franchise Tax Board.  The Company is not under examination by the Internal Revenue Service or other taxing authorities.

Note 15. Net Income (Loss) per Share

Basic net loss per share amounts for each period presented were computed by dividing net loss by the weighted-average number of shares of common stock outstanding. Diluted net loss per share for each period presented was computed by dividing net loss plus interest on dilutive convertible senior notes by the weighted-average number of shares of common stock outstanding during each period plus all additional common shares that would have been outstanding assuming dilutive potential common shares had been issued for dilutive convertible senior notes and other dilutive securities.

Dilutive potential common shares for dilutive convertible senior notes are calculated based on the “if-converted” method. Under the “if-converted” method, when computing the dilutive effect of convertible senior notes, the numerator is adjusted to add back the amount of interest and debt issuance costs recognized in the period and the denominator is adjusted to add the amount of shares that would be issued if the entire obligation is settled in shares. As of June 30, 2013, the Company’s outstanding indebtedness consisted of its 4.0% convertible senior notes due 2016.

Dilutive potential common shares also include the dilutive effect of the common stock underlying in-the-money stock options and are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option and the average amount of compensation cost, if any, for future service that the Company has not yet recognized when the option is exercised, are assumed to be used to repurchase shares in the current period.

The computations for basic and diluted net income (loss) per share were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(In thousands, except per share amounts)
Numerator:
Net income (loss) - basic	$	(53,168	)	$	(106,049	)	$	(86,839	)	$	(162,261	)
Add: interest and issuance costs related to convertible senior notes	—			—			—			—
Net income (loss) - diluted	$	(53,168	)	$	(106,049	)	$	(86,839	)	$	(162,261	)
Denominator:
Weighted average common shares outstanding - basic	72,951			64,209			72,113			63,953
Dilutive effect of convertible senior notes	—			—			—			—
Dilutive effect of stock options	—			—			—			—
Weighted-average common shares outstanding and dilutive potential common shares - diluted	72,951			64,209			72,113			63,953
Net income (loss) per share:
Basic	$	(0.73	)	$	(1.65	)	$	(1.20	)	$	(2.54	)
Diluted	$	(0.73	)	$	(1.65	)	$	(1.20	)	$	(2.54	)

Under the “if-converted” method, 5.8 million potential common shares relating to the 2016 Notes were not included in diluted net income (loss) per share for the three months and six months ended June 30, 2013 because their effect would be anti-dilutive. Diluted net loss per share does not include the effect of 3.3 million stock option awards that were outstanding during the three months and six months ended June 30, 2013, because their effect would have been anti-dilutive.

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Note 16. Accumulative Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) was as follows:

	June 30,  2013			December 31,  2012
	(In thousands)
Net unrealized gain (loss) on available-for-sale securities	$	(640	)	$	74
Accumulated other comprehensive income (loss)	$	(640	)	$	74

The change in accumulated other comprehensive income (loss), net of tax, by component for the three and six months ended June 30, 2013 and 2012 were as follows:

	Unrealized Gains (Losses) on Available-for-Sale Securities
	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013			Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
	(In thousands)
Beginning balance	$	42		$	74		$	(1,261	)	$	(2,011	)
Other comprehensive income (loss) before reclassification	(781		)	(808		)	649			1,399
Amount reclassified from accumulated other comprehensive income	99			94			—			—
Net current-period other comprehensive income (loss)	(682		)	(714		)	649			1,399
Closing balance	$	(640	)	$	(640	)	$	(612	)	$	(612	)

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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,” “potential,” “believe,” 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 Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.

Overview

We are a biopharmaceutical company dedicated to developing and commercializing innovative therapies that target the molecular mechanisms that cause cancer. By applying our expertise to develop and commercialize therapies designed to exploit the genetic and molecular differences between cancer cells and normal cells, we have built two franchise platforms — one in kinase inhibition and one in proteasome inhibition. In our kinase inhibitor franchise, our lead product, Nexavar® (sorafenib) tablets, is approved in multiple countries for unresectable liver cancer and advanced kidney cancer, and is under regulatory review for the treatment of patients with radioactive iodine-refractory differentiated thyroid cancer in the United States and the European Union. With our development and marketing partner Bayer HealthCare Pharmaceuticals Inc., or Bayer, we share equally in the profits and losses of Nexavar worldwide, except Japan. A second oral multi-kinase inhibitor, Stivarga® (regorafenib) tablets, a Bayer compound, is approved for the treatment of metastatic colorectal cancer (mCRC) in the United States, Canada and Japan, and for the treatment of locally advanced, unresectable or metastatic gastrointestinal stromal tumors (GIST) in the United States, and is under regulatory review for mCRC in the European Union, and for GIST in Japan. Onyx receives a twenty percent royalty from Bayer on net sales of Stivarga in approved oncology indications, globally.

In our proteasome inhibitor franchise, Kyprolis® (carfilzomib) for Injection is approved in the United States for the treatment of patients with multiple myeloma who have received at least two prior therapies including bortezomib and an immunomodulatory agent (IMiD), and have demonstrated disease progression on or within 60 days of completion of the last therapy. We are executing a broad global development plan for Kyprolis across lines of treatment for multiple myeloma. We are also developing two other novel proteasome inhibitors, including an oral proteasome inhibitor, oprozomib (ONX 0912), and an immunoproteasome inhibitor (ONX 0914). In addition to the products described above, we expect to continue to expand our development pipeline, with multiple clinical or preclinical stage product candidates.

Our Strategy

We plan to achieve our business strategy of transforming Onyx into a leading biopharmaceutical company in the oncology market by:

·establishing Kyprolis as a treatment for relapsed and refractory multiple myeloma;

·investing broadly in global clinical testing to evaluate Kyprolis for additional lines of treatment for multiple myeloma;

·maximizing current opportunities worldwide for Kyprolis and Stivarga in approved indications;

·jointly promoting and marketing Stivarga in the United States as a treatment for mCRC and GIST;

·investing with Bayer in a development program for Nexavar in breast cancer, as well as in the liver and kidney cancer adjuvant setting;

·preparing for future commercialization opportunities of Nexavar, Stivarga, Kyprolis and oprozomib; and

·continuing to expand our pipeline by advancing earlier stage therapies, as well as evaluating and adding new pipeline opportunities.

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Business Highlights

During the second quarter of 2013, we continued to execute on our Kyprolis commercialization strategy and our value building strategy by improving commercial margin for Nexavar and by jointly promoting Stivarga with Bayer.

Kyprolis

Kyprolis (carfilzomib) is approved by the United States Food and Drug Administration, or FDA, for the treatment of patients with multiple myeloma who have received at least two prior therapies including bortezomib and an immunomodulatory agent (IMiD), and have demonstrated disease progression on or within 60 days of completion of the last therapy. Approval was based on response rate. Clinical benefit, such as improvement in survival or symptoms, has not been verified. Carfilzomib is a tetrapeptide epoxyketone proteasome inhibitor that irreversibly binds to the N-terminal threonine-containing active sites of the 20S proteasome, the proteolytic core particle within the 26S proteasome. Carfilzomib has antiproliferative and proapoptotic activities in vitro in solid and hematologic tumor cells. Carfilzomib inhibits proteasome activity in blood and tissue and delays tumor growth in preclinical models of multiple myeloma, hematologic, and solid tumors.

Commercialization Status

During the second quarter of 2013, we continued to execute on our Kyprolis commercialization strategy. Net sales of Kyprolis during the three months and six months ended June 30, 2013 were $61.0 million and $125.0 million, respectively.

As part of the global commercialization strategy for Kyprolis, Onyx is exploring opportunities in countries outside of the United States that consider and permit marketing authorization based on U.S. approval. Onyx has established distribution agreements in Israel, Turkey, Colombia and Argentina, and is pursuing agreements in additional international markets with established distributors for regulatory and commercialization activities. Commercialization in other countries will be subject to successful completion of additional Kyprolis clinical studies and obtaining additional regulatory approvals. In addition, pending results of our two ongoing Phase 3 studies, FOCUS and ASPIRE, Onyx expects to pursue registration in Europe and other territories elsewhere in the world.

Recent developments

In late July, one of our representatives met with the independent Data Monitoring Committee (DMC) for our FOCUS study following the DMC review of a planned interim analysis.  On the basis of this review, the DMC notified us that the study may continue as planned without modification.

Onyx has initiated a global Phase 3 trial evaluating carfilzomib in combination with melphalan and prednisone versus bortezomib (Velcade®) with melphalan and prednisone in 882 patients with newly diagnosed, transplant ineligible multiple myeloma, referred to as the CLARION trial. The primary endpoint of the trial is progression-free survival.

Nexavar

Nexavar is approved by regulatory authorities in over 100 countries for the treatment of patients with unresectable liver cancer and advanced kidney cancer. Nexavar is a novel, orally available multiple kinase inhibitor that acts through dual mechanisms of action by inhibiting angiogenesis and the proliferation of cancer cells. A common feature of cancer cells is the excessive activation of signaling pathways that cause abnormal cell proliferation. In addition, tumors require oxygen and nutrients from newly formed blood vessels to support their growth. The formation of these new blood vessels is called angiogenesis. Nexavar inhibits the signaling of VEGFR-1, VEGFR-2, VEGFR-3 and PDGFR-ß, key receptors of Vascular Endothelial Growth Factor, or VEGF, and Platelet-Derived Growth Factor, or PDGF. Both receptors play a role in angiogenesis. Nexavar also inhibits RAF kinase, an enzyme in the RAS signaling pathway that has been shown in preclinical models to be important in cell proliferation. In normal cell proliferation, when the RAS signaling pathway is activated, or turned “on,” it sends a signal telling the cell to grow and divide. When a gene in the RAS signaling pathway is mutated, the signal may not turn “off” as it should, causing the cell to continuously reproduce. The RAS signaling pathway plays an integral role in the growth of some tumor types such as liver cancer and we believe that inhibiting this pathway could have an effect on tumor growth. Nexavar also inhibits other kinases involved in cancer, such as KIT, FLT-3 and RET.

Commercialization Status

During the second quarter of 2013, we continued to execute on our value-building strategy with our partner Bayer, by improving commercial margin of Nexavar and experienced continued growth in the Asia Pacific region and United States.

Nexavar was approved for the treatment of patients with advanced kidney cancer by the FDA in December 2005. It was approved in the European Union in July 2006 for the treatment of patients with advanced kidney cancer who have failed prior therapy or are considered unsuitable for other therapies. In the fourth quarter of 2007, Nexavar was approved in the European Union and United States for the treatment of patients with unresectable liver cancer. Nexavar is now approved in over 100 countries worldwide for the treatment of advanced kidney cancer and unresectable liver cancer. In the United States, we co-promote Nexavar with Bayer. Outside of the United States, Bayer manages all commercialization activities.

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Recent developments

On June 30, 2013, Bayer announced the submission of a New Drug Application, or NDA, to the FDA and an application for marketing authorization to the European Medicines Agency (EMA) for Nexavar for the treatment of radioactive iodine-refractory differentiated thyroid cancer. The submission is based on data from pivotal Phase 3 DECISION trial. In the trial, sorafenib significantly extended progression-free survival (PFS), the primary endpoint of the trial.

Stivarga

Stivarga is a Bayer compound and Onyx receives a royalty of 20% on global net sales of Stivarga in jurisdictions that have received commercial marketing approval. In October 2011, Onyx and Bayer entered into an Agreement Regarding Regorafenib in which Onyx agreed that Bayer would pay Onyx a royalty of 20% of any future commercially approved worldwide net sales of regorafenib. Onyx and Bayer also agreed that Onyx will have no obligation to pay past or future development and commercialization costs of regorafenib, except in instances where Onyx opts to develop Stivarga on its own. Onyx has, at this time, opted to co-promote regorafenib in the United States with Bayer, under a fee-for-service arrangement. In addition, Bayer also reimburses Onyx for certain Stivarga related medical science liaisons on a fixed rate. Bayer is responsible, at its sole cost and expense, for the development of Stivarga worldwide.

Stivarga is approved by the FDA and regulatory bodies in Canada, Japan and Switzerland for the treatment of patients with metastatic colorectal cancer (mCRC) who have been previously treated with currently available therapies (including fluoropyrimidine-, oxaliplatin- and irinotecan-based chemotherapy, an anti-VEGF therapy, and, if KRAS wild type, an anti-EGFR therapy). The United States approval of Stivarga is based on results from the pivotal Phase 3 CORRECT study that demonstrated improvement in overall survival (OS) and progression-free survival (PFS) compared to placebo in patients with mCRC whose disease had progressed after approved standard therapies.

Stivarga has also received regulatory approvals in the United States and in Japan for the treatment of patients with locally advanced, unresectable or metastatic gastrointestinal stromal tumors (GIST) who have been previously treated with imatinib and sunitinib malate.

Commercialization Status

We and Bayer jointly promote Stivarga in the U.S. Onyx receives a 20% royalty on Bayer’s global net sales of Stivarga in jurisdictions that have received commercial marketing approval. Stivarga royalty revenue was $10.2 million and $19.3 million for the three months and six months ended June 30, 2013, respectively.

Recent developments

In June 2013, Bayer announced that Stivarga had been recommended for approval by the European Committee for Medicinal Products for Human Use (CHMP) treatment of adult patients with mCRC who have been previously treated with, or are not considered candidates for, available therapies. These include fluoropyrimidine based chemotherapy, an anti VEGF therapy and an anti EGFR therapy. The decision of the European Commission on the approval is expected in the third quarter of 2013.

As part of a broad development program, Bayer has communicated plans to initiate two additional Phase 3 trials in 2013. The first study in approximately 530 patients is evaluating the efficacy and safety of regorafenib in patients with advanced liver cancer who have progressed on Nexavar (sorafenib) treatment and has begun enrollment. The primary endpoint of the study is overall survival. The second study is planned in patients with mCRC following resection of liver metastases.

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Financial Highlights

The following table is a summary of our financial highlights:

	Three Months Ended June 30,						Change 2013 vs 2012			Six Months Ended June 30,						Change 2013 vs 2012
	2013			2012			$	%		2013			2012			$	%
	(In thousands, except per share amounts and percentages)									(In thousands, except per share amounts and percentages)
Total revenue	$	153,026		$	72,704		80,322	110	%	$	298,518		$	144,736		153,782	106	%
Operating Expenses	200,559			178,477			22,082	12	%	374,524			301,260			73,264	24	%
Income (loss) from operations	(47,533		)	(105,773		)	58,240	55	%	(76,006		)	(156,524		)	80,518	51	%
Net income (loss)	(53,168		)	(106,049		)	52,881	50	%	(86,839		)	(162,261		)	75,422	46	%
Diluted net income (loss) per share	(0.73		)	(1.65		)	0.92	56	%	(1.20		)	(2.54		)	1.34	53	%

	June 30, 2013		December 31, 2012		Change		%
Cash, cash equivalents and current and non-current marketable securities	$	755,907	$	492,759	$	263,148	53	%

Total revenue more than doubled for the three months and six months ended June 30, 2013 from the same periods in 2012 and included product revenue from the sale of Kyprolis, revenue from the Nexavar collaboration, royalty revenue from sales of Stivarga by Bayer, and contract revenue from collaboration in connection with palbociclib development from Pfizer. Kyprolis net sales were $61.0 million and $125.0 million for the three months and six months ended June 30, 2013, respectively, including a favorable gross-to-net accrual adjustment of $5.9 million during the six months ended June 30, 2013. Revenue from the Nexavar collaboration was $81.8 million and $152.1 million for the three months and six months ended June 30, 2013, compared to $72.7 million and $144.7 million for the same periods in 2012. Nexavar net sales, as recorded by Bayer, excluding Japan, were $229.7 million and $428.2 million for the three months and six months ended June 30, 2013, respectively, compared to $214.5 million and $424.2 million for the same periods in 2012. The increase in Nexavar sales was primarily due to sales growth in the United States and Asia Pacific regions. Nexavar collaboration commercial profit improved to 67% for both the three and six months ended June 30, 2013, compared to 61% and 63% for the same periods in 2012. Stivarga royalty revenue was $10.2 million and $19.3 million for the three months and six months ended June 30, 2013, respectively. Onyx receives a 20% royalty on Bayer’s global net sales of Stivarga in jurisdictions that have received commercial marketing approval.

Total operating expenses for the three months and six months ended June 30, 2013 increased by 12% and 24%, respectively, from the same periods in 2012, primarily due to the global development of Kyprolis, particularly the ongoing Phase 3 ENDEAVOR trial, start-up activities associated with the front-line CLARION study, and due to the increase in selling, general and administrative expenses related to the Kyprolis commercial launch in the United States and adding select capabilities internationally, which were offset by lower Kyprolis Phase 3 FOCUS and ASPIRE trial expenses and lower contingent consideration expense.

Cash, cash equivalents and current and non-current marketable securities at June 30, 2013 were $755.9 million, an increase of $263.1 million, or 53%, from $492.8 million at December 31, 2012. The increase is primarily attributable to net cash proceeds of approximately $352.4 million received from a public offering of 4.4 million shares of common stock in January 2013.

Critical Accounting Policies, Estimates and Judgments

The accompanying discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Condensed Consolidated Financial Statements requires us to make significant estimates, assumptions and judgments that affect the amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Significant estimates include assumptions used in the determination of the fair value of marketable securities, revenue from collaboration agreement, multiple element arrangements, the effect of business combinations, fair value measurement of tangible and intangible assets and liabilities, goodwill and other intangible assets, fair value of convertible senior notes, research and development expenses, stock-based compensation and the provision for income taxes. Actual results may differ materially from these estimates. As of June 30, 2013, there have been no significant or material changes to our critical accounting policies or estimates since we filed our 2012 Annual Report on Form 10-K for the year ended December 31, 2012 with the Securities and Exchange Commission (“SEC”).

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Results of Operations

Three and six months ended June 30, 2013 and 2012

Total Revenue

Total revenue as compared to prior year was as follows:

	Three Months Ended June 30,				Change 2013 vs 2012				Six Months Ended June 30,				Change 2013 vs 2012
	2013		2012		$		%		2013		2012		$		%
	(In thousands, except percentages)								(In thousands, except percentages)
Revenue from collaboration agreement	$	81,828	$	72,704	$	9,124	12.5	%	$	152,135	$	144,736	$	7,399	5.1	%
Product revenue - Kyprolis	61,037		—		61,037		N/A		125,045		—		125,045		N/A
Royalty revenue - Stivarga	10,161		—		10,161		N/A		19,338		—		19,338		N/A
Contract revenue from collaboration	—		—		—		N/A		2,000		—		2,000		N/A
Total revenue	$	153,026	$	72,704	$	80,322	110	%	$	298,518	$	144,736	$	153,782	106	%

Total revenue increased by $80.3 million, or 110%, to $153.0 million for the three months ended June 30, 2013 and increased by $153.8 million, or 106%, to $298.5 million for the six months ended June 30, 2013, compared to the same periods in 2012, respectively. The increase in total revenue was primarily as a result of product revenue from Kyprolis of $61.0 million and $125.0 million for the three months and six months ended June 30, 2013, respectively, and royalty revenue from Stivarga of $10.2 million and $19.3 million for the three and six months ended June 30, 2013, respectively, that did not occur in the first half of 2012.

Product revenue from Kyprolis

Product revenue consists of revenue recorded on the sale of Kyprolis. Kyprolis net sales were $61.0 million and $125.0 million for the three and six months ended June 30, 2013, including a favorable gross-to-net accrual adjustment of $5.9 million recorded in the first quarter of 2013. Kyprolis sales of $61.0 million and $119.2 million for the three months and six months ended June 30, 2013, respectively, represented orders placed and received by end customers, clinics and hospitals. The FDA granted accelerated approval of Kyprolis on July 20, 2012. We record revenue on the sale of Kyprolis on the sell-through basis, once our customers sell the product to the end customers. Product revenue is derived by calculating the net sales of Kyprolis by distributors to the physicians and hospitals and deducting estimated government rebates, chargebacks, returns reserve, distribution costs and other deductions.

Kyprolis is currently marketed in the U.S. for the treatment of patients with multiple myeloma who have received at least two prior therapies including bortezomib and an immunomodulatory agent (IMiD), and have demonstrated disease progression on or within 60 days of completion of the last therapy. Kyprolis is also sold in certain international markets on a named patient or early access program.

Product revenue from Kyprolis for the three months and six months ended June 30, 2013 and 2012 is calculated as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
	(In thousands)					(In thousands)
Product revenue, gross	$	69,269		$	—	$	134,728		$	—
Government rebates, chargebacks and other	(4,952		)	—		(3,301		)	—
Returns reserve and distribution fees	(3,280		)	—		(6,382		)	—
Product revenue, net	$	61,037		$	—	$	125,045		$	—

Government rebates, chargebacks and other include a credit of $5.9 million for the three months ended March 31, 2013, related to a change in an accounting estimate following the completion of a product replacement program, as discussed below.

Gross to Net Sales Accruals

We record gross to net sales accruals for government rebates, and chargebacks, sales returns and allowances, distribution fees and other deductions. We sell Kyprolis through a limited number of distributors, and title and risk of loss transfer upon receipt by these distributors. Health care providers order Kyprolis through these distributors. Kyprolis currently has a shelf-life of 24 months from date of manufacture. Product sales are recorded net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions. Reserves are established for these deductions and actual amounts incurred are offset against applicable reserves. We reflect these reserves as either a reduction in the related account receivable from the distributor, or as an accrued liability depending on the nature of the sales deduction. Sales reserves are based on management’s estimates that consider payer mix in target markets, industry benchmarks and experience to date. These estimates involve a high degree of judgment and are periodically reviewed and adjusted as necessary.

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Chargebacks, Government Rebates and Other Deductions:  We estimate reductions to product sales for qualifying U.S. federal and state government programs including discounted pricing offered to Public Health Services, or PHS, as well as government-managed Medicaid programs. Our reserve for PHS is based on actual chargebacks that distributors have claimed for reduced pricing offered to the healthcare providers. Our reserve for Medicaid is based upon statutorily-defined discounts, estimated payor mix, expected sales to qualified healthcare providers, and our expectation about future utilization. We also provided financial assistance to qualifying patients that are underinsured, or cannot cover the cost of commercial coinsurance amounts, through a patient assistance program, Onyx 360. Onyx 360 is available to patients in the U.S. and its territories who meet various financial need criteria. Government rebates that are invoiced directly to us are recorded in accrued liabilities on our Consolidated Balance Sheet. For qualified programs that can purchase our products through distributors at a lower contractual government price, the distributors charge back to us the difference between their acquisition cost and the lower contractual government price, which we record as allowances against accounts receivable on our Consolidated Balance Sheet.

In connection with the launch of Kyprolis, we offered a product replacement program under which certain sales could qualify for the shipment of a free second vial. This program was in effect for sales made through November 30, 2012, and all free replacement vials were required to be authorized by us prior to March 22, 2013. Based on historical program utilization rates for similar products, management estimated that this program would be utilized and adjusted its government rebate and chargeback calculations accordingly for the quarters ended September 30, 2012 and December 31, 2012. During March 2013, the product replacement program came to an end. Since no product replacement claims which met the requirements of the program were received, we reduced our Medicaid rebate and PHS chargeback accrual by $5.9 million, which increased product revenue by the same amount, or $0.08 per share, during the six months ended June 30, 2013.

Distribution Fees and Product Returns:  We have written contracts with our customers that include terms for distribution-related fees. We record distribution fees due to our customers based on the number of units sold to healthcare providers. Consistent with industry practice, we offer our customers a limited right to return product purchased directly from us, which is principally based upon the product’s expiration date. We will accept returns for expired product during the three months prior to and after the product expiration date, on product that had been sold to the healthcare providers. Product returned is generally not resalable given the nature of our products and method of administration. We have developed estimates for Kyprolis product returns based upon historical industry information regarding product return rates of comparable products, including Nexavar, our other oncology product; inventory levels in the distribution channel; and other relevant factors. To date, actual Kyprolis product returns have been negligible. We monitor inventory levels in the distribution channel, as well as sales of Kyprolis by distributors to healthcare providers, using product-specific data provided by the distributors. If necessary, our estimates of product returns may be adjusted in the future based on actual returns experience, known or expected changes in the marketplace, or other factors.

	Chargebacks, Rebates and Other			Distribution Fees and Returns			Total
	(In thousands)
Balance as of December 31, 2012	$	7,654		$	2,286		$	9,940
Provision related to current period sales	4,236			3,102			7,338
Credits/payments	(4,466		)	(3,333		)	(7,799		)
Other	(5,888		)	—			(5,888		)
Balance as of March 31, 2013	1,536			2,055			3,591
Provision related to current period sales	4,952			3,280			8,232
Credits/payments	(4,325		)	(2,267		)	(6,592		)
Balance as of June 30, 2013	$	2,163		$	3,068		$	5,231

Revenue from Collaboration Agreement

Nexavar is currently approved in more than 100 countries worldwide for the treatment of unresectable liver cancer and advanced kidney cancer. We co-promote Nexavar in the United States with Bayer under collaboration and co-promotion agreements. Under the terms of the co-promotion agreement and consistent with the collaboration agreement, we and Bayer share equally in the profits or losses of Nexavar, if any, in the United States, subject only to our continued co-funding of the development costs of Nexavar worldwide outside of Japan and our continued co-promotion of Nexavar in the United States. Outside of the United States, excluding Japan, Bayer incurs all of the sales and marketing expenditures, and we reimburse Bayer for half of those expenditures. In addition, for sales generated outside of the United States, excluding Japan, we reimburse Bayer a fixed percentage of sales for their marketing infrastructure. Research and development expenditures on a worldwide basis, excluding Japan, are equally shared by both companies regardless of whether we or Bayer incurs the expense. In Japan, Bayer is responsible for all development and marketing costs and we received a royalty on net sales of Nexavar through December 31, 2011. Bayer has no obligation to pay royalties to Onyx for sales of Nexavar in Japan for any period after December 31, 2011.

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Revenue from collaboration agreement consists of our share of the pre-tax commercial profit generated from our collaboration with Bayer and reimbursement of our shared marketing costs related to Nexavar. Under the collaboration, Bayer recognizes all sales of Nexavar worldwide. Revenue from collaboration agreement is derived by calculating net sales of Nexavar to third-party customers and deducting the cost of goods sold, distribution costs, marketing costs (including without limitation, advertising and education expenses, selling and promotion expenses, marketing personnel expenses and Bayer marketing services expenses), Phase 4 clinical trial costs and allocable overhead costs. Reimbursement by Bayer of our shared marketing costs related to Nexavar are also included in the “Revenue from collaboration agreement” line item.

Revenue from collaboration agreement for the three months and six months ended June 30, 2013 is calculated as follows:

	Three Months Ended June 30,				Change 2013 vs 2012					Six Months Ended June 30,				Change 2013 vs 2012
	2013		2012		$			%		2013		2012		$			%
	(In thousands, except percentages)									(In thousands, except percentages)
Nexavar revenue subject to profit sharing (as recorded by Bayer)	$	229,708	$	214,459	$	15,249		7	%	$	428,233	$	424,159	$	4,074		1	%
Combined cost of goods sold, distribution, selling, general and administrative expenses	75,456		82,632		(7,176		)	(9	)%	141,596		158,949		(17,353		)	(11	)%
Combined collaboration commercial profit	$	154,252	$	131,827	$	22,425		17	%	$	286,637	$	265,210	$	21,427		8	%
Onyx’s share of collaboration commercial profit	$	77,126	$	65,913	$	11,213		17	%	$	143,318	$	132,605	$	10,713		8	%
Reimbursement of Onyx’s shared marketing expenses	4,702		6,791		(2,089		)	(31	)%	8,817		12,131		(3,314		)	(27	)%
Revenue from collaboration agreement	$	81,828	$	72,704	$	9,124		13	%	$	152,135	$	144,736	$	7,399		5	%

In accordance with our collaboration agreement with Bayer, Bayer recognizes all revenue from the sale of Nexavar. As such, for the three and six months ended June 30, 2013 and 2012, we reported no product revenue related to Nexavar.

Revenue from collaboration agreement was $81.8 million and $152.1 million for the three and six months ended June 30, 2013, respectively, compared to $72.7 million and $144.7 million for the same periods in 2012. The increase in revenue from collaboration was primarily due to sales growth in the United States and Asia Pacific regions, specifically Taiwan and Korea, as well as lower expenses. Collaboration commercial profit for the three and six months ended June 30, 2013 increased to 67%, for both periods, as a percentage of Nexavar revenue subject to profit sharing in 2013 from 61% and 63% for the three and six months ended June 30, 2012. Revenue from collaboration agreement is directly affected by the increases and decreases in Nexavar net revenue, over and above the associated cost of goods sold, distribution, selling and general administrative expenses. In addition, as our reimbursement of shared marketing expenses increases or decreases, our revenue from collaboration agreement increases or decreases accordingly. We expect Nexavar sales and Bayer’s and our shared cost of goods sold, distribution, selling and general administrative expense to increase as Bayer continues to expand Nexavar marketing and sales activities outside of the United States, particularly in certain Asia Pacific countries. Prolonged or profound economic downturn may result in adverse changes to product reimbursement and pricing and sales levels, which would harm our operating results.

Royalty revenue from Stivarga

Stivarga royalty revenue was $10.2 million and $19.3 million for the three and six months ended June 30, 2013, respectively, or 20% of worldwide net sales in approved markets. In October 2011, Onyx and Bayer entered into an agreement regarding regorafenib, which is marketed as Stivarga, in which Onyx and Bayer agreed that Bayer would pay Onyx a royalty of 20% of any future worldwide net sales of regorafenib in jurisdictions that have received commercial marketing approval. Onyx and Bayer also agreed that Onyx will have no obligation to pay past or future development and commercialization costs of regorafenib. Onyx has opted to co-promote regorafenib in the United States with Bayer, and to provide related medical science liaisons, under a fee-for-service arrangement. Development of regorafenib is managed by the same joint governance bodies that manage development of Nexavar; however, in the event of disagreement Bayer has the right to make final decisions for regorafenib.

In September 2012, the FDA approved Stivarga for the treatment of patients with metastatic colorectal cancer (mCRC) who have been previously treated with currently available therapies (including fluoropyrimidine-, oxaliplatin- and irinotecan-based chemotherapy, an anti-VEGF therapy, and, if KRAS wild type, an anti-EGFR therapy). The U.S. approval of Stivarga is based on results from the pivotal Phase 3 CORRECT study that demonstrated improvement in overall survival and progression-free survival compared to placebo in patients with mCRC whose disease had progressed after approved standard therapies. In February 2013, Stivarga received regulatory approvals in the United States and in Japan for the treatment of patients with locally advanced, unresectable or metastatic gastrointestinal stromal tumors (GIST) who have been previously treated with imatinib and sunitinib malate.

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Contract Revenue from Collaboration

Contract revenue from collaboration of $2.0 million for the six months ended June 30, 2013, relates to a milestone fee earned from Pfizer.

In May 1995, we entered into a research and development collaboration agreement with Warner-Lambert Company (formerly Parke Davis), now a subsidiary of Pfizer Inc., or Pfizer, to discover and commercialize small molecule drugs that restore control of, or otherwise intervene in, the misregulated cell cycle in tumor cells. Under this agreement, we developed screening tests, or assays, for jointly selected targets, and transferred these assays to Pfizer for screening of its compound library. The discovery research term ended in August 2001. Because Pfizer is developing a compound identified through this collaboration, we are entitled to receive payments upon achievement of certain clinical development and regulatory milestones and are entitled to receive royalties on worldwide sales.

As a result of the collaboration, Pfizer identified palbociclib (formerly known as PD-0332991), a selective inhibitor of cyclin-dependent kinase 4/6, or CDK 4/6. Pfizer began clinical testing with this drug candidate in late 2004. During the six months ended June 30, 2013 we earned $2.0 million in clinical development milestone fees from Pfizer and to date we have earned $5.0 million in clinical development milestone fees relating to this drug candidate. Under this agreement, remaining additional potential milestones payable by Pfizer to Onyx are, in aggregate, up to approximately $9.5 million and royalty payments will be based on an 8% of net sales, if any. Milestone payments earned under this agreement are classified as “Contract revenue from collaboration” on the Consolidated Statement of Operations.

The milestone and royalty provisions of the May 1995 collaboration agreement with Pfizer will remain in effect during the terms of the patents that cover palbociclib and will continue until the expiration of all licenses granted pursuant to the agreement. The patents that cover palbociclib will expire in January 2023, in both the United States and Europe. However, in both regions the patents may be extended up to 5 years under the statutes that provide for patent term extensions. There can be, though, no assurance that such extensions will be secured. Either party may terminate the agreement for the uncured material breach of the other party.

Total Operating Expenses

The expenses associated with development, manufacturing and commercialization of our products were significant factors affecting our results of operations. The following table summarizes our cost and expenses as well as the percentages of total cost and expenses for the periods indicated:

	Three Months Ended June 30,				Change 2013 vs 2012					Six Months Ended June 30,				Change 2013 vs 2012
	2013		2012		$			%		2013		2012		$			%
	(In thousands, except percentages)									(In thousands, except percentages)
Cost of goods sold	$	2,043	$	—	$	2,043		N/A		$	4,011	$	—	$	4,011		N/A
Research and development	102,761		76,356		26,405			35	%	194,063		157,017		37,046			24	%
Selling, general and administrative	87,512		48,907		38,605			79	%	160,057		87,851		72,206			82	%
Contingent consideration expense	3,022		53,214		(50,192		)	(94	)%	5,952		56,392		(50,440		)	(89	)%
Intangible asset amortization	5,221		—		5,221			N/A		10,441		—		10,441			N/A
Total operating expenses	$	200,559	$	178,477	$	22,082		12	%	$	374,524	$	301,260	$	73,264		24	%

Cost of goods sold - Kyprolis

Cost of goods sold consist primarily of direct and indirect costs related to the manufacturing of Kyprolis drug product incurred following the U.S. regulatory approval of Kyprolis, including third party manufacturing costs, salaries and benefits, allocation of overhead and royalty payments. A majority of the costs incurred to manufacture Kyprolis commercial supply prior to the U.S. regulatory approval in July 2012, including the Kyprolis drug product on hand, were charged to research and development expenses in the period those costs were incurred, which we expect will cause gross margin on net sales to vary until the inventory on hand at July 20, 2012 has been sold.

Cost of goods sold recorded for the three months and six months ended June 30, 2013 primarily represents manufacturing cost incurred after the U.S. regulatory approval of Kyprolis on July 20, 2012 and royalties, related to the goods sold during the period.

The inventory on hand at July 20, 2012 consisted of materials in various stages of production. At this time we cannot reasonably estimate the timing and rate of consumption of raw materials and work-in-progress inventory, or the timing of the sales of the finished goods to be manufactured with this inventory. The aggregate sales price of inventory on hand could be impacted by a number of factors including, but not limited to, market demand, future pricing of the product, competition and reimbursement by government and other payers. Inventory on hand as of July 20, 2012, that was expensed prior to Kyprolis’ U.S. regulatory approval, had an estimated cost of approximately $15.0 million, excluding any overhead allocation. As of June 30, 2013, we had approximately $3.9 million of the inventory produced before July 20, 2012 on hand and all finished goods inventory which had been produced prior to July 20, 2012 had been sold.

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We expect our cost of goods sold to increase in the future as inventory manufactured prior to approval is sold, which will have a negative impact on gross margin. The timing of the sales of such inventory and its impact on gross margin is dependent on the level of sales of Kyprolis. The cost of goods sold as a percentage of revenue for the expected sales of inventory capitalized after July 20, 2012 will be dependent upon our cost to manufacture inventory at normalized production levels under the commercial manufacturing arrangements we recently entered into with third party manufacturers. Therefore, the cost of goods sold as a percentage of future net sales revenue is not reasonably known at this time.

Research and Development Expenses

The increase in research and development expenses of 35% and 24% for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012 were primarily due to the global development of Kyprolis, particularly the ongoing Phase 3 ENDEAVOR trial, start-up activities associated with the front-line CLARION study, along with oprozomib development expense, and adding select capabilities internationally, which were partially offset by lower Kyprolis Phase 3 FOCUS and ASPIRE trial expense. The costs to develop Kyprolis increased by $22.4 million and $41.3 million, or 42% and 41%, respectively, during the three and six months ended June 30, 2013, respectively, compared to the same periods in the prior year. In addition, the costs to develop oprozomib, our oral proteasome inhibitor, increased by $3.5 million and $7.1 million during the first three and six months ended June 30, 2013, respectively, as we advanced this molecule. Offsetting these increases, Nexavar development expenses decreased by $12.2 million, or 29%, during the six months ended June 30, 2013, compared to the prior year, due to reduced clinical trial activity in 2013, while remaining flat for the three month period ended June 30, 2013 compared to the prior year. Research and development expenses also included stock-based compensation of $3.3 million and $5.9 million for the three and six months ended June 30, 2013, respectively, compared to $2.7 million and $4.6 million for the same periods in 2012.

A significant portion of our total research and development expenses, approximately 73% for both the three and six months ended June 30, 2013, relates to the further development of Kyprolis, compared to 69% and 64% for the same periods in 2012. Approximately 15% of our total research and development expenses for both the three months and six months ended June 30, 2013, relates to our cost sharing arrangement with Bayer and represents our share of the research and development costs incurred by Bayer on Nexavar, compared to 19% and 25% for the same periods in 2012. Our share of the research and development costs incurred for Nexavar include 98% and 97% of the costs incurred by Bayer for Nexavar for the three months and six months ended June 30, 2013, respectively, compared to 95% and 96% for the same periods in 2012. As a result of the cost sharing arrangement between us and Bayer for research and development costs, there were net reimbursable amounts of $14.9 million and $28.0 million due to Bayer for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2012, the net reimbursable amounts due to Bayer were $14.0 million and $38.6 million, respectively. Such amounts were recorded based on invoices and estimates we receive from Bayer. When such invoices have not been received, we must estimate the amounts owed to Bayer based on discussions with Bayer. For the periods covered in the financial statements presented, there have been no significant or material differences between actual amounts and estimates. However, if we underestimate or overestimate the amounts owed to Bayer, we may need to adjust these amounts in a future period, which could have an effect on earnings in the period of adjustment. As of June 30, 2013, our share of the Nexavar development costs incurred to date under the collaboration was $794.5 million.

We expect our research and development expenses to increase in future periods, primarily as a result of anticipated costs to further develop Kyprolis and oprozomib. We are currently conducting multiple Phase 3, Phase 2 and Phase 1 studies in multiple myeloma and solid tumors. We also expect our research and development activities to include developing other product candidates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries, employee benefits, consulting, advertising and promotion expenses, legal costs, other third party costs, corporate functional expenses and allocations for overhead and occupancy costs.

The increase in selling, general and administrative expenses for the three and six months ended June 30, 2013 compared to the same periods in 2012 were primarily due to increased headcount following the hiring of the field force associated with the commercial launch of Kyprolis in the United States and adding select capabilities internationally. Selling expenses increased by $21.7 million and $40.4 million, or 108% and 115%, respectively, for the three and six months ended June 30, 2013 compared to the same period in 2012, primarily related to the Kyprolis field sales force. General and administrative expenses increased by $16.9 million and $31.8 million or 59% and 60% respectively, for the three and six month periods ended June 30, 2013 compared to the same period in 2012, primarily related to the U.S. and international infrastructure build and associated payroll expenses. Selling, general and administrative expenses also included stock-based compensation of $9.1 million and $15.2 million for the three months and six months ended June 30, 2013, respectively, compared to $8.2 million and $13.0 million for the same periods in 2012. We expect our selling, general and administrative expenses to increase further to reflect the full year impact of the commercial costs of Kyprolis and Stivarga, as well as a planned increase in our international commercial infrastructure.

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Contingent Consideration Expense

As a result of the acquisition of Proteolix in November 2009 under the terms of an Agreement and Plan of Merger, or the Merger Agreement, which was entered into in October 2009 and amended in January 2011, we made a payment of $40.0 million in April 2010 and a further payment of $80.0 million in September 2012, following the accelerated marketing approval in the United States for relapsed/refractory multiple myeloma in July 2012. We may be required to pay up to an additional $365.0 million payable in up to three earn-out payments upon the achievement of certain regulatory approvals for Kyprolis in the U.S. and Europe within pre-specified timeframes. Under the Merger Agreement, the remaining earn-out payments will continue to become payable as follows:

·$65.0 million would be triggered by specified marketing approval on or before December 31, 2013 in the European Union for relapsed/refractory multiple myeloma;

·$150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the United States for relapsed multiple myeloma; and

·$150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the European Union for relapsed multiple myeloma.

Under certain circumstances, including if we fail to satisfy regulatory approval-related diligence obligations under the Merger Agreement, we may be required to make one or more earn-out payments even if the associated regulatory approvals are not received. Subject to the terms and conditions set forth in the Merger Agreement, we may, in our sole discretion, make any of the remaining earn-out payments that become payable to former holders of Proteolix preferred stock in the form of cash, shares of our common stock or a combination thereof.

We recorded a liability for this contingent consideration related to the three remaining earn-out payments with a fair value of $155.1 million at June 30, 2013 based upon a discounted cash flow model that uses significant estimates and assumptions, including the probability of technical and regulatory success (“PTRS”) of Kyprolis. Contingent consideration expense is recorded for the change in the fair value of the recognized amount of the liability for contingent consideration. During the three months and six months ended June 30, 2013, we recorded contingent consideration expense of $3.0 million and $6.0 million, respectively, compared to $53.2 million and $56.4 million during the same periods in 2012. The increase in the fair value of the contingent consideration liability during 2012 was primarily a result of changes made to the PTRS and reflects the expense recorded for the period following the June 20, 2012 vote by the FDA Oncology Drug Advisory Committee (CDAC) in favor of the approval of Kyprolis.

Intangible Asset Amortization

Amortization expense of $5.2 million and $10.4 million for the three and six months ended June 30, 2013, respectively, relates to our finite-lived intangible asset. Following the regulatory approval of Kyprolis on July 20, 2012, we reclassified the portion of the Kyprolis acquired IPR&D asset that relates to the U.S. market from indefinite lived intangible assets to finite-lived intangible assets. Finite-lived intangible assets consist of acquired IPR&D related to Kyprolis in the United States with a cost of $267.3 million, which is being amortized over its estimated useful life of 13 years, using the straight-line method, following the FDA approval of Kyprolis for marketing in the United States. At June 30, 2013, the accumulated amortization was $19.8 million.

Investment Income, net

Investment income was $0.6 million and $1.2 million for the three and six months ended June 30, 2013, respectively, compared to $0.6 million and $1.4 million for the same periods in 2012. Investment income consists of interest income and realized gains or losses from the sale of investments and remained virtually unchanged year over year.

Interest Expense

Interest expense was $5.7 million and $11.3 million for the three and six months ended June 30, 2013, respectively, compared to $5.4 million and $10.7 million for the same periods in 2012. Interest expense primarily relates to the 4.0% convertible senior notes due 2016 issued in August 2009, and includes non-cash imputed interest expense of $3.2 million and $6.3 million for the three months and six months ended June 30, 2013, respectively, and $2.8 million and $5.6 million for the same periods in 2012 along with coupon interest expense of $2.3 million and $4.6 million for the three and six months ended June 30, 2013, respectively, and $2.3 million and $4.6 million for the same periods in 2012.

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Other Income (Expense)

Other expense was $0.5 million and $0.6 million for the three and six months ended June 30, 2013, respectively, compared to other income of $4.5 million and $3.6 million for the same periods in 2012. The decrease in other income was primarily related to a milestone payment received in the prior year from S*BIO as a result of the license of the Janus Associated Kinase 2 (JAK2) inhibitor.

Liquidity and Capital Resources

With the exception of the profitability we achieved for the years ended December 31, 2011, 2009 and 2008, we have incurred significant annual net losses since our inception and have relied primarily on public and private financing, combined with milestone payments we received from our collaborators, to fund our operations. At June 30, 2013, we had cash, cash equivalents and current and non-current marketable securities of $755.9 million compared to $492.8 million at December 31, 2012. The increase of $263.1 million was primarily attributable to net cash proceeds received of approximately $352.4 million from a public offering of 4.4 million shares of common stock, completed in January 2013, partially offset by cash used in operating activities of $114.5 million.

Cash Used in Operating Activities

Net cash used in operating activities was $114.5 million in the first six months of 2013 and $87.0 million in the first six months of 2012. Our net loss of $86.8 million in the first six months of 2013, and $162.3 million in the first six months of 2012, included $21.9 million and $18.6 million, respectively, of non-cash stock based compensation, and $21.0 million and $8.1 million, respectively, of depreciation and amortization expenses. Net loss for the six months ended June 30, 2013 and 2012 included non-cash contingent consideration expense of $6.0 million and $56.4 million, respectively. At June 30, 2013, trade accounts receivable was $131.3 million, an increase of $52.2 million during the first six months of 2013 primarily due to increased sales of Kyprolis. We expect Kyprolis related accounts receivable to increase over time. Deferred revenue at June 30, 2013 of $10.0 million relates to the deferral of revenue on Kyprolis until product is sold to the end customer. Receivable from collaboration partner increased $12.0 million during the first six months of 2013, while accrued liabilities and accrued compensation decreased $3.9 million and $7.1 million, respectively. Inventory also increased $14.2 million during the first six months of 2013, as Kyprolis inventory costs are capitalized post regulatory approval.

Cash Used in and Provided by Investing Activities

Net cash used in investing activities was $104.8 million for the six months ended June 30, 2013, compared to $96.1 million of net cash provided by investment activities for the six months ended June 30, 2012. In the first six months of 2013, purchases of marketable securities exceeded sales and maturities of marketable securities by $94.1 million. During the same period in the prior year, sales and maturities of marketable securities exceeded purchases by $112.2 million. Expenditures for capital assets amounted to approximately $10.7 million in the first six months of 2013 and $16.1 million in the comparable period in 2012, primarily for construction of leasehold improvements at facilities in South San Francisco, California and for equipment to accommodate our employee growth.

Cash Provided by Financing Activities

Net cash provided by financing activities was $389.2 million in the first six months of 2013, compared to $25.5 million in the first six months of 2012. During the first six months of 2013, net proceeds from issuances of common stock was $389.6 million, primarily due to the public offering of 4.4 million shares of common stock in January 2013 in which we raised $352.4 million, in addition to an increase in exercises of employee stock options in 2013 compared to 2012.

Funding Requirements

We anticipate our operating costs to increase in 2013 as we continue to incur expenses for commercial sales of Kyprolis in the U.S. and in certain countries around the world, to conduct sales and marketing, to manufacture commercial product and to further develop Kyprolis, including the ongoing CLARION, ENDEAVOR, FOCUS, ASPIRE and CHAMPION trials, including the comparator drug costs for these trials and further development of oprozomib and other product candidates. In addition, the terms of the agreement and plan of merger for Proteolix provide that we may be required to pay up to an additional $365.0 million in earn-out payments upon the receipt of certain regulatory approvals.

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We will incur cash outlays associated with our lease agreements, primarily related to our headquarters and adjacent buildings located and to be constructed in South San Francisco. In July 2010, we entered into arrangements to lease and sublease a total of approximately 126,493 square feet located at 249 East Grand Avenue, South San Francisco, California. In November 2011, we entered into arrangements to lease a total of approximately 170,618 square feet located at 259 East Grand Avenue, South San Francisco, California. In March 2013, we entered into an arrangement to lease an additional 107,000 square feet located at 269 East Grand Avenue, South San Francisco, California for which the rent commencement date is expected in April 2014. As of June 30, 2013, the total future lease obligation related to the three building complex in South San Francisco was approximately $164.0 million.

We believe that our existing capital resources and interest thereon will be sufficient to fund our current and planned operations beyond 2013. However, if we change our commercialization and development plans, including acquiring or developing additional product candidates or complementary businesses, we may need additional funds sooner than we expect.

While most of our anticipated development costs are unknown at the current time, we may need to raise additional capital to continue the funding of our product development programs, our commercialization plans and our development plans in future periods beyond 2013. We intend to seek any required 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 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.

Off-Balance Sheet Arrangements

As of June 30, 2013, we did not have any material off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” Under this standard, entities will be required to disclose additional information with respect to changes in accumulated other comprehensive income (AOCI) balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income (for example, unrealized gains or losses on available for sale marketable securities) as well as presenting separately for each such component the portion of the change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts reclassified into income, disclosure in one location would be required, based upon each specific AOCI component, of the amounts impacting individual income statement line items. Disclosure of the income statement line item impacts will be required only for components of AOCI reclassified into income in their entirety. Therefore, disclosure of the income statement line items affected by AOCI components such as net periodic benefit costs would not be included. The disclosures required with respect to income statement line item impacts would be made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. This ASU is effective beginning January 1, 2013. Because this standard only impacts presentation and disclosure requirements, its adoption will not have a material impact on the Company’s consolidated results of operations or financial condition.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The primary objective of our investment activities is to preserve principal. We believe that we take a conservative approach to investing our cash in that we invest only in highly-rated securities, diversify our portfolio of investments by limiting the exposure to any one issuer and maintain a short overall duration. Our portfolio consists of cash equivalents and marketable securities in a variety of securities, including commercial paper, money market funds, U.S. government and government-related securities, investment grade corporate and municipal bonds. While we believe we take active measures to mitigate investment risk, such risks cannot be fully eliminated because of market circumstances particularly in the last few years. Our cash equivalents and investments are subject to market risk due to changes in interest rates. This means that a change in prevailing interest rates may cause the principal amount of the investments to fluctuate. As part of our risk management procedures, we use analytical techniques including sensitivity analysis to monitor the interest rate risk in our portfolio.A hypothetical increase of 1% in market interest rates would have resulted in a potential loss of $4.3 million and $2.2 million on the fair value of our investment portfolio at June 30, 2013 and December 31, 2012, respectively. A hypothetical decrease of 1% in market interest rates would have resulted in a potential gain of $2.3 million and $0.8 million on the fair value of our investment portfolio at June 30, 2013 and December 31, 2012, respectively.

The table below presents the amounts and related weighted average interest rates of our cash equivalents and marketable securities at:

	June 30, 2013				December 31, 2012
	Maturity	Fair Value (In millions)		Average Interest Rate	Maturity	Fair Value (In millions)		Average Interest Rate
Cash equivalents, fixed rate	0-3 months	$	90.6	0.08%	0 - 3 months	$	34.9	0.06%
Marketable securities, fixed rate	over 3 months	$	432.8	0.48%	over 3 months	$	339.5	0.50%

Our 2016 Notes, with a total par value of $230.0 million at June 30, 2013, bear interest at a fixed rate of 4.0%. Due to the fixed interest rate, we have no exposure to interest rate fluctuations. However, underlying market risk exists related to an increase in our stock price which may make the conversion of our 2016 Notes to common stock beneficial to the holders of such notes. Conversion of the 2016 Notes currently would have a dilutive effect on any future earnings and book value per common share.

Liquidity Risk

At June 30, 2013, our investment portfolio includes $5.7 million AAA rated securities with an auction reset feature (“auction rate securities”) that are collateralized by student loans. Since February 2008, these types of securities have experienced failures in the auction process. However, a limited number of these securities have been redeemed at par by the issuing agencies. As a result of the auction failures, interest rates on these securities reset at penalty rates linked to LIBOR or Treasury bill rates. The penalty rates are generally higher than interest rates set at auction. Based on the overall failure rate of these auctions, the frequency of the failures, the underlying maturities of the securities, a portion of which are greater than 30 years, and our belief that the market for these student loan collateralized instruments may take in excess of twelve months to fully recover, we have classified the auction rate securities as non-current marketable securities on our Condensed Consolidated Balance Sheet as June 30, 2013. We have determined the fair value to be $5.5 million for these securities, based on a discounted cash flow model, and have reduced the carrying value of these marketable securities by $0.2 million through accumulated other comprehensive income (loss) instead of earnings because we have deemed the impairment of these securities to be temporary. Further adverse developments in the credit market could result in an impairment charge through earnings in the future. The discounted cash flow model used to value these securities is based on a specific term and liquidity assumptions. In general, we do not intend to sell any of the auction rate securities it holds, nor will the Company likely be required to sell any of the auction rate securities, before it recovers its amortized cost basis.

Credit Quality Risk

We are also subject to credit risk in connection with accounts receivable from our product sales of Kyprolis, which are primarily due from four United States distributors, who are our customers. We have contractual payment terms with our United States customers. We monitor our customers’ financial performance and credit worthiness so that we can properly assess and respond to any changes in their credit profile. During the first six months of 2013 we did not recognize any charges for write-offs of accounts receivable related to Kyprolis.

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Foreign Currency Exchange Rate Risk

A majority of Nexavar sales are generated outside of the United States, and a significant percentage of Nexavar commercial and development expenses are incurred outside of the United States. Our revenue from collaboration agreement is dependent on these foreign currency denominated activities. In addition, we receive Stivarga royalties from sales outside the United States, and we incur research and development and general and administrative expenses outside of the United States. As a result of these underlying non-U.S. Dollar denominated activities, fluctuations in foreign currency exchange rates affect our operating results. Changes in exchange rates between these foreign currencies and the U.S. Dollar will affect the recorded levels of our assets and liabilities as foreign assets and liabilities are translated into U.S. Dollars for presentation in our financial statements, as well as our operating margins. The primary foreign currencies to which we are exposed are the euro, British Pound, Swiss Franc and Japanese Yen. A hypothetical 10% adverse movement in foreign currency exchange rates versus the U.S. Dollar at June 30, 2013, would have resulted in an approximate $2.0 million reduction in the fair value of foreign currency hedge contracts.

As we expand, we could be further exposed to exchange rate fluctuation in other currencies. Exchange rates between foreign currencies and U.S. Dollars have fluctuated significantly in recent years and may do so in the future. Commencing in the third quarter of 2010, we established a foreign currency hedging program. The objective of the program is to mitigate the foreign exchange risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. Dollar denominated currencies in order to reduce volatility in our cash flow and earnings. We have in the past hedged a certain portion of our foreign currency exchange rate exposure with foreign currency forward and option contracts, typically no more than one year into the future, and may in the future enter into other foreign exchange hedging arrangements. These derivative instruments, which include derivative instruments that have been designated as hedges under ASC 815, Derivatives and Hedging, are intended to reduce the effects of variations in our cash flow resulting from fluctuations in foreign currency exchange rates. However, in certain circumstances, these derivative instruments may expose us to the risk of financial loss.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures: Our chief executive officer and chief financial officer reviewed and evaluated our 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, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2013 to ensure the information required to be disclosed by us 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 our internal control over financial reporting during the quarter ending June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls: Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective at the reasonable assurance level to ensure the information required to be disclosed in this report is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below contain forward-looking statements, and our actual results may differ materially from those discussed here. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. We have marked with an asterisk (*) those risk factors below that reflect significant changes from the risk factors included in our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2013.

*Our stock price has increased significantly since we announced that our board of directors authorized our financial advisors to contact potential acquirers who may have an interest in a transaction with us that is in the best interest of our stockholders, and the price per share of our common stock could decrease significantly.

We disclosed in a press release at the end of June 2013 that we received and our Board of Directors rejected an unsolicited offer from Amgen Inc. to purchase all of our outstanding shares and share equivalents for $120 per share in cash, subject to due diligence and other conditions, and that our Board authorized our financial advisors to contact potential acquirers who may have an interest in a transaction with us that is in the best interest of our stockholders. This announcement caused the price of our common stock to increase significantly, from $87 per share at the close of market on the last trading day before the announcement, to $131 per share at the close of market on the first trading day following the announcement. There is no assurance that an improved proposal will be made by Amgen, that a definitive agreement will be executed relating to any proposed transaction, or that any transaction will be approved by our board of directors or consummated. The price of our common stock could be unusually volatile during this period, and if the market perceives that no transaction may occur, or that a transaction may occur at a price less than the current trading price, the price per share of our common stock could decrease, including back to preannouncement levels or even lower.

*Nexavar currently generates the largest portion of our commercial revenues. If Nexavar fails then our business and our ability to develop and commercialize Kyprolis and other products would be significantly harmed.

We rely extensively on Nexavar revenues to fund our operations, including the continued development and commercialization of Kyprolis. Unless we can continue to successfully commercialize Kyprolis or other product candidates and Bayer continues to successfully commercialize Stivarga, we will continue to rely on Nexavar to generate most of our revenues and fund our operations. Kyprolis received FDA approval in July 2012 and is in the early stages of commercialization, while our other product candidates are still development-stage or subject to regulatory review, and we may never obtain approval of or earn revenues from any of our product candidates. Similarly, Stivarga received FDA approval in September 2012 but Bayer may be unsuccessful in continuing to commercialize it. Successful development and commercialization of Kyprolis, Stivarga and our other product candidates is highly uncertain and depends on a number of factors, many of which are beyond our control.

We have never marketed a drug without a partner before, and we may not be able to commercialize Kyprolis successfully.

In order to successfully commercialize Kyprolis, we have expanded our U.S. field force. If we obtain marketing approval outside the United States, we may develop and maintain an international sales, marketing and distribution infrastructure, which may be difficult and time consuming, and may require substantial financial and other resources. We have limited experience maintaining a commercialization infrastructure in the United States and no experience in building such an infrastructure internationally. Factors that may hinder our efforts to maintain our expanded U.S. presence and develop an international sales, marketing, and distribution infrastructure include:

·our ability to recruit, retain and effectively manage adequate numbers of effective sales and marketing personnel;

·our ability to establish or maintain relationships with wholesalers and distributors;

·our ability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products;

·lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

·unforeseen delays, costs and expenses associated with creating international capabilities, including an international sales and marketing organization and international supply chain and reimbursement capabilities.

If we are unable to sustain our sales force and marketing capability for Kyprolis, it will reduce our ability to generate product revenue, may generate increased expenses and Kyprolis may never become profitable.

We expend significant time and resources to train our Kyprolis sales force to be credible, persuasive and compliant in discussing Kyprolis with the specialists treating the patients indicated under label. We must train our sales force to deliver a consistent and appropriate message about Kyprolis to our potential customers. If we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits and risks of Kyprolis and its proper administration, our ability to successfully commercialize Kyprolis could be diminished, which could have a material adverse effect on our financial condition, stock price and operations.

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We may also maintain high inventory levels of Kyprolis to mitigate risks such as variability in product demand, long lead times for manufacturing, supply interruptions of raw materials and production disruptions at our approved manufacturing sites due to contamination, equipment failure or other facility-related issues. The capital required to maintain our desired inventory levels may impact our liquidity and cash flows, and may also heighten the risk of inventory obsolescence and write-offs as a result.

*Our stock price is volatile, our operating results are unpredictable, we have a history of losses and we may be unable to achieve and sustain profitability.

Our stock price is volatile and is likely to continue to be volatile. A variety of factors may have a significant effect on our stock price, including:

·fluctuations in our results of operations, including sales of Nexavar, Stivarga and Kyprolis;

·announcements by us regarding, or speculation about, our strategic transactions or corporate development activities;

·results from, or speculation regarding, clinical trials or the regulatory status of Nexavar, Kyprolis, Stivarga or other product candidates;

·decisions or changes in policy by regulatory agencies, or changes in regulatory requirements;

·ability to accrue patients into clinical trials or submit or obtain approval of regulatory filings;

·developments in our relationship with Bayer, Ono Pharmaceutical Co., Ltd. and other commercialization partners;

·developments in our relationship with, or other problems at, our contract manufacturing organizations, and problems in our supply chain systems, including recalls, quality problems and stock outs and other similar problems;

·changes in relationships with our distributors;

·costs and expenditures in connection with litigation;

·disruptions to our business due to political, economic or other social instability, including the impact of an epidemic;

·inaccurate forecasting of net revenues and other operating costs;

·changes to our effective tax rate;

·changes in healthcare reimbursement policies or other government regulations;

·changes in generally accepted accounting principles and changes in tax laws;

·announcements by us or our competitors of innovations, clinical data results, new products or new regulatory filings;

·sales by us of our common stock or debt securities; and

·foreign currency fluctuations, which would affect our share of collaboration profits or losses and net income and expense related to international clinical and commercial operations.

In the past, following our announcement of the accelerated approval of Kyprolis or Bayer’s announcements regarding Nexavar clinical trial results, and following our announcements about various commercial, clinical and regulatory developments for Kyprolis or competing products, our stock price has fluctuated, in some cases significantly.

Our operating results and sales of Nexavar, Kyprolis and Stivarga will likely fluctuate from quarter to quarter and from year to year, and are difficult to predict. Our operating expenses are dependent in part on expenses incurred by Bayer and in certain regions are independent of Nexavar sales. We have to date incurred losses principally from costs incurred in our research and development programs, from our general and administrative costs and the development of our commercialization infrastructure. We will incur operating losses in the future as we expand our development and commercial activities for Kyprolis and our product candidates. We expect to incur significant operating expenses associated with the development and commercialization of Kyprolis and additional products, including potentially Stivarga, if we elect to conduct separate development of Stivarga in certain indications, at our own expense, as permitted under the regorafenib agreement with Bayer.

As a result of the acquisition of Proteolix, we may be required to pay up to an additional $365.0 million in three earn-out payments upon the receipt of certain regulatory approvals within pre-specified timeframes. We recorded a liability for this contingent consideration for the three earn-out payments with a fair value of $155.1 million at June 30, 2013 based upon a discounted cash flow model that uses significant estimates and assumptions. Any changes to these estimates and assumptions could significantly impact the fair values recorded for this liability resulting in significant charges to our Consolidated Statements of Operations. Moreover, we may, at our discretion, make any of the remaining earn-out payments in the form of cash, shares of Onyx common stock or a combination thereof. If we elect to issue shares of our common stock in lieu of making an earn-out payment in cash, this would have a dilutive effect on our common stock and could cause the trading price of our common stock to decline.

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It is difficult for us to accurately forecast profits or losses. It is possible that in some quarters our operating results could disappoint securities analysts or investors. Many factors, including, but not limited to, disappointing operating results or the other factors outlined above, could cause the trading price of our common stock to decline, perhaps substantially.

*We face intense competition and many of our competitors have substantially greater experience and resources than we have.

We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market oncology products that face significant competition from other products and therapies that currently exist or are being developed.

Nexavar is approved for the treatment of both unresectable liver cancer and advanced kidney cancer, and faces competition and potential future competition in both indications. There are many existing approaches used in the treatment of unresectable liver cancer including alcohol injection, radiofrequency ablation, chemoembolization, cryoablation and radiation therapy. Several other therapies are in development. If Nexavar is unable to compete or be combined successfully with existing approaches or if new therapies are developed for unresectable liver cancer, our business would be harmed.

Similarly, there are several competing therapies approved and in development for the treatment of advanced kidney cancer, including Sutent, a multiple kinase inhibitor marketed in the United States, the European Union and other countries by Pfizer; Torisel, an mTOR inhibitor marketed in the United States, the European Union and other countries by Pfizer; Avastin, an angiogenesis inhibitor approved for the treatment of advanced kidney cancer in the United States and the European Union and marketed by Genentech, a member of the Roche Group; Afinitor, an mTOR inhibitor marketed in the United States and the European Union by Novartis; GlaxoSmithKline’s Votrient, a multiple kinase inhibitor; and Pfizer’s Inlyta, a kinase inhibitor recently approved by the FDA for the treatment of advanced kidney cancer in the United States. Nexavar’s market share in advanced kidney cancer has declined following the introduction of these products into the market.

We expect competition to increase as generic versions of competing products are introduced and additional new products are approved. Beyond unresectable liver cancer and advanced kidney cancer, competitors that target the same tumor types as our Nexavar program and that have commercial products or product candidates at various stages of clinical development include Pfizer, Roche, Wyeth, Novartis International AG, Amgen, AstraZeneca PLC, Astellas Pharma Inc., GlaxoSmithKline, Eli Lilly and several others. A number of companies have agents such as small molecules or antibodies targeting VEGF, VEGF receptors, Epidermal Growth Factor, or EGF, EGF receptors, and other enzymes. In addition, many other pharmaceutical companies are developing novel cancer therapies that, if successful, would also provide competition for Nexavar.

A demonstrated survival benefit is often an important element in determining standard of care in oncology. We did not demonstrate a statistically significant overall survival benefit for patients treated with Nexavar in our Phase 3 kidney cancer trial. Competitors with statistically significant overall survival data could be preferred in the marketplace. The FDA approval of Nexavar permits Nexavar to be marketed as an initial, or first-line, therapy and subsequent lines of therapy for the treatment of advanced kidney cancer, but approvals in some other regions do not. For example, the European Union approval indicates Nexavar only for advanced kidney cancer patients that have failed prior cytokine therapy or whose physicians deem alternate therapies inappropriate. We may be unable to compete effectively against products with broader or different marketing authorizations in one or more countries.

Nexavar may face challenges and competition from generic products. Generic manufacturers may file Abbreviated New Drug Applications, or ANDAs, in the United States seeking FDA authorization to manufacture and market generic versions of Nexavar, together with Paragraph IV certifications that challenge the scope, validity or enforceability of the Nexavar patents. If Bayer and we are unsuccessful at challenging an ANDA, the ANDA filer may be able to launch a generic version of Nexavar, which would harm our business. Bayer and we may also be unable to successfully enforce and defend the Nexavar patents, and we may face generic competition prior to expiration of the Nexavar patents in 2020.

Similarly, outside the United States, generic drug manufacturers or other competitors may challenge the scope, validity or enforceability of the Nexavar patents, requiring Bayer and us to engage in complex, lengthy and costly litigation or other proceedings. Bayer may be unsuccessful in defending or enforcing the Nexavar patents in one or more countries and could face generic competition prior to expiration of the Nexavar patents, which would harm our business. Generic drug manufacturers may develop, seek approval for, and launch generic versions of Nexavar. For example, a generic version of Nexavar has been launched in Peru, and Cipla recently received approval to launch its version of Nexavar in India at a price that is significantly less than that charged for Nexavar in India. Recently, India’s controller general of patents, designs and trademarks has granted a compulsory license to the Indian generics drug maker, Natco, to make generic Nexavar. The license does not grant Natco the right to sell Nexavar outside of India. Bayer has appealed the ruling.

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Prior to regulatory approval of Kyprolis, we had not marketed products for any hematological cancer, including multiple myeloma, and may be at a disadvantage to our competitors. Kyprolis may face significant competition. Kyprolis competes with products marketed by Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited, Celgene Corporation and potentially against agents currently in development for treatment of this disease by Merck & Co. Inc., Bristol-Myers Squibb, Keryx Biopharmaceuticals, Inc., Nereus Pharmaceuticals, Teva Pharmaceutical Industries Ltd., and other companies. Our competitors may develop and commercialize therapies that change the treatment paradigm for multiple myeloma. For example, Millennium is developing a multiple myeloma therapy to be administered orally and Celgene received marketing authorization from the FDA for Pomalyst in February 2013. Pomalyst was approved by the FDA with a similar label to Kyprolis in terms of eligible patient population. This could result in Kyprolis being used in later lines of therapy due to convenience of Pomalyst’s oral administration, which could erode new patient share growth and negatively impact Kyprolis sales. Kyprolis, which is administered intravenously, may not compete effectively with orally administered drugs, and we may not succeed in developing an orally administered therapy, which would harm our business.

Stivarga may face significant competition. Colorectal cancer is a competitive marketplace with four approved therapies and multiple therapies in phase 3 development. GIST is a relatively infrequently occurring tumor for which there are currently two therapies approved in adjuvant, first and second line GIST, but none approved in the third line plus setting. Imatinib, marketed by Novartis, is a c-kit inhibitor approved in patients with Kit (CD117) positive unresectable or metastatic malignant GIST as well as the adjuvant treatment of adult patients following resection of Kit (CD117) positive GIST. Sunitinib, marketed by Pfizer, is a multi tyrosine kinase inhibitor approved in GIST after disease progression on or intolerance to imatinib. There are several therapies being developed in GIST, most notably phase 3 agents masitinib, by AB Science, and phase 2 agents ganetespib, by Synta, and pazopanib by GlaxoSmithKline.

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 and resources available than us to:

·discover and patent products;

·undertake preclinical testing and human clinical trials;

·license or acquire products;

·seek and obtain FDA and other regulatory approvals;

·manufacture products; and

·commercialize and obtain reimbursement for products.

Accordingly, our competitors may be more successful than us in any or all of these areas. 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, establishing relationships with academic and research institutions, and licensing proprietary technology.

We are dependent on Bayer and third parties to manufacture Nexavar, Stivarga, Kyprolis, oprozomib or any other product candidates, and do not have the manufacturing expertise or capabilities to manufacture any current or future products.

Under our collaboration agreement and regorafenib agreement with Bayer, Bayer has the manufacturing responsibility to supply Nexavar and Stivarga for clinical trials and for commercialization. Should Bayer give up its right to co-develop Nexavar, we would have to manufacture Nexavar, or contract with another third party to do so. In addition, we have manufacturing responsibility for Kyprolis and oprozomib, which we currently manufacture through third-party contract manufacturers, and have not yet established back-up manufacturers for these compounds.

We lack the resources, experience and capabilities to manufacture Nexavar, Stivarga, Kyprolis, oprozomib or any other product candidate on our own and would require substantial funds and time to establish these capabilities. Consequently, we are, and expect to remain, dependent on third parties for manufacturing. These parties may encounter difficulties and delays in production scale-up, production yields, control and quality assurance, validation, regulatory status or shortage of qualified personnel. They may not perform as agreed or may not continue to manufacture our products for the time required to test or market our products. They may fail to deliver the required quantities of our products or product candidates on a timely basis and at commercially reasonable prices. Any production shortfall on the part of our third party manufacturers that impairs the supply, quality or price of starting materials, drug substance or drug product could have a material adverse effect on our business, financial condition and results of operations and future prospects.

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*We are dependent on single source suppliers and manufacturers for Kyprolis and have not developed backups. Disruptions to our Kyprolis supply chain could materially reduce our future earnings and prospects.

We currently rely on single source suppliers and manufacturers for commercial production of Kyprolis. Significant time and effort is required to develop backup vendors or to replace a vendor in the case of a stoppage. A loss or disruption with any one of our manufacturers or suppliers could disrupt supply of Kyprolis, possibly for a significant time period, and we may not have sufficient inventories to maintain supply before the manufacturer or supplier could be replaced or the disruption is resolved. For example, our contract manufacturer for Kyprolis drug product has experienced media fill failures on the line used to produce Kyprolis, and from January to April 2013 the line was shut down for scheduled upgrades. Future media fill failures or shutdowns could delay the production of clinical or commercial supplies of Kyprolis, in which case we may not have sufficient inventory of Kyprolis product to satisfy our clinical and commercial requirements. In addition, marketed drugs and their contract manufacturing organizations are subject to continual review, including review and approval of their manufacturing facilities and the manufacturing processes, which can result in delays in the regulatory approval process and commercialization. Certain of the raw materials and components used in the manufacture of Kyprolis are provided by unaffiliated third-party suppliers and are specifically cited in the drug application, so that they must be obtained from that specific sole source and may not be obtained from another supplier unless and until the regulatory agency approved such supplier. Introducing a replacement or backup manufacturer or supplier for Kyprolis requires a lengthy regulatory and commercial process and there can be no guarantee that we could obtain necessary regulatory approvals in a timely fashion or at all. In addition, it is difficult to identify and select qualified suppliers and manufacturers with the necessary technical capabilities, and establishing new supply and manufacturing sources involves a lengthy and technical engineering process. Although we are in the process of developing secondary sources of manufacture and supply for Kyprolis, we have not yet done so and anticipate this process will require significant additional time to complete and we can provide no assurances that we will be successful. If our supply of Kyprolis is disrupted, this would have a negative impact on sales that we anticipate would materially diminish our revenues and future prospects.

We rely on a network of specialty pharmacies and distributors.

A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions, which often require a high level of patient education and ongoing management. The use of specialty pharmacies and distributors involves certain risks, including, but not limited to, risks that these specialty pharmacies and distributors will:

·not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaints about our products;

·reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support our products;

·not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;

·be unable to satisfy financial obligations to us or others; or

·cease operations.

*Regulatory approval may not be obtained for product candidates besides Nexavar, Kyprolis and Stivarga, or approval may be limited. In addition, additional regulatory approvals may not be obtained for Nexavar, Kyprolis and Stivarga.

We have limited experience managing regulatory filings and in negotiating product approval and licensure with regulatory authorities. We and Bayer may not succeed in obtaining additional regulatory approvals for Nexavar, Kyprolis and Stivarga or our other product candidates on anticipated timelines or at all. Failure or delay in obtaining regulatory approvals would delay, reduce or prevent further commercialization of Kyprolis, Nexavar and Stivarga or commercialization of our other product candidates, in the United States and other countries. The review process for a regulatory marketing authorization, including an NDA, in the United States and a Marketing Authorization Application, or MAA, in Europe, is extensive, lengthy, expensive and uncertain. Regulatory agencies such as the FDA or the EMA have significant discretion during the review process and may determine to delay action on or approval of a marketing approval application or limit or deny approval of a product candidate for many reasons. For example, the regulatory agencies may:

·conclude the marketing approval application fails to satisfy the requirements for approval;

·determine the data resulting from the clinical trials is not satisfactory, or investigators in those clinical trials could disagree with interpretation of the data;

·disagree with the number, design, size, conduct or implementation of clinical trials or conclude that the data fails to meet statistical or clinical significance or that there is an unmet medical need;

·find the data from preclinical studies and clinical studies insufficient to demonstrate that the study drug’s clinical and other benefits outweighs its safety risks;

·disagree with the interpretation of data from preclinical studies or clinical trials;

·reject data generated at clinical trial sites and monitored by third party clinical research organizations, or CROs;

·determine that there was not proper oversight of third party CROs and clinical trials;

·reject stability data for commercial product;

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·identify deficiencies in, or lack of control over, manufacturing processes, facilities or analytical methods, including those of third party contract manufacturers;

·identify deficiencies in, or lack of control over, the pharmacovigilence processes;

·change or adversely impact their position due to unexpected or unpredictable external circumstances; and

·change their approval policies, adopt new regulations or provide new guidance with significant requirements not currently included or considered when seeking marketing approval.

Even if the FDA, EMA and other regulatory agencies approve marketing of our or Bayer’s products, the regulatory agency may impose requirements, conditions and restrictions that could significantly increase costs or delay, limit or eliminate our and Bayer’s ability to successfully commercialize those products. The regulatory agency may require additional pre-clinical, clinical or retrospective or prospective observational studies or trials at the time of the approval or during the post-marketing phase. For example, the FDA may require a risk evaluation and mitigation strategy, or REMS, which could include a Medication Guide or a Conditions to Assure Safe Use requirement such as special patient monitoring and management to minimize risk of drug-related adverse events. The EMA has endorsed legislation and implemented processes to ensure that every marketing authorization holder has an established and robust pharmacovigilance process and can enforce new risk management measures for newly identified risks. These risk management measures can include safety studies or trials to further evaluate specified risks and study the risks in various populations and during long-term use. The regulatory agency may require post-marketing studies or trials to investigate known serious risks or signals of serious risks or identify unexpected serious risks and may require periodic status reports if new safety information develops. The regulatory agency may impose label restrictions to address safety concerns or limit the patient population. Such label restrictions could include limited indications and usage, expanded contraindications and expanded warnings and precautions. For serious drug-related adverse events, a recall of the product may be required and the regulatory agency could also withdraw existing regulatory approvals. Any REMS plan, post-marketing studies, trials or commitments, label restrictions or withdrawal of regulatory approvals could significantly delay, limit, or prevent successful commercialization of a product or otherwise severely harm our business, financial condition and future prospects. Failure to conduct post-marketing studies in a timely manner may also result in substantial civil fines and even future withdrawal of approval to commercialize.

Our clinical trials for Nexavar or Kyprolis, and Bayer’s clinical trials of Stivarga, could take longer to complete than we project or may not be completed at all.

The timing of initiation and completion of clinical trials may be subject to significant delays resulting from various causes, including actions by Bayer for Nexavar or Stivarga clinical trials, conflicts regarding scheduling or competing clinical trials with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, modification of clinical trial designs, and shortages of available drug supply, including supply of comparator drugs or combination drugs for clinical and commercial purposes. We may face difficulties developing and sustaining relationships with Kyprolis development partners, including clinical research organizations, contract manufacturing organizations, key opinion leaders and clinical investigators. We and Bayer may not complete clinical trials involving Nexavar, Kyprolis or Stivarga or any of our other product candidates as projected or at all.

We may not have the necessary capabilities to successfully manage the execution and completion of clinical trials in a way that leads to approval of Nexavar, Stivarga, Kyprolis or other product candidates for their target indications. In addition, we rely on Bayer, academic institutions, cooperative oncology organizations and clinical research organizations to conduct, supervise or monitor the majority of clinical trials involving Nexavar, Kyprolis and Stivarga. We have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. The timing of review by regulatory authorities is uncertain.

Development and commercialization of compounds that appear promising in research or development, including Phase 2 clinical trials, may be delayed or fail to reach later stages of development or the market for a variety of reasons including:

·nonclinical tests may show the product to be toxic or lack efficacy in animal models;

·clinical trial results may show the product to be less effective than desired or to have harmful or problematic side effects;

·regulatory approvals may not be received, or may be delayed due to factors such as slow enrollment in clinical studies, extended length of time to achieve study endpoints, additional time requirements for data analysis or preparation of an Investigational New Drug, or IND, application, discussions with regulatory authorities, requests from regulatory authorities for additional preclinical or clinical data, analyses or changes to study design, including possible changes in acceptable trial endpoints, or unexpected safety, efficacy or manufacturing or quality issues, changes in policy or objectives at regulatory authorities, and regulatory filings submitted on competing drugs that could alter the regulatory prospects of our drugs;

·difficulties formulating the product, scaling the manufacturing process or in validating or getting approval for manufacturing;

·manufacturing costs, pricing or reimbursement issues, or other factors may make the product uneconomical;

·proprietary or contractual rights of others and their competing products and technologies may prevent our product from being developed or commercialized or may increase the cost of doing so; and

·contractual rights of our collaborators or others may prevent our product from being developed or commercialized or may increase the cost of doing so.

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Failure to successfully further develop Nexavar, Kyprolis or Stivarga could harm their commercialization, and failure to successfully launch or commercialize Kyprolis or Stivarga for these or any other reasons would significantly harm our business and future prospects.

*We may not obtain or retain adequate coverage or reimbursement for Kyprolis from third-party payers, which would harm our business.

Our sales of Kyprolis are dependent on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. In the United States, reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost products that already are reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and imperfections in Medicare or Medicaid data used to calculate these rates. Net prices for products are reduced by mandatory discounts or rebates required by government health care programs and privately-negotiated discounts.

We rely on reimbursement and coverage by federal and state government programs such as Medicare and Medicaid in the United States and will rely on equivalent programs in other countries, once we receive regulatory approval for Kyprolis in those countries. We also rely on coverage and reimbursement from private pharmaceutical insurers in the United States. To the extent that we seek approvals to market Kyprolis in foreign territories, we will need to work with the government-sponsored healthcare systems in Europe and other foreign jurisdictions that are the primary payers of healthcare costs in those regions. Governments and private payers may regulate prices, reimbursement levels and access to Kyprolis in order to control costs or to affect levels of use of our products. We cannot predict the future availability or level of coverage and reimbursement for Kyprolis or our product candidates and a reduction in coverage or reimbursement for our products could have a material adverse effect on our product sales and results of operations. In addition, our estimates of discounts and reserves against our gross sales of Kyprolis, referred to as gross to net adjustments, will continue to be informed and evolve as we continue to build a history of coverage and reimbursement for Kyprolis, which for some categories like Medicaid rebates and returns, may take up to a full year after launch.

Many of the patients in the United States who seek treatment with Kyprolis are eligible for Medicare benefits. Other patients are covered by private health plans. The Medicare program is administered by the Centers for Medicare & Medicaid Services, or CMS, and coverage and reimbursement for products and services under Medicare are determined pursuant to statute, regulations promulgated by CMS, and CMS’s subregulatory coverage and reimbursement determinations. It is difficult to predict exactly how CMS may apply those regulations and policy determinations to Kyprolis, and those regulations and interpretive determinations are subject to change. Moreover, the procedures and criteria by which CMS makes coverage and reimbursement determinations and the reimbursement amounts established by statute are subject to change, particularly because of budgetary pressures facing the Medicare program.

Medicare Part B provides limited coverage of outpatient drugs that are furnished “incident to” a physician’s services. Generally, “incident to” drugs are covered only if they satisfy certain criteria, including that they are of the type that is not usually self-administered by the patient and they are reasonable and necessary for a medically accepted diagnosis or treatment. To date Kyprolis is generally covered under Medicare Part B and the Medical benefit for private insurers. Medicare Part B generally pays for drugs provided in a hospital outpatient setting and in physicians’ offices under a payment methodology using Average Sales Price, or ASP, information. The U.S. Department of Health and Human Services Inspector General may compare the ASP for a drug or biological to the widely available market price, or WAMP, and the Medicaid Average Manufacturer Price, or AMP, for that drug or biological, and if the ASP exceeds the WAMP or AMP by at least 5 percent and other conditions are met, CMS can reduce Medicare payment rates.

Physicians who administer Kyprolis to Medicare beneficiaries in their offices are reimbursed at wholesale acquisition cost (WAC) plus six percent until ASP data are available, at which point reimbursement changes to ASP plus six percent. Through 2012, Kyprolis was reimbursed at 95 percent of average wholesale price, or AWP, in the hospital outpatient setting. Effective January 1, 2013, Kyprolis was assigned with a product specific C code and pass-through status for use in the hospital outpatient setting. Kyprolis was reimbursed by CMS at WAC plus six percent in both the physician office and hospital outpatient settings until there is sufficient sales data for CMS to calculate an ASP.  Historically, Medicare’s ASP-based reimbursement has been at ASP plus 6%. However, the Budget Control Act of 2011 requires automatic spending cuts in particular categories of federal outlays, a process known as sequestration. Under sequestration, aggregate Medicare payments for drugs and biologicals administered by physicians and hospital outpatient departments, including Kyprolis, have been reduced by up to 2 percent, effective April 1, 2013. We therefore expect

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reimbursement to remain at ASP plus 4.3% until April 1, 2014, unless Congress acts to end sequestration before then. Sequestration could remain in effect after April 1, 2014, if Congress does not enact legislation achieving sufficient deficit reduction under the Budget Control Act or an alternate deficit reduction plan. In future years, Congress also could enact legislation to change the reimbursement rate in physician offices or hospital outpatient departments. In addition, when Kyprolis no longer has pass-through status, CMS could implement regulations to change both the hospital payment rate and the cost threshold for determining whether a drug is separately reimbursed in hospital outpatient departments, and these changes could adversely affect payment for Kyprolis. This reduction in CMS reimbursement rates could reduce the number of physician offices and hospital outpatient departments that furnish injectable drugs such as Kyprolis, and therefore could have at least a temporary negative impact on Kyprolis net revenues.  If, as described above, sequestration reduces the number of physicians and hospital outpatient departments that furnish injectable drugs, such as Kyprolis, the proportion of Kyprolis patients receiving treatments in “340B entities,” as described in the following risk factor, could increase, resulting in more sales by us of Kyprolis at the significantly discounted 340B ceiling price.

*If we fail to comply with our reporting and payment obligations under governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We participate in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. We also participate in and have certain price reporting obligations to several states, and we have obligations to report ASP for the Medicare program. Under the Medicaid Drug Rebate program, we are required to pay a rebate to each state Medicaid program for each unit of our drug dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Those rebates are based on pricing data reported by us on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data include the AMP and, in the case of innovator products such as Kyprolis, the best price, or BP for each drug.

CMS has issued proposed regulations to implement the changes to the Medicaid Drug Rebate program under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the Healthcare Reform Act or the PPACA, but has not yet issued final regulations. Moreover, in the future, Congress could enact legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program has and will continue to increase our costs and the complexity of compliance, has been and will be time-consuming, and could have a material adverse effect on our results of operations.

The availability of federal funds under Medicaid and Medicare Part B to pay for Kyprolis and any other products that are approved for marketing also is conditioned on our participation in the Public Health Service 340B drug pricing program. The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These covered entities include hospitals that serve a disproportionate share of poor Medicare beneficiaries, as well as a variety of community health clinics and other recipients of health services grant funding. PPACA expanded the 340B program to include additional entity types: certain free standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Act. The 340B ceiling price is calculated using a statutory formula, which is based on the AMP and rebate amount for the covered outpatient drug as calculated under the Medicaid rebate program. Changes to the definition of AMP and the Medicaid rebate amount under PPACA and CMS’s issuance of final regulations implementing those changes also could affect our 340B ceiling price for Kyprolis or any other of our products that are approved for marketing and negatively impact our results of operations.

Federal law also requires that a company that participates in the Medicaid rebate program report ASP information to CMS for certain categories of drugs that are paid under Part B of the Medicare program.  Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS as to what should or should not be considered in computing ASP.  An ASP for each National Drug Code for a product that is subject to the ASP reporting requirement must be submitted to CMS no later than 30 days after the end of each calendar quarter.  CMS uses these submissions to determine payment rates for drugs under Medicare Part B.  Changes affecting the calculation of ASP could affect the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations.

Pricing and rebate calculations vary among products and programs. The calculations are complex and are often subject to interpretation by us, governmental or regulatory agencies and the courts. The Medicaid rebate amount is computed each quarter based on our submission to the CMS of our current AMPs and BPs for the quarter. If we become aware that our reporting for prior quarters was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations serve to increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Any corrections to our rebate

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calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the price that we are required to charge certain safety-net providers under the Public Health Service 340B drug discount program. Any revisions to previously reported Medicaid pricing data also may require revisions to the 340B ceiling prices that were based on those data and could require the issuance of refunds.

We have limited experience marketing a Medicare Part B drug, or reporting AMP, BP and ASP information, as is required by CMS. If we fail to collect and report information correctly and on a timely basis, our business could be harmed. If we are found to have made a misrepresentation in the reporting of AMP, BP or ASP, we may be subject to significant civil and criminal penalties, including exclusion from federal health care programs.  While we will implement policies in an effort to comply with mandated reimbursement rates, the United States government, state governments and private payers frequently pursue actions against pharmaceutical and biotechnology companies alleging that the companies have overstated prices in order to inflate reimbursement rates. Any such action could adversely affect the pricing of and the commercial success of our products and expose us to civil money penalties or other liability.

In addition to retroactive rebates and the potential for 340B program refunds, if we are found to have knowingly submitted false AMP, ASP or BP information to the government, we may be liable for civil monetary penalties in the amount of $100,000 per item of false information. Our failure to submit monthly and quarterly AMP, ASP and BP data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date. In the event that the CMS terminates our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.

In September 2010, CMS and the Office of the Inspector General indicated that they intend more aggressively to pursue companies who fail to report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our submissions will not be found by CMS to be incomplete or incorrect.

The PPACA also obligates the Secretary of the Department of Health and Human Services to create regulations and processes to improve the integrity of the program and to update the agreement that manufacturers must sign to participate in the program to obligate manufacturers to sell to covered entities if they sell to any other purchaser and to report to the government the ceiling prices for its drugs.

*Healthcare law and policy changes, including those based on recently enacted legislation, may impact our business in ways that we cannot currently predict and these changes could have a material adverse effect on our business and financial condition.

In March 2010, the Healthcare Reform Act, or the PPACA, was adopted. This law substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The PPACA contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, rules regarding prescription drug benefits under the health insurance exchanges, and fraud and abuse and enforcement. These changes will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.

The PPACA is expected to impact the United States pharmaceutical industry substantially, including with regard to how health care is financed by both governmental and private insurers. Among the provisions of PPACA of greatest importance to the pharmaceutical industry are the following:

·an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, not including orphan drug sales;

·an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1 percent and 13 percent of the average manufacturer price for innovator and non-innovator drugs, respectively;

·a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50 percent point-of-sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

·extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

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·expansion of eligibility criteria for Medicaid programs, thereby potentially increasing manufacturers’ Medicaid rebate liability;

·expansion of the entities eligible for discounts under the Public Health Service 340B pharmaceutical pricing program;

·new requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers and other healthcare providers, and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the preceding calendar year, with data collection to be required starting August 1, 2013 and reporting to be required by March 31, 2014;

·expansion of health care fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance;

·a licensure framework for follow-on biologic products; and

·a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

Many of the PPACA’s most significant reforms do not take effect until 2014 and thereafter, and their details will be shaped significantly by implementing regulations that have yet to be finalized.  In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of PPACA. The Supreme Court’s decision upheld most of the PPACA and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, the Supreme Court struck down a provision in the PPACA that penalized states that choose not to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a state’s current eligibility levels to 133 percent of the federal poverty limit. As a result of the Supreme Court’s ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133 percent of the federal poverty level and whether there will be more uninsured patients in 2014 than anticipated when Congress passed the PPACA. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall, which could impact our sales, business and financial condition.

While the constitutionality of key provisions of PPACA were upheld by the Supreme Court, legislative changes to it remain possible. We expect that the PPACA, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and on our ability to maintain or increase our product sales or successfully commercialize our product candidates or could limit or eliminate our future spending on development projects.  In addition to the PPACA, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payers to keep healthcare costs down while expanding individual healthcare benefits.  For example, legislation may be introduced in Congress that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

Foreign policymakers and payers continue to express significant interest in promoting reforms aimed at containing healthcare costs, improving quality and expanding access. In many international markets, governments control the prices of prescription pharmaceuticals, including through the implementation of reference pricing, price cuts, rebates, revenue-related taxes and profit control. The use of formal economic metrics has been increasing across Europe, as well as in several emerging markets throughout the world, to determine whether or not a new product will be reimbursed and, increasingly, in setting the maximum price at which the product will be reimbursed. With increased budgetary constraints, payers in many countries employ a variety of measures to exert downward price pressure such as international price referencing, therapeutic reference pricing (e.g., setting the reimbursement rate for a given class of agents at the lowest price within the class), increasing mandates or incentives for generic substitution, and government-mandated discounts and price cuts. Additionally, many nations are considering or, like France, have implemented new transparency requirements to report certain financial arrangements with physicians and other organizations (either similar to or broader than the requirements in the PPACA).  These transparency requirements could have a material adverse effect on our industry generally and on our interactions with these physicians or other organizations.

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*If Nexavar does not continue to be broadly adopted for the treatment of unresectable liver cancer, our business would be harmed. If our ongoing and planned clinical trials fail to demonstrate that Nexavar is safe and effective for additional indications or we are unable to obtain necessary approvals for other uses, we will be unable to expand the commercial market for Nexavar and our business may be harmed or fail.

The market size for Nexavar in treating unresectable liver cancer depends on several factors, including educating treating physicians on the appropriate use of Nexavar and the management of patients who are receiving Nexavar. Achieving these goals may be difficult as liver cancer patients typically have underlying liver disease and other comorbidities and can be treated by a variety of medical specialists. In addition, screening, diagnostic and treatment practices can vary significantly by region. Further, liver cancer is common in many regions in the developing world where the healthcare systems are limited and reimbursement for Nexavar is limited or unavailable, which will likely limit or slow adoption. While we have established Nexavar as part of the treatment paradigm for liver cancer, we may not be able to successfully achieve its full market potential for this indication. In addition, certain countries require pricing to be established before reimbursement for this indication may be obtained and in some Asia Pacific countries where most of the current market is private pay, these approvals require prolonged negotiations with the governments, potentially including multiple government agencies. In addition, we may not receive or maintain pricing approvals at favorable levels or at all, which could harm our ability to broadly market Nexavar.

Nexavar has not been approved in any indications other than unresectable liver cancer and advanced kidney cancer. We and Bayer are currently conducting a number of clinical trials of Nexavar intended to evaluate Nexavar in other indications; however, our clinical trials may fail to demonstrate that Nexavar is safe and effective in other indications, and Nexavar may not gain additional regulatory approval, which would limit the potential market for the product and harm our future prospects. Although we have filed regulatory submissions based on the results of the recent DECISION trial with the FDA and EMA in June 2013, there is no guarantee that Nexavar will receive regulatory approvals for an additional indication in the treatment of RAI-refractory differentiated thyroid cancer. If we are not able to obtain approval for label expansion or alternative delivery mechanisms, we will have incurred significant clinical trial costs without corresponding benefits, our future prospects may suffer and our business and financial condition could be materially and adversely affected. Success in one or even several cancer types does not indicate that Nexavar would be approved or have successful clinical trials in other cancer types. Regulatory requirements change over time, including acceptable clinical endpoints. We may be unable to satisfy new requirements or expectations of regulatory authorities and hence, Nexavar may never be approved in additional indications.

Even if our products receive regulatory approval, guidelines and recommendations published by various organizations may affect the uptake, adoption and use of those products.

Government agencies issue regulations and guidelines directly applicable to us and to our products and to Bayer’s products. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time publish guidelines or recommendations to the medical and patient communities. These various sorts of recommendations may relate to such matters as product usage, dosage, route of administration and use of related or competing therapies. Such recommendations or changes to such recommendations or other changes or other guidelines advocating alternative therapies could result in decreased use of Nexavar, Kyprolis and Stivarga, which may adversely affect our results of operations.

We are dependent upon our collaborative relationship with Bayer to further develop, manufacture and commercialize Nexavar and Stivarga.

Developing, manufacturing and commercializing Nexavar and Stivarga depend in large part upon our relationship with Bayer. If we are unable to maintain our collaborative relationship with Bayer, we may be unable to continue development, manufacturing and marketing activities at our own expense. As permitted under our amended collaboration agreement and regorafenib agreement with Bayer, we may develop Nexavar and Stivarga in certain indications at our own expense. Even if we were able to develop, manufacture and commercialize Nexavar or Stivarga on our own, this would significantly increase our capital and infrastructure requirements, would necessarily impose delays on development programs and could limit the indications we are able to pursue. These expenses and other obstacles could effectively prevent us from developing and commercializing Nexavar and Stivarga on our own, even in situations where we would otherwise be permitted to do so under the collaboration agreement.

Disputes with Bayer may delay or prevent us from further developing, manufacturing or commercializing or increasing the sales of Nexavar, and could lead to additional disputes with Bayer, which could be time consuming and expensive. We are subject to a number of other risks associated with our dependence on our collaborative relationship with Bayer, including:

·unfavorable decisions by Bayer regarding the amount and timing of resource expenditures for the development and commercialization of Nexavar and Stivarga;

·possible disagreements as to development plans, clinical trials, regulatory marketing or sales;

·our inability to co-promote Nexavar or Stivarga in any country outside the United States, which makes us solely dependent on Bayer to promote Nexavar and Stivarga in foreign countries;

·Bayer’s right to terminate the collaboration agreement on limited notice in certain circumstances involving our insolvency or material breach of the agreement;

·loss of significant rights if we fail to meet our obligations under the collaboration agreement;

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·adverse regulatory or legal action against Bayer resulting from failure to meet healthcare industry compliance requirements in the promotion and sale of Nexavar and Stivarga, including federal and state reporting requirements;

·changes in key management personnel at Bayer, including Bayer’s representatives on the collaboration’s executive team; and

·disagreements with Bayer regarding interpretation or enforcement of the collaboration agreement or the regorafenib agreement.

We have limited ability to direct Bayer in its promotion of Nexavar outside of the U.S. and Stivarga globally and we may be unable to obtain any remedy against Bayer. Bayer may not have sufficient expertise to promote or obtain reimbursement for oncology products in foreign countries and may fail to devote appropriate resources to this task. In addition, Bayer may establish a sales and marketing infrastructure for Nexavar outside the United States that is too large and expensive in view of the magnitude of the Nexavar sales opportunity. We are at risk with respect to the success or failure of Bayer’s commercial decisions related to Nexavar and Stivarga as well as the extent to which Bayer succeeds in the execution of its strategy.

Bayer’s development of other products, including Stivarga, may provide Bayer incentives to develop and commercialize Nexavar that are different from our own. In preparation for approval and commercialization of Stivarga we increased the number of sales representatives who promote Nexavar and Stivarga in the U.S. This may result in disrupting many current relationships with physicians. The new representatives and current representatives may not have access to or will have a delay in access to the physicians. This could result in lower sales of Nexavar and Stivarga for the time period until access is established or lower sales permanently if access is not fully re-established. In addition, selling two products is more complex than selling a single product, and some representatives may be slow to or unable to make this transition, resulting in lower sales in their territory.

Under the terms of the collaboration agreement, we and Bayer must agree on the development plan for Nexavar. If we and Bayer cannot agree, clinical trial progress could be significantly delayed or halted. Bayer has the right, upon 60 days’ notice, to cease co-funding of the development of Nexavar. If Bayer ceases co-funding Nexavar development, further development of Nexavar could be delayed and we may be unable to fund the development costs on our own and may be unable to find a new collaborator. If we or Bayer cease funding development of Nexavar under the collaboration agreement, then the party which ceases funding will be entitled to receive a royalty, but not to share in profits. In addition, Bayer has the right, which it is not currently exercising, to nominate a member to our board of directors as long as we continue to collaborate on the development of a compound. Because of these rights, ownership and voting arrangements, our stockholders may not be able to effectively control the election of all members of the board of directors and our ability to independently determine all corporate actions could be diminished.

Moreover, we are highly dependent on Bayer for timely and accurate information regarding any revenues realized from sales of Nexavar and Stivarga and the costs incurred in developing and selling Nexavar, in order to accurately report our results of operations. If we do not receive timely and accurate information or incorrectly estimate activity levels associated with the co-promotion and development of Nexavar and Stivarga, we could be required to record adjustments in future periods and may be required to restate our results for prior periods. Such inaccuracies or restatements could cause a loss of investor confidence in our financial reporting or lead to claims against us, harming our operations and future prospects.

Our collaboration agreement with Bayer will terminate when patents expire that were issued in connection with product candidates discovered under that agreement, or at the time when neither we nor Bayer are entitled to profit sharing under that agreement, whichever is later. Our right to royalties on the sale of Stivarga will terminate with expiration of Stivarga patents. The worldwide patents and patent applications covering Nexavar and Stivarga are owned by Bayer and certain patents are licensed to us through our collaboration agreement and regorafenib agreement. We have limited control over the filing, strategy, or prosecution of the Nexavar and Stivarga patent applications and no control of enforcement or defense of the patents outside the United States.

*We may need additional funds, our future access to capital is uncertain, and unstable market and economic conditions may have serious adverse consequences on our business.

We may need additional funds to conduct the costly and time-consuming activities related to the development and commercialization of Nexavar and Kyprolis and our other product candidates, including manufacturing, clinical trials and regulatory approval. Also, we may need funds to develop our early stage product candidates, to acquire rights to additional product candidates, or acquire new or complementary businesses. Our future capital requirements will depend upon a number of factors, including:

·revenue from our product sales and collection of our receivables;

·global product development and commercialization activities;

·the cost involved in enforcing patents against third parties and defending claims by third parties;

·the costs associated with acquisitions or licenses of additional products;

·the cost of acquiring new or complementary businesses;

·competing technological and market developments; and

·future fee and milestone payments.

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We may not be able to raise additional capital on favorable terms, or at all. If we are unable to obtain additional funds, we may not be able to fund our share of commercialization expenses and 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 on terms that are unfavorable to us. If we change our development plans, acquire rights to or license additional products, or seek to acquire new or complementary businesses, we may need additional funds sooner than we expect. In addition, we anticipate that our expenses related to Kyprolis will increase over the next several years. While these costs are unknown at the current time, we may need to raise additional capital to meet them.

Our general business may be adversely affected by global economic difficulties, a volatile business environment and unpredictable and unstable market conditions. If the equity and credit markets do not sustain improvement or begin to deteriorate again, it may make any necessary future debt or equity financing more difficult, more costly and more dilutive, and may result in adverse changes to product reimbursement and pricing and sales levels, which would harm our operating results. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and future prospects and could require us to delay or abandon clinical development plans or plans to acquire additional technology. There is also a possibility that our stock price may decline, due in part to the volatility of the stock market and the general economic downturn, such that we would lose our status as a Well-Known Seasoned Issuer, which allows us to more rapidly and more cost-effectively seek to raise funds in the public markets.

Additionally, other challenges resulting from the current economic environment include fluctuations in foreign currency exchange rates, global pricing pressures, continued high national unemployment impacting patients’ ability to access drugs, increases in uninsured or underinsured patients affecting their ability to afford pharmaceutical products and increased U.S. free goods to patients. There is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which would directly affect our ability to attain our operating goals on schedule and on budget. Further dislocations in the credit market may adversely impact the value or liquidity of marketable securities owned by us.

*Our operating results could be adversely affected by product sales occurring outside the United States and fluctuations in the value of the United States dollar against foreign currencies or unintended consequences from our currency contracts.

A majority of Nexavar sales are generated outside of the United States, and a significant percentage of Nexavar commercial and development expenses are incurred outside of the United States. Under our collaboration agreement, when these sales and expenses are translated into U.S. dollars by Bayer in determining amounts payable to us or payable by us, we are exposed to fluctuations in foreign currency exchange rates. If we successfully commercialize Kyprolis globally, we expect a significant percentage of Kyprolis revenue would be denominated in currencies other than the U.S. dollar. In addition, our contract with Ono provides for potential milestone and royalty payments in Japanese Yen. We also incur a significant percentage of research and development expenses for Kyprolis and our earlier-stage development products in currencies other than the U.S. dollar. We enter into transactions to manage our exposure to fluctuations in foreign currency exchange rates. Such transactions may expose us to the risk of financial loss in certain circumstances, including instances in which there is a change in the expected differential between the underlying exchange rate in the contracts and actual exchange rate.

The primary foreign currencies in which we have current exchange rate fluctuation exposure are the Euro, British Pound, Swiss Franc and Japanese Yen. As we expand our business geographically, we will be exposed to exchange rate fluctuation in other currencies. Exchange rates between these currencies and the U.S. dollar have fluctuated significantly in recent years and may do so in the future. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results.

If serious adverse side effects are associated with Nexavar, Stivarga or Kyprolis, our business could be harmed.

The FDA-approved package inserts for Nexavar, Kyprolis and Stivarga includes several warnings relating to observed adverse reactions. For example, severe and sometimes fatal hepatotoxicity has been observed in clinical studies of Stivarga and severe and sometimes fatal cardiac events or hepatotoxicity has been observed in clinical studies of Kyprolis. The adverse reaction of hepatotoxicity is highlighted as a boxed warning in the labeling for Stivarga, which could increase regulatory scrutiny for adequately addressing risk information in promotional messaging.  A number of these and other adverse reactions are highlighted in the warnings and precautions section of each of these labels.  With commercial use and additional clinical trials of Nexavar and Stivarga, we and Bayer have updated and expect to continue to update adverse reactions listed in the package insert to reflect current information and we also expect to update the adverse reactions listed in the Kyprolis package insert to reflect current information. If additional adverse reactions emerge, or a pattern of severe or persistent previously observed side effects is observed in the relevant patient populations,

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the FDA or other regulatory agencies could modify or revoke marketing approval of any product or we may choose to withdraw one or more products from the market. If this were to occur, we may be unable to obtain marketing approval in additional indications. In addition, if patients receiving Nexavar, Kyprolis or Stivarga were to suffer harm as a result of their use of these products, these patients or their representatives may bring claims against us. These claims, or the mere threat of these claims, could have a material adverse effect on our business and results of operations.

We expect to seek additional regulatory approvals of Kyprolis in the United States and other countries. We have observed and reported safety and adverse events in Kyprolis clinical trials, which may increase the risk that FDA, or other regulatory agencies, could reject future applications for marketing approval. Similarly, Bayer is seeking additional regulatory approval for Stivarga, and has reported safety and adverse events in Stivarga trials, which may increase the risk that regulatory agencies could reject additional marketing approval for Stivarga. Even if Bayer succeeds in obtaining multiple regulatory approvals for Stivarga, we expect that their package inserts, if approved, will include information related to safety and adverse events, which could limit the market potential or reimbursability of either or both products.

If previously unforeseen and unacceptable side effects are observed in Nexavar, Kyprolis, or Stivarga, or the seriousness or incident rate of previously observed side effects were to increase, we may be unable to proceed with further clinical trials, to seek or obtain regulatory approval in one or more indications, maintain current regulatory approvals or otherwise realize full commercial benefits of our products. In clinical trials, patients may be treated with Nexavar, Kyprolis, or Stivarga as a single agent or in combination with other therapies. During the course of treatment, these patients may die or suffer adverse medical effects for reasons unrelated to our products, including adverse effects related to the products that are administered in combination with our products. These adverse effects may impact the interpretation of clinical trial results, which could lead to adverse conclusions regarding the toxicity or efficacy of Nexavar, Kyprolis or Stivarga.

*We are subject to extensive government regulation, which can be costly, time consuming and subject us to unanticipated delays. We may incur significant liability if it is determined that we are in violation of federal and state regulations related to the promotion of drugs in the United States or elsewhere.

If we have disagreements with Bayer regarding ownership of clinical trial results or regulatory approvals for Nexavar, and the FDA refuses to recognize Onyx as holding, or having access to, the regulatory approvals necessary to commercialize Nexavar, we may experience delays in or be precluded from marketing Nexavar.

For Kyprolis, we are responsible for managing communications with regulatory agencies, including filing investigational new drug applications, filing new drug applications, submission of promotional materials and generally directing the regulatory processes. We have limited experience directing such activities and may not be successful with our planned development strategies, on the planned timelines, or at all. If we fail to conduct any required post-approval studies or if the studies fail to verify that any of our product candidates are safe and effective, our FDA approval could be revoked. If we or Bayer fail to comply with applicable regulatory requirements we could be subject to penalties, including fines, suspensions of regulatory approval, product recall, seizure of products and criminal prosecution.

To date, the FDA has approved Nexavar only for the treatment of advanced kidney cancer and unresectable liver cancer. Physicians are not prohibited from prescribing Nexavar for the treatment of diseases other than advanced kidney cancer or unresectable liver cancer, however, we and Bayer are prohibited from promoting Nexavar for any non-approved indication, often called “off label” promotion. Likewise, to date, the FDA has approved Kyprolis only for the treatment of patients with multiple myeloma who have received at least two prior therapies, including bortezomib and an immunomodulatory agent, and have demonstrated disease progression on or within 60 days of completion of the last therapy; and Stivarga only for the treatment of patients with mCRC who have been previously treated with fluoropyrimidine-, oxaliplatin- and irinotecan-based chemotherapy, an anti-VEGF therapy, and, if KRAS wild type, an anti-EGFR therapy, and for the treatment of patients with locally advanced, unresectable or metastatic gastrointestinal stromal tumor (GIST) who have been previously treated with imatinib mesylate and sunitinib malate. Although physicians are not prohibited from prescribing Kyprolis or Stivarga for the treatment of diseases other than the FDA-approved indication, we are prohibited from promoting Kyprolis or Stivarga for any other indications. The FDA and other regulatory agencies actively enforce regulations prohibiting off label promotion and the promotion of products for which marketing authorization has not been obtained. A company that is found to have improperly promoted an off label use may be subject to significant liability, including civil and administrative remedies, as well as criminal sanctions. We engage in the support of medical education activities and engage investigators and potential investigators interested in our clinical trials. Although we believe that all of our communications regarding Nexavar, Kyprolis and Stivarga are in compliance with the relevant regulatory requirements, the FDA or another regulatory authority may disagree, and we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.

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Certain federal and state healthcare laws and regulations pertaining to fraud and abuse are and will be applicable to our business. For example, in the United States, the federal anti-kickback law prohibits, among other things, knowingly and willfully offering,  paying, soliciting, or receiving remunerations intended to induce or in return for the purchase, lease, order or arranging for the purchase, lease or order of any healthcare item or services reimbursable under Medicare, Medicaid or other federal financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Violations of these laws can lead to civil and criminal penalties, including fines, imprisonment and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations of our products may be subject to scrutiny if they do not qualify for an exemption or safe harbor. We seek to comply with the exemptions and safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

The U.S. federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid.  Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare programs. In addition, in recent years the government has pursued False Claims Act cases against a number of pharmaceutical companies for causing false claims to be submitted as a result of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws, including federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs.

The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.  A number of states have enacted laws that require pharmaceutical companies to track and report payments, gifts and other benefits relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states.  Other states prohibit providing meals to prescribers or other marketing related activities. Still other states require the posting of information relating to clinical studies and their outcomes.  In addition, California, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes of conduct.  Additional states are considering or recently have considered similar proposals.

The number and complexity of both federal and state laws continue to increase, and additional governmental resources are being added to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the Healthcare Reform Act includes a number of provisions aimed at strengthening the government’s ability to pursue anti-kickback and false claims cases against pharmaceutical manufacturers and other healthcare entities, including substantially increased funding for healthcare fraud enforcement activities, enhanced investigative powers, amendments to the False Claims Act that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations and the Physician Payment Sunshine or Open Payments Program provisions.  The Open Payments Program will require extensive tracking of physician and teaching hospital payments, maintenance of a payments database, and public reporting of the payment data. CMS recently issued a final rule implementing the Open Payments Program provisions and clarified the scope of the reporting obligations. The final rule also provided that manufacturers must begin tracking on August 1, 2013 and must begin reporting payment data to CMS by March 31, 2014. While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us to the risk of government investigations and enforcement actions. Responding to a government investigation or enforcement action would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Numerous federal and state laws, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use and disclosure of personal information. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition, most healthcare providers who are expected to prescribe our products and from whom we obtain patient health information are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996, or HIPAA as amended by the Health Information Technology for Economic and Clinical Health Act. Although we are not directly subject to HIPAA, we could be subject to civil penalties for violations of the privacy and security requirements of HIPAA and could also be subject to criminal penalties if we knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business,

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including recently enacted laws in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of doing business. International laws, such as the EU Data Protection Directive (95/46/EC) and Swiss Federal Act on Data Protection, regulate the processing of personal data within Europe and between European countries and the United States. Failure to provide adequate privacy protections and maintain compliance with Safe Harbor mechanisms could jeopardize business transactions across borders and result in significant penalties.

*As we expand our development and commercialization activities outside of the United States, we will be subject to an increased risk of inadvertently conducting activities in a manner that violates the U.S. Foreign Corrupt Practices Act and similar laws. If that occurs, we may be subject to civil or criminal penalties which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We are also subject to the UK Anti-Bribery Act, which prohibits both domestic and international bribery, as well as bribery across both public and private sectors.

In the course of establishing and expanding our commercial operations and seeking regulatory approvals outside of the United States, we will need to establish and expand business relationships with various third parties, such as independent contractors, distributors, vendors, advocacy groups and physicians, and we will interact more frequently with foreign officials, including regulatory authorities and physicians employed by state-run healthcare institutions who may be deemed to be foreign officials under the FCPA, UK Anti-Bribery Act or similar laws of other countries that may govern our activities. Any interactions with any such parties or individuals where compensation is provided that are found to be in violation of such laws could result in substantial fines and penalties and could materially harm our business. Furthermore, any finding of a violation under one country’s laws may increase the likelihood that we will be prosecuted and be found to have violated another country’s laws. If our business practices outside the United States are found to be in violation of the FCPA, UK Anti-Bribery Act or other similar law, we may be subject to significant civil and criminal penalties which could have a material adverse effect on our business, financial condition, results of operations, liquidity and growth prospects.

Lastly, similar to the U.S. disclosure and transparency in the Open Payments Program, many countries plan to or, like France, have required extensive tracking of physician, hospital, patient advocacy, and grant payments, maintenance of a payments database, and public reporting of the payment data.  While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us to increased risk of government investigations and enforcement actions.

The market may not accept our marketed products.

Our marketed products may not be adopted rapidly, or at all, by physicians. Factors that can affect the rate of adoption and that can increase the difficulty of forecasting sales include the following:

·physician and patient unfamiliarity with new marketed products such as Kyprolis and Stivarga;

·cautionary prescribing behavior due to concerns regarding the safety and risk-benefits;

·cautionary prescribing behavior due to lack of reimbursement history for Kyprolis or Stivarga;

·confusion and questions relating to the label;

·difficulty in identifying appropriate patients for treatment;

·the cost of the marketed product;

·other aspects of physician education;

·the size of the market for our marketed products, which may not be as large as forecasted;

·treatment guidelines issued by government and non-government agencies;

·types of cancer for which the marketed product is approved;

·timing of market entry relative to competitive products;

·availability of alternative therapies;

·price of our marketed product relative to alternative therapies, including generic versions of our products, or generic versions of innovative products that compete with our marketed products;

·patients’ reliance on patient assistance programs, under which we provide free drugs;

·rates of returns and rebates;

·uncertainty of launch trajectory for Kyprolis and Stivarga;

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·our ability to manufacture and deliver Kyprolis in commercially sufficient quantities;

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

·side effects or unfavorable publicity concerning our marketed products or similar products;

·duration of time a patient remains on treatment; and

·dose used, in accordance with the label.

The extent to which any of these or other factors individually or in the aggregate may impact future sales of our marketed products is uncertain and difficult to predict.

*We may be subject to pharmaceutical pricing and third-party reimbursement pressures.

Third-party payers and governments are increasingly challenging the pricing of medical products and services, especially in markets outside of the U.S., and their evolving policies may affect the price levels for Nexavar, Kyprolis or Stivarga, or any other future product. Governments outside of the United States may increasingly rely on health, economic and budget impact assessments to determine pricing thresholds for cancer drugs. In addition, the market for our products in the U.S. may be limited by reforms being explored by third party payers, including payment reforms (e.g., reduction in buy and bill reimbursement), patient cost sharing reforms and reforms in utilization management (e.g., increased use of prior authorizations and clinical pathways).

Our success in Europe and other regions, particularly in Asia Pacific, could also depend on obtaining and maintaining government reimbursement. For example, in Europe and in many other international markets, patient access is limited for medicines that are not reimbursed by the government. Negotiating prices with governmental authorities can delay commercialization by up to twelve months or more. Even if reimbursement is available, reimbursement policies may adversely affect sales and profitability of our marketed products. In addition, in Europe and in many international markets, governments control the prices of prescription pharmaceuticals and prices of prescription pharmaceuticals can in some cases decline over the life of the product or as volumes increase. In some cases, health authorities in countries that have been hit particularly hard by the financial crisis limit reimbursement of oncology drugs to specific patient subpopulations to limit the budget impact. In the Asia-Pacific region, excluding Japan, China leads in Nexavar sales, however, reimbursement typically requires multiple steps and is very challenging for oncology products. In March 2013, health authorities in China published a new National Essential Drug List, or NEDL, which lists medicines that are expected to be sold at government controlled prices. Although some basic chemotherapies were included for the first time, there were no targeted oncology drugs, including Nexavar, on the NEDL. Reimbursement policies are subject to change due to economic, political or competitive factors. We believe that this will continue into the foreseeable future as governments struggle with escalating health care spending.

The downward pressure on healthcare costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the role of the National Institute for Health and Clinical Excellence in the United Kingdom, which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. In addition, more countries are introducing international price referencing as part of their price evaluations to ensure they are receiving competitive prices.  This price referencing can reduce the price potential in a given country and through referencing, a price cut in one country can also reduce prices in other countries. In some countries cross-border imports from low-priced markets (parallel imports) exert commercial pressure on revenue potential within a country.

Forecasting sales of Kyprolis may be difficult and revenue recognition may be deferred. If our revenue projections are inaccurate or revenue is deferred and our business forecasting and planning decisions are not reflected in our actual results, our business may be harmed and our future prospects may be adversely affected.

Our management must make forecasting decisions regarding future revenue in the course of business planning despite this uncertainty, and actual results of operations may deviate materially from projected results. This may lead to inefficiencies and increased difficulties in operational planning. If our revenues from Kyprolis sales are lower than we anticipate or revenue is deferred, we will incur costs in the short term that will result in losses that are unavoidable. A shortfall in our revenue would have a direct impact on our cash flow and on our business generally. In addition, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.

Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more

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alternatives, any of which may be reasonable under the circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative.

Certain accounting policies are critical to presenting our financial condition and results. The preparation of our financial statements require us to make significant estimates, assumptions and judgments that affect the amounts of assets, liabilities, revenues and expenses and related disclosures. Significant estimates made by us include assumptions used in the determination of revenue recognition and the calculation of reserves, the fair value of marketable securities, revenue from the Bayer collaboration agreement, multiple element arrangements, the effect of business combinations, fair value measurement of tangible and intangible assets and liabilities, goodwill and other intangible assets, fair value of convertible senior notes, research and development expenses, stock-based compensation and the provision for income taxes. For example, our management exercised judgment in determining the appropriate revenue recognition policy for product sales of Kyprolis. Although we base our estimates and judgments on historical experience, our interpretation of existing accounting literature and on various other assumptions that we believe to be reasonable under the circumstances, if our interpretation or application of existing accounting literature is deemed to be materially incorrect, actual results may differ materially from these estimates.

The integration of acquired businesses may present significant challenges to us.

In 2009 we acquired Proteolix, and in the future we may enter into other acquisitions of, or investments in, businesses, in order to complement or expand our current business or enter into a new product area. Achieving the anticipated benefits of any future acquisition, depends upon the successful integration of the acquired business’ operations and personnel in a timely and efficient manner. The difficulties of integration include, among others:

·consolidating research and development operations;

·retaining key employees;

·consolidating corporate and administrative infrastructures, including integrating and managing information technology and other support systems and processes;

·preserving relationships with third parties, such as regulatory agencies, clinical investigators, key opinion leaders, clinical research organizations, contract manufacturing organizations, licensors and suppliers;

·appropriately identifying and managing the liabilities of the combined company;

·maintaining the value and preserving relationships with established industrial, academic and advocacy alliances;

·utilizing potential tax assets of the acquired business; and

·managing risks associated with acquired facilities, including environmental risks and compliance with laws regulating laboratories.

We cannot assure stockholders that we will receive any benefits of any future merger or acquisition, or that any of the difficulties described above will not adversely affect us. In addition, integration efforts would place a significant burden on our management and internal resources, which could result in delays in clinical trial and product development programs and otherwise harm our business, financial condition and operating results.

Negotiations associated with an acquisition or strategic investment could divert management’s attention and other company resources. Any of the following risks associated with future acquisitions or investments could impair our ability to grow our business, develop new products, or sell Nexavar, Stivarga or Kyprolis, and ultimately could have a negative impact on our growth or our financial results for many reasons:

·difficulty in operating in a new or multiple new locations;

·difficulty in realizing the potential financial or strategic benefits of the transaction;

·difficulty in maintaining uniform standards, controls, procedures and policies;

·disruption of or delays in ongoing research, clinical trials and development efforts;

·diversion of capital and other resources;

·assumption of liabilities and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; and

·difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions.

In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we make an investment in cash or use cash to pay for all or a portion of an acquisition, our cash and investment balances would be reduced which could negatively impact our liquidity, the growth of our business or our ability to develop new products. However, if we pay the consideration with shares of common stock, or convertible debentures, the holdings of our existing stockholders could be diluted. We cannot forecast the number, timing or size of future strategic investments or acquisitions, or the effect that any such investments or acquisitions might have on our operations or financial results.

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

The loss of the services of key employees may have an adverse impact on our business unless or until we hire a suitably qualified replacement. 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. The recent offer from Amgen to purchase the Company and related developments have added additional challenges. In order to succeed in our research and development efforts, we will need to continue to hire individuals with the appropriate scientific skills.

We may need to further expand our sales, market access, managerial, operational, administrative and other functions in order to continue to commercialize Nexavar, Kyprolis and Stivarga, manage and fund our operations and continue our development activities. To support this growth, we have hired and intend to continue hiring additional employees. Our management, personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:

·Increase our activities related to commercialization, and effectively hire, train and manage a sales force, who will have limited or no prior experience with our company or our products, and establish appropriate systems, policies and infrastructure to support our commercial organization; and

·continue to improve our operational, financial and management controls, reporting systems and procedures.

We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our development and commercialization goals.

Risks associated with operating in foreign countries could materially adversely affect our business.

We have expanded our operations into Europe and, if Kyprolis and other products are approved in that region, we expect to import, market, sell and distribute our products in European countries. We expect to expand our presence in Europe. Our clinical and commercial supply chain activities could occur outside the United States. Consequently, we are, and will continue to be, subject to risks related to operating in foreign countries. Risks associated with conducting operations in foreign countries include:

·differing regulatory requirements for drug approvals and regulation of approved drugs in foreign countries;

·unexpected changes in tariffs, trade barriers and regulatory requirements;

·economic weakness, including inflation, or political instability in particular foreign economies and markets;

·compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

·foreign taxes, including withholding of payroll taxes;

·foreign currency fluctuations, which could result in increased operating expenses or reduced revenues, and other obligations incident to doing business or operating in another country;

·workforce uncertainty in countries where labor unrest is more common than in the United States;

·production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

·business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks described elsewhere in these risk factors associated with our international operations could materially adversely affect our business.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

We employ individuals who were previously employed at educational institutions or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

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*We incurred significant indebtedness through the sale of our 4.0% convertible senior notes due 2016, and we may incur additional indebtedness in the future. The indebtedness created by the sale of the notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and results of operations.

We incurred senior indebtedness in August 2009 when we sold $230 million aggregate principal amount of 4.0% convertible senior notes due 2016, or the 2016 Notes. We may also incur additional long-term indebtedness or obtain working capital lines of credit to meet future financing needs. Our indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:

·increasing our vulnerability to adverse economic and industry conditions;

·limiting our ability to obtain additional financing;

·requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;

·limiting our flexibility in planning for, or reacting to, changes in our business; and

·placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.

We cannot assure stockholders that we will continue to maintain sufficient cash reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of the 2016 Notes, or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the 2016 Notes and such other indebtedness to accelerate the maturity of the notes and such other indebtedness and could cause defaults under the 2016 Notes and such other indebtedness. Any default under the notes or any indebtedness which we may incur in the future could have a material adverse effect on our business, results of operations and financial condition.

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

The sales of Nexavar, Stivarga and Kyprolis, and the use of Nexavar, Kyprolis, Stivarga or other products and product candidates in clinical trials expose us to product liability claims. In the United States, FDA approval of a drug may not offer protection from liability claims under state law (i.e., federal preemption defense), the tort duties for which may vary state to state. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of Nexavar, Kyprolis, Stivarga or future products. We may not be able to maintain product liability insurance coverage at a reasonable cost. We may not be able to obtain additional insurance coverage that will be adequate to cover product liability risks that may arise should a future product candidate receive marketing approval. Whether or not we are insured, a product liability claim or product recall may result in significant losses. Regardless of merit or eventual outcome, product liability claims may result in:

·decreased demand for a product;

·injury to our reputation;

·distraction of management;

·withdrawal of clinical trial volunteers; and

·loss of revenues and depletion of our cash reserves.

*We or Bayer may not be able to protect or enforce our or their intellectual property rights and we may not be able to operate our business without infringing 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, effectively maintained as trade secrets, or otherwise protected as confidential information or know-how. 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, particularly generic drug manufacturers.

Patents and patent applications covering Nexavar and Stivarga are owned by Bayer. Those Nexavar patents that arose out of our collaboration agreement with Bayer are licensed to us, including two United States patents listed in the FDA’s Approved Drug Product List (Orange Book) as covering Nexavar and pharmaceutical compositions of Nexavar. Both patents will expire January 12, 2020. Based on publicly available information, Bayer also has patents in several European countries covering Nexavar, which will expire in 2020. Bayer has other patents and patent applications pending worldwide that cover Nexavar and pharmaceutical compositions of Nexavar alone or in combination with other drugs for treating cancer. Certain of these patents may be subject to possible patent-term extension, the entitlement to and the term of which cannot presently be calculated, in part because Bayer does not

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share with us all of the information related to its Nexavar patent portfolio. Patents and patent applications covering Stivarga are owned by Bayer. Bayer has an issued patent in Europe that claims Stivarga and expires in 2024, and applications pending in the United States and other countries of the world that, if issued, will also have a patent term expiring in 2024. The 2024 expiration date is without considering any patent term extension to which the patents may be entitled. We cannot be certain that Bayer’s issued patents and future patents if they issue will provide adequate protection for Nexavar or Stivarga or will not be challenged by third parties in connection with the filing of an ANDA, or otherwise. Similarly, we cannot be certain that the patents and patent applications owned by us, acquired in the Proteolix acquisition, or licensed to us by any licensor, will provide adequate protection for Kyprolis or any other product, or will not be challenged by third parties in connection with the filing of an ANDA, or otherwise. The patents related to Kyprolis and oprozomib will begin to expire in 2025 and 2027, respectively. Third parties may claim to have rights in the assets that we acquired from Proteolix, including Kyprolis, or to have intellectual property rights that will be infringed by our commercialization of our assets, including those that we acquired from Proteolix. If third parties were to succeed in such claims, our business and company could be harmed.

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. Third party patents may cover the materials, methods of treatment, dosage or formulation related to our product, or compounds to be used in combination with our products; those third parties may make allegations of infringement. We cannot provide assurances that our products or activities, or those of our licensors or licensees, will not infringe patents or other intellectual property owned by third parties.

Competitors may have independently developed technologies similar or complementary to ours, including compounds to be used in combination with our products. We may need to license the right to use third-party patents and intellectual property to develop and market our product candidates. We may be unable to 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 or other violations of intellectual property rights, assert claims of infringement, enforce our patents, protect our trade secrets or know-how, or determine the scope and validity of others’ proprietary rights. We may face challenges to our patents and pending patent applications via mechanisms available through the United States Patent and Trademark Office or its foreign counterparts. In addition, we may require interference, derivation proceedings or similar proceedings in the United States Patent and Trademark Office or its foreign counterparts to establish priority of invention. These activities are uncertain, making any outcome difficult to predict and costly and may be a substantial distraction for our management team.

Bayer may have rights to publish data and information in which we have rights. In addition, we sometimes engage individuals, entities or consultants, including clinical investigators, to conduct research that may be relevant to our business. The ability of these third parties to publish or otherwise publicly disclose information generated during the course of their research is subject to certain contractual limitations; however, these contracts may be breached and we may not have adequate remedies for any such breach. If we do not apply for patent protection prior to publication or if we cannot otherwise maintain the confidentiality of our confidential information, then our ability to receive patent protection or protect our proprietary information will be harmed.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent Office has recently adopted regulations and procedures to govern administration of the Leahy-Smith Act. It is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

*Limited foreign intellectual property protection and compulsory licensing could limit our revenue opportunities.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. The requirements for patentability may differ in certain countries, particularly developing countries. For example, in 2009, we became aware that a third-party had filed an opposition proceeding with the Chinese patent office to invalidate the patent that covers Nexavar. Unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug, such as Nexavar. The Chinese courts ultimately determined the matter in Bayer’s favor, and thus the Nexavar Chinese patent has been upheld, but we or Bayer could be subject to similar claims in the future. Generic drug manufacturers or other competitors may challenge the scope, validity or enforceability of the Nexavar patents, requiring Bayer and us to engage in

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complex, lengthy and costly litigation or other proceedings. Generic drug manufacturers may develop, seek approval for, and launch generic versions of Nexavar. For example, Bayer has a patent in India that covers Nexavar. Cipla Limited, an Indian generic drug manufacturer, applied to the Drug Controller General of India, or DCGI, for market approval for Nexavar, which Bayer sought to block based on its patent. Bayer sued the DCGI and Cipla Limited in the Delhi High Court requesting an injunction to bar the DCGI from granting Cipla Limited market authorization. The Court ruled against Bayer, stating that in India, unlike the U.S., there is no link between regulatory approval of a drug and its patent status. Bayer unsuccessfully appealed. Consequently, Bayer has appealed to the Indian Supreme Court, and has filed a patent infringement suit against Cipla that is currently pending before the Delhi high court.  Cipla, however, is now selling a generic version of Nexavar in India.

In 2012, the Controller of Patents in India granted Natco Pharma Limited a non-exclusive compulsory license under Bayer’s patent 215758 to make and sell sorafenib tosylate in India, with no right to sublicense or to export, for a 6 percent royalty.   Bayer filed an appeal to the Intellectual Property Appellate Board (IPAB) in Chenai.  The IPAB upheld the license but raised the royalty to 7 percent.   An appeal is being filed by Bayer with the High Court in Mumbai and further appeal may be available up to the Supreme Court.  Bayer has informed us that it will continue to vigorously defend its patent rights, but there can be no assurance of success in this matter. Two other Indian companies, MDL ChemPharm and BDR Pharmaceuticals Inc., have filed for a compulsory license to sell generic Nexavar. Bayer has sued both these parties for patent infringement.

In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, Bayer, the owner of the Nexavar patent estate, may have limited remedies if the Nexavar patents are infringed or if Bayer is compelled to grant a license for Nexavar to a third party, which could materially diminish the value of those patents that cover Nexavar. This could limit our potential revenue opportunities.

If we use hazardous or potentially hazardous materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of hazardous or potentially hazardous materials, including chemical, biological and radioactive materials. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may incur significant additional costs to comply with these and other applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could significantly deplete or even exhaust our resources. We do not have any insurance for liabilities arising from hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and manufacturing efforts, which could harm our business. We are subject to various laws and regulations governing laboratory practices and the experimental use of animals. We are also subject to regulation by the Occupational Safety and Health Administration, or OSHA, and the Environmental Protection Agency, or the EPA, and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA or the EPA may promulgate regulations that may affect our research and development programs.

Provisions in the indenture for the 2016 Notes may deter or prevent a business combination.

If a fundamental change occurs prior to the maturity date of the 2016 Notes, holders of the notes will have the right, at their option, to require us to repurchase all or a portion of their notes. In addition, if a fundamental change occurs prior to the maturity date of 2016 Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its notes in connection with such fundamental change. A fundamental change is defined in the indenture governing the 2016 Notes and includes certain transactions resulting in a change of control of our common stock, the approval of a plan for our liquidation or dissolution or the delisting of our common stock from Nasdaq or other national securities exchanges. In addition, the indenture for the notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the 2016 Notes. These and other provisions could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to our stockholders.

Our business may be affected by legal proceedings.

We have been in the past, and may become in the future, involved in legal proceedings. Civil and criminal litigation is inherently unpredictable and outcomes can result in significant fines, penalties and injunctive relief that could affect how we operate our business. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and requires resources which could otherwise be focused on our business activities. In addition, legal fees and costs incurred in connection with such activities could be significant. Settlements and decisions adverse to our interests in legal actions could result in the payment of substantial amounts and could have a material adverse effect on our cash flow, results of operations and financial position.

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A breakdown or breach of our information technology systems could subject us to liability or interrupt the operation of our business.

We rely upon our information technology systems and infrastructure for our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. There can be no assurance that our management or diligence efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.

Provisions in Delaware law, our charter and executive change of control agreements we have entered into may prevent or delay a change of control.

Certain provisions of our certificate of incorporation and bylaws, as well as provisions of the Delaware General Corporation Law, may have the effect of delaying, deferring or preventing a change in control of us, including transactions in which our stockholders might otherwise have received a substantial premium for their shares over then current market prices. For examples, these provisions:

·give authority to our board of directors to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any stockholder vote;

·provide for a board of directors consisting of three classes, each of which serves for a different three-year term

·do not provide for cumulative voting in the election of directors;

·provide that stockholders may only act at a duly called meeting of stockholders and not by written consent;

·allow special meetings of the stockholders to be called only by the chairman of the board, the chief executive officer, the board or 10 percent or more of the stockholders entitled to vote at the meeting;

·require stockholders to give advance notice prior to submitting proposals for consideration at stockholders’ meetings or to nominate persons for election as directors; and

·restrict certain business combinations between us and any person who beneficially owns 15 percent or more of our outstanding voting stock.

We have entered into change in control severance agreements with each of our officers at the vice president level and above, including 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 24 months of a change in control. The change in control severance agreements may have the effect of preventing a change in control.

In the future, the failure of one or more of our customers could have a significant impact on our business.

Following the commercial launch of Kyprolis, our sales and trade accounts receivable in the United States are primarily with a limited number of drug wholesalers and specialty distributors. As a result, we are highly dependent on these customers. This concentration of credit risk could increase the risk of financial loss, should one or more of these companies fail. Although we will monitor the financial performance and creditworthiness of our customers and will monitor economic conditions along with associated impacts on the financial markets and its business, there can be no assurance that our efforts will prevent credit losses that could adversely affect our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information.

None.

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Item 6. Exhibits.

2.1(1)†*	Agreement and Plan of Merger dated as of October 10, 2009 among the Company, Proteolix, Inc., Profiterole Acquisition Corp., and Shareholder Representative Services LLC.
2.2(2)†	Amendment No. 1 to Agreement and Plan of Merger dated as of January 27, 2011 between the Company and Shareholder Representative Services LLC.
3.1(3)	Restated Certificate of Incorporation of the Company.
3.2(4)	Amended and Restated Bylaws of the Company.
3.3(5)	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
3.4(6)	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
3.5(7)	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2(3)	Specimen Stock Certificate.
4.3(8)	Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.4(8)	First Supplemental Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.5(8)	Form of 4.00% Convertible Senior Note due 2016.
10.7(9)+	1996 Employee Stock Purchase Plan.
10.13(i)(9)+	2005 Equity Incentive Plan.
10.40(9)+	2013 Cash Performance Incentive Plan.
31.1(10)	Certification of Chief Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2(10)	Certification of Chief Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1(10)	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101	The following materials from Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2013 and 2012, (iv) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

†	Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission.
*	Certain schedules related to identified agreements and persons have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and Exchange Commission.
+	Management contract or compensatory plan.
(1)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 13, 2009.
(2)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 2, 2011.
(3)	Filed as an exhibit to the Company’s Registration Statement on Form SB-2 (No. 333-3176-LA).
(4)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed on December 5, 2008.
(5)	Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (No. 000-28298).
(6)	Filed as an exhibit to the Company’s Registration Statement on Form S-3 (No. 333-134565) filed on May 30, 2006.
(7)	Filed as an exhibit to Company’s Current Report on Form 8-K filed on May 27, 2011.
(8)	Filed as an exhibit to Company’s Current Report on Form 8-K filed on August 12, 2009.
(9)	Filed as an exhibit to Company’s Current Report on Form 8-K filed on May 23, 2013.
(10)	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.

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SIGNATURES

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

	ONYX PHARMACEUTICALS, INC.
Date: August 8, 2013	By:	/s/ N. Anthony Coles
		N. Anthony Coles
		Chairman and Chief Executive Officer
		(Principal Executive Officer)
Date: August 8, 2013	By:	/s/ Matthew K. Fust
		Matthew K. Fust
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

2.1(1)†*	Agreement and Plan of Merger dated as of October 10, 2009 among the Company, Proteolix, Inc., Profiterole Acquisition Corp., and Shareholder Representative Services LLC.
2.2(2)†	Amendment No. 1 to Agreement and Plan of Merger dated as of January 27, 2011 between the Company and Shareholder Representative Services LLC.
3.1(3)	Restated Certificate of Incorporation of the Company.
3.2(4)	Amended and Restated Bylaws of the Company.
3.3(5)	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
3.4(6)	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
3.5(7)	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2(3)	Specimen Stock Certificate.
4.3(8)	Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.4(8)	First Supplemental Indenture dated as of August 12, 2009 between the Company and Wells Fargo Bank, National Association.
4.5(8)	Form of 4.00% Convertible Senior Note due 2016.
10.7(9)+	1996 Employee Stock Purchase Plan.
10.13(i)(9)+	2005 Equity Incentive Plan.
10.40(9)+	2013 Cash Performance Incentive Plan.
31.1(10)	Certification of Chief Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2(10)	Certification of Chief Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1(10)	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101	The following materials from Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2013 and 2012, (iv) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

†	Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission.
*	Certain schedules related to identified agreements and persons have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and Exchange Commission.
+	Management contract or compensatory plan.
(1)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 13, 2009.
(2)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 2, 2011.
(3)	Filed as an exhibit to the Company’s Registration Statement on Form SB-2 (No. 333-3176-LA).
(4)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed on December 5, 2008.
(5)	Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (No. 000-28298).
(6)	Filed as an exhibit to the Company’s Registration Statement on Form S-3 (No. 333-134565) filed on May 30, 2006.
(7)	Filed as an exhibit to Company’s Current Report on Form 8-K filed on May 27, 2011.
(8)	Filed as an exhibit to Company’s Current Report on Form 8-K filed on August 12, 2009.
(9)	Filed as an exhibit to Company’s Current Report on Form 8-K filed on May 23, 2013.
(10)	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.

59