U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to______________
Commission File Number: 0-28298
-------
ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3154463
- -------- ----------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
3031 Research Drive
Richmond, California 94806
(Address of principal executive offices)
(510) 222-9700
(Registrant's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(XX) Yes ( ) No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 11,418,286 as of October 30, 1998.
ONYX PHARMACEUTICALS, INC.
INDEX
PART I: FINANCIAL INFORMATION
PAGE
ITEM 1. Financial Statements
Condensed balance sheets - September 30, 1998 and
December 31, 1997 3
Condensed statements of operations - three and nine months
ended September 30, 1998 and 1997 4
Condensed statements of cash flows - nine months ended
September 30, 1998 and 1997 5
Notes to condensed financial statements 6
ITEM 2. Management's discussion and analysis of financial
condition and results of operations 7
PART II: OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
2
ONYX PHARMACEUTICALS, INC.
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1998 1997
------------- ------------
(unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 22,263 $ 18,828
Short-term investments 12,608 16,644
Other current assets 960 1,002
------------- ------------
Total current assets 35,831 36,474
Property and equipment, net 3,811 4,562
Notes receivable from related parties 739 812
Other assets 38 10
------------- ------------
TOTAL ASSETS $ 40,419 $ 41,858
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,276 $ 1,319
Accrued liabilities 3,033 1,731
Accrued clinical trials and related expenses 2,352 1,704
Accrued compensation 726 496
Deferred revenue 2,101 1,209
Long-term debt, current portion 2,199 2,130
------------- ------------
Total current liabilities 11,687 8,589
Long-term debt, noncurrent portion 2,932 4,336
Deferred rent 50 112
Stockholders' equity:
Preferred stock, $0.001 par value: 5,000,000
shares authorized, none issued and outstanding -- --
Common stock, $0.001 par value: 25,000,000 shares
authorized, 11,418,286 and 9,850,518 shares issued
and outstanding as of September 30, 1998 and
December 31, 1997, respectively 11 10
Additional paid-in capital 84,933 74,836
Deferred compensation (249) (413)
Accumulated deficit (58,945) (45,612)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 25,750 28,821
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,419 $ 41,858
------------- ------------
------------- ------------
See accompanying notes.
3
ONYX PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenue:
Contract and other revenue $ 479 $ 300 $ 1,274 $ 910
Contract revenue from related parties 2,183 1,590 7,301 5,280
-------- -------- -------- --------
Total revenue 2,662 1,890 8,575 6,190
Operating expenses:
Research and development 6,625 5,489 19,309 14,469
General and administrative 1,331 1,319 3,941 3,912
-------- -------- -------- --------
Total operating expenses 7,956 6,808 23,250 18,381
-------- -------- -------- --------
Loss from operations (5,294) (4,918) (14,675) (12,191)
Interest income, net 408 511 1,342 1,533
-------- -------- -------- --------
Net loss $ (4,886) $ (4,407) $(13,333) $(10,658)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.43) $ (0.45) $ (1.19) $ (1.10)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing basic and
diluted net loss per share 11,372 9,816 11,243 9,678
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes.
4
ONYX PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(unaudited)
Nine Months Ended
September 30,
-------- --------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,333) $(10,658)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,295 1,352
Forgiveness of notes receivable 89 12
Amortization of deferred compensation 164 164
Changes in assets and liabilities:
Other current assets 42 12
Other assets (28) (48)
Accounts payable (43) (150)
Accrued clinical trials and related expenses 648 867
Accrued liabilities 1,267 883
Accrued compensation 230 192
Deferred revenue 892 538
Deferred rent (62) (140)
-------- --------
Net cash used in operating activities (8,839) (6,976)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (11,308) (30,631)
Sales and maturities of short-term investments 15,344 12,444
Capital expenditures (544) (1,549)
Notes receivable from related parties (16) (482)
Proceeds from sale of fixed assets 35 -
-------- --------
Net cash provided by (used in) investing activities 3,511 (20,218)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (1,335) (335)
Net proceeds from issuance of common stock 10,098 3,581
-------- --------
Net cash provided by financing activities 8,763 3,246
-------- --------
Net increase (decrease) in cash and cash equivalents 3,435 (23,948)
Cash and cash equivalents at beginning of the period 18,828 36,258
-------- --------
Cash and cash equivalents at end of the period $ 22,263 $ 12,310
-------- --------
-------- --------
See accompanying notes.
5
ONYX PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1997
included in the Onyx Pharmaceuticals, Inc. (the "Company" or "Onyx")
Annual Report on Form 10-K.
NOTE 2. NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of SFAS 130 had no impact on
the Company's net loss or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior
to adoption were reported separately in stockholders' equity, to be included
in other comprehensive income.
During the quarter and nine months ended September 30, 1998 and 1997, total
comprehensive income approximates net loss.
6
ONYX PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS OVERVIEW AND THE
FOLLOWING DISCUSSION CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
OVERVIEW
Since its inception, Onyx Pharmaceuticals, Inc. (the "Company" or "Onyx")
has been engaged in the discovery and development of novel therapeutics
including both small molecule drugs and therapeutic viruses which are based
upon the genetics of human disease. The Company has initially chosen to focus
its research in the area of cancer. The Company intends to pursue its
therapeutic discovery programs independently and in collaboration with
pharmaceutical companies, and to collaborate with such companies on the
development and commercialization of any products which may result from the
Company's discovery programs. The Company has entered into collaborative
agreements with Bayer Corporation ("Bayer") in the area of ras oncogenes and
Eli Lilly and Company ("Eli Lilly") on the function of the BRCA1 gene in
breast cancer. The Company has also entered into two separate collaborative
agreements with Warner-Lambert Company ("Warner-Lambert"), one in cell cycle
mutations in cancer and a second pertaining to inflammation and autoimmunity.
The Company has not been profitable since inception and expects to incur
substantial and increasing losses for the foreseeable future, primarily due
to the expansion of its research and development programs, including
preclinical studies and clinical trials to develop ONYX-015, the lead product
in the Company's p53 therapeutic virus program. The Company expects that
losses will fluctuate from quarter to quarter and that such fluctuations may
be substantial. As of September 30, 1998, the Company's accumulated deficit
was approximately $58.9 million.
The Company's business is subject to significant risks, including the risks
inherent in its research and development efforts, the results of the ONYX-015
clinical trials, uncertainties associated with obtaining and enforcing patents,
the lengthy and expensive regulatory approval process and competition from other
products. The Company does not expect to generate revenues from the sale of
proposed products in the foreseeable future.
A strategic decision has been made to focus the Company's resources on those
programs that offer the most immediate potential for clinical and commercial
development. As a result of this decision, the Company's mouse genomics
research program will be phased out during the fourth quarter. This program
represents leading-edge, early-stage technology that will require significant
funding over the next several years in order to realize a product development
opportunity. As a result, the program is not within the current strategic
focus of the Company.
The mouse genomics effort was developed and has been led by Dr. Allan
Balmain, Ph.D., F.R.S.E., Vice President of Research. Dr. Balmain has made
the decision to leave Onyx to accept a position at the University of
California San Francisco Cancer Research Center ("UCSF"). Onyx's mouse
genomics group, including six scientists and researchers, will transfer to
UCSF under Dr. Balmain's direction. Onyx will retain rights to initial
product opportunities from this program, and Dr. Balmain will maintain a
relationship with Onyx as a consultant and as a member of the Scientific
Advisory Board.
7
ONYX PHARMACEUTICALS, INC.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
The Company's revenues increased 41% to $2,662,000 and 39% to $8,575,000 for
the three and nine months ended September 30, 1998, respectively, as compared
to the same periods in 1997. Revenues for the 1997 periods were $1,890,000
and $6,190,000 respectively. Revenues for the three and nine months ended
September 30, 1998 and 1997 were primarily attributable to amounts earned for
research performed under the Company's collaborations with Bayer,
Warner-Lambert and Eli Lilly. The increase in revenues for the three and nine
months ended September 30, 1998 as compared to the same periods in 1997 is
primarily due to the collaborative agreement with Warner-Lambert for the
inflammation program which was effective as of July 31, 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 21% to $6,625,000 and 33% to
$19,309,000 for the three and nine months ended September 30, 1998,
respectively, as compared to the same periods in 1997. The increase was
primarily due to additional clinical costs associated with Phase I and Phase
II clinical trials of ONYX-015. The Company expects to continue to expand
the scope of its research and development programs in future periods, which
may result in substantial increases in research and development expenses,
including costs associated with clinical development of ONYX-015. These
research and development expenses may not be funded by collaborative
partners. It is anticipated that the decision to transfer the mouse genomics
research program to UCSF will have a favorable impact on operating expenses
of approximately $400,000 in the first quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses remained relatively flat at $1,331,000
and $3,941,000 for the three and nine months ended September 30, 1998,
respectively, as compared with $1,319,000 and $3,912,000 for the same periods
in 1997. General and administrative expenses are expected to increase
moderately to support the Company's research and development efforts.
NET INTEREST INCOME
The Company had net interest income of $408,000 and $1,342,000 for the three
and nine months ended September 30, 1998, respectively, as compared with
$511,000 and $1,533,000 for the same periods in 1997. The decrease in net
interest income was due primarily to increased interest expense on the
Company's line of credit arrangement.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have substantially exceeded
its revenues and the Company has relied primarily on the proceeds from the
sale of equity securities, revenue from collaborative research and
development agreements and bank loans to fund its operations.
The Company's cash, cash equivalents and short-term investments were
$34,871,000 at September 30, 1998, compared with $35,472,000 at December 31,
1997. Increasing levels of clinical research and product development expenses
associated with ONYX-015 resulted in approximately $8,839,000 of cash used in
operations for the nine months ended September 30, 1998. The decrease in cash
and investments of $601,000 at September 30, 1998 compared with December 31,
1997 was due to cash used in operations and payment of bank loans partially
offset by the private
8
ONYX PHARMACEUTICALS, INC.
placement financing completed on January 12, 1998 which raised approximately
$10 million. The Company expects cash used in operations will continue to
increase as clinical development for ONYX-015 progresses.
Total capital expenditures for equipment and leasehold improvements for the
nine-month period ended September 30, 1998 was $783,000. The Company expects
to make expenditures of approximately $500,000 for the remainder of 1998 for
capital equipment.
The Company believes that its existing capital resources and interest
thereon, and anticipated revenues from existing collaborations will be
sufficient to fund its current and planned operations through the end of
1999. There can be no assurance, however, that changes in the Company's
operating expenses will not result in the expenditure of such resources
before such time, and in any event, the Company will need to raise
substantial additional capital to fund its operations in future periods.
BUSINESS RISKS
The Company is at an early stage of development. The development of the
Company's technology and proposed products will require a commitment of
substantial funds to conduct these costly and time-consuming activities. All
of the Company's potential products are in research or development and will
require significant additional research and development efforts prior to any
commercial use, including extensive preclinical and clinical testing as well
as lengthy regulatory approval. The development of new products is subject
to a number of significant risks. Potential products that appear to be
promising at an early stage of development may not reach the market for a
number of reasons. Such risks include the possibilities that the potential
products will be found ineffective or unduly toxic during clinical trials,
fail to receive necessary regulatory approvals, be difficult to manufacture
on a large scale, be uneconomical to market or be precluded from
commercialization by proprietary rights of third parties.
The Company is currently engaged in four self-funded Phase II clinical trials
of ONYX-015 for the treatment of head and neck cancer and pancreatic cancer.
The ability of the Company to obtain a corporate partner for ONYX-015 and to
continue its development as a potential product will depend materially on the
results of these trials. There is no assurance that such results will be
positive or, even if they are positive, that they will be sufficiently strong
to support the Company's corporate partnering or product development
objectives.
In addition, many of the Company's potential products are subject to
development and licensing arrangements with the Company's collaborators.
Therefore, the Company is dependent on the research and development efforts
of these collaborators. Moreover, the Company is entitled to only a portion
of the revenues, if any, realized from the commercial sale of any of the
potential products covered by the collaborations. Should the Company or its
collaborators fail to perform in accordance with the terms of any of their
agreements or terminate such agreements without cause, any consequent loss of
revenue under the agreements could have a material adverse effect on the
Company's results of operations.
There can be no assurance that the Company will be able to maintain existing
collaborative agreements, negotiate collaborative arrangements in the future
on acceptable terms, if at all, or that any such collaborative arrangements
will be successful. To the extent that the Company is not able to maintain
or establish such arrangements, the Company would be required to undertake
such activities at its own expense.
The proposed products under development by the Company have never been
manufactured on a commercial scale, and there can be no assurance that such
products can be manufactured at a cost or in quantities necessary to make
them commercially viable. The Company has no sales, marketing or
distribution capability. If any of its products subject to collaborative
agreements are successfully developed, the Company must rely on its
collaborators to market such products. If the Company develops any products
which are not subject to collaborative agreements, it must
9
ONYX PHARMACEUTICALS, INC.
either rely on other large pharmaceutical companies to market such products
or must develop a marketing and sales force with technical expertise and
supporting distribution capability in order to market such products directly.
The Company intends to seek additional funding through collaborative
arrangements, public or private equity or debt financings, capital lease
transactions or other financing sources that may be available. However,
there can be no assurance that additional financing will be available on
acceptable terms or at all. If additional funds are raised by issuing equity
securities, substantial dilution to existing stockholders may result. If
adequate funds are not available, the Company may be required to delay,
reduce the scope of, or eliminate one or more of its research or development
programs or to obtain funds through collaborative arrangements with others
that are on unfavorable terms or that may require the Company to relinquish
rights to certain of its technologies, product candidates or products that
the Company would otherwise seek to develop itself.
The foregoing risks reflect the Company's early stage of development and the
nature of its industry and proposed product. Also inherent in the Company's
stage of development is a range of additional risks, including competition,
uncertainties regarding protection of patents and proprietary rights,
government regulation and uncertainties regarding health care reform.
IMPACT OF THE YEAR 2000
Computer programs using two rather than four digits to identify the year in a
date field may cause computer systems to malfunction in the year 2000. Any
computer programs that have time-related software may determine a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to engage in specific
business activities.
The Company has appointed a task force comprised of certain members of
management to initiate and monitor a Year 2000 ("Y2K") program. The
Company's plan to resolve the Y2K issue involves the following three phases:
assessment, implementation of action plans and testing of systems to ensure
compliance. To date, the Company is approximately 70% complete with the
assessment phase and expects to be 100% complete by January 31, 1999. The
assessments completed to date indicate that the financial systems of the
Company are Y2K compliant. It is anticipated that the information technology
systems of the Company will be 100% Y2K compliant by December 31, 1998. The
Company intends to engage consultants to help it identify areas of exposure
regarding its scientific research and development systems applications.
There can be no assurance that the Company will be able to upgrade any or all
of its systems in accordance with its Y2K program or, once upgraded, that the
systems will be Y2K compliant.
The Company is gathering information about the Y2K compliance status
of its significant suppliers and other third parties with which it has
relationships. The Company is requesting that its outside suppliers and
other third parties notify the Company in writing of the status of their Y2K
compliance programs. To date, the Company is not aware of any outside
supplier or other third party with a Y2K issue that would materially impact
the Company's business operations. However, there can be no assurance that
the Company's outside suppliers and other third parties will be successful in
their Y2K compliance efforts.
The Company believes that its costs associated with the upgrade and/or
conversion of existing computer software and hardware relating to the Y2K
issue will be less than $200,000 based on modifications to date as well as
the amount of scientific research and development equipment that may have to
be upgraded.
In the event that the Company does not upgrade its systems in a timely
manner, the Company may encounter problems with the completion of certain
scientific research and development experiments. The Company currently has
no contingency plans in place in the event it does not complete all phases of
the Y2K program. The Company plans to evaluate the status of completion of
its Y2K program in March 1999 and determine whether such a contingency plan
is necessary.
10
ONYX PHARMACEUTICALS, INC.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered
by this report.
11
ONYX PHARMACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONYX PHARMACEUTICALS, INC.
Date: November 13, 1998 By: /s/ Hollings C. Renton
-----------------------
Hollings C. Renton
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: November 13, 1998 By: /s/ Douglas L. Blankenship
--------------------------
Douglas L. Blankenship
Treasurer
(Principal Financial and Accounting Officer)
12
ONYX PHARMACEUTICALS, INC.
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Number Description of Exhibits Page
- -------------- ----------------------- ----
27.1 Financial Data Schedule