The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. These statements appearing throughout our Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth under Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q.
Overview
Changing the way cancer is treatedŽ
We are a biopharmaceutical company dedicated to developing innovative therapies that target the molecular mechanisms that cause cancer. With our collaborators, we are developing anticancer therapies, and we are applying our expertise to develop and commercialize therapies designed to exploit the genetic differences between cancer cells and normal cells.
Our first commercially available product, NexavarŽ (sorafenib) tablets, being developed with our collaborator, Bayer HealthCare Pharmaceuticals, or Bayer, is approved by the United States Food and Drug Administration, or FDA, for the treatment of patients with advanced kidney cancer and liver cancer. Nexavar is a novel, orally available kinase inhibitor and is one of a new class of anticancer treatments that target both cancer cell proliferation and tumor growth through the inhibition of key signaling pathways. In December 2005, Nexavar became the first newly approved drug for patients with advanced kidney cancer in over a decade. In November 2007, Nexavar was approved as the first and is currently the only systemic therapy for the treatment of patients with liver cancer. Nexavar is now approved in more than 90 countries for the treatment of advanced kidney cancer and in more than 80 countries for the treatment of liver cancer. We and Bayer are also conducting clinical trials of Nexavar in several important cancer types in addition to advanced kidney cancer and liver cancer, including lung, breast, thyroid, ovarian and colon cancers.
We and Bayer are commercializing Nexavar, for the treatment of patients with advanced kidney cancer and liver cancer. Nexavar has been approved and is marketed for these indications in the United States and in the European Union, as well as other territories worldwide. In the United States, we co-promote Nexavar with Bayer. Outside of the United States, Bayer manages all commercialization activities. For the nine months ended September 30, 2009, worldwide net sales of Nexavar as recorded by Bayer were $608.3 million. In collaboration with Bayer, we initially focused on demonstrating Nexavar's ability to benefit patients suffering from a cancer for which there were no or few established therapies. With the approval of Nexavar for the treatment of advanced kidney cancer and liver cancer, the two companies have established the Nexavar brand and created a global commercial oncology presence. In order to benefit as many patients as possible, we and Bayer are also investigating the administration of Nexavar with previously approved and investigational anticancer therapies in many common cancers, with the objective of enhancing the anti-tumor activity of existing therapies through combination with Nexavar. We and Bayer are developing and marketing Nexavar under our collaboration and co-promotion agreements. We fund 50% of the development costs for Nexavar worldwide, excluding Japan. With Bayer, we co-promote Nexavar in the United States and share equally in any profits or losses. Outside of the United States, excluding Japan, Bayer has exclusive marketing rights and we share profits equally. In Japan, Bayer funds all product development, and we receive a royalty on any sales. Our agreements with Bayer also provide that we receive creditable milestone-based payments totaling $40.0 million, all of which have been received. These payments were repayable by us to Bayer from a portion of our share of any quarterly collaboration profits and royalties after deducting certain contractually agreed upon expenditures. As of September 30, 2009, was all of these payments were paid back to Bayer based on the profitability of the collaboration thus far.
We have expanded our development pipeline through the acquisition of rights to development-stage novel anticancer agents. In November 2008, we entered into an agreement to license worldwide development and commercialization rights to ONX 0801, previously known as BGC 945, from BTG International Limited, or BTG, a London-based specialty pharmaceuticals company. ONX 0801 is in clinical development and is believed to work by combining two established approaches to improve outcomes for cancer patients, selectively targeting tumor cells through the alpha-folate receptor, which is overexpressed in a number of tumor types, and inhibiting thymidylate synthase, a key enzyme responsible for cell growth and division. In December 2008, we acquired options to

license SB1518 (designated by Onyx as ONX 0803) and SB1578 (designated by Onyx as ONX 0805), which are both Janus Kinase 2, or JAK2, inhibitors, from S*BIO Pte Ltd, or S*BIO, a Singapore-based company. The activation of JAK2 stimulates blood cell production and the JAK2 pathway is known to play a critical role in the proliferation of certain types of cancer cells and in the anti-inflammatory pathway. ONX 0803 is in multiple Phase 1 studies and ONX 0805 is in preclinical development.
In October 2009, we entered into an Agreement and Plan of Merger with Proteolix, Inc., pursuant to which we expect to acquire Proteolix, Inc., a privately held biopharmaceutical company focused on discovering and developing novel therapies that target the proteasome for the treatment of hematological malignancies and solid tumors. Proteolix's lead compound, carfilzomib, is a proteasome inhibitor currently in multiple clinical trials, including an advanced Phase 2b clinical trial for patients with relapsed and refractory multiple myeloma.
With the exception of the year ended December 31, 2008, we have incurred annual net losses since our inception. Our ability to achieve continued and sustainable profitability is uncertain and is dependent on a number of factors. These factors include, but are not limited to, the level of patient demand for Nexavar, the ability of Bayer's distribution network to process and ship product on a timely basis, investments in sales and marketing efforts to support the sales of Nexavar, Bayer and our investments in the research and development of Nexavar, fluctuations in foreign exchange rates and expenditures we may incur to acquire or develop and commercialize additional products. Our operating results will likely fluctuate from quarter to quarter and from year to year, and are difficult to predict. Since inception, we have relied on public and private financings, combined with milestone payments from our collaborators, to fund our operations and may continue to do so in future periods. As of September 30, 2009, our accumulated deficit was approximately $449.0 million.
Our business is subject to significant risks, including the risks inherent in our development efforts, the results of the Nexavar clinical trials, the marketing of Nexavar as a treatment for patients in approved indications, our dependence on collaborative parties, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. For a discussion of these and some of the other risks and uncertainties affecting our business, see Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and the Use of Estimates Critical accounting policies are those that require significant estimates, assumptions and judgments by management about matters that are inherently uncertain at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider certain accounting policies related to the fair value of marketable securities, stock-based compensation, revenue from collaboration agreement, research and development expenses and the use of estimates to be critical policies. Significant estimates used in 2009 included assumptions used in the determination of the fair value of marketable securities, stock-based compensation related to stock options granted, revenue from collaboration agreement, fair value of convertible senior notes and research and development expenses. Actual results could differ materially from these estimates.
Convertible Senior Notes
In August 2009, we issued, through an underwritten public offering, $230.0 million aggregate principal amount of 4.0% convertible senior notes due 2016 (the "2016 Notes"). The 2016 Notes are accounted for in accordance with Accounting Standards Codification ("ASC") Subtopic 470-20, formerly known as Financial Accounting Standards Board ("FASB") Staff Position Accounting Principles Board 14-1. 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 the 2016 Notes was computed by estimating the fair value of a similar liability issued at 12.5% effective interest rate, which is determined by considering the rate of return investors would require in our capital structure as well as taking into consideration effective interest rates derived by comparable companies. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the 2016 Notes and results in a corresponding increase to debt discount. Subsequently, the debt discount is amortized as interest expense through the maturity date of the 2016 Notes. Other than as set forth herein, there have been no other material changes in our critical accounting policies, estimates and judgments during the three months ended September 30, 2009 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008. Results of Operations

Three and nine months ended September 30, 2009 and 2008 Revenue
Nexavar, our only marketed product, was approved in the United States in December 2005. In accordance with our collaboration agreement with Bayer, Bayer recognizes all revenue from the sale of Nexavar. As such, for the three and nine months ended September 30, 2009 and 2008, we reported no product revenue. For the three and nine months ended September 30, 2009, Nexavar net sales recorded by Bayer were $229.2 million and $608.3 million, primarily in the United States and the European Union. This represents an increase of $48.3 million, or 27%, and $107.0 million, or 21%, over Nexavar net sales of $180.9 million and $501.3 million recorded by Bayer for the three and nine months ended September 30, 2008.
Revenue from Collaboration Agreement
Nexavar is currently marketed and sold in the United States, most countries in the European Union and other countries worldwide. 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 worldwide, excluding Japan. In the United States, we contribute half of the overall number of sales force personnel required to market and promote Nexavar and half of the medical science liaisons to support Nexavar. We and Bayer each bear our own sales force and medical science liaison expenses. These expenses are not included in the calculation of the profits or losses of the collaboration.
Revenue from collaboration agreement consists of our share of the pre-tax commercial profit generated from our collaboration with Bayer, reimbursement of our shared marketing costs related to Nexavar and royalty revenue. Under the collaboration, Bayer recognizes all sales of Nexavar worldwide. We record revenue from collaboration agreement on a quarterly basis. Revenue from collaboration agreement for the three and nine months ended September 30, 2009 and 2008 is calculated as follows:

                                                  Three Months Ended                Nine Months Ended
                                                    September 30,                     September 30,
                                                2009             2008             2009             2008
                                                    (In thousands)                    (In thousands)

Nexavar product revenue, net (as
recorded by Bayer)                            $ 229,243        $ 180,887        $ 608,295        $ 501,303

Nexavar revenue subject to profit
sharing (as recorded by Bayer)                $ 199,774        $ 168,141        $ 548,093        $ 476,584
Combined cost of goods sold,
distribution, selling, general and
administrative expenses                          76,309           79,362          222,531          222,200

Combined collaboration commercial profit      $ 123,465        $  88,779        $ 325,562        $ 254,384

Onyx's share of collaboration commercial
profit                                        $  61,732        $  44,390        $ 162,781        $ 127,192
Reimbursement of Onyx's shared marketing
expenses                                          5,342            5,484           16,079           15,771
Royalty revenue                                   2,063              892            4,214            1,730

Revenue from collaboration agreement          $  69,137        $  50,766        $ 183,074        $ 144,693

For the three months ended September 30, 2009 and 2008, revenue from collaboration agreement was $69.1 million and $50.8 million, respectively. For the nine months ended September 30, 2009 and 2008, revenue from collaboration agreement was $183.1 million and $144.7 million, respectively. The increase in revenue from collaboration agreement is primarily a result of increased net product revenue on sales of Nexavar as recorded by Bayer in countries around the world and royalty revenue. Additionally, revenue from collaboration agreement for the three months ended September 30, 2009 as compared to the same period in 2008 increased as a result of a decrease in shared marketing expenses. Revenue from collaboration agreement increases with increased Nexavar net revenue, or decreases with decreased Nexavar net revenue, over and above the associated cost of goods sold, distribution, selling and general administrative expenses. Increases to the associated costs of goods sold, distribution, selling and general and administrative expenses decreases revenue from collaboration agreement and decreases to these costs will increase revenue from collaboration agreement. Additionally, prolonged or profound

economic downturn may result in adverse changes to product reimbursement and pricing and sales levels, which would harm our operating results. 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. Research and Development Expenses
Research and development expenses were $35.6 million for the three months ended September 30, 2009, a net increase of $13.8 million, or 64%, from $21.8 million in the same period in 2008. For the nine months ended September 30, 2009 research and development expenses were $92.5 million, a net increase of $28.6 million, or 45%, from $63.8 million in the same period in 2008. The increase is primarily due to planned increases in the development program for Nexavar across additional tumor types, such as thyroid, colorectal and adjuvant liver cancer, and Onyx's costs to further develop ONX 0801, including a milestone payment of $7.0 million to BTG, partially offset by decreased spending for lung cancer trials. A significant portion of our research and development expenses, approximately 61% and 67% for the three and nine months ended September 30, 2009, respectively, and approximately 73% and 77% for the three and nine months ended September 30, 2008, respectively, relate to our cost sharing arrangement with Bayer and represent our share of the research and development costs incurred by Bayer for Nexavar. As a result of the cost sharing arrangement between us and Bayer for research and development costs, there was a net reimbursable amount of $17.7 million and $47.8 million due to Bayer for the three and nine months ended September 30, 2009, respectively. For the three and nine months ended September 30, 2008 there was net reimbursable amount of $10.8 million and $36.8 million, respectively, due to Bayer as a result of the cost sharing arrangement. 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. 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.
The major components of research and development costs include clinical manufacturing costs, clinical trial expenses, consulting and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead and occupancy costs. In addition, our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial sites and clinical research organizations. In the normal course of business, we contract with third parties to perform various clinical trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, and the completion of portions of the clinical trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical trials are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract. If we underestimate activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.
We expect research and development expenses to increase in future periods as we and Bayer continue to expand our investment in the development of Nexavar by conducting clinical trials to test Nexavar's efficacy in other potential indications in future periods. We also expect our research and development activities to include developing ONX 0801 further. In addition, we expect our research and development expenses to increase if we exercise our options to license the rights to ONX 0803 and/or ONX 0805. S*BIO will retain responsibility for all development costs prior to the option exercise. After the exercise of our option to license rights to either compound, we are required to assume development costs for the U.S., Canada, and Europe subject to S*BIO's option to fund a portion of the development costs in return for enhanced royalties on any future product sales. Upon the exercise of our option of either compound, S*BIO is entitled to receive a one-time fee, milestone payments upon achievement of certain development and sales levels and royalties on any future product sales. Together with Bayer, we have executed a broad-based global development strategy for Nexavar that implements simultaneous clinical programs currently designed to expand the number of approved indications of Nexavar and evaluate the use of Nexavar in new and/or novel combinations. Our global development plan includes Phase 3 investments in liver, kidney, thyroid and non-small cell lung cancers and Phase 2 investments in breast, ovarian and colorectal cancers. As of September 30, 2009, our share of the Nexavar development costs incurred to date under the collaboration was $474.7 million.
In connection with the Agreement and Plan of Merger to acquire Proteolix, Inc. we expect our research and development expenses to increase substantially in future periods, if consummated. The transaction is expected to close in the fourth quarter of 2009, subject to the receipt of clearance under the Hart-Scott-Rodino Act and customary closing conditions. Under the terms of the transaction, we will make a $276.0 million cash payment upon closing of the transaction. Additional payments include $40 million payable in 2010 based

on the achievement of a development milestone and four additional payments of up to $535.0 million contingent upon obtaining regulatory approvals of carfilzomib in the U.S. and Europe.
Selling, General and Administrative Expenses Selling, general and administrative expenses were $23.4 million for the three months ended September 30, 2009, a net increase of $4.1 million, or 21%, from $19.3 million in the same period in 2008. For the nine months ended September 30, 2009 selling, general and administrative expenses were $68.9 million, a net increase of $9.9 million, or 17%, from $59.0 million in the same period in 2008. This increase is primarily due to increased headcount and increased employee-related expenses to support Nexavar's commercial growth, as well as increased headcount and legal and employee-related expenses to support our growth. The nine months ended September 30, 2008 included non-recurring employee related expenses consisting of $2.0 million for modifications of previously granted stock-based awards for two employees and $2.0 million for compensation, search fees and other expenses related to the transition of the chief executive officer. Selling, general and administrative expenses consist primarily of salaries, employee benefits, consulting, advertising and promotion expenses, other third party costs, corporate functional expenses and allocations for overhead and occupancy costs. We expect our selling, general and administrative expenses to increase due to increases in marketing expenses related to Nexavar, increases in personnel and increases in transaction related costs.
Investment Income
Investment income consists of interest income and realized gains or losses from the sale of marketable equity investments. We had investment income of $1.0 million for the three months ended September 30, 2009, a decrease of $1.7 million, or 63%, from $2.8 million in the same period in 2008. For the nine months ended September 30, 2009, we recorded investment income of $3.1 million, a decrease of $7.6 million, or 71%, from $10.7 million in the same period in 2008. These decreases were primarily due to lower effective interest rates in the market as well as a change in the asset allocation of our investment portfolio.
Interest Expense
Interest expense of $2.3 million for the third quarter 2009 relates to the 4.0% convertible senior notes due 2016 issued in August 2009, and includes non-cash imputed interest expense of $1.0 million as a result of the application of Accounting Standards Codification ("ASC") Subtopic 470-20, formerly known as FASB Staff Position Accounting Principles Board 14-1. Liquidity and Capital Resources
With the exception of the profitability we achieved for the year ended December 31, 2008, we have incurred significant annual net losses since our inception, and we have relied primarily on public and private financing to fund our operations.
At September 30, 2009, we had cash, cash equivalents and current and non-current marketable securities of $843.1 million, compared to $458.0 million at December 31, 2008. The increase of $385.1 million was primarily attributable to net proceeds raised by our convertible senior notes and equity financings in August 2009. Our collaboration agreement with Bayer calls for creditable milestone-based payments. These amounts are interest-free and are repayable to Bayer from a portion of our profits and royalties. We received a total of $40.0 million of milestone payments from Bayer in connection with the approval of Nexavar. As of September 30, 2009, all of the development payments had been repaid to Bayer.
Our investment portfolio includes $39.6 million of AAA rated securities with an auction reset feature ("auction rate securities") that are collateralized by student loans. In October 2009, $0.1 million in securities were redeemed at par and, accordingly, we classified them as current marketable securities in the accompanying unaudited balance sheet at September 30, 2009. Therefore, a remaining balance of $39.5 million of par value auction rate securities is currently outstanding in our investment portfolio. 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 with a par value of $39.5 million as non-current marketable securities on the accompanying unaudited condensed balance sheet. We have determined the fair value to be $38.4 million for these securities, based on a discounted cash flow model, and have reduced the carrying value of these marketable securities by $1.0 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. An increase in either of these assumptions could result in a $1.6 million decrease in value. Alternatively, a decrease in either of the assumptions could result in a $1.7 million increase in value. Currently, we believe these investments are not other-than-temporarily impaired as all of them are substantially backed by the federal government, but it is not . . .