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ONXX > SEC Filings for ONXX > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for ONYX PHARMACEUTICALS INC

Form 10-Q for ONYX PHARMACEUTICALS INC


2-Nov-2012

Quarterly Report


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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. These statements appearing throughout our Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth under Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q.

Overview

We are a biopharmaceutical company dedicated to developing 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 for unresectable liver cancer and advanced kidney cancer. With our development and marketing partner Bayer, we share equally in the profits and losses of Nexavar worldwide, except Japan. A second oral multikinase inhibitor, Stivarga® (regorafenib) tablets, a Bayer HealthCare Pharmaceuticals Inc., or Bayer, compound, is approved in the United States for the treatment of metastatic colorectal cancer; and Bayer also submitted a supplemental New Drug Application, or sNDA, in the United States, for regorabenib for the treatment of gastrointestinal stromal tumors, or GIST, in patients whose disease has progressed despite prior treatment. Onyx will receive a twenty percent royalty on potential future net sales of Stivarga 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 also developing two other novel proteasome inhibitors, including an oral proteasome inhibitor oprozomib (ONX 0912) and an immunoproteasome inhibitor (ONX 0914). In addition, 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 clinical testing to evaluate Kyprolis for additional lines of treatment for multiple myeloma;

† maximizing current opportunities worldwide for Kyprolis in approved indications;

† establishing Bayer's Stivarga as a treatment for metastatic colorectal cancer and potentially for other indications;

† investing with our partner Bayer in a development program for Nexavar by pursuing other types of cancer including thyroid and breast cancer;

† 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 pursuing other opportunities using a disciplined financial approach.

Business Highlights

Proteasome Inhibitor Franchise

On July 20, 2012, we received accelerated approval of Kyprolis™ for injection, a proteasome inhibitor, indicated 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. During the second quarter of 2012, we continued to invest in the pre-launch commercialization of Kyprolis in preparation for the commercial launch in the third quarter of 2012.

On July 2, 2012, we announced that we have begun enrollment in the ENDEAVOR trial, a Phase 3 trial evaluating Kyprolis in combination with dexamethasone, versus Velcade® (bortezomib) with dexamethasone, in patients with relapsed multiple myeloma.


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Kinase Inhibitor Franchise

On September 27, 2012, we announced that Bayer HealthCare received accelerated approval in the United States of Stivarga® (regorafenib) tablets, the oral multikinase inhibitor, indicated for the treatment of metastatic colorectal cancer (mCRC) in patients whose disease has progressed despite prior treatment (including fluoropyrimidine-, oxaliplatin-, and irinotecan-based chemotherapy, an anti-VEGF therapy, and, if KRAS wild type, an anti-EGFR therapy). Bayer HealthCare has also submitted applications in Europe and Japan seeking marketing authorization for Stivarga for the treatment of patients with mCRC. The United States approval was based on improvement in overall survival and progression-free survival compared to placebo in patients with mCRC whose disease had progressed after approved standard therapies. Onyx co-promotes Stivarga in the United States with Bayer, and receives a twenty percent royalty on global net sales of Stivarga in oncology.

On August 30, 2012, Bayer announced the submission of a supplemental New Drug Application, or sNDA, to the U.S. Food and Drug Administration (FDA) for regorafenib for the treatment of metastatic unresectable gastrointestinal stromal tumors (GIST) in patients whose disease had progressed despite prior treatment. The submission is based on data from pivotal Phase 3 GRID (GIST - Regorafenib in Progressive Disease) trial, which showed that regorafenib plus best supportive care (BSC) significantly improved progression-free survival (PFS) compared to placebo plus BSC in patients with metastatic and/or unresectable GIST who were previously treated with imatinib and sunitinib. In October 2012, the U.S. FDA granted priority review to Bayer's sNDA for regorafenib for the treatment of metastatic and/or unresectable gastrointestinal stromal tumors (GIST) in patients whose disease has progressed despite prior treatment.

During the third quarter of 2012, we continued to execute on our value-building strategy by increasing worldwide sales and improving commercial margin of Nexavar. In October 2011, we restructured our partnership with Bayer HealthCare for the global development and marketing of Nexavar and entered into a new agreement related to regorafenib. Under the terms of the agreements, regorafenib is a Bayer compound, and Bayer will have the final decision-making authority for global development and commercialization.

On July 23, 2012, Bayer HealthCare Pharmaceuticals, Onyx, and Astellas Pharma Inc. announced that the Phase 3 SEARCH (Sorafenib and Erlotinib, a rAndomized tRial protoCol for the treatment of patients with Hepatocellular carcinoma) trial evaluating the efficacy and safety of the addition of Tarceva® (erlotinib) tablets to Nexavar® (sorafenib) tablets did not improve overall survival for patients with unresectable hepatocellular carcinoma (HCC) compared to treatment with Nexavar alone.

Financial Highlights

Our operating results for the three months and nine months ended September 30, 2012 included revenue from the Nexavar collaboration agreement, product revenue from the sale of Kyprolis in the United States and royalty revenue from the sale of Stivarga by Bayer. KyprolisTM (carfilzomib) net sales were $18.6 million for the third quarter of 2012, representing orders placed and received by end customers clinics and hospitals post approval. The FDA granted accelerated approval of Kyprolis on July 20, 2012. Revenue from the collaboration agreement was $70.7 million for the third quarter of 2012, a decrease of 6% compared to $75.0 million for the same period in 2011. Nexavar net sales, as recorded by Bayer, excluding Japan, were $208.2 million for the third quarter of 2012, compared to $250.3 million for the same period in 2011. The decline in the dollar-Euro exchange rate offset higher sales in various regions around the world and an improvement in commercial margin, which was 64% for the third quarter 2012 compared to 63% for the third quarter of 2011. Stivarga® (regorafenib) tablets royalty revenue was $0.1 million for the third quarter 2012, following marketing approval by the FDA on September 27, 2012. Onyx receives a 20% royalty on Bayer's global net sales of Stivarga in oncology.

Total operating expenses for the three months and nine months ended September 30, 2012 were $161.9 million and $463.1 million, respectively, an increase of $54.6 million, or 51% and $129.6 million or 39% from $107.2 million and $333.5 million for the same periods in 2011, respectively. The increase in operating expenses was primarily due to the increase in research and development expenses for the global development of Kyprolis, particularly the Phase 3 ASPIRE, FOCUS and ENDEAVOR trials, the expensing of commercial supply inventory prior to regulatory approval of Kyprolis in the United States and expenses related to the commercial launch of Kyprolis in the United States.

Cash, cash equivalents and current and non-current marketable securities at September 30, 2012 were $573.0 million, a decrease of $95.4 million, or 14%, from $668.4 million at December 31, 2011. The decrease is primarily attributable to net cash used in operations and the increase in research and development expenses for the development of Kyprolis.

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. Actual results may differ materially from these estimates. As of September 30, 2012, there have been no significant or material changes to our critical accounting policies or estimates since we filed our 2011 Annual Report on Form 10-K for the year ended December 31, 2011 with the Securities and Exchange Commission ("SEC"), other than the following:


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Revenue Recognition - Product Revenue

Revenue is recognized when the related costs are incurred and 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, we defer the recognition of revenue by recording deferred revenue until such time that all criteria under the provision are met. During the initial launch period, we defer the recognition of revenue until the product is sold to the healthcare providers, the end customers, due to the inherent uncertainties in estimating normal channel inventory at the distributors, and during which period we also provide extended payment terms to the distributors. As of September 30, 2012, we had a deferred revenue balance of $5.1 million related to Kyprolis and recorded this amount as a liability in our Condensed Consolidated Balance Sheet.

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.

                                             Chargebacks,
                                                Rebates        Distribution Fees
                                               and Other          and Returns           Total
                                                               (In thousands)

Balance as of June 30, 2012                  $           -    $                 -    $         -
Provision related to current period sales            2,785                    986          3,771
Credits/ Payments                                     (728 )                  (74 )         (802 )
Balance as of September 30, 2012             $       2,057    $               912    $     2,969

Chargebacks, Government Rebates and Other Deductions: We estimate 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. 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 payer 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 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. Government rebates that are invoiced directly to us are recorded in accrued liabilities on our Condensed 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 Condensed Consolidated Balance Sheet.

Distribution Fees and Product Returns: We have written contracts with its 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.


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Inventories, net

Inventories are stated at the lower of cost or market. Cost is determined based on actual cost. 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. These reserves are determined based on estimates.

Research and Development

Research and development costs are charged to expense when incurred. The major components of research and development costs include clinical manufacturing costs, preclinical study expenses, 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. Preclinical study expenses include, but are not limited to, costs incurred for the laboratory evaluation of a product candidate's chemistry and its biological activities and costs incurred to assess the potential safety and efficacy of a product candidate and its formulations. Clinical trial expenses include, but are not limited to, investigator fees, site costs, comparator drug costs and clinical research organization costs. 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. 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, cooperative groups and clinical research organizations. 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. We monitor service provider activities to the extent possible; however, if we incorrectly estimate activity levels associated with various studies at a given point in time, we could be required to record adjustments to research and development expenses in future periods.

Manufacturing costs are a component of research and development expenses and include costs associated with third-party contractors for validation and commercial batch production, process technology transfer, quality control and stability testing, raw material purchases, overhead expenses and facilities costs. We previously recorded these manufacturing-related expenses as research and development as incurred because these costs did not meet the definition of an inventory asset, as future use could not be determined based upon the uncertainty of whether Kyprolis would be approved for marketing in the United States by the FDA. Inventories include owned items that are held for sale in the ordinary course of business, that are in process of production for sale, or that will be consumed in the production of goods or services that will be held for sale. On July 20, 2012, the FDA approved Kyprolis for marketing in the United States. Therefore, we are now capitalizing certain manufacturing costs as an inventory asset that would previously have been expensed as research and development costs, in cases where the manufacturing costs meet the definition of an inventory asset.

In instances where we enter into agreements with third parties for clinical trials and other consulting activities, up-front payment amounts are capitalized and expensed as services are performed or as the underlying goods are delivered. If we do not expect the services to be rendered or goods to be delivered, any remaining capitalized amounts for non-refundable up-front payments are charged to expense immediately. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables.

Intangible Assets - In-process Research and Development

Intangible assets related to in-process research and development costs, or IPR&D, are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.

Intangible Assets - Finite lived

Finite-lived intangible assets consist of acquired IPR&D related to Kyprolis in the Unites States with a cost of $267.3 million, which is being amortized over their estimated useful life of 13 years, using the straight-line method, following the FDA approval of Kyprolis for marketing in the United States. At September 30, 2012, the accumulated amortization was $4.1 million. The Company reviews this finite-lived intangible asset for impairment when facts or circumstances indicate a reduction in the fair value below their carrying amount.

Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist of accounts receivable.


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Results of Operations

Three and nine months ended September 30, 2012 and 2011

Product revenue from Kyprolis

KyprolisTM (carfilzomib) for Injection net sales were $18.6 million for the third quarter of 2012. Product revenue consists of revenue recorded on the sale of Kyprolis. The Company records revenue on the sale of Kyprolis on the sell-through basis, once its customers sell the product to the end customers. Product revenue is derived by calculating the net sales of Kyprolis by the distributors to the physicians and deducting the estimated government rebates, chargebacks, returns reserve and distribution costs.

Kyprolis is currently marketed 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.

Product revenue from Kyprolis for the three and nine months ended September 30, 2012 and 2011 is calculated as follows:

                                          Three Months Ended September 30,                Nine Months Ended September 30,
                                              2012                     2011                   2012                    2011
                                                                          (In thousands)

Product Revenue, Gross              $                  22,407      $           -    $                 22,407      $           -
Government rebates, chargebacks
and other                                              (2,785 )                -                      (2,785 )                -
Returns reserve and Distribution
fees                                                     (986 )                -                        (986 )                -
Product Revenue, Net                $                  18,636      $           -    $                 18,636      $           -

Revenue from Collaboration Agreement

In accordance with our collaboration agreement with Bayer, Bayer recognizes all revenue from the sale of Nexavar. As such, for the three months and nine months ended September 30, 2012 and 2011, we reported no product revenue related to Nexavar. Nexavar revenues subject to profit sharing as recorded by Bayer were $208.2 million and $632.4 million for the three months and nine months ended September 30, 2012, respectively and $208.7 million and $608.5 million for the same periods in 2011, primarily from sales in the United States, the European Union, Asia-Pacific and other territories worldwide. This represents a decrease of $0.5 million, or 0% and an increase of $23.9 million, or 4%, over Nexavar net sales recorded by Bayer for the three and nine months ended September 30, 2011, respectively.

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. Under the Fourth Amendment to the collaboration agreement, Bayer will have no obligation to pay royalties to Onyx for sales of Nexavar in Japan for any period after December 31, 2011.

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. 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 . . .

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