Summary of ONYX PHARMACEUTICALS INC

Item 7. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth under "Business," Item 1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

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. 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 in the United States for the treatment of metastatic colorectal cancer (mCRC) and for the treatment of locally advanced, unresectable or metastatic gastrointestinal stromal tumors (GIST); and is under regulatory review for mCRC in the European Union and Japan, and for GIST in Japan. Onyx receives a twenty percent royalty from Bayer on net sales of Stivarga in 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.

Kyprolis (carfilzomib) was approved by the United States Food and Drug Administration, or FDA, on July 20, 2012 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. Net sales of Kyprolis from its U.S. commercial launch in late July 2012 to the end of 2012 were $64.0 million.

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. During 2012, we continued to execute on our value-building strategy with our partner Bayer, by increasing worldwide sales and improving commercial margin of Nexavar. 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. In the United States, we co-promote Nexavar with Bayer. Outside of the United States, Bayer manages all commercialization activities. For the years ended December 31, 2012, 2011 and 2010, worldwide net sales of Nexavar (excluding sales in Japan), as recorded by Bayer, were $861.4 million, $839.9 million and $795.0 million, respectively.

Stivarga is a Bayer compound and Onyx receives a royalty of 20% on global net sales in human oncology from the sale of Stivarga. 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). We and Bayer jointly promote Stivarga in the U.S. Onyx receives a 20% royalty on Bayer's global net sales of Stivarga in human oncology. For the year ended December 31, 2012, Onyx recorded royalty revenue of $8.3 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 Annual Report on Form 10-K.

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2012 Business Highlights

Proteasome Inhibitor Franchise

In October 2012, enrollment was completed in the FOCUS trial, an international Phase 3 clinical trial evaluating single-agent carfilzomib in patients with relapsed and refractory myeloma. An interim analysis is planned in the second half of 2013 and, if results are positive, could support regulatory filings in Europe in patients with relapsed/refractory myeloma.

On July 20, 2012, the U.S. FDA granted 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 enrollment had begun 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.

Kinase Inhibitor Franchise

In February 2013, the FDA approved Stivarga for the treatment of patients with locally advanced, unresectable or metastatic gastrointestinal stromal tumors (GIST) who have been previously treated with imatimib and sunitinib malate. The United States approval is based on results from the pivotal Phase 3 GRID (GIST - Stivarga in Progressive Disease) trial, that demonstrated that Stivarga 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 January 2013, Onyx and Bayer announced top-line results from the DECISION (stuDy of sorafEnib in loCally advanced or metastatIc patientS with radioactive Iodine refractory thyrOid caNcer) trial in patients with locally advanced or metastatic radioactive iodine (RAI)-refractory differentiated thyroid cancer. The study met its primary endpoint of improving progression-free survival. Full results are expected to be presented at an upcoming medical meeting. The companies anticipate that this data will form the basis for regulatory submission of Nexavar in the treatment of RAI-refractory differentiated thyroid cancer.

In the fourth quarter of 2012, Bayer submitted a supplemental NDA for priority review to the Japanese MHLW for regorafenib in a second potential indication for metastatic and/or unresectable gastrointestinal stromal tumors. The submission is also based on data from pivotal Phase 3 GRID trial, which showed that Stivarga 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.

On September 27, 2012, we announced that Bayer received accelerated approval in the United States of Stivarga, an oral multi kinase 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 has 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 human oncology.

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 Stivarga. Under the terms of the agreements, Stivarga is a Bayer compound, and Bayer will have the final decision-making authority for global development and commercialization.

On July 23, 2012, Bayer, 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.

2012 Financial Highlights

Total revenue for the year ended December 31, 2012 included revenue from the Nexavar collaboration, product revenue from the sale of Kyprolis in the U.S. and royalty revenue from sales of Stivarga by Bayer. Kyprolis net sales were $64.0 million for 2012, representing orders placed and received by end customers, clinics and hospitals. The FDA granted accelerated approval of Kyprolis on July 20, 2012. Revenue from the Nexavar collaboration was $288.4 million for 2012, compared to $287.0 million for

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2011. Nexavar net sales, as recorded by Bayer, excluding Japan, were $861.4 million for the year ended December 31, 2012, compared to $839.9 million for the year ended December 31, 2011. The increase in Nexavar sales was driven by increased sales in the U.S. and demand driven growth in emerging markets including Asia Pacific and Latin America. Nexavar commercial margin also improved to 62% for 2012 compared to 60% for 2011. Stivarga royalty revenue was $8.3 million for the year ended December 31, 2012, following marketing approval in the U.S. by the FDA on September 27, 2012. Onyx receives a 20% royalty on Bayer's global net sales of Stivarga in human oncology.

Total operating expenses for the year ended December 31, 2012 were $629.3 million, an increase of $280.4 million, or 80%, from $348.9 million for the year ended December 31, 2011. The increase in operating expenses was partly due to the increase in research and development expenses for the global development of Kyprolis, particularly the ongoing Phase 3 ASPIRE, FOCUS and ENDEAVOR trials, and due to the increase in selling, general and administrative expenses related to the hiring of the field force associated with the Kyprolis commercial launch as well as promotional costs. Onyx also recorded contingent consideration expense of $69.2 million in 2012 compared to a benefit of $93.5 million in 2011.

Cash, cash equivalents and current and non-current marketable securities at December 31, 2012 were $492.8 million, a decrease of $175.6 million, or 26%, from $668.4 million at December 31, 2011. The decrease is primarily attributable to net cash used in operations.

2013 Outlook

We continue to strategically invest in the development of Kyprolis to unlock additional value across all lines of therapy. We look forward to continuing our business momentum in 2013, with many near-term clinical, regulatory, and commercial milestones across the proteasome and kinase inhibitor franchises.

Kyprolis

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º As part of the global commercialization strategy for Kyprolis, Onyx is exploring opportunities in countries outside of the U.S. that consider marketing authorization based on U.S. approval. Onyx expects to pursue agreements with established distributors for regulatory and commercialization activities in those markets.

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º An interim analysis is planned in the fourth quarter 2013 or later for the ASPIRE trial, an international Phase 3 trial evaluating carfilzomib plus lenalidomide (Revlimid®) and low-dose dexamethasone when compared to lenalidomide and low-dose dexamethasone alone in 780 patients with relapsed multiple myeloma.

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º An interim analysis is planned in the second half of 2013 for the FOCUS trial, a randomized trial evaluating Kyprolis versus best supportive care of low dose steroids plus cytoxan (optional), in patients with relapsed and refractory multiple myeloma following treatment with at least three prior therapies. If results are positive, these data could support regulatory filings in Europe in patients with relapsed/refractory myeloma.

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º In 2013, Onyx expects to initiate a Phase 3 trial evaluating carfilzomib in patients with newly diagnosed multiple myeloma.

Oprozomib

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º A new extended release tablet of oprozomib, an oral proteasome inhibitor, is being assessed in an ongoing Phase 1b/2 trial in hematologic malignancies including multiple myeloma. Preliminary data are expected to be submitted to a medical conference in the first half of 2013.

Stivarga

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º As part of a broad development program, Bayer has communicated plans to initiate two Phase 3 trials in 2013, in second-line hepatocellular carcinoma (HCC) and in CRC following resection of liver metastases.

Nexavar

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º In the first half of 2013, enrollment is expected to complete in the RESILIENCE trial, a Phase 3 study comparing capecitabine (Xeloda®) in combination with sorafenib or placebo for treatment of locally advanced or metastatic HER2-negative breast cancer.

Conditions in our current macroeconomic environment could affect our ability to achieve our goals, including healthcare policy changes in the United States and continued government pricing pressures internationally. We will continue to monitor these factors and will adjust our business processes to mitigate these risks to our business.

The successes we experienced in 2012 have helped us execute our strategy and as we continue to grow our business and achieve greater operational leverage, we remain focused on Kyprolis, Nexavar and Stivarga revenue growth, development of Kyprolis and oprozomib, and disciplined expense management that we believe will enable execution of our operating objectives for 2013.

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Critical Accounting Policies, Estimates and Judgments

The accompanying discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 used in 2012 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.

We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

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 securities. Concentration of risk is limited by diversifying investments among a variety of industries and issuers. Available-for-sale securities are carried at fair value based on quoted market prices, with any unrealized gains and losses reported in accumulated other comprehensive income (loss). For securities with unobservable quoted market prices, such as the AAA rated auction rate securities collateralized by student loans that are included in our investment portfolio, 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%. An increase or decrease of 1% in the discount rate would have a $0.4 million change in the auction rate securities valuation. The expected holding period was 5.1 years. An increase or decrease of 1 year in the expected holding period would result in a negligible change in the auction rate securities valuation. Unrealized losses are charged against "investment income" when a decline in fair value is determined to be other-than-temporary. We review several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the extent to which the fair value is less than cost and the cause for the fair value decline, (ii) the financial condition and near-term prospects of the issuer, (iii) the length of time a security is in an unrealized loss position and (iv) our ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. We do not intend to sell our marketable securities and it is not likely that we will be required to sell our marketable securities prior to the recovery of their amortized cost bases. Available-for-sale securities with initial maturities of greater than one year are classified as long-term. The amortized cost of securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. The cost of securities sold or the amount reclassified out of accumulated other comprehensive income into earnings is based on the specific identification method. Realized gains and losses and declines in value judged to be other than temporary are included in the statements of operations. Interest earned and gains realized on marketable securities, amortization of discounts received and accretion of premiums paid on the purchase of marketable securities are included in investment income.

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 December 31, 2012, we had a deferred revenue balance of $9.8 million related to Kyprolis and recorded this amount as a liability in our 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

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degree of judgment and are periodically reviewed and adjusted as necessary. Refer to Note 3 of the consolidated financial statements for a rollforward of these reserves for the year ended December 31, 2012.

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 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.

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 distributors 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.

Concentration of Credit Risk: Financial instruments which potentially subject us to concentrations of credit risk include accounts receivable. 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. During 2012, 99% of our net Kyprolis product revenues were generated by three distributors. Despite the significant concentration of distributors, the demand for Kyprolis is driven primarily by patient therapy requirements and we are not dependent upon any individual distributor with respect to Kyprolis sales. Due to the pricing of Kyprolis, the specialty distributors and pharmacies generally carry a very limited inventory, resulting in sales of Kyprolis being closely tied to end-user demand.

Revenue from Collaboration Agreement: In accordance with Accounting Standards Codification (ASC) Subtopic 808-10, Collaborative Arrangements, we record our share of the pre-tax commercial profit generated from the collaboration with Bayer, reimbursement of our shared marketing costs related to Nexavar and royalty revenue in one line item, "Revenue from collaboration agreement." Our portion of shared collaboration research and development expenses is not included in the line item "Revenue from collaboration agreement," but is reflected under operating expenses. According to the terms of the collaboration agreement, the companies share all research and development, marketing and non-U.S. sales expenses. We and Bayer each bear our own U.S. sales force and medical science liaison expenses. These costs related to our U.S. sales force and medical science liaisons are recorded in selling, general and administrative expenses. Bayer recognizes all revenue under the Nexavar collaboration and incurs the majority of expenses relating to the development and marketing of Nexavar. We are highly dependent on Bayer for timely and accurate information regarding any revenues realized from sales of Nexavar and the costs incurred in . . .