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ONXX > SEC Filings for ONXX > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for ONYX PHARMACEUTICALS INC


8-May-2013

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

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

Our Strategy

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

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

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

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

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

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

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

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

Business Highlights

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

Kyprolis

Kyprolis (carfilzomib) is approved by the United States Food and Drug Administration, or FDA, for the treatment of patients with multiple myeloma who have received at least two prior therapies including bortezomib and an immunomodulatory agent (IMiD), and have demonstrated disease progression on or within 60 days of completion of the last therapy. Approval was based on response rate. Clinical benefit, such as improvement in survival or symptoms, has not been verified. Carfilzomib is a tetrapeptide epoxyketone


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proteasome inhibitor that irreversibly binds to the N-terminal threonine-containing active sites of the 20S proteasome, the proteolytic core particle within the 26S proteasome. Carfilzomib has antiproliferative and proapoptotic activities in vitro in solid and hematologic tumor cells. Carfilzomib inhibits proteasome activity in blood and tissue and delays tumor growth in models of multiple myeloma, hematologic, and solid tumors.

Commercialization Status

During the first quarter of 2013, we continued to execute on our Kyprolis commercialization strategy. In the United States, net sales of Kyprolis during the three months ended March 31, 2013 were $64.0 million.

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

Recent developments

In 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 third quarter of 2013 and, if results are positive, could support regulatory filings in Europe and other territories for patients with relapsed/refractory myeloma.

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

Nexavar

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

Commercialization Status

During the three months ended March 31, 2013, we continued to execute on our value-building strategy with our partner Bayer, by 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. Nexavar is now approved in over 100 countries worldwide for the treatment of advanced kidney cancer and unresectable liver cancer. In the United States, we co-promote Nexavar with Bayer. Outside of the United States, Bayer manages all commercialization activities.

Recent developments

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 submissions globally of Nexavar in the treatment of RAI-refractory differentiated thyroid cancer.


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Stivarga

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

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

Commercialization Status

We and Bayer jointly promote Stivarga in the U.S. Onyx receives a 20% royalty on Bayer's global net sales of Stivarga in jurisdictions that have received commercial marketing approval. Stivarga royalty revenue was $9.2 million for the three months ended March 31, 2013.

Recent developments

In February 2013, Stivarga received regulatory approvals in the United States and in Japan for the treatment of patients with locally advanced, unresectable or metastatic gastrointestinal stromal tumors (GIST) who have been previously treated with imatimib and sunitinib malate.

In March 2013, Stivarga received regulatory approvals for the treatment of patients with metastatic colorectal cancer (mCRC) in Canada, Japan and Switzerland.

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

Financial Highlights



The following table is a summary of our financial highlights:



                                                      Three Months Ended                        Change
                                                          March 31,                          2013 vs 2012
                                                    2013                 2012                $              %
                                                  (In thousands, except per share amounts and percentages)
Total revenue                               $            145,492    $       72,031             73,461         102 %
Operating Expenses                                       173,965           122,782             51,183          42 %
Income (loss) from operations                            (28,473 )         (50,751 )           22,278          44 %
Net income (loss)                                        (33,671 )         (56,212 )           22,541          40 %
Diluted net income (loss) per share                        (0.47 )           (0.88 )             0.41          47 %
Cash, Cash Equivalents and Current and
Non-Current Marketable Securities                        738,855           492,759            246,096          50 %

Total revenue for the three months ended March 31, 2013 included revenue from the Nexavar collaboration, product revenue from the sale of Kyprolis in the U.S. royalty revenue from sales of Stivarga by Bayer, and contract revenue from collaboration in connection with palbociclib development from Pfizer. Kyprolis net sales were $64.0 million for the first quarter 2013, including a favorable gross-to-net accrual adjustment of $5.9 million. Demand sales were $58.1 million, 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 $70.3 million for the first quarter 2013, compared to $72.0 million for the same period in 2012. Nexavar net sales, as recorded by Bayer, excluding Japan, were $198.5 million for the first quarter 2013, compared to $209.7 million for the same period in 2012. The decrease in Nexavar sales was primarily due to inventory reductions of specialized oncology pharmacies in the United States and lower sales in Europe which were partially offset by growth in the Asia-Pacific region and improved commercial margin in the business. Nexavar collaboration commercial profit also improved to 67% for the first quarter 2013 compared to 64% for the same period in 2012. Stivarga royalty revenue was $9.2 million for the first quarter 2013, 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 jurisdictions that have received commercial marketing approval.


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Total operating expenses for the three months ended March 31, 2013 were $174.0 million, an increase of $51.2 million, or 42%, from $122.8 million for the same period in 2012. The increase in operating expenses was partly due to the increase in research and development expenses due to the global development of Kyprolis, particularly the ongoing Phase 3 ENDEAVOR trial and start-up activities associated with the front line CLARION study, and due to the increase in selling, general and administrative expenses related to the Kyprolis commercial launch in the United States. Onyx also recorded contingent consideration expense of $2.9 million in the first quarter 2013 compared to a $3.2 million for the same period in 2012.

Cash, cash equivalents and current and non-current marketable securities at March 31, 2013 were $738.9 million, an increase of $246.1 million, or 50%, from $492.8 million at December 31, 2012. The increase is primarily attributable to net cash proceeds of approximately $352.4 million received from a public offering of 4.4 million shares of common stock, in January 2013.

Critical Accounting Policies, Estimates and Judgments

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

Results of Operations

Three months ended March 31, 2013 and 2012

Total Revenue



Total revenue, as compared to prior year was as follows:



                                          Three Months Ended           Change
                                               March 31,            2013 vs 2012
                                           2013           2012         $        %
                                           (In thousands, except percentages)
Revenue from collaboration agreement   $      70,307    $ 72,031   $  (1,724 )  (2 )%
Product revenue - Kyprolis                    64,008           -      64,008   N/A
Royalty revenue - Stivarga                     9,177           -       9,177   N/A
Contract revenue from collaboration            2,000           -       2,000   N/A
Total revenue                          $     145,492    $ 72,031   $  73,461   102 %

Total revenue increased by $73.5 million, or 102%, to $145.5 million for the three months ended March 31, 2013 compared to the same period in 2012, primarily as a result of product revenue from Kyprolis of $64.0 million and royalty revenue from Stivarga of $9.2 million that did not occur in the first quarter of 2012.

Product revenue from Kyprolis

Product revenue consists of revenue recorded on the sale of Kyprolis. Kyprolis net sales were $64.0 million for the first quarter 2013, including a favorable gross-to-net accrual adjustment of $5.9 million. Demand sales were $58.1 million, representing orders placed and received by end customers, clinics and hospitals. The FDA granted accelerated approval of Kyprolis on July 20, 2012. 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 estimated government rebates, chargebacks, returns reserve, distribution costs and other deductions.

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


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Product revenue from Kyprolis for the three months ended March 31, 2013 and 2012 is calculated as follows:

                                              Three Months Ended
                                                   March 31,
                                                 2013         2012
                                                (In thousands)
Product revenue, gross                      $       65,459    $   -
Government rebates, chargebacks and other            1,651        -
Returns reserve and distribution fees               (3,102 )      -
Product revenue, net                        $       64,008    $   -

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

Gross to Net Sales Accruals

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

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 payor mix, expected sales to qualified healthcare providers, and our expectation about future utilization. We also provided financial assistance to qualifying patients that are underinsured, or cannot cover the cost of commercial coinsurance amounts, through a patient assistance program, Onyx 360. Onyx 360 is available to patients in the U.S. and its territories who meet various financial need criteria. Government rebates that are invoiced directly to us are recorded in accrued liabilities on our Consolidated Balance Sheet. For qualified programs that can purchase our products through distributors at a lower contractual government price, the distributors charge back to us the difference between their acquisition cost and the lower contractual government price, which we record as allowances against accounts receivable on our Consolidated Balance Sheet.

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

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


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                                            Chargebacks,    Distribution
                                               Rebates          Fees
                                              and Other      and Returns     Total
Balance as of December 31, 2012             $       7,653   $       2,286   $  9,939
Provision related to current period sales           4,236           3,102   $  7,338
Credits/payments                                   (4,466 )        (3,333 ) $ (7,799 )
Other                                              (5,887 )             -   $ (5,887 )
Balance as of March 31, 2013                $       1,536   $       2,055   $  3,591

Revenue from Collaboration Agreement

Nexavar is currently approved in more than 100 countries worldwide for the treatment of unresectable liver cancer and advanced kidney cancer. We co-promote Nexavar in the United States with Bayer under collaboration and co-promotion agreements. Under the terms of the co-promotion agreement and consistent with the collaboration agreement, we and Bayer share equally in the profits or losses of Nexavar, if any, in the United States, subject only to our continued co-funding of the development costs of Nexavar worldwide outside of Japan and . . .

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