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ONXX > SEC Filings for ONXX > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for ONYX PHARMACEUTICALS INC

Form 10-Q for ONYX PHARMACEUTICALS INC


9-Aug-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," "potential," "believe," 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, and is under regulatory review for the treatment of patients with radioactive iodine-refractory differentiated thyroid cancer in the United States and the European Union. 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 approved 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 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.


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Business Highlights

During the second quarter of 2013, we continued to execute on our Kyprolis commercialization strategy and 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 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 preclinical models of multiple myeloma, hematologic, and solid tumors.

Commercialization Status

During the second quarter of 2013, we continued to execute on our Kyprolis commercialization strategy. Net sales of Kyprolis during the three months and six months ended June 30, 2013 were $61.0 million and $125.0 million, respectively.

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 distribution agreements in Israel, Turkey, Colombia and Argentina, 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 late July, one of our representatives met with the independent Data Monitoring Committee (DMC) for our FOCUS study following the DMC review of a planned interim analysis. On the basis of this review, the DMC notified us that the study may continue as planned without modification.

Onyx has initiated a global Phase 3 trial evaluating carfilzomib in combination with melphalan and prednisone versus bortezomib (Velcade®) with melphalan and prednisone 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 second quarter of 2013, we continued to execute on our value-building strategy with our partner Bayer, by improving commercial margin of Nexavar and experienced continued growth in the Asia Pacific region and United States.

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.


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Recent developments

On June 30, 2013, Bayer announced the submission of a New Drug Application, or NDA, to the FDA and an application for marketing authorization to the European Medicines Agency (EMA) for Nexavar for the treatment of radioactive iodine-refractory differentiated thyroid cancer. The submission is based on data from pivotal Phase 3 DECISION trial. In the trial, sorafenib significantly extended progression-free survival (PFS), the primary endpoint of the trial.

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 and regulatory bodies in Canada, Japan and Switzerland 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.

Stivarga has also 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 imatinib and sunitinib malate.

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 $10.2 million and $19.3 million for the three months and six months ended June 30, 2013, respectively.

Recent developments

In June 2013, Bayer announced that Stivarga had been recommended for approval by the European Committee for Medicinal Products for Human Use (CHMP) treatment of adult patients with mCRC who have been previously treated with, or are not considered candidates for, available therapies. These include fluoropyrimidine based chemotherapy, an anti VEGF therapy and an anti EGFR therapy. The decision of the European Commission on the approval is expected in the third quarter of 2013.

As part of a broad development program, Bayer has communicated plans to initiate two additional Phase 3 trials in 2013. The first study in approximately 530 patients is evaluating the efficacy and safety of regorafenib in patients with advanced liver cancer who have progressed on Nexavar (sorafenib) treatment and has begun enrollment. The primary endpoint of the study is overall survival. The second study is planned in patients with mCRC following resection of liver metastases.


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Financial Highlights



The following table is a summary of our financial highlights:



                                Three Months Ended                       Change                        Six Months Ended                        Change
                                     June 30,                         2013 vs 2012                         June 30,                         2013 vs 2012
                              2013                 2012                $             %            2013                 2012                  $             %
                           (In thousands, except per share amounts and percentages)              (In thousands, except per share amounts and percentages)
Total revenue         $            153,026    $       72,704             80,322      110 %  $         298,518    $         144,736            153,782      106 %
Operating Expenses                 200,559           178,477             22,082       12 %            374,524              301,260             73,264       24 %
Income (loss) from
operations                         (47,533 )        (105,773 )           58,240       55 %            (76,006 )           (156,524 )           80,518       51 %
Net income (loss)                  (53,168 )        (106,049 )           52,881       50 %            (86,839 )           (162,261 )           75,422       46 %
Diluted net income
(loss) per share                     (0.73 )           (1.65 )             0.92       56 %              (1.20 )              (2.54 )             1.34       53 %




                                                                    June 30,      December 31,
                                                                      2013            2012          Change       %
Cash, cash equivalents and current and non-current marketable
securities                                                          $ 755,907    $      492,759    $ 263,148      53 %

Total revenue more than doubled for the three months and six months ended June 30, 2013 from the same periods in 2012 and included product revenue from the sale of Kyprolis, revenue from the Nexavar collaboration, royalty revenue from sales of Stivarga by Bayer, and contract revenue from collaboration in connection with palbociclib development from Pfizer. Kyprolis net sales were $61.0 million and $125.0 million for the three months and six months ended June 30, 2013, respectively, including a favorable gross-to-net accrual adjustment of $5.9 million during the six months ended June 30, 2013. Revenue from the Nexavar collaboration was $81.8 million and $152.1 million for the three months and six months ended June 30, 2013, compared to $72.7 million and $144.7 million for the same periods in 2012. Nexavar net sales, as recorded by Bayer, excluding Japan, were $229.7 million and $428.2 million for the three months and six months ended June 30, 2013, respectively, compared to $214.5 million and $424.2 million for the same periods in 2012. The increase in Nexavar sales was primarily due to sales growth in the United States and Asia Pacific regions. Nexavar collaboration commercial profit improved to 67% for both the three and six months ended June 30, 2013, compared to 61% and 63% for the same periods in 2012. Stivarga royalty revenue was $10.2 million and $19.3 million for the three months and six months ended June 30, 2013, respectively. Onyx receives a 20% royalty on Bayer's global net sales of Stivarga in jurisdictions that have received commercial marketing approval.

Total operating expenses for the three months and six months ended June 30, 2013 increased by 12% and 24%, respectively, from the same periods in 2012, primarily due to the global development of Kyprolis, particularly the ongoing Phase 3 ENDEAVOR trial, 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 and adding select capabilities internationally, which were offset by lower Kyprolis Phase 3 FOCUS and ASPIRE trial expenses and lower contingent consideration expense.

Cash, cash equivalents and current and non-current marketable securities at June 30, 2013 were $755.9 million, an increase of $263.1 million, or 53%, 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 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 June 30, 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").


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Results of Operations

Three and six months ended June 30, 2013 and 2012

Total Revenue



Total revenue as compared to prior year was as follows:



                           Three Months Ended           Change            Six Months Ended             Change
                                June 30,             2013 vs 2012             June 30,              2013 vs 2012
                            2013           2012        $        %        2013           2012          $        %
                            (In thousands, except percentages)             (In thousands, except percentages)
Revenue from
collaboration
agreement               $      81,828    $ 72,704   $  9,124   12.5 % $   152,135    $  144,736   $   7,399    5.1 %
Product revenue -
Kyprolis                       61,037           -     61,037    N/A       125,045             -     125,045    N/A
Royalty revenue -
Stivarga                       10,161           -     10,161    N/A        19,338             -      19,338    N/A
Contract revenue from
collaboration                       -           -          -    N/A         2,000             -       2,000    N/A
Total revenue           $     153,026    $ 72,704   $ 80,322    110 % $   298,518    $  144,736   $ 153,782    106 %

Total revenue increased by $80.3 million, or 110%, to $153.0 million for the three months ended June 30, 2013 and increased by $153.8 million, or 106%, to $298.5 million for the six months ended June 30, 2013, compared to the same periods in 2012, respectively. The increase in total revenue was primarily as a result of product revenue from Kyprolis of $61.0 million and $125.0 million for the three months and six months ended June 30, 2013, respectively, and royalty revenue from Stivarga of $10.2 million and $19.3 million for the three and six months ended June 30, 2013, respectively, that did not occur in the first half of 2012.

Product revenue from Kyprolis

Product revenue consists of revenue recorded on the sale of Kyprolis. Kyprolis net sales were $61.0 million and $125.0 million for the three and six months ended June 30, 2013, including a favorable gross-to-net accrual adjustment of $5.9 million recorded in the first quarter of 2013. Kyprolis sales of $61.0 million and $119.2 million for the three months and six months ended June 30, 2013, respectively, represented orders placed and received by end customers, clinics and hospitals. The FDA granted accelerated approval of Kyprolis on July 20, 2012. We record revenue on the sale of Kyprolis on the sell-through basis, once our customers sell the product to the end customers. Product revenue is derived by calculating the net sales of Kyprolis by distributors to the physicians and hospitals 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. Kyprolis is also sold in certain international markets on a named patient or early access program.

Product revenue from Kyprolis for the three months and six months ended June 30, 2013 and 2012 is calculated as follows:

                                         Three Months Ended                Six Months Ended
                                              June 30,                         June 30,
                                        2013             2012             2013            2012
                                           (In thousands)                   (In thousands)
Product revenue, gross             $       69,269    $          -    $      134,728    $         -
Government rebates, chargebacks
and other                                  (4,952 )             -            (3,301 )            -
Returns reserve and
distribution fees                          (3,280 )             -            (6,382 )            -
Product revenue, net               $       61,037    $          -    $      125,045    $         -

Government rebates, chargebacks and other include a credit of $5.9 million for the three months ended March 31, 2013, 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.


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Chargebacks, Government Rebates and Other Deductions: We estimate reductions to product sales for qualifying U.S. 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, we 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 us 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, we reduced our 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 six months ended June 30, 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 . . .

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