Liability for Contingent Consideration

9 Months Ended

Sep. 30, 2012

Liability for Contingent Consideration

Liability for Contingent Consideration

Note 5. Liability for Contingent Consideration

In November 2009, we acquired Proteolix, Inc., or Proteolix, a privately-held biopharmaceutical company located in South San Francisco, California under the terms of an Agreement and Plan of Merger, or Merger Agreement. Proteolix focused primarily on the discovery and development of novel therapies that target the proteasome for the treatment of hematological malignancies, solid tumors and autoimmune disorders. This acquisition, which included Kyprolis, has provided us with an opportunity to expand into the hematological malignancies market. Under the terms of the Merger Agreement, the aggregate cash consideration paid to former Proteolix stockholders at closing was $276.0 million and an additional $40.0 million earn-out payment was made in April 2010. In January 2011, the Company entered into Amendment No. 1 to the Merger Agreement which required us to make a milestone payment of $80 million, based on Kyprolis’ accelerated marketing approval in the United States for relapsed/refractory multiple myeloma, which was achieved on July 20, 2012. Approximately $63.0 million of the milestone was paid in the form of Onyx common stock, and $17.0 million was paid in cash.

In addition, under the Merger Agreement, we may be required to pay up to an additional $365.0 million in up to three earn-out payments upon the achievement of certain regulatory approvals for Kyprolis in the U.S. and Europe within pre-specified timeframes, as follows:

·$65.0 million would be triggered by specified marketing approval on or before December 31, 2013 in the European Union for relapsed/refractory multiple myeloma;

·$150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the United States for relapsed multiple myeloma; and

·$150.0 million would be triggered by specified marketing approval on or before March 31, 2016 in the European Union for relapsed multiple myeloma.

Under certain circumstances, including if we fail to satisfy regulatory approval-related diligence obligations under the Merger Agreement, we may be required to make one or more earnout payments even if the associated regulatory approvals are not received. Subject to the terms and conditions set forth in the Merger Agreement, we may, in our sole discretion, make any of the remaining earnout payments that become payable to former holders of Proteolix preferred stock in the form of cash, shares of our common stock or a combination thereof.

The range of the undiscounted amounts we could be required to pay for the remaining earn-out payments is between zero and $365.0 million. We determined the fair value of the non-current liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. These inputs include the probability of technical and regulatory success (“PTRS”) for unapproved product candidates considering their stages of development.

We recorded a liability for this contingent consideration related to the three earn-out payments with a fair value of $146.2 million at September 30, 2012 based upon a discounted cash flow model that uses significant estimates and assumptions, including the probability of technical and regulatory success (“PTRS”) of the product candidate. Contingent consideration (benefit)/expense is recorded for the change in the fair value of the recognized amount of the liability for contingent consideration. Any further changes to these estimates and assumptions could significantly impact the fair values recorded for this liability resulting in significant charges to our Consolidated Statements of Operations.

During the three months and nine months ended September 30, 2012, the Company recorded a contingent consideration expense of $9.8 million and $66.2 million, respectively, compared to $5.9 million and $23.2 million for the same periods in the prior year. For the three months and nine months ended September 30, 2012, the decrease in the fair value of the contingent consideration liability is primarily a result of the $80 million milestone payment triggered by regulatory approval of Kyprolis offset by changes made to the PTRS following the June 20, 2012 vote by the FDA Oncology Drug Advisory Committee (CDAC) in favor of the approval of Kyprolis.