Oncolytics Biotech Inc. Announces 2008 Second Quarter Results

CALGARY, July 29 /PRNewswire-FirstCall/ - Oncolytics Biotech Inc. ("Oncolytics") today announced its financial results and highlights for the three and six month periods ended June 30, 2008.

"Oncolytics experienced a strong second quarter with the reporting of durable clinical responses to REOLYSIN(R) combination therapy treatment in refractory head and neck cancer patients," said Dr. Brad Thompson, President and CEO of Oncolytics. "We are enrolling increasing numbers of patients in our clinical program for REOLYSIN(R), and the positive results from these trials are helping us to plan the later-stage development program for REOLYSIN(R)."

This discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements of Oncolytics Biotech Inc. as at and for the three and six months ended June 30, 2008 and 2007, and should also be read in conjunction with the audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in our annual report for the year ended December 31, 2007. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

FORWARD-LOOKING STATEMENTS

The following discussion contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, including our belief as to the potential of REOLYSIN(R) as a cancer therapeutic and our expectations as to the success of our research and development and manufacturing programs in 2008 and beyond, future financial position, business strategy and plans for future operations, and statements that are not historical facts, involve known and unknown risks and uncertainties, which could cause our actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the need for and availability of funds and resources to pursue research and development projects, the efficacy of REOLYSIN(R) as a cancer treatment, the success and timely completion of clinical studies and trials, our ability to successfully commercialize REOLYSIN(R), uncertainties related to the research, development and manufacturing of pharmaceuticals, uncertainties related to competition, changes in technology, the regulatory process and general changes to the economic environment. Investors should consult our quarterly and annual filings with the Canadian and U.S. securities commissions for additional information on risks and uncertainties relating to the forward-looking statements. Forward-looking statements are based on assumptions, projections, estimates and expectations of management at the time such forward-looking statements are made, and such assumptions, projections, estimates and/or expectations could change or prove to be incorrect or inaccurate. Investors are cautioned against placing undue reliance on forward-looking statements. We do not undertake to update these forward-looking statements.

OVERVIEW

Oncolytics Biotech Inc. is a Development Stage Company

Since our inception in April of 1998, Oncolytics Biotech Inc. has been a development stage company and we have focused our activities on the development of REOLYSIN(R), our potential cancer therapeutic. We have not been profitable since our inception and expect to continue to incur substantial losses as we continue our research and development. We do not expect to generate significant revenues until, if and when, our cancer product becomes commercially viable.

General Risk Factors

Prospects for biotechnology companies in the development stage should generally be regarded as speculative. It is not possible to predict, based upon studies in animals, or early studies in humans, whether a new therapeutic will ultimately prove to be safe and effective in humans, or whether necessary and sufficient data can be developed through the clinical trial process to support a successful product application and approval.

If a product is approved for sale, product manufacturing at a commercial scale and significant sales to end users at a commercially reasonable price may not be successful. There can be no assurance that we will generate adequate funds to continue development, or will ever achieve significant revenues or profitable operations. Many factors (e.g. competition, patent protection, appropriate regulatory approvals) can influence the revenue and product profitability potential.

In developing a pharmaceutical product, we rely upon our employees, contractors, consultants and collaborators and other third party relationships, including our ability to obtain appropriate product liability insurance. There can be no assurance that these reliances and relationships will continue as required.

In addition to developmental and operational considerations, market prices for securities of biotechnology companies generally are volatile, and may or may not move in a manner consistent with the progress being made by Oncolytics.

See also "RISK Factors Affecting Future Performance" in our 2007 MD&A.

REOLYSIN (R) Development Update for the Second Quarter of 2008

We continue to develop our lead product REOLYSIN(R) as a potential cancer therapy. Our goal each year is to advance REOLYSIN(R) through the various steps and stages of development required for potential pharmaceutical products. In order to achieve this goal, we actively manage the development of our clinical trial program, our pre-clinical and collaborative programs, our manufacturing process and supply, and our intellectual property.

Clinical Trial Program

During the second quarter of 2008, our clinical trial program expanded to eleven clinical trials of which nine are being conducted by us and two are being sponsored by the U.S. National Cancer Institute ("NCI").

Clinical Trials - Positive Interim Results

U.K. Combination REOLYSIN(R) and Carboplatin/Paclitaxel Clinical Trial

In the second quarter of 2008, we announced positive interim results and completed the dose escalation portion of our U.K. combination REOLYSIN(R) and carboplatin/paclitaxel trial. Four of the first eight patients treated in the study to date have a diagnosis of carcinoma of the head and neck. All three head and neck patients evaluated to date have had excellent clinical and radiological responses without appreciable toxicity. Preliminary assessment after recruitment of the first two cohorts has suggested that patients with head and neck carcinomas represent a group of patients for whom the combination of carboplatin/paclitaxel and REOLYSIN(R) may prove effective.

In the first cohort, the patient with head and neck cancer received 8 cycles of treatment (the maximum allowed) and achieved a clinical complete response. In the second cohort, the two patients with head and neck cancers with widespread disseminated disease have each received seven cycles of treatment to date and both have achieved significant partial responses. Two of the three patients, including the patient with the clinical complete response, had previously received cisplatin/5-FU treatment and all three had previously received radiotherapy.

This clinical trial has two components. The first is an open-label, dose-escalating, non-randomized study of REOLYSIN(R) given intravenously with paclitaxel and carboplatin every three weeks. Standard dosages of paclitaxel and carboplatin were delivered to patients with escalating dosages of REOLYSIN(R) intravenously. The second component of the trial includes the enrolment of a further 9 patients for a total of 12 patients at the maximum dosage of REOLYSIN(R) in combination with a standard dosage of paclitaxel and carboplatin.

Eligible patients include those who have been diagnosed with advanced or metastatic solid tumours such as head and neck, melanoma, lung and ovarian cancers that are refractory (have not responded) to standard therapy or for which no curative standard therapy exists. The primary objective of the trial is to determine the Maximum Tolerated Dose ("MTD"), Dose-Limiting Toxicity ("DLT"), recommended dose and dosing schedule and safety profile of REOLYSIN(R) when administered in combination with paclitaxel and carboplatin. Secondary objectives include the evaluation of immune response to the drug combination, the body's response to the drug combination compared to chemotherapy alone and any evidence of anti-tumour activity.

U.S. Phase II Sarcoma Clinical Trial

During the second quarter of 2008, we announced interim results from our Phase II study of intravenous REOLYSIN(R) in patients with sarcomas metastatic to the lung which were presented at the American Society of Clinical Oncology ("ASCO") annual meeting. The presentation, entitled "A Phase II Study of Intravenous REOLYSIN (Wild-type Reovirus) in the Treatment of Patients with Bone and Soft Tissue Sarcomas Metastatic to the Lung" was delivered by Dr. Monica Mita, the study principal investigator and her team at the Institute of Drug Development (IDD), the Cancer Therapy and Research Center at the University of Texas Health Science Center, (UTHSC), San Antonio, Texas.

The interim results demonstrated that the treatment had been well tolerated to date, with 8 of 16 evaluable patients experiencing stable disease for periods ranging from two to more than twelve, 28-day cycles. As well, the third patient treated in the study was demonstrated to have stable disease by RECIST criteria for more than six months as measured by CT scan. A PET scan taken at the same time showed that any residual mass was metabolically inert.

Clinical Trials - Actively Enrolling

During the second quarter of 2008, we commenced enrollment in two additional U.K. chemotherapeutic co-therapy clinical trials and the NCI began to enroll in its Phase I/II ovarian cancer clinical trial in the U.S. At the end of the second quarter of 2008, eight of our nine sponsored clinical trials were enrolling patients along with one of the NCI sponsored clinical trials.

Clinical Trials - Expanded Trial Program

U.K. Phase II Combination REOLYSIN(R) with Paclitaxel and Carboplatin

During the second quarter of 2008, we received a letter of approval from the U.K. Medicines and Healthcare products Regulatory Agency for our Clinical Trial Application ("CTA") to begin a Phase II clinical trial using intravenous administration of REOLYSIN(R) in combination with paclitaxel and carboplatin in patients with advanced head and neck cancers. The principal investigator is Dr. Kevin Harrington of The Institute of Cancer Research and The Royal Marsden NHS Foundation Trust.

This trial is a 14 patient, single arm, open-label, dose-targeted, non-randomized, multi-centre trial of REOLYSIN(R) given intravenously in combination with a standard dosage of paclitaxel and carboplatin. Eligible patients include those with advanced or metastatic head and neck cancer that are refractory to standard therapy or for which no curative standard therapy exists. The primary objective of the Phase II trial is to measure tumour responses and duration of response, and to describe any evidence of antitumour activity. The secondary objective is to determine the safety and tolerability of REOLYSIN(R) when administered in combination with paclitaxel and carboplatin to patients with advanced or metastatic head and neck cancer. The trial began enrolling patients in June, 2008.

U.S. Phase II Combination REOLYSIN(R) with Paclitaxel and Carboplatin

During the second quarter of 2008, following a U.S. Food and Drug Administration ("FDA") review, we initiated a U.S. Phase II clinical trial using intravenous administration of REOLYSIN(R) in combination with paclitaxel and carboplatin in patients with advanced head and neck cancers. The Principal Investigator is Dr. Monica Mita of the CTRC at UTHSCSA.

This trial is a 14-patient, single arm, open-label, dose-targeted, non-randomized trial of REOLYSIN(R) given intravenously in combination with a standard dosage of paclitaxel and carboplatin. Eligible patients include those with advanced or metastatic head and neck cancers that are refractory to standard therapy or for which no curative standard therapy exists. The primary objective of the Phase II trial is to measure tumour responses and duration of response, and to describe any evidence of antitumour activity. The secondary objective is to determine the safety and tolerability of REOLYSIN(R) when administered in combination with paclitaxel and carboplatin to patients with advanced or metastatic head and neck cancers.

Pre-Clinical Trial and Collaborative Program

Presentations

In the second quarter of 2008, Dr. Anders Kolb of the Nemours Center for Childhood Cancer Research presented a poster entitled "Radiation in Combination with Reolysin for Pediatric Sarcomas" at the American Association for Cancer Research ("AACR") Annual Meeting.

The poster covered preclinical work using reovirus in combination with radiation in mice implanted with pediatric rhabdomyosarcoma and Ewing's sarcoma tumours. The results demonstrated that the combination of reovirus and radiation significantly enhanced efficacy compared to either treatment alone in terms of tumour regression and event-free survival.

As well, Dr. Chandini Thirukkumaran of the Tom Baker Cancer Centre, Calgary, presented an oral presentation entitled "Targeting Multiple Myeloma with Oncolytic Viral Therapy" at the AACR Annual Meeting.

The presentation covered preclinical work using reovirus as a purging agent during autologous (harvested from the patient themselves) hematopoietic stem cell transplants for multiple myeloma. The results demonstrated that up to 70% of multiple myeloma cell lines tested showed reovirus sensitivity and reovirus induced cell death mediated through apoptosis. The investigators concluded that this preclinical data supports initiating a Phase I purging trial using reovirus against multiple myeloma.

Publications

In the April 10, 2008 online issue of Gene Therapy, Prof. Alan Melcher and his research group at St. James's University Hospital in Leeds, U.K. published the results of their work entitled "Inflammatory Tumour Cell Killing by Oncolytic Reovirus for the Treatment of Melanoma."

The investigators showed that reovirus effectively kills and replicates in both human melanoma cell lines and freshly resected tumour. They demonstrated that reovirus melanoma killing is more potent than, and distinct from, chemotherapy or radiotherapy-induced cell death. They concluded that reovirus is suitable for clinical testing in melanoma.

In the May 1, 2008 online issue of the Journal of Immunology, Prof. Alan Melcher and his research group at St. James's University Hospital in Leeds, U.K. published the results of their work with reovirus in a paper entitled "Reovirus Activates Human Dendritic Cells to Promote Innate Antitumor Immunity."

The researchers studied the ability of reovirus to activate human dendritic cells ("DC"), key regulators of both innate and adaptive immune responses. The data demonstrated that reovirus directly activates human DC, which in turn stimulate innate killing of cancer cells by natural killer ("NK") and T cells, suggesting a novel potential role for T cells in oncolytic virus-induced local tumor cell death. Combined with the virus's ability to directly kill cancer cells, the researchers concluded that reovirus recognition by DC may enhance the efficacy of reovirus as a therapeutic agent.

Manufacturing and Process Development

During the second quarter of 2008, we successfully transferred our cGMP manufacturing process for REOLYSIN(R) at the 40-litre batch size to SAFC Pharma(TM), a Division of Sigma-Aldrich Corporation and commenced production. Yields at the 40-litre scale should provide sufficient doses to support future development plans leading to registration and also anticipated early stage commercial requirements.

During the second quarter of 2008, we continued our process development work examining further scale-up to the 100-litre level and lyophilization.

Intellectual Property

During the second quarter of 2008, one U.S. patent and one Canadian patent were issued. At the end of the second quarter of 2008, we had been issued over 180 patents including 27 U.S. and nine Canadian patents as well as issuances in other jurisdictions. We also have over 180 patent applications filed in the U.S., Canada and other jurisdictions.

Financial Impact

We estimated at the beginning of 2008 that our average monthly cash usage would be approximately $1,660,000 for 2008. Our cash usage for the six month period ending June 30, 2008 was $7,224,814 from operating activities which includes our intellectual property expenditures which is lower than our expected monthly average but continues to be in line with our expectations for 2008. Our net loss for the six month period ending June 30, 2008 was $8,648,903.

Cash Resources

We exited the second quarter of 2008 with cash resources totaling $17,930,270 (see "Liquidity and Capital Resources").

Expected REOLYSIN(R) Development for the Remainder of 2008

We plan to continue to enroll patients in our clinical trials throughout 2008. We expect to complete enrollment in a number of our co-therapy trials in the U.K. and our sarcoma study in the U.S. We believe that the results from these trials will allow us to broaden our Phase II clinical trial program and choose a pivotal trial path.

We expect to produce REOLYSIN(R) for our clinical trial program throughout 2008. We believe we will complete our 100-litre scale up activities and will continue our examination of a lyophilization (freeze drying) process for REOLYSIN(R).

We continue to estimate, based on our expected activity for 2008 that our average monthly cash usage will be $1,660,000 per month (see "Liquidity and Capital Resources").

INITIAL ADOPTION OF NEW ACCOUNTING STANDARD

On April 1, 2008, we early adopted the new Canadian Institute of Chartered Accountants' (the "CICA") Handbook Section 3064 "Goodwill and Intangible Assets". Pursuant to the transitional provisions set out in Section 3064, we retroactively adopted this standard with restatement.

The adoption of Section 3064 impacted the treatment of our patent costs. Prior to Section 3064, we accounted for our patent costs as an intangible asset under CICA Handbook Section 3450 "Research and Development Costs". Section 3450 allowed us to capitalize our third party legal costs associated with our patent portfolio as a limited-life intangible asset which was then amortized over the estimated useful life of the patents. Section 3064 does not permit the capitalization of these third party legal costs. Consequently, the third party legal costs previously capitalized as intellectual property are required to be expensed and any previously recorded related amortization charges are to be reversed. The intellectual property costs which remain capitalized and subject to amortization relate to the initial acquisition of our business by SYNSORB Biotech Inc.

In order for us to capitalize our intellectual property expenditures we would be required to demonstrate all of the following:

Therefore, all of our future intellectual property expenditures will be expensed as incurred until we meet all of the capitalization criteria set out above. We plan to regularly monitor our research and development activity in conjunction with these six criteria to ensure we record our intellectual property expenditures in line with Section 3064.

The impact of the early adoption of Section 3064 on our previously reported consolidated balance sheets is as follows:

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

As at June 30, 2008, we had cash and cash equivalents (including short-term investments) and working capital positions of $17,930,270 and $14,267,085, respectively compared to $25,213,829 and $22,732,987, respectively for December 31, 2007. The decrease in our cash and cash equivalent position reflects the cash usage from our operating activities which includes intellectual property expenditures for the six month period ending June 30, 2008. The larger decrease in our working capital position during the first half of 2008 reflects the increase in our accounts payable and accrued liabilities at June 30, 2008. During the second quarter of 2008, our clinical trial and manufacturing activities increased compared to the first quarter of 2008. As a result of the growth in our operating activities, our accrued expenses increased as we have yet to receive the related invoices from our suppliers. All of our trade accounts payable are current.

We desire to maintain adequate cash and short-term investment reserves to support our planned activities which include our clinical trial program, product manufacturing, administrative costs, and our intellectual property expansion and protection. In 2008, we expect to continue to enroll patients in our various clinical trials and we also expect to continue with our collaborative studies pursuing support for our clinical trial program. We will therefore need to ensure that we have enough REOLYSIN(R) to supply our clinical trial and collaborative programs. We still expect our average monthly cash usage to be $1,660,000 in 2008 and we believe our existing capital resources are adequate to fund our current plans for research and development activities well into 2009. Factors that will affect our anticipated monthly burn rate include, but are not limited to, the number of manufacturing runs required to supply our clinical trial program and the cost of each run, the number of clinical trials ultimately approved, the timing of patient enrollment in the approved clinical trials, the actual costs incurred to support each clinical trial, the number of treatments each patient will receive, the timing of the NCI's R&D activity, and the level of pre-clinical activity undertaken.

In the event that we choose to seek additional capital, we will look to fund additional capital requirements primarily through the issue of additional equity. We recognize the challenges and uncertainty inherent in the capital markets and the potential difficulties we might face in raising additional capital. Market prices and market demand for securities in biotechnology companies are volatile and there are no assurances that we will have the ability to raise funds when required.

To manage the risk of availability of raising additional capital, we filed a base shelf prospectus on June 16, 2008 which qualifies for distribution up to $150,000,000 of common shares, subscription receipts, warrants, debt securities and/or units. Establishing a base shelf provides us with additional flexibility when seeking additional capital as, under certain circumstances, it shortens the time period to close a financing and is expected to increase the number of potential investors that may be prepared to invest in our company. As of June 30, 2008, we have not registered or distributed any securities under this shelf.

Investing Activities

Under our Investment Policy, we are permitted to invest in short-term instruments with a rating no less than R-1 (DBRS) with terms less than two years. We have $9,750,929 invested under this policy and we are currently earning interest at an effective rate of 3.77% (2007 - 4.08%).

INITIAL ADOPTION OF ACCOUNTING POLICIES

Capital Disclosures

On January 1, 2008, we adopted the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") for disclosure of our objectives, policies and processes for managing capital (CICA Handbook Section 1535), as discussed further in Note 6 of our interim consolidated financial statements.

Financial Instruments - Disclosures

On January 1, 2008, we adopted the new recommendations of the CICA for disclosures about financial instruments, including disclosures about fair value and the credit, liquidity and market risks associated with financial instruments (CICA Handbook Section 3862), as discussed further in Notes 7 and 8 of our interim consolidated financial statements.

Financial Instruments - Presentation

On January 1, 2008, we adopted the new recommendations of the CICA for presentation of financial instruments (CICA Handbook Section 3863). Adoption of this standard had no impact on the Company's financial instrument related presentation disclosures.

Goodwill and Intangible Assets

On April 1, 2008, we early adopted the new recommendations of the CICA for the accounting for goodwill and intangible assets (CICA Handbook Section 3064). The impact of adopting Section 3064 is further discussed under "Initial Adoption of New Accounting Standard" and in Note 2 of our June 30, 2008 interim consolidated financial statements.

OTHER MD&A REQUIREMENTS

We have 41,180,748 common shares outstanding at July 29, 2008. If all of our warrants (4,220,000) and options (3,870,493) were exercised we would have 49,271,241 common shares outstanding.

Additional information relating to Oncolytics Biotech Inc. is available on SEDAR at www.sedar.com.

Controls and Procedures

There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2008 that materially affected or are reasonably likely to materially affect, internal controls over financial reporting.

Liquidity risk

Liquidity risk is the risk that we will encounter difficulty in meeting

obligations associated with financial liabilities. We manage liquidity

risk through the management of our capital structure as outlined in note

6 to the unaudited financial statements.

Accounts payable are all due within the current operating period.

About Oncolytics Biotech Inc.

Oncolytics is a Calgary-based biotechnology company focused on the development of oncolytic viruses as potential cancer therapeutics. Oncolytics' clinical program includes a variety of Phase I/II and Phase II human trials using REOLYSIN(R), its proprietary formulation of the human reovirus, alone and in combination with radiation or chemotherapy. For further information about Oncolytics, please visit www.oncolyticsbiotech.com.

CONTACT: PLEASE CONTACT: For Canada: Oncolytics Biotech Inc., Cathy Ward,
210, 1167 Kensington Cr NW, Calgary, Alberta, T2N 1X7, Tel: (403) 670-7377,
Fax: (403) 283-0858, cathy.ward@oncolytics.ca; The Equicom Group, Nick
Hurst, 325, 300 5th Ave. SW, Calgary, Alberta, T2P 3C4, Tel: (403)
538-4845, Fax: (403) 237-6916, nhurst@equicomgroup.com; For United States:
The Investor Relations Group, Erika Moran, 11 Stone St, 3rd Floor, New
York, NY 10004, Tel: (212) 825-3210, Fax: (212) 825-3229,
emoran@investorrelationsgroup.com