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Oncolytics Biotech Inc. Announces 2008 Second Quarter Results
Date:7/29/2008

CALGARY, July 29 /PRNewswire-FirstCall/ - Oncolytics Biotech Inc. ("Oncolytics") (TSX:ONC, NASDAQ:ONCY) 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)."

Second Quarter Highlights

Significant Clinical Advances

- Presented positive interim U.S. Phase II sarcoma trial results at the

American Society of Clinical Oncology (ASCO) annual meeting, showing 8

of 16 evaluable patients experienced stable disease for periods

ranging from two to more than ten, 28-day cycles.

- Presented positive interim results from a U.K. combination REOLYSIN(R)

and paclitaxel/carboplatin trial at the British Society of Gene

Therapy (BSGT) conference in Edinburgh. Three head and neck patients

evaluated at that time had excellent clinical and radiological

responses without appreciable toxicity. The dose escalation portion of

this trial was completed in the second quarter.

- Received approval for U.K. and U.S. Phase II clinical trials

investigating REOLYSIN(R) in combination with paclitaxel and

carboplatin, and started patient enrolment in the U.K. trial.

- The U.S. National Cancer Institute started patient enrolment in a

Phase I/II ovarian, peritoneal and fallopian tube cancer trial using

systemic and intraperitoneal administration of REOLYSIN(R).

- Started patient enrolment in a U.K. combination REOLYSIN(R) and

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:

1. The technical feasibility of completing the intangible asset so that

it will be available for use or sale.

2. Our intention to complete the intangible asset and use or sell it.

3. Our ability to use or sell the intangible asset.

4. How the intangible asset will generate probable future economic

benefits. Among other things, we are able to demonstrate the

existence of a market for the output of the intangible asset or the

intangible asset itself or, if it is to be used internally, the

usefulness of the intangible asset.

5. The availability of adequate technical, financial and other resources

to complete the development and to use or sell the intangible asset.

6. Our ability to measure reliably the expenditure attributable to the

intangible asset during its development.

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:

March 31, December 31, December 31,

2008 2007 2006

Consolidated Balance Sheet $ $

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Intellectual Property

Intellectual property,

previously reported 5,006,297 5,026,540 5,079,805

Adjustment, adoption of

Section 3064 (4,554,422) (4,484,290) (4,176,055)

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Intellectual property, restated 451,875 542,250 903,750

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Deficit

Deficit, previously reported (83,846,498) (80,522,257) (65,030,066)

Adjustment, adoption of

Section 3064 (4,554,422) (4,484,290) (4,176,055)

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Deficit, restated (88,400,920) (85,006,547) (69,206,121)

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The impact of the early adoption of Section 3064 on our previously reported consolidated statements of loss, comprehensive loss and cash flows is as follows:

Cumulative

from

Three Month inception on

Period April 2,

Ending Year Ended Year Ended 1998

Consolidated March 31, December December to December

Statements of Loss 2008 31, 2007 31, 2006 31, 2007

and Comprehensive Loss $ $ $ $

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Net loss and

comprehensive loss,

previously reported 3,324,241 15,642,191 14,297,524 80,522,257

Adjustment, adoption

of Section 3064 70,132 308,235 330,767 4,484,290

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Net loss and

comprehensive loss,

restated 3,394,373 15,950,426 14,628,291 85,006,547

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Basic and diluted loss

per share, previously

reported (0.08) (0.39) (0.39) -

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Basic and diluted loss

per share, restated (0.08) (0.39) (0.40) -

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Cumulative

from

Three Month inception on

Period April 2,

Ending Year Ended Year Ended 1998

Consolidated March 31, December December to December

Statements of 2008 31, 2007 31, 2006 31, 2007

Cash Flows $ $ $ $

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Operating activities,

previously reported (2,991,234) (13,569,594) (12,155,372) (66,551,036)

Adjustment,

adoption of

Section 3064 (257,304) (852,498) (842,610) (6,351,778)

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Operating activities,

restated (3,248,538) (14,422,092) (12,997,982) (72,902,814)

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Investing activities,

previously reported 3,602,844 4,678,785 11,894,126 (22,987,619)

Adjustment,

adoption of

Section 3064 257,304 852,498 842,610 6,351,778

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Investing activities,

restated 3,860,148 5,531,283 12,114,394 (16,635,871)

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SECOND QUARTER RESULTS OF OPERATIONS

(for the three months ended June 30, 2008 and 2007)

Net loss for the three month period ending June 30, 2008 was $5,254,530 compared to $3,837,244 for the three month period ending June 30, 2007.

Research and Development Expenses ("R&D")

2007

2008 $

$ (Restated)

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Manufacturing and related process development

expenses 1,284,955 828,602

Clinical trial expenses 1,633,445 983,896

Pre-clinical trial and research collaboration

expenses 82,624 331,379

Intellectual property expenditures (1) 401,468 325,331

Other R&D expenses 644,412 562,498

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Research and development expenses 4,046,904 3,031,706

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Note

1 Upon adoption of CICA Handbook Section 3064, intellectual property

expenditures are now recorded as an expense for the period.

For the second quarter of 2008, R&D increased to $4,046,904 compared to $3,031,706 for the second quarter of 2007. The increase in R&D was due to the following:

Manufacturing & Related Process Development ("M&P")

2008 2007

$ $

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Product manufacturing expenses 1,089,357 774,883

Technology transfer expenses - -

Process development expenses 195,598 53,719

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Manufacturing and related process development

expenses 1,284,955 828,602

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Our M&P expenses for the second quarter of 2008 increased to $1,284,955 compared to $828,602 for the second quarter of 2007.

In the second quarter of 2008, we completed the 40-litre production run that started earlier in the year and began the vial and packaging process. As well, we commenced an additional 40-litre production run. In the second quarter of 2007, we completed the 20-litre production runs that had been scheduled earlier in 2007.

Our process development activity in the second quarter of 2008, continues to focus on scale up to 100-litre production runs and also includes lyophilization (freeze drying) studies. In the second quarter of 2007, our process development activity focused on completing our 40-litre scale up studies.

Clinical Trial Program

2008 2007

$ $

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Direct clinical trial expenses 1,603,171 913,360

Other clinical trial expenses 30,274 70,536

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Clinical trial expenses 1,633,445 983,896

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During the second quarter of 2008, our direct clinical trial expenses increased to $1,603,171 compared to $913,360 for the second quarter of 2007. In the second quarter of 2008, we incurred direct patient costs in our eight enrolling clinical trials compared to only six actively enrolling clinical trials in the second quarter of 2007.

Pre-Clinical Trial Expenses and Research Collaborations

2008 2007

$ $

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Research collaboration expenses 82,624 331,379

Pre-clinical trial expenses - -

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Pre-clinical trial expenses and research

collaborations 82,624 331,379

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During the second quarter of 2008, our research collaboration expenses were $82,624 compared to $331,379 for the second quarter of 2007. Our research collaboration activity continues to focus on the interaction of the immune system and the reovirus and the use of the reovirus as a co-therapy with existing chemotherapeutics and radiation. In the second quarter of 2008, we continued to review our collaborations, only renewing certain contracts. In the second quarter of 2007, we incurred costs associated with a number of previously contracted collaborations.

Intellectual Property Expenditures

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2007

2008 $

$ (Restated)

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Intellectual property expenditures 401,468 325,331

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In the second quarter of 2008, our intellectual property expenditures were $401,468 compared to $325,331 for the second quarter of 2007. The change in intellectual property expenditures reflects the timing of filing costs associated with our expanded patent base. 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.

Other Research and Development Expenses

2008 2007

$ $

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R&D consulting fees 66,337 50,114

R&D salaries and benefits 449,330 395,166

Other R&D expenses 128,745 117,218

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Other research and development expenses 644,412 562,498

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Our R&D salaries and benefits costs in the second quarter of 2008 were $449,330 compared to $395,166 in the second quarter of 2007. The increase is a result of increases in staff levels during the second quarter of 2008 compared to the second quarter of 2007.

Operating Expenses

2008 2007

$ $

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cyclophosphamide trial.

- Subsequent to the quarter end, announced that the 200th patient had

been treated with REOLYSIN(R).

Preclinical Advances

- Two presentations were delivered at the American Society of Gene

Therapy (ASGT) meeting covering work using the reovirus against

mesothelioma, and also to purge lymph nodes of tumor cells.

- Another two presentations were delivered at the American Association

for Cancer Research (AACR) covering work using the reovirus in

combination with radiation for pediatric sarcomas, and reovirus as a

purging agent for autologous stem cell transplants.

- A paper covering preclinical work demonstrating that reovirus can kill

melanoma cell lines and freshly resected tumour was published in Gene

Therapy.

- A paper covering preclinical work demonstrating that reovirus can

activate dendritic cells to promote innate, antitumor immunity was

published in the Journal of Immunology.

Manufacturing

- Successfully transferred cGMP production of REOLYSIN(R) at the

40-litre batch size to SAFC Pharma(TM), a Division of Sigma-Aldrich

Corporation. Yields at the 40-litre scale should provide sufficient

doses to support future development plans leading to registration and

also early-stage commercial requirements. Development work at the 100-

litre scale is continuing.

Intellectual Property

- One U.S. patent and one Canadian patent were secured in the second

quarter. Oncolytics has secured more than 180 patents worldwide,

including 27 U.S. patents and 9 Canadian patents.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements of Onc-------

Public company related expenses 1,066,933 719,501

Office expenses 252,565 272,806

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Operating expenses 1,319,498 992,307

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During the second quarter of 2008, our public company related expenses increased to $1,066,933 compared to $719,501 for the second quarter of 2007. In the second quarter of 2008, we continued to incur additional professional fees associated with the expansion of our corporate structure and an increase in our investor relations activity.

YEAR TO DATE RESULTS OF OPERATIONS

(for the six months ended June 30, 2008 and 2007)

Net loss for the six month period ending June 30, 2008 was $8,648,903 compared to $8,047,335 for the six month period ending June 30, 2007.

Research and Development Expenses ("R&D")

2007

2008 $

$ (Restated)

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Manufacturing and related process development

expenses 1,788,048 2,666,795

Clinical trial expenses 2,676,237 1,705,513

Pre-clinical trial and research collaboration

expenses 82,940 437,660

Intellectual property expenditures (1) 669,054 562,809

Other R&D expenses 1,224,022 1,114,643

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Research and development expenses 6,440,301 6,487,420

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Note:

1. Upon adoption of CICA Handbook Section 3064, intellectual property

expenditures are now recorded as an expense for the period.

For the six month period ending June 30, 2008, our R&D expenses were $6,440,301 compared to $6,487,420 for the six month period ending June 30, 2007. The change in R&D was due to the following:

Manufacturing & Related Process Development ("M&P")

2008 2007

$ $

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Product manufacturing expenses 1,705,017 2,523,301

Process development expenses 83,031 143,494

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Manufacturing and related process development

expenses 1,788,048 2,666,795

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Our M&P expenses for the six month period ending June 30, 2008 decreased to $1,788,048 compared to $2,666,795 for the six month period ending June 30, 2007.

During the six month period ending June 30, 2008, we completed a 40-litre cGMP production run of REOLYSIN(R) that will be used to supply our clinical trial program. As well, towards the end of the first half of 2008, we began the fill and packaging process of this 40-litre run and commenced an additional 40-litre production run. During the first half of 2007, we completed and initiated production runs at the 20-litre scale.

Our process development expenses for the six month period ending June 30, 2008 were $83,031 compared to $143,494 for the six month period ending June 30, 2007. During the first half of 2008, we continued examining further scale up to the 100-litre level and lyophilization. During the first half of 2007, our process development focus was on our earlier 40-litre scale up studies.

We now expect that our M&P expenses for 2008 will decrease compared to 2007. We are realizing the benefit of our increased scale and better production yields resulting from our prior process development activities allowing us to reduce the number of production runs for 2008. We initiated our final 40-litre production run for 2008 which we expect will be completed in the third quarter. We plan to fill and package enough REOLYSIN(R) to meet our immediate clinical trial requirements during the third quarter. We still expect to finalize our 100-litre scale up studies and continue the examination of a lyophilization process for REOLYSIN(R) in 2008.

Clinical Trial Program

2008 2007

$ $

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Direct clinical trial expenses 2,597,818 1,596,467

Other clinical trial expenses 78,419 109,046

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Clinical trial expenses 2,676,237 1,705,513

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During the six month period ending June 30, 2008, our direct clinical trial expenses increased to $2,597,818 compared to $1,596,467 for the six month period ending June 30, 2007. In the first half of 2008, we incurred direct patient costs in our eight enrolling clinical trials of which six were enrolling throughout the six month period. During the first half of 2007, we were actively enrolling in six clinical trials of which only three had been enrolling throughout the six month period.

We still expect our clinical trial expenses to increase in 2008 compared to 2007. The increase in these expenses is expected to arise from continued enrollment and continued re-treatments in our existing clinical trials.

Pre-Clinical Trial Expenses and Research Collaborations

2008 2007

$ $

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Research collaboration expenses 82,940 400,530

Pre-clinical trial expenses - 37,130

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Pre-clinical trial expenses and research

collaborations 82,940 437,660

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During the six month period ending June 30, 2008, our research collaboration expenses were $82,940 compared to $400,530 for the six month period ending June 30, 2007. Our research collaboration activity continues to focus on the interaction of the immune system and the reovirus and the use of the reovirus as a co-therapy with existing chemotherapeutics and radiation. During the first half of 2008, we have been reviewing our collaborations and renewing only certain contracts which has resulted in fewer ongoing collaborations compared to the first half of 2007.

We now expect that our pre-clinical trial expenses and research collaborations in 2008 will be less than 2007.

Intellectual Property Expenditures

2007

2008 $

$ (Restated)

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Intellectual property expenditures 669,054 562,809

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During the first half of 2008, our intellectual property expenditures were $669,054 compared to $562,809 for the first half of 2007. The change in intellectual property expenditures reflects the timing of filing costs associated with our expanded patent base. As well, we have benefited from fluctuations in the Canadian dollar as our patent costs are typically incurred in U.S. currency. 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.

Other Research and Development Expenses

2008 2007

$ $

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R&D consulting fees 93,746 141,891

R&D salaries and benefits 927,448 767,553

Quebec scientific research and experimental

development refund - (15,927)

Other R&D expenses 202,828 221,126

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Other research and development expenses 1,224,022 1,114,643

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During the six month period ending June 30, 2008, our R&D consulting fees were $93,746 compared to $141,891 for the six month period ending June 30, 2007. During the first half of 2007, we incurred consulting activity associated with our co-therapy clinical trial applications that was not incurred in the first half of 2008.

During the six month period ending June 30, 2008, our R&D salaries and benefits costs were $927,448 compared to $767,553 for the six month period ending June 30, 2007. The increase is a result of increases in staff and salary levels for 2008 compared to 2007.

We now expect that our Other R&D expenses will increase compared to 2007 due to increases in our staff levels.

Operating Expenses

2008 2007

$ $

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Public company related expenses 1,793,543 1,301,377

Office expenses 576,849 597,646

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Operating expenses 2,370,392 1,899,023

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During the six month period ending June 30, 2008, our public company related expenses were $1,793,543 compared to $1,301,377 for the six month period ending June 30, 2007. During the first half of 2008, we incurred an increase in professional fees associated with the expansion of our corporate structure and an increase in our investor relations activity.

During the six month period ending June 30, 2008, our office expenses were $576,849 compared to $597,646 for the six month period ending June 30, 2007. Our office expense activity has remained consistent in the first half of 2008 compared to the first half of 2007.

Stock Based Compensation

2008 2007

$ $

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Stock based compensation 37,616 103,969

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Stock based compensation for the six month period ending June 30, 2008 was $37,616 compared to $103,969 for the six month period ending June 30, 2007. In the first half of 2008 and 2007, we incurred stock based compensation associated with the vesting of options previously granted.

Commitments

As at June 30, 2008, we are committed to payments totaling $1,992,000 for activities related to manufacturing, clinical trial activity and collaborations. All of these committed payments are considered to be part of our normal course of business.

SUMMARY OF QUARTERLY RESULTS

The following unaudited quarterly information is presented in thousands of dollars except for per share amounts:

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2008 2007 2006

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June March Dec. Sept. June March Dec. Sept.

(1) (1) (1) (1) (1) (1) (1) (1)

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Revenue - - - - - - -

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Interest

income 174 180 265 319 359 268 286 320

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Net

loss(3) 5,255 3,394 4,116 3,786 3,837 4,210 4,907 3,460

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Basic and

diluted

loss per

common

share(3) $0.13 $0.10 $0.10 $0.09 $0.09 $0.11 $0.13 $0.09

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Total

assets

(4) 19,011 22,854 26,298 29,444 33,269 37,502 29,390 33,911

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Total

cash(2),

(4) 17,930 21,963 25,214 28,191 31,533 35,681 27,614 31,495

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Total

long-term

debt(5) - - - - - - 150 150

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Cash

dividends

declared(6) Nil Nil Nil Nil Nil Nil Nil Nil

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(1) Subsequent to the adoption of CICA Section 3064 "Goodwill and

Intangible Assets". See note 2 to the unaudited interim consolidated

financial statements for June 30, 2008.

(2) Included in total cash are cash and cash equivalents plus short-term

investments.

(3) Included in net loss and loss per common share between June 2008 and

July 2006 are quarterly stock based compensation expenses of

$18,023, $19,593, $396,278, $38,909, $82,573, $21,396, $109,670, and

$34,671, respectively.

(4) We issued 4,600,000 units for net cash proceeds of $12,063,394

during 2007 with each unit consisting of one common share and one

half of one common share purchase warrant. (2006 - 284,000 common

shares for cash proceeds of $241,400)

(5) The long-term debt recorded represents repayable loans from the

Alberta Heritage Foundation. On January 1, 2007, in conjunction with

the adoption of the CICA Handbook section 3855 "Financial

Instruments", this loan was recorded at fair value (see note 3 of

the December 31, 2007 audited financial statements).

(6) We have not declared or paid any dividends since incorporation.

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 tholytics 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 mae 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 http://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.

Oncolytics Biotech Inc.

CONSOLIDATED BALANCE SHEETS

(unaudited)

As at,

December 31,

2007

June 30, $

2008 (Restated

$ see note 2)

-------------------------------------------------------------------------

ASSETS

Current

Cash and cash equivalents 8,179,341 6,715,096

Short-term investments (note 7) 9,750,929 18,498,733

Accounts receivable 47,283 80,085

Prepaid expenses 435,727 260,300

-------------------------------------------------------------------------

18,413,280 25,554,214

Property and equipment 236,468 201,103

Intellectual property (note 2) 361,500 542,250

-------------------------------------------------------------------------

19,011,248 26,297,567

-------------------------------------------------------------------------

-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current

Accounts payable and accrued liabilities 4,146,195 2,821,227

-------------------------------------------------------------------------

Shareholders' equity

Share capital

Authorized: unlimited number of common shares

Issued: 41,180,748

(December 31, 2007 - 41,180,748) 92,759,665 92,759,665

Warrants 5,346,260 5,346,260

Contributed surplus (note 3) 10,414,578 10,376,962

Deficit (notes 2 and 4) (93,655,450) (85,006,547)

-------------------------------------------------------------------------

14,865,053 23,476,340

-------------------------------------------------------------------------

19,011,248 26,297,567

-------------------------------------------------------------------------

-------------------------------------------------------------------------

See accompanying notes

Oncolytics Biotech Inc.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(unaudited)

Cumulative

from

inception

Three Month Six Month on April 2,

Period Period 1998

Three Month Ending June Six Month Ending June to June

Period 30, 2007 Period 30, 2007 30, 2008

Ending June $ Ending June $ $

30, 2008 (Restated 30, 2008 (Restated (Restated

$ see note 2) $ see note 2) see note 2)

-------------------------------------------------------------------------

Revenue

Rights revenue - - - - 310,000

-------------------------------------------------------------------------

- - - - 310,000

-------------------------------------------------------------------------

Expenses

Research and

development 4,046,904 3,031,706 6,440,301 6,487,420 67,540,017

Operating 1,319,498 992,307 2,370,392 1,899,023 22,976,028

Stock based

compensation 18,023 82,573 37,616 103,969 4,742,421

Foreign

exchange

loss/gain (58,347) (10,855) (49,085) (16,088) 608,625

Amortization -

intellectual

property 90,375 90,375 180,750 180,750 3,253,500

Amortization -

property and

equipment 12,194 10,009 23,380 19,864 471,777

-------------------------------------------------------------------------

5,428,647 4,1nagement 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
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SOURCE Oncolytics Biotech Inc.
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