Oncolytics Biotech Inc. Announces 2007 First Quarter Results

CALGARY, April 27 /PRNewswire-FirstCall/ - Oncolytics Biotech Inc. ("Oncolytics") (TSX:ONC, NASDAQ:ONCY) today announced its financial results and highlights for the three month period ended March 31, 2007.

    First Quarter Highlights

    -   Received approval for two U.K. clinical trials; one investigating
        REOLYSIN(R) in combination with gemcitabine and the other
        investigating REOLYSIN(R) in combination with docetaxel;

    -   Presented results from a number of preclinical studies that show that
        the reovirus kills cancer cells directly, and also primes the immune
        system to fight cancer cells exposed to reovirus;

    -   Presented preclinical results at the 4th International Conference on
        Oncolytic Viruses as Cancer therapeutics in Carefree, Arizona,
        showing that reovirus has a synergistic effect when used in
        combination with cisplatin or cyclophosphamide;

    -   Appointed Ms. Mary Ann Dillahunty as Vice President, Intellectual
        Property;

    -   Closed a financing and over-allotment option that provided gross
        proceeds of $13.8 million to the Company;

    -   Secured two additional U.S. patents in the quarter, with a third
        issued just subsequent to the quarter end;

    -   In April 2007, announced the initiation of a U.S. Phase II sarcoma
        clinical trial; and,

    -   Presented preclinical results at the American Association for Cancer
        Research Annual Meeting in April showing the synergistic combination
        of reovirus and gemcitabine.

"Oncolytics is pleased to have initiated its Phase II REOLYSIN(R) clinical program both in the U.S. and the U.K.," said Dr. Brad Thompson, President and CEO of Oncolytics. "We are looking forward to continuing to further expand our clinical program in 2007."


    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited financial statements of Oncolytics Biotech Inc. as at and for the three months ended March 31, 2007 and 2006, 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, 2006. 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 2007 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 research and development efforts 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 research and development efforts. 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 research and 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 the 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.

REOLYSIN(R) Development Update for the First Quarter of 2007

We continue to develop our lead product REOLYSIN(R) as a possible 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

We currently have six clinical trials ongoing of which three are actively enrolling patients and three have been recently approved.

Clinical Trials - Actively Enrolling

During the first quarter of 2007, we continued to enroll patients in our phase II and Phase Ib combination REOLYSIN(R)/radiation clinical trials in the U.K. and in our Phase I/II recurrent malignant glioma clinical trial in the U.S.

Clinical Trials - Recently Approved to Commence

Along with our U.K. REOLYSIN(R) in combination with paclitaxel and carboplatin clinical trial, we received approval to commence two additional co-therapy clinical trials in the U.K.

U.K. REOLYSIN(R) in Combination with Docetaxel

In the first quarter of 2007, we announced we had received a letter of approval from the U.K. Medicines and Healthcare products Regulatory Agency ("MHRA") for our Clinical Trial Application ("CTA") to begin a clinical trial using intravenous administration of REOLYSIN(R) in combination with docetaxel (Taxotere(R)) in patients with advanced cancers including bladder, prostate, lung and upper gastro-intestinal. The principal investigator is Professor Hardev Pandha of The Royal Surrey Hospital, U.K. Docetaxel is used in patients with lung, breast and prostate cancers, and is also used widely in the treatment of many other types of cancers.

The trial has two components. The first is an open-label, dose-escalating, non-randomized study of REOLYSIN(R) given intravenously with docetaxel every three weeks. A standard dosage of docetaxel will be delivered with escalating dosages of REOLYSIN(R) intravenously. A maximum of three cohorts will be enrolled in the REOLYSIN(R) dose escalation portion. The second component of the trial will immediately follow and will include the enrolment of a further 12 patients at the maximum dosage of REOLYSIN(R) in combination with a standard dosage of docetaxel.

Eligible patients include those who have been diagnosed with advanced or metastatic solid tumours such as bladder, lung, prostate or upper gastro-intestinal cancers that are refractory 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 docetaxel. 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.K. REOLYSIN(R) in Combination with Gemcitabine

During the first quarter of 2007, we announced we had received a letter of approval from the MHRA to begin a clinical trial using intravenous administration of REOLYSIN(R) in combination with gemcitabine (Gemzar(R)) in patients with advanced cancers including pancreatic, lung and ovarian. The principal investigators are Dr. Johann de Bono of The Royal Marsden NHS Foundation Trust and The Institute of Cancer Research, London and Professor Jeff Evans of the University of Glasgow and the Beatson Oncology Centre in Glasgow, Scotland. Gemcitabine is used in patients with lung, pancreatic and ovarian cancers and is also used widely in the treatment of many other types of cancers.

This trial has two components. The first is an open-label, dose-escalating, non-randomized study of REOLYSIN(R) given intravenously with gemcitabine every three weeks. A standard dosage of gemcitabine will be delivered with escalating dosages of REOLYSIN(R) intravenously. A maximum of three cohorts will be enrolled in the REOLYSIN(R) dose escalation portion. The second component of the trial will immediately follow and will include the enrolment of a further 12 patients at the maximum dosage of REOLYSIN(R) in combination with a standard dosage of gemcitabine.

Eligible patients include those who have been diagnosed with advanced or metastatic solid tumours including pancreatic, lung and ovarian cancers that are refractory to standard therapy or for which no curative standard therapy exists. The primary objective of the trial is to determine the MTD, DLT, recommended dose and dosing schedule and safety profile of REOLYSIN(R) when administered in combination with gemcitabine. 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.

Pre-Clinical Trial and Collaborative Program

In the first quarter of 2007, an oral presentation entitled "Reovirus as a Potentially Immunogenic as well as Cytotoxic Therapy for Metastatic Colorectal Cancer" was given by one of our collaborators, Dr. Sheila Fraser of St. James's University Hospital in Leeds, U.K. The investigators tested reovirus in vitro against recently resected colorectal cancer liver metastases. The results showed that a significant proportion of tumour cell cultures showed susceptibility to death following reovirus infection, and also demonstrated effective replication of reovirus within these cells. In addition, dendritic cells that prime the immune system to fight cancer cells were activated by exposure to the reovirus. The investigators concluded that the data supports the development of reovirus as a novel therapy for colorectal cancer, with the potential to direct the immune system to target cancer cells.

During the first quarter of 2007, an abstract entitled "In Vivo Synergy between Oncolytic Reovirus and Gemcitabine in Ras-Mutated Human HCT116 Xenografts" was made available on the American Association for Cancer Research (AACR) website at www.aacr.org. The abstract covered preclinical work using reovirus in combination with gemcitabine and showed the combination of reovirus and gemcitabine was more effective than gemcitabine or reovirus alone at killing human colon cancer cells in a mouse model.

In March 2007, Professor Hardev Pandha of The Royal Surrey Hospital, U.K. presented a poster entitled "Synergistic Antitumour Activity of Oncolytic Reovirus and Cisplatin in Malignant Melanoma" at the 4th International Conference on Oncolytic Viruses as Cancer Therapeutics in Carefree, Arizona. The results of the preclinical study showed that the combination of reovirus and cisplatin was significantly more effective than cisplatin or reovirus alone at killing melanoma cancer cells in a mouse model. The investigators concluded that the addition of chemotherapeutic agents can enhance the efficacy of reovirus therapy.

Finally in March 2007, Dr. Richard Vile of the Mayo College of Medicine, Rochester, Minnesota delivered an oral presentation at the 4th International Conference on Oncolytic Viruses as Cancer Therapeutics in Carefree, Arizona that covered a study of systemic administration of reovirus in combination with cyclophosphamide, an immune modulator. The work demonstrated that systemic administration of reovirus in combination with cyclophosphamide enhanced tumour regression in a melanoma animal model without increasing toxicity. In addition, the investigators were able to demonstrate that the addition of cyclophosphamide significantly increased the amount of reovirus replicating within the tumour. The investigators concluded that the addition of cyclophosphamide may lead to improved efficacy of REOLYSIN(R) treatment.

Manufacturing and Process Development

We continued to have REOLYSIN(R) manufactured in order to supply our current and future clinical trial program. In the first quarter of 2007, we contracted for additional cGMP ("current good manufacturing practices") production runs. As well, we continued process development activity focused on the potential scale up of our manufacturing process.

Intellectual Property

In the first quarter of 2007, two U.S. patents were issued. At the end of the first quarter of 2007, we had been issued a total of 19 U.S., five Canadian and three European patents. We also have other patent applications filed in the U.S., Europe and Canada and other jurisdictions.

Financing Activity

During the first quarter of 2007, we issued 4,600,000 units at a price of $3.00 per unit for net proceeds of $12,068,172. Each unit consisted of one common share and one-half of one common share purchase warrant. Each whole common share purchase warrant shall entitle the holder thereof to acquire one common share upon payment of $3.50 expiring on February 22, 2010. The net proceeds from this offering will be used for our clinical trial program, manufacturing activities in support of the clinical trial program and for general corporate purposes.

Financial Impact

We estimated at the beginning of 2007 that our monthly cash usage would be approximately $1,400,000 for 2007. Our cash usage for the first quarter of 2007 was $3,747,709 from operating activities and $252,925 for the purchases of intellectual property and capital assets which is in line with our estimate. Our net loss for the first quarter of 2007 was $4,113,231.

Cash Resources

We exited the first quarter of 2007 with cash resources totaling $35,681,286 (see "Liquidity and Capital Resources").

Expected REOLYSIN(R) Development for the Remainder of 2007

We believe that we will continue to expand our clinical trials to include studies investigating REOLYSIN(R) as a monotherapy. As well, we expect to commence enrollment in our co-therapy chemotherapy clinical trials in 2007 and to continue to enroll patients in our other trials. We believe we will complete enrollment in our U.K. Phase Ia/Ib and Phase II combination REOLYSIN (R) /radiation clinical trials by the end of 2007 and complete enrollment in our chemotherapy co-therapy studies in 2008. We expect to produce REOLYSIN(R) in 2007 to supply our clinical trial program. We also plan to complete our scale up studies in an effort to continue to improve our manufacturing process.

Based on our expected activity in 2007, we continue to estimate our monthly cash usage to be $1,400,000 per month (see "Liquidity and Capital Resources").

    Recent 2007 Progress

    U.S. Phase II Sarcoma Clinical Trial

On April 11, 2007, we announced that subsequent to the regulatory review period for this submission, we are proceeding with a Phase II trial to evaluate the intravenous administration of REOLYSIN(R) in patients with various sarcomas that have metastasized to the lung. The Principal Investigators are Dr. Glenn S. Kroog of the Montefiore Medical Center/Albert Einstein College of Medicine in the Bronx, New York, Dr. Laurence H. Baker of the University of Michigan Comprehensive Cancer Center in Ann Arbor, and Dr. Monica Mita of the Cancer Therapy and Research Center, Institute for Drug Development in San Antonio, Texas.

This trial is a Phase II, open-label, single agent study whose primary objective is to measure tumour responses and duration of response, and to describe any evidence of antitumour activity of intravenous, multiple dose REOLYSIN(R) in patients with bone and soft tissue sarcomas metastatic to the lung. REOLYSIN(R) will be given intravenously to patients at a dose of 3x10 (10) TCID (50) for five consecutive days. Patients may receive additional five-day cycles of therapy every four weeks for a maximum of eight cycles. Up to 52 patients will be enrolled in the study.

Eligible patients must have a bone or soft tissue sarcoma metastatic to the lung deemed by their physician to be unresponsive to, or untreatable by standard therapies. These include patients with osteosarcoma, Ewing sarcoma family tumours, malignant fibrous histiocytoma, synovial sarcoma, fibrosarcoma and leiomyosarcoma.

RESULTS OF OPERATIONS

Net loss for the three month period ending March 31, 2007 was $4,113,231 compared to $2,994,536 for the three month period ending March 31, 2006.

    Research and Development Expenses ("R&D")

                                                           2007       2006
                                                             $          $
    -------------------------------------------------------------------------
    Manufacturing and related process
     development expenses                               1,838,193    843,141
    Clinical trial expenses                               721,617    546,767
    Pre-clinical trial expenses and collaborations        106,281    155,086
    Other R&D expenses                                    552,146    371,328
    -------------------------------------------------------------------------
    Research and development expenses                   3,218,237  1,916,322
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

For the first quarter of 2007, R&D increased to $3,218,237 compared to $1,916,322 for the first quarter of 2006. The increase in R&D was due to the following:

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

                                                           2007       2006
                                                             $          $
    -------------------------------------------------------------------------
    Product manufacturing expenses                      1,748,417    643,423
    Process development expenses                           89,776    199,718
    -------------------------------------------------------------------------
    Manufacturing and related process development
     expenses                                           1,838,193    843,141
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Our M&P expenses for the first quarter of 2007 increased to $1,838,193 compared to $843,141 for the first quarter of 2006.

In the first quarter of 2007, our production and vial filling activity increased compared to the first quarter of 2006. In the first quarter of 2007, we commenced additional production runs to manufacture REOLYSIN(R). As well, we incurred costs associated with the vialling of our production runs that were completed at the end of 2006. In the first quarter of 2006, we were completing the production runs that had started at the end of 2005.

Our process development expenses for the first quarter of 2007 were $89,776 compared to $199,718 for the first quarter of 2006. In the first quarter of 2007, our main process development focus was on our scale up studies. In the first quarter of 2006, our process development activity included scale up studies and the validation of the fill process used in our manufacturing process.

We still expect that our overall manufacturing and related process development expenses for 2007 will decrease compared to 2006. We expect to complete our planned 2007 production runs in the third quarter of 2007. As well, we expect to continue our process development activity that is examining the potential scale up of our manufacturing process.

We are also examining ways to reduce our economic dependence resulting from having only a single cGMP manufacturer. This might include building up a level of inventory, increasing the scale of each production run, engaging another cGMP manufacturer or manufacturing REOLYSIN(R) ourselves. Depending on how we mitigate our risk of economic dependence our expectation of our 2007 M&P expenses may change.

    Clinical Trial Program
                                                           2007       2006
                                                             $          $
    -------------------------------------------------------------------------
    Direct clinical trial expenses                        683,107    499,633
    Other clinical trial expenses                          38,510     47,134
    -------------------------------------------------------------------------
    Clinical trial expenses                               721,617    546,767
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the first quarter of 2007, our direct clinical trial expenses increased to $683,107 compared to $499,633 for the first quarter of 2006. In the first quarter of 2007, we incurred direct patient costs in our three ongoing clinical trials along with start up costs associated with our three U.K. co-therapy clinical trials that were approved to commence at the end of 2006 and at the beginning of 2007. In the first quarter of 2006, we incurred direct patient costs in our three ongoing clinical trials.

We still expect our clinical trial expenses in 2007 will increase compared to 2006 as we expect to commence enrollment in our U.K. co-therapy trials in 2007. As well, we expect to continue to expand our clinical trial program to include additional Phase II trials.

    Pre-Clinical Trial Expenses and Research Collaborations

                                                           2007       2006
                                                             $          $
    -------------------------------------------------------------------------
    Research collaboration expenses                       106,281    155,086
    Pre-clinical trial expenses                                 -          -
    -------------------------------------------------------------------------
    Pre-clinical trial expenses and research
     collaborations                                       106,281    155,086
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the first quarter of 2007, our research collaboration expenses were $106,281 compared to $155,086 for the first quarter of 2006. 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. As well, we will also examine the use of new RAS active viruses as potential therapeutics and investigate new uses of the reovirus in therapy.

For the remainder of 2007, we still expect that pre-clinical trial expenses and research collaborations will decline compared to 2006. We expect to continue with our various collaborations in order to provide support for our expanding clinical trial program. As well, we may expand our collaborative activities to include other viruses.

    Other Research and Development Expenses

                                                           2007       2006
                                                             $          $
    -------------------------------------------------------------------------
    R&D consulting fees                                    91,776     32,955
    R&D salaries and benefits                             372,389    321,125
    Quebec scientific research and experimental
     development refund                                         -    (52,344)
    Other R&D expenses                                     87,981     69,592
    -------------------------------------------------------------------------
    Other research and development expenses               552,146    371,328
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the first quarter of 2007, our R&D consulting fees were $91,776 compared to $32,955 for the first quarter of 2006. In the first quarter of 2007, we incurred consulting activity associated with our ongoing clinical trials and assistance with our clinical trial applications. In the first quarter of 2006, our consulting activity related to our ongoing clinical trials.

Our R&D salaries and benefits costs were $372,389 in the first quarter of 2007 compared to $321,125 in the first quarter of 2006. The increase is a result of increases in salary and staff levels along with the hiring of our Vice President of Intellectual Property in 2007.

We now expect that our other research and development expenses for the remainder of 2007 will increase compared to 2006. We expect that salaries and benefits will increase to reflect increased compensation levels and the salary and benefit costs for our Vice President of Intellectual Property. Our R&D consulting fees are expected to remain consistent with 2006. However, we may choose to engage additional consultants to assist us in the development of protocols and regulatory filings for our additional combination therapy and phase II clinical trial studies, possibly causing our R&D consulting expenses to increase.

    Operating Expenses
                                                           2007       2006
                                                             $          $
    -------------------------------------------------------------------------
    Public company related expenses                       581,876    834,720
    Office expenses                                       324,839    283,216
    -------------------------------------------------------------------------
    Operating expenses                                    906,715  1,117,936
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the first quarter of 2007, our public company related expenses were $581,876 compared to $834,720 for the first quarter of 2006. In the first quarter of 2006, we incurred financial advisory costs that were not incurred in the first quarter of 2007.

During the first quarter of 2007, our office expenses were $324,839 compared to $283,216 for the first quarter of 2006. Our office expense activity has remained consistent in the first quarter of 2007 compared to the first quarter of 2006 with increases mainly due to increased compensation levels and a general increase in office costs.

Commitments

As at March 31, 2007, we are committed to payments totaling $1,623,000 during the remainder of 2007 for activities related to 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:


    -------------------------------------------------------------------------
                2007                2006                       2005
    -------------------------------------------------------------------------
               March    Dec.   Sept.    June   March    Dec.   Sept.    June
    -------------------------------------------------------------------------
    Revenue        -       -       -       -       -       -       -       -
    -------------------------------------------------------------------------
    Interest
     income      268     286     320     335     292     160     211     168
    -------------------------------------------------------------------------
    Net
     loss(3),  4,156   4,890   3,425   2,988   2,995   3,941   3,510   2,955
    -------------------------------------------------------------------------
    Basic
     and
     diluted
     loss per
     common
     share(3)  $0.11   $0.13   $0.09   $0.08   $0.08   $0.12   $0.11   $0.09
    -------------------------------------------------------------------------
    Total
     assets
    (1),(4)   41,775  33,566  37,980  40,828  43,660  46,294  34,538  38,081
    -------------------------------------------------------------------------
    Total
     cash
    (2),(4)   35,681  27,614  31,495  34,501  37,687  40,406  28,206  31,975
    -------------------------------------------------------------------------
    Total
     long-term
     debt(5)       -     150     150     150     150     150     150     150
    -------------------------------------------------------------------------
    Cash
     dividends
     declared(6) Nil     Nil     Nil     Nil     Nil     Nil     Nil     Nil
    -------------------------------------------------------------------------
    (1) Subsequent to the acquisition of Oncolytics Biotech Inc. by SYNSORB
        in April 1999, we applied push down accounting. See note 2 to the
        audited financial statements for 2006.
    (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 March 2007 and
        April 2004 are quarterly stock based compensation expenses of
        $64,167, $109,670, $34,671, $222,376, $36,833, $38,152, $4,173, and
        $8,404, respectively.
    (4) We issued 4,600,000 common shares for net cash proceeds of $12,068
        during 2007 (2006 - 284,000 common shares for cash proceeds of
        $241,400; 2005 - 4,321,252 common shares for cash proceeds of
        $18,789,596).
    (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 1 of the
        March 31, 2007 interim financial statements).
    (6) We have not declared or paid any dividends since incorporation.

    LIQUIDITY AND CAPITAL RESOURCES

    Liquidity

As at March 31, 2007, we had cash and cash equivalents (including short-term investments) and working capital positions of $35,681,286 and $33,664,830, respectively compared to $27,613,748 and $25,719,870, respectively for December 31, 2006. The increase in 2007 reflects the cash inflow from financing activities of $12,068,172 offset by cash usage from operating activities and purchases of intellectual property of $3,747,709 and $218,177, respectively.

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. For the remainder of 2007, we are expecting to commence patient enrollment in our co-therapy trials and continue to enroll patients in our existing trials throughout 2007. We also expect to continue to expand our clinical trial program. As well we expect to continue with our collaborative studies pursuing support for our future clinical trial program. We will therefore need to ensure that we have enough REOLYSIN(R) to supply our clinical trial and collaborative programs. We continue to expect our cash usage in 2007 to be $1,400,000 per month 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.

Capital Expenditures

We spent $218,177 on intellectual property in the first quarter of 2007 compared to $230,948 in the first quarter of 2006. The change in intellectual property expenditures reflects the timing of filing costs associated with our expanded patent base. In the first quarter of 2007, two U.S. patents were issued bringing our total patents issued to 19 in the U.S., five in Canada and three in Europe.

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 $24,356,007 invested under this policy and we are currently earning interest at an effective rate of 4.08% (2006 - 3.56%).

OTHER MD&A REQUIREMENTS

We have 41,120,748 common shares outstanding at April 26, 2007. If all of our warrants (4,972,000) and options (3,537,950) were exercised we would have 49,630,698 common shares outstanding.


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

                           Oncolytics Biotech Inc.

                               BALANCE SHEETS
                                 (unaudited)

    As at
                                                     March 31,   December 31,
                                                       2007          2006
                                                         $             $
    -------------------------------------------------------------------------
    ASSETS
    Current
    Cash and cash equivalents                       11,325,279     3,491,511
    Short-term investments (note 7)                 24,356,007    24,122,237
    Accounts receivable                                 50,948        84,003
    Prepaid expenses                                   781,957       638,540
    -------------------------------------------------------------------------
                                                    36,514,191    28,336,291

    Property and equipment                             174,488       149,596

    Intellectual property                            5,086,290     5,079,805
    -------------------------------------------------------------------------
                                                    41,774,969    33,565,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Accounts payable and accrued liabilities         2,849,361     2,616,421
    -------------------------------------------------------------------------
    Alberta Heritage Foundation loan (notes 1 and 8)         -       150,000
    -------------------------------------------------------------------------

    Shareholders' equity
    Share capital (note 2)
      Authorized: unlimited number of common shares
      Issued: 41,120,748
       (December 31, 2006 - 36,520,748)             92,713,443    83,083,271
    Warrants (note 2)                                6,654,740     4,216,740
    Contributed surplus (note 4)                     8,550,722     8,529,326
    Deficit (notes 1 and 5)                        (68,993,297)  (65,030,066)
    -------------------------------------------------------------------------
                                                    38,925,608    30,799,271
    -------------------------------------------------------------------------
                                                    41,774,969    33,565,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes


                           Oncolytics Biotech Inc.

                  STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
                                 (unaudited)

    For the three month periods ended March 31,
                                                                  Cumulative
                                                                     from
                                                                  inception
                                                                  on April 2,
                                                                    1998 to
                                                                   March 31,
                                          2007          2006         2007
                                            $             $            $
    -------------------------------------------------------------------------

    Revenue
    Rights revenue                             -             -       310,000
    -------------------------------------------------------------------------
                                               -             -       310,000
    -------------------------------------------------------------------------

    Expenses
    Research and development           3,218,237     1,916,322    46,439,431
    Operating                            906,715     1,117,936    17,677,296
    Stock based compensation (note 3)     21,396        36,833     4,187,045
    Foreign exchange loss (gain)          (5,233)      (10,051)      643,615
    Amortization - intellectual
     property                            230,992       210,440     4,267,826
    Amortization - property and
     equipment                             9,856        15,278       417,539
    -------------------------------------------------------------------------
                                       4,381,963     3,286,758    73,632,752
    -------------------------------------------------------------------------

                                       4,281,963     3,286,758    73,322,752

    Interest income                     (268,732)     (292,222)   (5,071,737)

    Gain on sale of BCY
     LifeSciences Inc.                         -             -      (299,403)

    Loss on sale of Transition
     Therapeutics Inc.                         -             -     2,156,685
    -------------------------------------------------------------------------

    Loss before taxes                  4,113,231     2,994,536    70,108,297

    Future income tax recovery                 -             -    (1,115,000)
    -------------------------------------------------------------------------

    Net loss and comprehensive loss
     for the period                    4,113,231     2,994,536    68,993,297
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted loss
     per share                             (0.11)        (0.08)
    -----------------------------------------------------------
    -----------------------------------------------------------

    Weighted average number of
     shares (basic and diluted)       38,231,859    36,236,748
    -----------------------------------------------------------
    -----------------------------------------------------------
    See accompanying notes


                           Oncolytics Biotech Inc.

                           STATEMENTS OF CASH FLOWS
                                 (unaudited)

    For the three month periods ended March 31,
                                                                  Cumulative
                                                                     from
                                                                  inception
                                                                  on April 2,
                                                                    1998 to
                                                                   March 31,
                                          2007          2006         2007
                                            $             $            $
    -------------------------------------------------------------------------
    OPERATING ACTIVITIES
    Net loss for the period           (4,113,231)   (2,994,536)  (68,993,297)
    Deduct non-cash items
      Amortization - intellectual
       property                          230,992       210,440     4,267,826
      Amortization - property and
       equipment                           9,856        15,278       417,539
      Stock based compensation            21,396        36,833     4,187,045
      Other non-cash items (note 6)            -             -     1,383,537
    Net changes in non-cash working
     capital (note 6)                    103,278       270,772     2,008,199
    -------------------------------------------------------------------------
                                      (3,747,709)   (2,461,213)  (56,729,151)
    -------------------------------------------------------------------------
    INVESTING ACTIVITIES
    Purchase of intellectual
     property                           (218,177)     (230,948)   (5,717,457)
    Purchase of property and
     equipment                           (34,748)      (27,381)     (658,096)
    Purchase of short-term
     investments                        (233,770)     (249,443)  (48,353,237)
    Redemption of short-term
     investments                               -     5,900,000    23,578,746
    Investment in BCY
     LifeSciences Inc.                         -             -       464,602
    Investment in Transition
     Therapeutics Inc.                         -             -     2,532,343
    -------------------------------------------------------------------------
                                        (486,695)    5,392,228   (28,153,099)
    -------------------------------------------------------------------------
    FINANCING ACTIVITIES
    Proceeds from exercise of
     warrants and stock options                -             -    15,208,468
    Proceeds from private placements           -             -    38,137,385
    Proceeds from public offerings
     (note 2)                         12,068,172             -    42,861,676
    -------------------------------------------------------------------------
                                      12,068,172             -    96,207,529
    -------------------------------------------------------------------------
    Increase in cash and cash
     equivalents during the period     7,833,768     2,931,015    11,325,279
    Cash and cash equivalents,
     beginning of the period           3,491,511     3,511,357             -
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of the period                11,325,279     6,442,372    11,325,279
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes


                           Oncolytics Biotech Inc.

                        NOTES TO FINANCIAL STATEMENTS

    March 31, 2007 (unaudited)


    1.  ACCOUNTING POLICIES

    These unaudited interim financial statements do not include all of the
    disclosures included in the Company's annual financial statements.
    Accordingly, these unaudited interim financial statements should be read
    in conjunction with the Company's most recent annual financial
    statements. The information as at and for the year ended December 31,
    2006 has been derived from the Company's audited financial statements.

    The accounting policies used in the preparation of these unaudited
    interim financial statements conform with those used in the Company's
    most recent annual financial statements except the following:

    Adoption of New Accounting Policy

    Financial Instruments

    On January 1, 2007, the Company prospectively adopted, without
    restatement, CICA Handbook section 3855 "Financial Instruments -
    Recognition and Measurement" and section 1530 "Other Comprehensive
    Income". Pursuant to the transitional provisions of Section 3855, the
    Company classified its short-term investments as held-to-maturity fixed
    income securities and recorded its Alberta Heritage Foundation interest
    free loan at fair value. As a result, at the beginning of the year, there
    were no adjustments made to short-term investments or other comprehensive
    income and there was a decrease in the Alberta Heritage Foundation loan
    of $150,000 with a corresponding decrease of $150,000 in the Company's
    deficit.

    Financial Assets

    Financial assets comprise of cash and cash equivalents, accounts
    receivable (mainly goods and service tax receivable), and short-term
    investments.

    Cash and cash equivalents

    Cash and cash equivalents consist of cash on hand and balances with the
    Company's bank including interest bearing deposits.

    Short-term investments

    The Company determines the appropriate classification of its short-term
    investments at the time of purchase and reevaluates such designation as
    of each balance sheet date. Short-term investments can be classified as
    held-for-trading, available-for-sale or held-to-maturity. Currently, the
    Company has classified all its short-term investments as held-to-maturity
    as it has the positive intent and ability to hold the securities to
    maturity. Held-to-maturity securities are stated at original cost,
    adjusted for amortization of premiums and accretion of discounts to
    maturity computed under the effective interest method. Such amortization
    and interest on securities classified as held-to-maturity are included in
    interest income.

    2.  SHARE CAPITAL

    Authorized:

    Unlimited number of common shares

    Issued:                 Shares                    Warrants
    -------------------------------------------------------------------------
                                          Amount                    Amount
                             Number          $         Number          $
    -------------------------------------------------------------------------
    Balance, December 31,
     2005                  36,236,748   82,841,871    2,784,800    4,429,932
    Exercise of options       284,000      241,400            -            -
    Expired warrants                -            -     (112,800)    (213,192)
    -------------------------------------------------------------------------
    Balance, December 31,
     2006                  36,520,748   83,083,271    2,672,000    4,216,740
    Issued for cash pursuant
     to February 22, 2007
     public offering (a)    4,600,000   11,362,000    2,300,000    2,438,000
    Share issue costs                   (1,731,828)           -            -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Balance, March 31,
     2007                  41,120,748   92,713,443    4,972,000    6,654,740
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (a) Pursuant to a public offering, 4,600,000 units were issued at an
        issue price of $3.00 per unit for gross proceeds of $13,800,000. Each
        unit included one common share (ascribed value of $2.47) and one-half
        of one common share purchase warrant (ascribed value of $0.53) for a
        total of 2,300,000 warrants. Each whole common share purchase warrant
        entitles the holder to acquire one common share in the capital of the
        Company upon payment of $3.50 per share until February 22, 2010.
        Share issue costs for this offering were $1,731,828.


    The following table summarizes the weighted average assumptions used in
    the Black Scholes Model with respect to the valuation of warrants issued
    in the three month period ending March 31, 2007:

                                                                        2007
    -------------------------------------------------------------------------

    Risk-free interest rate                                            4.08%
    Expected hold period to exercise                                 3 years
    Volatility in the price of the Company's shares                    62.8%
    Dividend yield                                                         -
    -------------------------------------------------------------------------

    There were no warrants issued during the three month period ending
    March 31, 2006.


    The following table summarizes the Company's outstanding warrants as at
    March 31, 2007:

                                                                    Weighted
                                                                     Average
                                                                   Remaining
           Outstanding,   Granted  Exercised  Expired                Contrac-
             Beginning     During     During   During  Outstanding,     tual
    Exercise    of the        the        the      the       End of      Life
    Price       Period     Period     Period   Period       Period    (years)
    -------------------------------------------------------------------------
    $3.50            -  2,300,000          -        -    2,300,000      2.90

    $5.65      320,000          -          -        -      320,000      1.75

    $6.15    1,600,000          -          -        -    1,600,000      1.75

    $8.00      752,000          -          -        -      752,000      0.65
    -------------------------------------------------------------------------
             2,672,000  2,300,000          -        -    4,972,000      2.12
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    3.  STOCK BASED COMPENSATION

    As the Company is following the fair value based method of accounting for
    stock options, the Company recorded compensation expense of $21,396
    (March 31, 2006 - $36,833) for the period with respect to the vesting of
    options issued in prior periods with an offsetting credit to contributed
    surplus.

    On February 1, 2007, the Company granted 100,000 options with an exercise
    price of $3.28 (the market price at the date of grant) to its recently
    appointed Vice President of Intellectual Property. These options are
    conditional upon an increase in the Company's option pool which the
    Company presently expects to occur at the Annual General Meeting on
    May 2, 2007. As a result, no compensation expense has been recorded with
    respect to these options during the three month period ending March 31,
    2007.


    4.  CONTRIBUTED SURPLUS

                                                                    Amount
                                                                       $
    -------------------------------------------------------------------------
    Balance, December 31, 2005                                     7,912,584

    Expired warrants                                                 213,192

    Stock based compensation                                         403,550

    Exercise of stock options                                              -
    -------------------------------------------------------------------------
    Balance, December 31, 2006                                     8,529,326

    Stock based compensation                                          21,396
    -------------------------------------------------------------------------
    Balance, March 31, 2007                                        8,550,722
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    5.  DEFICIT

                                                                    Amount
                                                                       $
    -------------------------------------------------------------------------
    Balance, December 31, 2005                                    50,732,542

    Net loss for the year                                         14,297,524
    -------------------------------------------------------------------------
    Balance, December 31, 2006                                    65,030,066

    Adjustment - Alberta Heritage Foundation loan (note 1)          (150,000)

    Net loss and comprehensive loss, March 31, 2007                4,113,231
    -------------------------------------------------------------------------
    Balance, March 31, 2007                                       68,993,297
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    6.  ADDITIONAL CASH FLOW DISCLOSURE

    Net Change In Non-Cash Working Capital

    For the three month period ending March 31,
                                                                  Cumulative
                                                                     from
                                                                  inception
                                                                  on April 2,
                                                                    1998 to
                                                                   March 31,
                                          2007          2006         2007
                                            $             $            $
    -------------------------------------------------------------------------
    Change in:
    Accounts receivable                   33,055       (69,921)      (50,948)
    Prepaid expenses                    (143,417)       12,772      (781,957)
    Accounts payable and accrued
     liabilities                         232,940       323,454     2,849,361
    -------------------------------------------------------------------------
    Change in non-cash working
     capital                             122,578       266,305     2,016,456
    Net change associated with
     investing activities                (19,300)        4,467        (8,257)
    -------------------------------------------------------------------------
    Net change associated with
     operating activities                103,278       270,772     2,008,199
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other Non-Cash Items
                                                                  Cumulative
                                                                     from
                                                                  inception
                                                                  on April 2,
                                                                    1998 to
                                                                   March 31,
                                          2007          2006         2007
                                            $             $            $
    -------------------------------------------------------------------------
    Foreign exchange loss                      -             -       425,186
    Donation of medical equipment              -             -        66,069
    Loss on sale of Transition
     Therapeutics Inc.                         -             -     2,156,685
    Gain on sale of BCY
     LifeSciences Inc.                         -             -      (299,403)
    Cancellation of contingent
     payment obligation settled
     in common shares                          -             -       150,000
    Future income tax recovery                 -             -    (1,115,000)
    -------------------------------------------------------------------------
                                               -             -     1,383,537
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    7.  SHORT-TERM INVESTMENTS

    Short-term investments, mainly consisting of government of Canada
    treasury bills, are liquid investments that are readily convertible to
    known amounts of cash and are subject to an insignificant risk of changes
    in value. The objectives for holding short-term investments are to invest
    the Company's excess cash resources in investment vehicles that provide a
    better rate of return compared to the Company's interest bearing bank
    account with limited risk to the principal invested. The Company also
    intends to match the maturities of these short-term investments with the
    cash requirements of the Company's activities.

                                                                   Effective
                        Original    Accrued    Carrying      Fair   Interest
                          Cost      Interest     Value       Value    Rate
    -------------------------------------------------------------------------
    March 31, 2007
    Short-term
     investments       24,136,102     219,905  24,356,007  24,354,521  4.08%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    December 31, 2006
    -------------------------------------------------------------------------
    Short-term
     investments       23,672,719     449,518  24,122,237  24,124,810  3.95%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Fair value is determined by using published market prices provided by the
    Company's investment advisor.


    8.  ALBERTA HERITAGE LOAN

    The Company received an interest free loan of $150,000 from the Alberta
    Heritage Foundation for Medical Research. Pursuant to the terms of the
    agreement, the Company is required to repay this amount in annual
    installments from the date of commencement of sales in an amount equal to
    the lesser of: (a) 5% of the gross sales generated by the Company; or (b)
    $15,000 per annum until the entire loan has been paid in full.


    9.  COMPARATIVE FIGURES

    Certain comparative figures have been reclassified to conform with the
    current period's presentation.

    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 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.

SOURCE Oncolytics Biotech Inc.