ONCY

Business Context and Reporting Period

Company: Oncolytics Biotech Inc.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2011
Accounting Standard: International Financial Reporting Standards (IFRS) – First year of adoption.
Business Overview: Oncolytics is a development-stage biopharmaceutical company focused on the discovery and development of REOLYSIN®, a therapeutic reovirus designed to treat cancers with an activated Ras pathway. The company has no commercial product sales and relies on equity financing to fund research and development (R&D).

Key Financial Metrics

Note: The company reported no debt other than trade accounts payable and contingent obligations. Working capital was approximately $29.1 million as of December 31, 2011.

Material Changes vs. Prior Period

• Increased Net Loss: Net loss increased by approximately $4.4 million (17.8%) compared to 2010, driven primarily by a significant increase in R&D expenses.
• R&D Expense Surge: R&D expenses rose by $9.5 million (68.5%) to $23.4 million. This increase was attributed to the startup efforts and patient enrollment in the global randomized Phase III head and neck clinical trial (REO 018).
• Asset Write-Down: The company recorded a non-cash write-down of $735,681 for an asset held for sale (investment in British Canadian Biosciences Corp.) which was written off to nil in 2011 after failing to complete a sale.
• Warrant Liability: In 2010, the company recorded a loss of $4.8 million due to the revaluation of warrant liabilities. In 2011, this resulted in a gain of $36,000 as the remaining warrants were exercised or expired, eliminating the liability.
• Equity Financing: The company issued 3,293,033 common shares in 2011 for net cash proceeds of $14.8 million, compared to 6.4 million shares for $27.3 million in 2010.

Guidance, Outlook, and Risks

Outlook and Guidance: The company anticipates continuing to incur significant losses in 2012 and the foreseeable future. Expenditures are expected to increase in 2012 to complete enrollment in the Phase III head and neck trial, support other clinical trials, and cover manufacturing costs for clinical supply. The company does not expect to reach profitability until after the successful commercialization of one or more products.

Key Risks and Contingencies:

• Development Risk: REOLYSIN® is in the research and development stage. There is no assurance that clinical trials will demonstrate safety and efficacy or that regulatory approval will be obtained.
• Liquidity Risk: The company has a history of losses and no operating revenues. It requires additional financing to fund future R&D and capital requirements. Access to capital markets may be restricted.
• Manufacturing Risk: The company relies on third-party contract manufacturers. Disruptions or scaling issues could delay clinical trials.
• Regulatory Risk: Intense regulatory approval processes in the U.S. (FDA) and other jurisdictions could delay or prevent marketing.
• PFIC Status: The company believes it qualified as a Passive Foreign Investment Company (PFIC) for 2011, which may have adverse U.S. federal income tax consequences for U.S. shareholders.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $34.9 million in cash and short-term investments to fund the accelerated Phase III trial enrollment and manufacturing scale-up through 2012 without immediate dilution.
• Clinical Trial Progress: Monitor enrollment rates and interim data for the Phase III head and neck trial (REO 018), which is the primary driver of current R&D spending.
• Financing Needs: Assess the likelihood and terms of future equity offerings required to bridge the gap to commercialization, given the lack of operating revenue.
• Regulatory Milestones: Track FDA and Health Canada interactions regarding the Investigational New Drug (IND) status and potential New Drug Submission timelines.
• PFIC Implications: U.S. investors should consult tax advisors regarding the tax consequences of the company's PFIC status.