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SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2004 [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from               to Commission File Number 001-15167 BIOPURE CORPORATION  Delaware
    
    04-2836871(State of Incorporation)
    
    (IRS Employer Identification Number)11 Hurley Street, Cambridge, Massachusetts
    
    02141(Address of principal executive offices)
    
    (Zip Code)
 (617) 234-6500
(Registrants telephone number) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [  ] No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [  ] No The number of shares outstanding of each of the issuers classes of common
stock as of June 10, 2004 was: Class A Common Stock, $.01 par value
    
    
    48,520,521Class B Common Stock, $1.00 par value
    
    
    117.7




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BIOPURE CORPORATION INDEX TO FORM 10-Q PagePart I  Financial Information:Item 1 - Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at April 30, 2004 and October 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended April 30, 2004 and April 30, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended April 30, 2004 and April 30, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3 - Quantitative and Qualitative Disclosure of Market Risk
    
    
    21Item 4 - Controls and Procedures
    
    
    22Part II  Other Information:Item 1 - Legal Proceedings
    
    
    23Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    24Item 3 - Defaults Upon Senior Securities
    
    
    24Item 4  Submission of Matters to a Vote of Security Holders
    
    
    24Item 5 - Other Information
    
    
    25Item 6 - Exhibits and Reports on Form 8-K
    
    
    33Signatures
    
    
    34Exhibit IndexEX-10.1 EMPLOYMENT AGREEMENT DATED FEB. 25, 2004EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.EX-32.1 SECTION 906 CERTIFICATION OF C.E.O.EX-32.2 SECTION 906 CERTIFICATION OF C.F.O.
  Biopure®,
Hemopure® and Oxyglobin® are registered trademarks of Biopure
Corporation. 2




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##### Table of Contents



Part I 
  BIOPURE CORPORATION 
    April 30, 2004
    
    October 31, 2003Assets:Current assets:Cash and cash equivalents
    
    $
    11,865
    
    
    $
    26,862Accounts receivable, net
    
    
    599
    
    
    
    762Inventories
    
    
    7,971
    
    
    
    8,985Other current assets
    
    
    969
    
    
    
    1,233Total current assets
    
    
    21,404
    
    
    
    37,842Property, plant and equipment, net
    
    
    34,405
    
    
    
    36,861Other assets
    
    
    10,893
    
    
    
    10,922Total assets
    
    $
    66,702
    
    
    $
    85,625Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    574
    
    
    $
    1,159Accrued expenses
    
    
    4,798
    
    
    
    6,100Total current liabilities
    
    
    5,372
    
    
    
    7,259Long-term debt
    
    
    9,847
    
    
    
    9,847Deferred compensation
    
    
    121
    
    
    
    142Total long-term liabilities
    
    
    9,968
    
    
    
    9,989Stockholders equity:Preferred stock, $0.01 par value,
30,000,000 shares
authorized, no shares outstanding
    
    
    
    
    
    
    Common stock:Class A, $0.01 par value,
100,000,000 shares authorized,
48,520,521 shares outstanding at
January 31, 2004 and 44,494,050 at
October 31, 2003
    
    
    485
    
    
    
    445Class B, $1.00 par value, 179
shares authorized, 117.7 shares
outstanding
    
    
    
    
    
    
    Capital in excess of par value
    
    
    478,215
    
    
    
    472,287Contributed capital
    
    
    24,574
    
    
    
    24,574Notes receivable
    
    
    (257
    )
    
    
    (256
    )Accumulated deficit
    
    
    (451,655
    )
    
    
    (428,673
    )Total stockholders equity
    
    
    51,362
    
    
    
    68,377Total liabilities
and stockholders
equity
    
    $
    66,702
    
    
    $
    85,625
 Note: The balance sheet at October 31, 2003 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. See accompanying notes. 3




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BIOPURE CORPORATION 
    Three Months Ended
    
    Six Months EndedApril 30, 2004
    
    April 30, 2003
    
    April 30, 2004
    
    April 30, 2003Revenues:Oxyglobin
    
    $
    893
    
    
    $
    1,961
    
    
    $
    1,643
    
    
    $
    1,982Total revenues
    
    
    893
    
    
    
    1,961
    
    
    
    1,643
    
    
    
    1,982Cost of revenues
    
    
    3,604
    
    
    
    5,973
    
    
    
    8,409
    
    
    
    10,821Gross loss
    
    
    (2,711
    )
    
    
    (4,012
    )
    
    
    (6,766
    )
    
    
    (8,839
    )Operating expenses:Research and development
    
    
    3,491
    
    
    
    2,536
    
    
    
    6,490
    
    
    
    5,082Sales and marketing
    
    
    949
    
    
    
    1,606
    
    
    
    1,792
    
    
    
    2,622General and administrative
    
    
    4,894
    
    
    
    3,526
    
    
    
    8,031
    
    
    
    6,253Total operating
Expenses
    
    
    9,334
    
    
    
    7,668
    
    
    
    16,313
    
    
    
    13,957Loss from operations
    
    
    (12,045
    )
    
    
    (11,680
    )
    
    
    (23,079
    )
    
    
    (22,796
    )Other income, net
    
    
    41
    
    
    
    28
    
    
    
    97
    
    
    
    62Net loss
    
    $
    (12,004
    )
    
    $
    (11,652
    )
    
    $
    (22,982
    )
    
    $
    (22,734
    )Per share data:Basic and diluted net loss per
common share
    
    $
    (0.25
    )
    
    $
    (0.35
    )
    
    $
    (0.50
    )
    
    $
    (0.71
    )Weighted-average shares used in
computing basic and diluted net
loss per common share
    
    
    47,335
    
    
    
    33,351
    
    
    
    45,899
    
    
    
    31,920
 See accompanying notes. 4




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BIOPURE CORPORATION 
    Six Months EndedApril 30, 2004
    
    April 30, 2003Operating activities:Net loss
    
    $
    (22,982
    )
    
    $
    (22,734
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    2,663
    
    
    
    2,658Equity compensation
    
    
    
    
    
    
    208Accrued interest on stockholders
notes receivable
    
    
    (1
    )
    
    
    (1
    )Non-cash charges related to issuance of stock
    
    
    969
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    163
    
    
    
    (283
    )Inventories
    
    
    1,014
    
    
    
    7Other current assets
    
    
    264
    
    
    
    (345
    )Accounts payable
    
    
    (606
    )
    
    
    (577
    )Accrued expenses
    
    
    (1,303
    )
    
    
    (220
    )Net cash used in operating activities
    
    
    (19,819
    )
    
    
    (21,287
    )Investing activities:Purchases of property, plant and equipment
    
    
    (179
    )
    
    
    (1,156
    )Other assets
    
    
    1
    
    
    
    (3
    )Net cash used in investing activities
    
    
    (178
    )
    
    
    (1,159
    )Financing activities:Net proceeds from sales of common stock
    
    
    5,000
    
    
    
    17,837Net cash provided by financing activities
    
    
    5,000
    
    
    
    17,837Net decrease in cash and cash equivalents
    
    
    (14,997
    )
    
    
    (4,609
    )Cash and cash equivalents at beginning of period
    
    
    26,862
    
    
    
    19,710Cash and cash equivalents at end of period
    
    $
    11,865
    
    
    $
    15,101
 See accompanying notes. 5




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BIOPURE CORPORATION 
     1.
    
    Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six
month periods ended April 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending October 31, 2004; however,
the Company expects to incur a substantial loss for the year ended October
31, 2004.The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Biopure Netherlands, BV,
Biopure South Africa, Pty, Ltd., NeuroBlok Incorporated, Reperfusion Systems
Incorporated, DeNovo Technologies Corporation and Biopure Overseas Holding
Company. All intercompany accounts and transactions have been eliminated in
consolidation.These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K/A for the fiscal year ended October 31, 2003 filed
with the SEC on January 30, 2004.The Company has financed operations from inception primarily through sales of
equity securities, development and license agreement payments, interest income
and debt. The Company has not been profitable since inception and had an
accumulated deficit of $451,655,000 as of April 30, 2004. April 30, 2004, the
Company had $11,865,000 in cash and cash equivalents. The Company expects this
funding to be sufficient to fund operations into September 2004 under the
Companys current operating plan. To remain a going concern, the Company will
require significant funding. The Company expects to incur additional operating
losses over the next several years seeking regulatory approvals, conducting
clinical trials and marketing Hemopure. The Company is assessing opportunities
to raise capital, and expects to continue financing operations until it is
profitable through sales of securities, strategic alliances and other
financing vehicles, if any, that might become available. The Company is
working to identify additional cost reductions. However, there can be no
assurance that additional cost reductions will be identified nor that any such
additional financing will be available to the Company on terms that it deems
acceptable, if at all. Failure to secure additional funding or modification of
our clinical plans could trigger impairment of certain long-term assets.2.
    
    Net Loss per ShareBasic net loss per common share is computed based on the weighted-average
number of common shares outstanding during the period. Diluted net loss per
common share is computed based upon the weighted-average number of common
shares outstanding during the period, adjusted for the dilutive effect of the
Companys common stock equivalents, including the shares issuable upon the
conversion of Class B Common Stock outstanding and the exercise of common
stock options and warrants determined based upon the average market price of
common stock for the period. However, basic and diluted net loss per common
share is computed the same for all periods presented as the Company had
losses for all periods presented and, consequently, the effect of Class B
Common Stock, options and warrants is anti-dilutive. Dilutive weighted
average shares outstanding do not include 10,836,580 common-equivalent shares
for the three and six months ended April 30, 2004 and 8,651,480
common-equivalent shares for the three and six months ended April 30, 2003 as
their effect would have been anti-dilutive.3.
    
    Stock Based CompensationThe Company applies the intrinsic value method pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for its stock-based compensation
plans. Accordingly, no 6




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
April 30, 2004
(Unaudited)
(continued)  compensation expense has been recognized for stock-based awards to employees.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123(SFAS No. 148). Had compensation expense for the Companys stock option
plans been determined based on the fair value at the grant date for awards
under these plans, consistent with the methodology prescribed under SFAS No.
148, the Companys net loss and net loss per share would have approximated
the pro forma amounts indicated below: Three Months Ended
    
    Six Months EndedApril 30,
    
    April 30,
    
    April 30,
    
    April 30,In thousands (except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Net loss, as
reported
    
    $
    (12,004
    )
    
    $
    (11,652
    )
    
    $
    (22,982
    )
    
    $
    (22,734
    )Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (885
    )
    
    
    (1,153
    )
    
    
    (1,613
    )
    
    
    (2,175
    )Pro forma net loss
    
    $
    (12,889
    )
    
    $
    (12,805
    )
    
    $
    (24,595
    )
    
    $
    (24,909
    )Net loss per share:Basic and diluted 
as reported
    
    $
    (0.25
    )
    
    $
    (0.35
    )
    
    $
    (0.50
    )
    
    $
    (0.71
    )Basic and diluted 
pro forma
    
    $
    (0.27
    )
    
    $
    (0.38
    )
    
    $
    (0.54
    )
    
    $
    (0.78
    )
  The weighted average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes
option-pricing model and is amortized over the vesting period of the
underlying options. The assumptions used to calculate the SFAS No. 148 pro
forma disclosure and the weighted average information are as follows: Three Months Ended
    
    Six Months EndedApril 30,
    
    April 30,
    
    April 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest
rate
    
    
    2.76
    %
    
    
    4.88
    %
    
    
    2.76
    %
    
    
    4.88
    %Expected dividend
yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected lives
    
    7 years
    
    7 years
    
    7 years
    
    7 yearsExpected volatility
    
    
    81
    %
    
    
    80
    %
    
    
    81
    %
    
    
    80
    %
  4.
    
    Inventories  Inventories are valued at the lower of cost (determined using the first-in,
first-out method) or market. Inventories were as follows: In thousands
    
    April 30, 2004
    
    October 31, 2003Raw materials
    
    $
    998
    
    
    $
    1,270Work-in-process
    
    
    690
    
    
    
    885Finished goods-Oxyglobin
    
    
    1,323
    
    
    
    1,937Finished goods-Hemopure
    
    
    4,960
    
    
    
    4,893$
    7,971
    
    
    $
    8,985
 7




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
April 30, 2004
(Unaudited)
(continued)  5.
    
    Accrued Expenses and Cost Reduction Plan  Accrued expenses consisted of the following: In thousands
    
    April 30, 2004
    
    October 31, 2003Accrued payroll and related employee
expenses
    
    $
    666
    
    
    $
    487Accrued vacation
    
    
    523
    
    
    
    629Accrued legal and audit fees
    
    
    253
    
    
    
    451Accrued health and dental premiums
    
    
    340
    
    
    
    340Financing fees
    
    
    537
    
    
    
    537South Carolina project
    
    
    300
    
    
    
    650Accrued severance
    
    
    578
    
    
    
    875Other
    
    
    1,601
    
    
    
    2,131$
    4,798
    
    
    $
    6,100
  On February 19, 2004 the Company announced a cost reduction plan to decrease
its ongoing cash burn. Under the plan, the Company terminated 49 employees,
effective April 23, 2004. The employees terminated were primarily employees
from the Companys manufacturing division. During the second fiscal quarter
ended April 30, 2004 in accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities,the Company recorded within
General and Administrative expense a charge of $578,000 related to this
reduction in force. The charge primarily represented severance costs and fees
for outplacement services. At April 30, 2004, the company had not paid any
costs related to this reduction in force and, as a result, had an accrual of
$578,000.At October 31, 2003, the Company had an accrual of $875,000 for costs related
to the reduction in force announced on October 30, 2003. During the first six
months of fiscal 2004 the Company paid $723,000 in severance costs and fees
for outplacement services which represented the entire cash payments
made pursuant to the October 30, 2003 reduction in force. The reduction in expected expenses was due to
lower than anticipated costs for outplacement services. The
remaining accrual of $152,000 was recorded as a credit to General
and Administrative expenses during the quarter ended April 30,
2004.6.
    
    CommitmentsIn July 1994, the Company acquired a 50% general partnership interest in
Eleven Hurley Street Associates (EHSA), a real estate partnership, which owns
the Companys principal office and research and development facility. The
Company accounts for its investment in EHSA under the equity method of
accounting. In the event EHSA became insolvent or was unable to pay its
obligations, the Company, as one of the general partners, could be liable for
all partnership obligations. EHSAs liabilities as of April 30, 2004 consist
of a promissory note to a bank with a principal balance of $1,088,966. The
note accrues interest at 8.63% and matures on January 30, 2006. As of April
30, 2004, the maximum potential amount of future payments the under the note
would be $1,241,000. The note is secured by the office and research and
development facility which the Company believes has fair value sufficient to
satisfy the current promissory note balance. Biopure currently leases this
facility from EHSA for $262,000 annually under an operating lease expiring in
December 2007 that is included as an operating lease commitment in our Annual
Report on Form 10-K/A for the fiscal year ended October 31, 2003.Sumter RealtyIn December 2001, the Company signed an amended letter of intent with Sumter
Realty Group, LLC for the construction and financing of a manufacturing plant
in South Carolina, which is designed to produce 500,000 Hemopure units per
year and expected to cost approximately $120,000,000. Under the letter of
intent the financing would be in the form of a capital lease. 8




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
April 30, 2004
(Unaudited)
(continued)  The terms of a lease, as outlined in the letter of intent and based on
financing terms expected to be available at that time, would be: (i) lease
payments to start at substantial completion of the facility; (ii) annual
lease payments of $13,750,000 per year for the first two years; and (iii)
lease payments of $17,158,000 per year for the balance of a 240-month term.
The Company would own the facility at the end of the lease term. The Company
is committed to pay a finders fee, of approximately 2 percent of the net
amount financed, to CB Richard Ellis, a real estate consulting firm, when
financing for the facility is completed if financing is provided through
Sumter Realty Group or any of its principals. However, there is no assurance
that the Company will be able to obtain financing under the terms set forth
in the letter of intent.Under the letter of intent, the Company agreed to invest $10,000,000 in
engineering for a new facility to be reimbursed by Sumter Realty Group under
certain conditions. As of April 30, 2004, the Company has invested
$14,348,000 for the engineering and design costs of the planned manufacturing
facility and for permits and acquisition of land, which has been included in
property, plant and equipment. No additional expenditures will be incurred
unless and until a financing proposal has been accepted.The $10,000,000 has been accounted for as a deposit in long term assets as of
April 30, 2004 and is offset by $9,847,000 in long-term debt. If financing
on the terms of the letter of intent is not obtained or conditions to the
refund are not met, the $10,000,000 will not be returned to the Company and
the deposit and long-term debt will be eliminated.The Company has examined its long-lived assets for potential impairment, with
a particular emphasis on the asset related to the planned South Carolina
manufacturing facility. As part of the review, the Company considered lack of
financing for this facility to date, the potential timing of construction
activities, the extent to which the asset is site specific, and its ongoing
commitment to ultimately build a new facility in South Carolina. Based upon
this analysis, the Company determined that while the delays in obtaining
financing for this facility and FDA approval are significant and therefore
indicators of potential impairment, the Company believes its plan for the
South Carolina manufacturing facility is still valid and fully expects to be
able to finance it on commercially reasonable terms in the future. Therefore,
the Company determined that no impairment exists at April 30, 2004.Research Agreement(1)On March 4, 2003, the Company entered into a Cooperative Research and
Development Agreement (CRADA) with the United States Naval Medical Research
Center (NMRC). The intent of the CRADA is to support a pivotal, randomized,
standard therapy controlled clinical trial of Hemopure in the out-of-hospital
setting in the resuscitation of patients with severe hemorrhagic shock (acute
blood loss). The CRADA has been modified to grant the Naval Medical Research
Center primary responsibility for designing, seeking FDA acceptance of a
protocol, and conducting a proposed U.S. trauma trial of Hemopure in the
out-of-hospital setting. Under the CRADA, as amended, each of Biopure and the
NMRC is expected to fund the activities for which it is responsible. The
Company believes that all or most of its costs could be covered by government
funding. In April 2004, the NMRC and academic trauma experts met with the
FDA for a preliminary discussion of a proposed trial protocol, entitled
Restore Effective Survival in Shock (RESUS). An investigational new drug
(IND) application for the trial has not yet been filed. However, the NMRC,
with Biopures assistance, continues to work on moving this project forward.To date, approximately $14 million in Congressional, Navy and Army funding
has been appropriated, granted or otherwise earmarked to support the trauma
development program for Hemopure.(2) Of this amount, approximately $5,000,000
is being administered by the U. S. Army and is being used to fund key ongoing
preclinical animal studies of Hemopure and may also help to fund the
Companys obligations under the CRADA. A portion of the funds will also be
applied to the Armys administrative costs.   (1) The content of this document does not necessarily reflect the position
or the policy of the U.S. Government or the Department of Defense, and no
official endorsement should be inferred. Completion of the proposed RESUS
clinical trial of Hemopure in trauma is contingent upon further funding.(2) $4,502,900 is from Grant DAMD17-02-1-0697. The U.S. Army Medical
Research Acquisition Activity, 820 Chandler Street, Fort Detrick MD
21702-5014 is the awarding and administering acquisition office. 9




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
April 30, 2004
(Unaudited)
(continued)  7.
    
    Recently Issued Accounting StandardsIn May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
150, Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity(SFAS 150), which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Companys adoption of the initial recognition and
initial measurement provisions of SFAS 150, effective June 1, 2003, did not
have an impact on the Companys results of operations or financial position.In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities,(FIN 46 or the Interpretation) to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity; in December 2003 FASB issued a revision to FIN 46(FIN46R).
Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN No. 46 changes that by requiring a variable interest
entity, as defined, to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns
or both. FIN No. 46 also requires disclosures about variable interest entities
that the company is not required to consolidate but in which it has a
significant variable interest. FIN 46 is applicable to entities subject to the
Interpretation no later than the end of the first reporting period ended after
March 15, 2004, and, accordingly, was applicable to the Company as
of the end of the quarter ended April 30, 2004. The Companys adoption of
FIN 46, effective April 30, 2004, did not have an impact on the Companys
results of operations or financial position. See Note 6 for additional
information.8.
    
    LitigationSEC Investigation.During the fourth quarter of fiscal 2003, the Company was
notified of a confidential investigation by the Securities and Exchange
Commission (SEC). On December 22, 2003, the Company, its former Chief
Executive Officer and its former Senior Vice President, Regulatory and
Operations, and on April 29, 2004 the Companys Chairman, a former director,
its Chief Technology Officer and General Counsel received Wells Notices
from the staff of the SEC stating the Staffs preliminary determination to
recommend that the SEC bring a civil injunctive proceeding against the
Company and the individuals. Biopure and the individuals are responding in
writing to the notices.Biopure believes the notices relate to Company disclosures concerning
communications with the FDA about a clinical hold imposed on a clinical study
protocol the Company submitted to the agency in March 2003 and the status of
the Companys BLA. In March 2003, the Company filed a proposed protocol for a
Phase II clinical trial in trauma patients in a hospital setting. The FDA put
the protocol and its related investigational new drug application (IND) on
clinical hold, meaning the trial could not begin as proposed. The FDA cited
safety concerns based on a preliminary review of data from the Companys
Phase III clinical trial in patients undergoing orthopedic surgery. After the
Company responded in two written submissions, the clinical hold was
reasserted twice in writing, most recently on July 30, 2003. The Company did
not disclose the clinical hold because the Company did not consider
correspondence with the agency about data interpretation in the development
of a protocol to be material, notwithstanding the references to data in the
BLA. The Staffs investigation also concerns the Companys disclosures
concerning the FDAs review of the BLA, after receipt of the complete
response letter dated July 30, 2003. The Company has been cooperating
throughout the investigation with the SEC Staff. At this time, the Company
cannot estimate what impact, if any, this inquiry may have on its financial
position or results of operations.Litigation.Biopure, its former Chief Executive Officer, its Chief Technology Officer and
its Chief Financial Officer were named as defendants in a number of similar,
purported class action complaints, filed between December 30, 2003 and
January 28, 2004 (the complaints), in the U.S. District Court for the
District of Massachusetts (the Court) by alleged purchasers of Biopures 10




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
April 30, 2004
(Unaudited)
(continued)  common stock. Those complaints have since been consolidated in a single
action. The complaints claim that Biopure violated the federal securities
laws by publicly disseminating materially false and misleading statements
regarding the status of its biologic license application pending with the
U.S. Food and Drug Administration and of its trauma development program,
resulting in the artificial inflation of Biopures common stock price during
the purported class period. The complaints do not specify the amount of
alleged damages plaintiffs seek to recover. The complaints set forth varying
class periods but generally focus on March 2003 through December 24, 2003.
The defendants believe that the complaints are without merit and intend to
defend the actions vigorously. At this time, the Company cannot estimate what
impact, if any, these cases may have on its financial position or results of
operations.The seven board members of Biopures Board of Directors during the period
March through December 2003, were named as defendants in two shareholder
derivative actions filed on January 26, 2004 and January 29, 2004 in the same
Court. The Company is named as a defendant, even though in a derivative
action any award is for the benefit of the Company, not individual
stockholders. The complaints allege in derivative actions brought by
shareholders on behalf of the Company that the individual directors breached
fiduciary duties in connection with the same disclosures set forth in the
purported securities class action complaints. The complaints do not specify
the amount of the alleged damages plaintiffs seek to recover. At this time,
the Company cannot estimate what impact, if any, these cases may have on its
financial position or results of operations.On or about June 16, 2003, plaintiff Steelhead Investments, Ltd. filed a

complaint alleging that the Company breached a contract with the plaintiff by
giving insufficient notice of offerings of common stock and warrants by the
Company in March and April 2003. On April 14, 2004, the Company and
Steelhead dismissed the litigation with prejudice. The Company issued
350,000 shares of its common stock to a nominee of Steelhead, and the parties
to the litigation signed mutual general releases. The Company incurred a
one-time non-cash expense of $500,000, representing the fair market value of the 350,000
shares of Class A common stock, in connection with the settlement of this
litigation. 11




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Part I 
  BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004 Cautionary Statement Regarding Forward-Looking Information The following discussion of our financial condition and results of operations
should be read in conjunction with the Condensed Consolidated Financial
Statements and the related Notes included elsewhere in this report. The
content of this report does not necessarily reflect the position or the policy
of the Government or the Department of Defense, and no official endorsement
should be inferred. Except for strictly historical information contained
herein, matters discussed in this report constitute forward-looking statements.
When used herein, the words expects, estimates, intends, plans,
should, anticipates and similar expressions are intended to identify such
forward-looking statements. Actual results could differ materially from those
set forth in the forward-looking statements. There can be no assurance that
Biopure will be able to commercially develop Hemopure, that necessary
regulatory approvals will be obtained, that anticipated milestones will be met
in the expected timetable, that any clinical trials will be successful, or that
any approved product will attain market acceptance and be manufactured and sold
in the quantities anticipated. Actual results may differ from those projected
in forward-looking statements due to risks and uncertainties that exist in the
Companys operations and business environment. These risks include, without
limitation, the availability of sufficient financing to continue operations,
the Companys stage of product development, history of operating losses,
accumulated deficit, and uncertainties and possible delays related to clinical
trials and regulatory approvals, possible healthcare reform, manufacturing
capability, marketing, market acceptance and competition. In light of the
substantial risks and uncertainties inherent in all future projections, the
inclusion of forward-looking statements in this report should not be regarded
as representations by the Company that the objectives or plans of the Company
will be achieved. The Company undertakes no obligation to release publicly the
results of revisions to these forward-looking statements to reflect events or
circumstances after the date hereof. Reference is made in particular to the
risk factors and the discussions set forth below in this report under
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Overview Our top priorities are to raise additional capital, to resolve the regulatory
issues surrounding Hemopure in the United States and to recruit a new chief
executive officer. By the fall of 2004, we plan to address the FDAs safety and efficacy concerns
by providing answers to certain questions posed by the agency and by submitting
results of four animal studies required by the agency, three of which are
underway. Many of the FDAs questions require the collection and tabulation of
data from source documents at 78 clinical trial sites in the United States and
abroad. Most of these documents have been collected, and data is currently
being sorted, tabulated and analyzed. We believe our cash and cash equivalents, as of April 30, 2004, to be
sufficient to fund our operations into September 2004. Under our current
operating plan, our activities and expenditures for the balance of fiscal 2004
will be associated primarily with maintaining some manufacturing capability,
replying to issues identified in the FDAs complete response letter for our
Hemopure biologics license application (BLA), conducting FDA-requested
preclinical animal studies and continuing clinical development of additional
Hemopure indications. A number of factors pose uncertainties in estimating the amount of funds we may
need to sustain operations: As described in Note 8 to the financial statements, Biopure is a defendant in
litigation, the outcomes of which are unknown. It is also the subject of an
investigation by the Securities and Exchange Commission and has received a
Wells Notice from the Commission staff. The outcomes and financial effects of
these matters cannot be determined at this time, nor can any adverse effect
they may have on the price of our common stock and our ability to raise capital
from sales of equity or otherwise. 12




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) The process of obtaining U.S. marketing approval for a first indication for
Hemopure also has risks of delays that make the ultimate development cost
unpredictable. We are hopeful that we can respond to all issues the FDA has
raised to date regarding our BLA, but
since it is likely that Biopure will need to conduct one or more additional
human clinical trials before the FDA will consider approving Hemopure, the
Company will evaluate all of its clinical and regulatory options, not just the
orthopedic surgical anemia indication for which Biopures biologics license
application (BLA) was filed. Towards that end, the Company is engaged in the
early stages of clinical development for indications in both trauma and
cardiology. In Europe, patient enrollment is proceeding in a 45-patient, Phase
II clinical trial assessing the safety and feasibility of Hemopure, at low
doses, as a potential cardioprotective agent in patients undergoing coronary
angioplasty. In South Africa, patient enrollment is anticipated to
begin shortly
in a 50-patient, Phase II clinical trial assessing the safety and tolerability
of Hemopure, in a hospital setting, for emergency treatment of unstable
patients who have significant blood loss as a result of blunt or penetrating
trauma. Although Hemopure is approved for commercial sale in South Africa, the product
has not yet been offered for sale. Since we obtained marketing approval
surgeons have treated patients with Hemopure units that we previously provided
without charge. We gave notice to our exclusive distributor in South Africa
that we were terminating our distribution agreement according to its terms and
intend to market through a wholly-owned subsidiary. We cannot predict when our
first sales might occur but are hopeful that there will be limited sales this
year. On February 19, 2004, the Company announced a cost reduction plan to decrease
its ongoing cash burn. Under the plan, the Company terminated 49 employees
effective April 23, 2004. The employees terminated were primarily employees
from the Companys manufacturing division. This reduction and other cost
cutting measures are expected to reduce the Companys ongoing cash burn,
primarily associated with manufacturing and marketing expenses, by
approximately $8 million annually. The Company is considering additional
measures to reduce its cash burn, but significant additional capital will be
required to fund the Companys operations until the Company becomes profitable.
The Company is assessing opportunities to raise capital, and expects to
continue financing operations until we are profitable through sales of
securities, strategic alliances and other financing vehicles, if any, that
might become available. Critical Accounting Policies The Companys significant accounting policies are described in the Notes to the
Consolidated Financial Statements, as disclosed in our Form 10-K/A for the
fiscal year ended October 31, 2003. The application of our critical accounting
policies is particularly important to the accurate portrayal of the Companys
financial position and results of operations. These critical accounting
policies require the Company to make subjective judgments in determining
estimates about the effect of matters that are inherently uncertain. The
following critical accounting policies are considered most significant: Inventories Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market. Inventories consist of raw material,
work-in-process and Hemopure and Oxyglobin finished goods. Both Oxyglobin and
Hemopure have a shelf life of 3 years from the date of manufacture. Inventories
of these products are reviewed periodically to identify expired units and units
with a remaining life too short to be commercially viable based on projected
and historical sales activity. Inventories are also subject to quality
compliance investigations. Reserves are established for inventory based on
these reviews and investigations. If our sales activity is significantly less
than anticipated or quality compliance testing results in the rejection of
inventory, then we may incur significant inventory write-downs, resulting in
charges to cost of revenues in such period. Long-Lived Assets SFAS 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Our investments in property and equipment, such
as construction in progress and new facility construction; real property
license rights related to the source, supply and initial processing of our
major raw 13




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) material; and the asset related to the expenditures for a planned manufacturing
facility in South Carolina are the principal long-lived assets that could be
subject to such a review. Pursuant to SFAS 144, during the second quarter we
assessed our long-lived assets for potential impairment, with a particular
emphasis on the asset related to the planned South Carolina manufacturing
facility. As part of our review, we considered lack of financing for this
facility to date, the potential timing of construction activities, the extent
to which the asset is site specific, and our ongoing commitment to ultimately
build our new facility in South Carolina. Based upon our analysis we believe
that, while the delays in obtaining financing for this facility and FDA
approval are significant and therefore indicators of potential impairment, we
believe our plan for the South Carolina manufacturing facility is still valid
and we fully expect we will be able to finance it on commercially reasonable
terms in the future and anticipate that we will be able to generate sufficient
positive future cash flows to recover our investment in the facility.
Therefore, we determined that no impairment exists at April 30, 2004. However,
should there be a change in circumstances with respect to the South Carolina
manufacturing facility or other long-lived assets, such changes may result in
our recording significant impairment charges in the future. Revenue Recognition The Company recognizes revenue from sales of Oxyglobin upon shipment provided
that there is evidence of a final arrangement, there are no uncertainties
surrounding acceptance, collectibility is probable and the price is fixed. The
Company sells Oxyglobin directly to veterinarians in the United States. The
Company sells Oxyglobin to a distributor in the United Kingdom that sells
product in selected European countries through local veterinary distributors in
Germany, France and the UK. Collectibility is reasonably assured once pricing
arrangements are established, as these agreements establish the distributors
intent to pay. The Companys customers do not have a right to return product.
The Company monitors creditworthiness on a regular basis and believes
collectibility of product revenues is reasonably assured at the time of sale. Research and Development Since its founding in 1984, Biopure has been primarily a research and
development company focused on developing Hemopure, our oxygen therapeutic for
human use, and obtaining regulatory approval in the United States. Our research
and development expenses have been devoted to basic research, product
development, process development, pre-clinical studies, clinical trials and
filing a Hemopure BLA with the FDA. In addition, our development expenses
historically have included the design, construction, validation and maintenance
of a large-scale pilot manufacturing plant in Cambridge, Massachusetts. The
existing pilot plant was completed in 1995, expanded in 1998 and expanded again
in 2002. Such a facility is a necessary part of developing a product like Hemopure.
Hemopure is classified by the FDA as a biologic, because it is derived from
animal-source material. Unlike drugs that are chemical compounds, biologics are
defined by their manufacturing process and composition. Any change in the
manufacturing process could be considered, under FDA regulations, to produce an
altered, possibly different product. Therefore, demonstration of manufacturing
capability at greater than laboratory scale is necessary for an application for
regulatory approval of a biologic to be accepted for review. This requirement
results in high manufacturing research and development costs in the development
of a biologic relative to other types of drugs. The only product made in our plant prior to 1998 was product for use in
pre-clinical and clinical trials. As an offshoot of the research and
development for Hemopure, Oxyglobin, a similar product, gained approval for
veterinary use in 1998. This product was then produced for sale in the pilot
manufacturing plant built and maintained for the development of Hemopure.
Consequently, costs of production of Oxyglobin for sale and an allocation of
overhead based on capacity used for Oxyglobin are charged to inventory and to
cost of revenues. The remaining costs of the pilot plant continued to be
included in research and development expenses through May 2002. Beginning in May 2002, when we began to make Hemopure for sale under our
regulatory approval in South Africa, the primary function of the pilot plant
changed from support of the development of Hemopure to production of goods for
sale. Since then, all costs of maintaining and operating the pilot plant have
been charged to inventory and cost of revenues. Any actual future use of the
facility for research and development activities will be expensed. In addition,
clinical trial materials taken from inventory for use in research and
development are charged to research and development. 14




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) Results of Operations As the Company generates net losses, the key drivers of the losses are cost of
revenues, research and development and other expenses consisting of sales and
marketing and general and administrative. For the three and six month periods
ended April 30, 2004 and 2003, these items were as follows: Three Months Ended
    
    Six Months EndedApril 30, 2004
    
    April 30, 2003
    
    April 30, 2004
    
    April 30, 2003Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percentof
    
    
    
    
    
    of
    
    
    
    
    
    of
    
    
    
    
    
    ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Costs
    
    Amount
    
    Costs
    
    Amount
    
    Costs
    
    Amount
    
    CostsRevenues
    
    $
    893
    
    
    
    
    
    
    $
    1,961
    
    
    
    
    
    
    $
    1,643
    
    
    
    
    
    
    $
    1,982Cost of RevenuesOxyglobin
    
    
    1,175
    
    
    
    9
    %
    
    
    2,708
    
    
    
    20
    %
    
    
    2,745
    
    
    
    11
    %
    
    
    3,441
    
    
    
    14
    %Hemopure
    
    
    2,429
    
    
    
    19
    %
    
    
    3,265
    
    
    
    24
    %
    
    
    5,664
    
    
    
    23
    %
    
    
    7,380
    
    
    
    30
    %Total Cost of Revenues
    
    
    3,604
    
    
    
    28
    %
    
    
    5,973
    
    
    
    44
    %
    
    
    8,409
    
    
    
    34
    %
    
    
    10,821
    
    
    
    44
    %Research and
Development
    
    
    3,491
    
    
    
    27
    %
    
    
    2,536
    
    
    
    19
    %
    
    
    6,490
    
    
    
    26
    %
    
    
    5,082
    
    
    
    21
    %Sales and MarketingOxyglobin
    
    
    276
    
    
    
    2
    %
    
    
    852
    
    
    
    6
    %
    
    
    724
    
    
    
    3
    %
    
    
    1,209
    
    
    
    5
    %Hemopure
    
    
    673
    
    
    
    5
    %
    
    
    754
    
    
    
    6
    %
    
    
    1,068
    
    
    
    4
    %
    
    
    1,413
    
    
    
    6
    %Total Sales and
Marketing
    
    
    949
    
    
    
    7
    %
    
    
    1,606
    
    
    
    12
    %
    
    
    1,792
    
    
    
    7
    %
    
    
    2,622
    
    
    
    11
    %General and
Administrative
    
    
    4,894
    
    
    
    38
    %
    
    
    3,526
    
    
    
    26
    %
    
    
    8,031
    
    
    
    32
    %
    
    
    6,253
    
    
    
    25
    %Total Costs
    
    $
    12,938
    
    
    
    100
    %
    
    $
    13,641
    
    
    
    100
    %
    
    $
    24,722
    
    
    
    100
    %
    
    $
    24,778
    
    
    
    100
    %
 Three months ended April 30, 2004 compared to three months ended April 30, 2003 Total revenues, consisting of sales of the companys veterinary product
Oxyglobin, were $893,000 for the second quarter of fiscal 2004 compared to
$1,961,000 for the same period in 2003. Revenues for the second quarter of
fiscal 2003 include approximately $1,300,000 in backorders that were filled
during the quarter. Excluding these backorders, Oxyglobin revenues increased
during the second fiscal quarter of 2004 compared to the same period in 2003
due to increased demand, including customers purchasing Oxyglobin in
anticipation of future supply shortages. In our efforts to conserve cash, we
announced workforce reductions in October 2003 and February 2004. As a
result, we expect substantially lower Oxyglobin sales for the fiscal year
ending October 31, 2004, as we are unable to manufacture sufficient product to
meet demand. Cost of revenues was $3,604,000 for the second quarter of fiscal 2004,
compared to $5,973,000 for the same period in 2003. Cost of revenues includes
costs of both Oxyglobin and Hemopure, the companys product for human use,
although Hemopure is not currently being offered for sale. Oxyglobin cost of
revenues was $1,175,000 for the second quarter of fiscal 2004 compared to
$2,708,000 for the same period in 2003. The decrease for the quarter was
primarily due to the decreased number of Oxyglobin units sold in 2004. 15




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) Due to fixed manufacturing costs, we expect that costs to produce Oxyglobin
will exceed Oxyglobin revenues until the company more fully utilizes its
manufacturing capacity. Hemopure cost of revenues, consisting of the
allocation of unabsorbed fixed manufacturing costs, was $2,429,000 for the
second quarter of fiscal 2004 compared to $3,265,000 for the same period in
2003. This decrease is primarily due to lower manufacturing costs resulting
from the October 2003 workforce and cost reductions. Research and development expenses include product and process development and
engineering, pre-clinical studies, clinical trials and clinical trial
materials. Our research and development expenses have continued to be primarily
for our one major projectHemopure development for use in patients undergoing
surgery. A breakdown of our research and development expenses by major
activity is as follows: Three Months EndedApril 30, 2004
    
    April 30, 2003Percent of
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    Total R&D Costs
    
    Amount
    
    Total R&D CostsBLA Preparation and Support of Review Process
    
    $
    2,955
    
    
    
    85
    %
    
    $
    2,340
    
    
    
    92
    %Phase II European Trial (Cardiovascular project)
    
    
    429
    
    
    
    12
    %
    
    
    
    
    
    
    Other Projects (Trauma)
    
    
    107
    
    
    
    3
    %
    
    
    196
    
    
    
    8
    %Total
    
    $
    3,491
    
    
    
    100
    %
    
    $
    2,536
    
    
    
    100
    %
 Surgery/BLA Project The completed Phase III orthopedic surgery trial cost approximately $37,000,000
over the four years from protocol development to the final report on July 26,
2002. These trial costs include costs incurred at 46 hospitals, trial site
monitoring, data management, regulatory consulting, statistical analysis,
medical writing and clinical materials and supplies as well as Company
personnel engaged in these activities. Costs incurred in submitting the
Hemopure BLA include Company personnel and payments to third parties for
manufacturing process documentation, medical consultants, regulatory
consultants, integrating the safety and efficacy databases for all clinical
trials and pre-clinical studies. Research and development expenses continue to
include amounts for support of the BLA review process including responding to
FDA inquiries. If the FDA grants a marketing license for Hemopure, this major
project will be substantially complete. However, the FDA complete response
letter of July 30, 2003 consisted of requests for extensive additional
information. In addition, during a meeting with the FDA on January 6, 2004
regarding the BLA, the FDA said that it would also require the results of four
preclinical studies previously requested for the trauma program to be submitted
for its review of the BLA and to allow the company to conduct additional human
clinical trials in the orthopedic or any other indication. Three of the
studies are currently underway and the fourth is expected to begin during the
third quarter of fiscal 2004. If the Company submits to the FDA a formal
written reply to the complete response letter, the Agency can be expected to
take six months from the date of Biopures reply to review and act on the BLA
amendment based on FDA performance goals in the Prescription Drug User Fee Act
(PDUFA III). However, it is currently unclear what effect, if any, the results
of the requested preclinical animal studies or other potential FDA requests,
including the likely requirement that Biopure conduct one or more additional
human trials, may have on the timetable for obtaining FDA approval of Hemopure. Cardiovascular and Trauma Projects Both the cardiovascular and the trauma projects are in early stages (i.e.,
safety clinical trials). Cardiovascular expenditures to date of $841,000
consist of the costs of preparing and carrying out the ongoing Phase II
European Trial. Trauma expenditures to date of $393,000 consist of
preparation costs primarily associated with protocol and study design. The
costs of any additional clinical trials and preclinical studies that might be
necessary cannot be estimated at the present time. If additional trials or
preclinical studies are required, it cannot yet be determined when they will be
completed, if at all. The risks and uncertainties associated with the early
stage of planning and execution of these projects, include among other things,
uncertainties about results that at any time could require us 16




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) to abandon or greatly modify either project. Accordingly, we cannot estimate
the period in which material net cash inflows for either of these two projects
might commence, and we do not anticipate the possibility of obtaining marketing
approval earlier than 2006. By the fall of 2004, Biopure plans to address the FDAs safety and efficacy
concerns by providing answers to certain questions posed by the agency and by
submitting results of the four animal studies required by the agency, three of
which are underway. Many of the FDAs questions require the collection and
tabulation of data from source documents at 78 clinical trial sites in the
United States and abroad. Most of these documents have been collected, and data
is currently being sorted, tabulated and analyzed. The process of obtaining U.S. marketing approval for a first indication for
Hemopure also has risks of delays that make the ultimate development cost
unpredictable. We are hopeful that we can respond to all issues the FDA has
raised to date regarding our BLA, but since it is likely that Biopure will need
to conduct one or more additional human clinical trials before the FDA will
consider approving Hemopure, the Company will evaluate all of its clinical and
regulatory options, not just the orthopedic surgical anemia indication for
which Biopures biologics license application (BLA) was filed. In Europe,
patient enrollment is proceeding in a 45-patient, Phase II clinical trial
assessing the safety and feasibility of Hemopure, at low doses, as a potential
cardioprotective agent in patients undergoing coronary angioplasty. In South Africa, patient enrollment is anticipated to begin shortly in a
50-patient, Phase II clinical trial assessing the safety and tolerability of
Hemopure, in a hospital setting, for emergency treatment of unstable patients
who have significant blood loss as a result of blunt or penetrating trauma. We cannot predict when Hemopure will be approved, and regardless of when it is
approved we do not anticipate that we will attain profitability until we are
able to achieve economies of scale associated with a significant increase in
our manufacturing capacity. There are substantial risks and uncertainties
relating to whether and when we will obtain FDA approval for Hemopure, the
timing of the construction of additional capacity and other factors that may
affect our ability to generate a profit from our research and development of
Hemopure. Of the research and development expenses for the second quarter of fiscal 2004,
$2,955,000 was for BLA support costs and $429,000 for costs associated with the
Phase II clinical trial in Europe explained above. In the corresponding quarter
of fiscal 2003, expenditures included $2,340,000 for BLA support costs and the
balance for various expenditures not allocable to any major project. Due to
the extensive additional information the FDA has requested, the Company expects
research and development expenses to continue at a higher rate than experienced
last year. Sales and marketing expenses consist of Hemopure-related expenses and
Oxyglobin-related expenses. Hemopure-related sales and marketing expenses were
$673,000 for the second quarter of fiscal 2004, compared to $754,000 for the
same period in 2003. This decrease is primarily due to the reduction of
marketing and educational activities in fiscal 2004 consistent with the
companys cost-cutting measures. The Company anticipates that Hemopure and
Oxyglobin-related sales and marketing expenses will be lower in fiscal 2004
compared to fiscal 2003 because of cost-cutting. Oxyglobin-related sales and
marketing expenses were $276,000 for the second quarter of fiscal 2004 compared
to $852,000 for the same period in 2003. This decrease was due to the
unusually high volume of Oxyglobin shipments during the second quarter of 2003,
as mentioned above, and associated commissions and planning activities in
Europe. General and administrative expenses were $4,894,000 for the second quarter of
fiscal 2004, compared to $3,526,000 for the same period in 2003. This increase
is mostly due to $947,000 in expenses related to severance charges incurred
during the quarter and to a one-time non-cash expense of $500,000, the fair
market value of the 350,000 shares of Class A common stock issued to Steelhead
Investments Ltd. in connection with the settlement of litigation. 17




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) Six months ended April 30, 2004 compared to six months ended April 30, 2003 Total revenues were $1,643,000 for the first six months of fiscal 2004 compared
to $1,982,000 for the same period in 2003. Revenues for the first six months
of fiscal 2003, as explained above, include approximately $1,300,000 in
backorders that were filled. In our efforts to conserve cash, we are limiting
manufacturing capacity and thereby the amount of Oxyglobin we will be able to
sell. As a result, we expect revenues for the fiscal year ending October 31,
2004 to be substantially lower than last fiscal year. Cost of revenues was $8,409,000 for the first six months of fiscal 2004,
compared to $10,821,000 for the same period in 2003. Cost of revenues includes
costs of both Oxyglobin and Hemopure, although Hemopure is not currently being
sold. Oxyglobin cost of revenues was $2,745,000 for the first six months of
fiscal 2004 compared to $3,441,000 in 2002. This decrease is largely due to
the decreased number of units sold in the first six months of fiscal 2004
compared to the same period last year. Because of fixed manufacturing costs,
the Company expects that costs to produce Oxyglobin will exceed Oxyglobin
revenues until the Company more fully utilizes its manufacturing capacity.
Hemopure cost of revenues decreased $1,716,000 during the first six months of
fiscal 2004 compared to the corresponding period last year primarily due to
lower manufacturing costs resulting from the October 2003 workforce and cost
reductions. Research and development expenses include product and process development and
engineering, pre-clinical studies, clinical trials and clinical trial
materials. Our research and development expenses have continued to be primarily
for our one major projectHemopure development for use in patients undergoing
surgery. A breakdown of our research and development expenses by major
activity is as follows: Six Months EndedApril 30, 2004
    
    April 30, 2003Percent of
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    Total R&D Costs
    
    Amount
    
    Total R&D CostsBLA Preparation and Support of Review Process
    
    $
    5,620
    
    
    
    87
    %
    
    $
    4,724
    
    
    
    93
    %Phase II European Trial
    
    
    601
    
    
    
    9
    %
    
    
    
    
    
    
    Other Projects
    
    
    269
    
    
    
    4
    %
    
    
    358
    
    
    
    7
    %Total
    
    $
    6,490
    
    
    
    100
    %
    
    $
    5,082
    
    
    
    100
    %
 Of the research and development expenses for the first six months of fiscal
2004, $5,620,000 was for BLA support costs and $601,000 was for costs
associated with the Phase II clinical trial in Europe explained above. In the
corresponding quarter of fiscal 2003, expenditures included $4,724,000 for BLA
support costs and the balance for various expenditures not allocable to any
major project. Due to the extensive additional information the FDA has
requested, the Company expects research and development expenses to continue at
a higher rate than experienced last year. Sales and Marketing expenses consist of Hemopure-related expenses and
Oxyglobin-related expenses. Hemopure-related sales and marketing expenses were
$1,068,000 for the first six months of fiscal 2004, compared to $1,413,000 for
the same period in 2003. This decrease is primarily due to the reduction of
marketing and educational activities in fiscal 2004 consistent with the
companys cost-cutting measures. The Company anticipates that Hemopure and
Oxyglobin-related sales and marketing expenses will be lower in fiscal 2004
compared to fiscal 2003 because of cost-cutting. Oxyglobin-related sales and
marketing expenses were $724,000 for the first six months of fiscal 2004
compared to $1,209,000 for the same period in 2003. This decrease was due to
the unusually high volume of Oxyglobin shipments during the first six months of
2003, as mentioned above, and associated commissions and planning activities in
Europe. 18




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) General and administrative expenses were $8,031,000 for the first six months of
fiscal 2004, compared to $6,253,000 for the same period in 2003. This increase
is mostly due to $885,000 in expenses related to severance and other employee
related expenses incurred during the period and to a one-time non-cash expense
of $500,000, the fair market value of the 350,000 shares of Class A common
stock issued to Steelhead Investments Ltd. in connection with the settlement of
litigation. Legal fees also increased by $640,000 during the first six months
of fiscal 2004 compared to the same period in fiscal 2003. These costs were
partially offset by a decrease of $428,000 in consulting fees during the first
six months of fiscal 2004 compared to last year. Liquidity and Capital Resources At April 30, 2004, we had $11,865,000 in cash and cash equivalents which we
believe to be sufficient to fund operations into September 2004 under the
Companys current operating plan. To fund operations through December 31, 2004,
we estimate that we will need to raise approximately $7,500,000. We plan to
spend up to $150,000 for the remainder of fiscal 2004 on capital
projects for our existing facilities. These capital expenditures are included in the cash requirements identified above. Because the
Companys funds on hand at October 31, 2003 and forecast sales were not
sufficient to fund our operations into fiscal 2005, the audit report of Ernst &
Young LLP, the Companys independent auditor, on our fiscal 2003 financial
statements includes a going concern modification. For us to remain a going
concern we will require significant funding. We expect to continue financing our operations, until we are profitable,
through sales of securities, strategic alliances and other financing vehicles,
if any, that might become available. The Company is working to identify
additional cost reductions. However, there can be no assurance that additional
cost reductions will be identified nor that any such additional financing will
be available to the Company on terms that it deems acceptable, if at all. If
Hemopure were approved by the FDA as a red blood cell replacement, the Companys
revenue will be limited by manufacturing capacity, and the Company does not
expect prices for that indication to permit it to become profitable unless it
can achieve economies of scale by increasing that capacity. We have not been
profitable since inception and had an accumulated deficit of $451,655,000 as of
April 30, 2004. We anticipate that we will continue to generate losses for the
next several years. Failure to secure additional funding or modification of our
clinical plans could trigger impairment of certain long-term assets. Net cash used in operating activities went down $1,468,000 in the first six
months of 2004 compared to the corresponding period last year. Cash provided
by inventories increased compared to last year due mostly to lower production
during the first six months of fiscal 2004 compared to the same period last
year. Cash provided by other current assets, consisting of prepaid expenses,
increased by $609,000 due to an increase in insurance premiums paid for in the
prior fiscal year and a reduction in consulting agreements and service
contracts entered into during the first six months of fiscal 2004 compared to
the same period last year. Accrued expenses consumed $1,083,000 more cash
during the first six months of 2004 than in 2003 mostly due to severance
payments made during the first six months of fiscal 2004. Recently Issued Accounting Standards In May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
150, Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity(SFAS 150), which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Companys adoption of the initial recognition and
initial measurement provisions of SFAS 150, effective June 1, 2003, did not
have an impact on the Companys results of operations or financial position. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities,(FIN 46 or the Interpretation) to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity; in December 2003 FASB issued a revision to FIN 46(FIN46R).
Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN No. 46 changes that by requiring a variable interest
entity, as defined, to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns
or both. FIN No. 46 also requires disclosures about variable interest entities
that the company is not required to 19




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
April 30, 2004
(continued) consolidate but in which it has a significant variable interest. FIN 46 is
applicable to entities subject to the Interpretation no later than the end of
the first reporting period ended after March 15, 2004, and, accordingly, was
applicable to the Company as of the end of the quarter ended April 30, 2004.
The Companys adoption of FIN 46, effective April 30, 2004, did not have an
impact on the Companys results of operations or financial position. See Note 6
for additional information. 20




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BIOPURE CORPORATION April 30, 2004 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company currently does not have any foreign currency exchange risks, with
the exception of negligible exchange fluctuations associated with expenses for
marketing and regulatory activities outside of the United States. Biopure sells
Oxyglobin to its European distributors in U.S. dollars and therefore our
customers bear the risk of foreign currency exchange fluctuation. The Company
invests its cash and cash equivalents in high-grade commercial paper and money
market funds. These investments are subject to interest rate risk. However, due
to the nature of the Companys short-term investments, it believes that the
financial market risk exposure is not material. 21




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BIOPURE CORPORATION April 30, 2004 
 Item 4. Disclosure Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. Under the supervision and
with the participation of our management, including our interim Chief Executive
Officer and our Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of April 30, 2004.
Based on this evaluation, our interim Chief Executive Officer and Chief
Financial Officer concluded as of the evaluation date that our disclosure
controls and procedures were effective to ensure that information required to
be disclosed by us in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. (b) Changes in Internal Control Over Financial Reporting. There have been no
changes in our internal control over financial reporting (as defined under
Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently
completed fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. 22




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BIOPURE CORPORATION 
 Part II  Other Information
April 30, 2004 
 Item 1. Legal Proceedings  SEC Investigation.During the fourth quarter of fiscal 2003, the Company was
notified of a confidential investigation by the Securities and Exchange
Commission (SEC). On December 22, 2003, the Company, its former Chief
Executive Officer and its former Senior Vice President, Regulatory and
Operations, and on April 29, 2004 the Companys Chairman, a former director,
its Chief Technology Officer and General Counsel received Wells Notices
from the staff of the SEC stating the staffs preliminary determination to
recommend that the SEC bring a civil injunctive proceeding against the
Company and the individuals. Biopure and the individuals are responding in
writing to the notices.Biopure believes the notices relate to Company disclosures concerning
communications with the FDA about a clinical hold imposed on a clinical study
protocol the Company submitted to the agency in March 2003 and the status of
the Companys BLA. In March 2003, the Company filed a proposed protocol for a
Phase II clinical trial in trauma patients in a hospital setting. The FDA put
the protocol and its related investigational new drug application (IND) on
clinical hold, meaning the trial could not begin as proposed. The FDA cited
safety concerns based on a preliminary review of data from the Companys
Phase III clinical trial in patients undergoing orthopedic surgery. After the
Company responded in two written submissions, the clinical hold was
reasserted twice in writing, most recently on July 30, 2003. The Company did
not disclose the clinical hold because the Company did not consider
correspondence with the agency about data interpretation in the development
of a protocol to be material, notwithstanding the references to data in the
BLA. The staffs investigation also concerns the Companys disclosures
concerning the FDAs review of the BLA, after receipt of the complete
response letter dated July 30, 2003. The Company has been cooperating
throughout the investigation with the SEC staff. At this time, the Company
cannot estimate what impact, if any, this inquiry may have on its financial
position or results of operations. Litigation.  Biopure, its former Chief Executive Officer, its Chief Technology Officer and
its Chief Financial Officer were named as defendants in a number of similar,
purported class action complaints, filed between December 30, 2003 and
January 28, 2004 (the complaints), in the U.S. District Court for the
District of Massachusetts (the Court) by alleged purchasers of Biopures
common stock. Those complaints have since been consolidated in a single
action. The complaints claim that Biopure violated the federal securities
laws by publicly disseminating materially false and misleading statements
regarding the status of its biologic license application pending with the
U.S. Food and Drug Administration and of its trauma development program,
resulting in the artificial inflation of Biopures common stock price during
the purported class period. The complaints do not specify the amount of
alleged damages plaintiffs seek to recover. The complaints set forth varying
class periods but generally focus on March 2003 through December 24, 2003.
The defendants believe that the complaints are without merit and intend to
defend the actions vigorously. At this time, the Company cannot estimate what
impact, if any, these cases may have on its financial position or results of
operations.The seven board members of Biopures Board of Directors during the period
March through December 2003, were named as defendants in two shareholder
derivative actions filed on January 26, 2004 and January 29, 2004 in the same
Court. The Company is named as a defendant, even though in a derivative
action any award is for the benefit of the Company, not individual
stockholders. The complaints allege in derivative actions brought by
shareholders on behalf of the Company that the individual directors breached
fiduciary duties in connection with the same disclosures set forth in the
purported securities class action complaints. The complaints do not specify
the amount of the alleged damages plaintiffs seek to recover. At this time,
the Company cannot estimate what impact, if any, these cases may have on its
financial position or results of operations.As previously disclosed, on or about June 16, 2003, plaintiff Steelhead
Investments, Ltd. filed a complaint alleging that the Company breached a
contract with the plaintiff. On April 14, 2004, the Company and Steelhead
dismissed the litigation with prejudice. The Company issued 350,000 shares
of its common stock to a nominee of Steelhead, and the parties to the
litigation signed mutual general releases. 23




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##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities. None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a vote of Security Holders  (a)
    
    The Company held its 2004 annual meeting on April 7, 2004.(b)
    
    Daniel P. Harrington was elected as director at the meeting. The other
directors whose terms of office continued after the meeting are David N.
Judelson, C. Everett Koop, MD, Carl W. Rausch and Charles A. Sanders, M.D.(c)
    
    The shares voted were: For
    
    WithheldDaniel P. Harrington
    
    
    32,704,874
    
    
    
    3,740,265
  (d)
    
    An amendment to the 2002 Omnibus Securities and Incentive Plan was
approved and the shares voted were as follows: For
    
    Against
    
    Abstain7,454,627
    
    
    4,868,285
    
    
    
    246,950
  (e)
    
    A proposal to approve the Companys issuance and sale on March 25, 2003,
of shares class A common stock and warrants to three of the Companys
directors or their associates was adopted and the shares voted were as
follows: For
    
    Against
    
    Abstain9,784,158
    
    
    2,577,965
    
    
    
    207,738
 There were no broker held nonvoted shares represented at the meeting. 24




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) 
 Item 5. Other Information RISK FACTORS These risks and uncertainties are not the only ones we face. Others that we do
not know about now, or that we do not now think are important, may impair our
business or the trading price of our securities Company Risks We May Not Be Able to Continue as a Going Concern, as Our Funds Are Only
Sufficient to Fund Operations Into September 2004 Ernst & Young LLP, our independent auditors, have included a going concern
modification in their audit opinion on our consolidated financial statements
for the fiscal year ended October 31, 2003, which states that the Companys
recurring losses from operations and the current lack of sufficient funds to
sustain its operations through the third quarter of fiscal 2004 raise
substantial doubt about its ability to continue as a going concern. We expect our cash position at April 30, 2004 to fund operations into
September 2004 per our current operating plan. We are assessing our ability to
raise additional capital through equity offerings, strategic alliances and
other financing vehicles, but we cannot assure you that sufficient funds will
be available to us on terms that we deem acceptable, if they are available at
all. The inclusion of a going concern modification in Ernst & Young LLPs audit
opinion may materially and adversely affect our stock price and our ability to
raise new capital. Our financial statements have been prepared on the basis of a going
concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. We have not made any adjustments
to our financial statements as a result of the going concern opinion. If we
cannot continue as a going concern, we may have to liquidate our assets and we
may receive significantly less than the values at which they are carried on our
financial statements. Any shortfall in the proceeds from the liquidation of our
assets would directly reduce the amounts that holders of our common stock could
receive in liquidation. Failure to Raise Additional Funds Will Affect the Development, Manufacture and
Sale of Our Products The development and regulatory processes for obtaining approval to market
Hemopure for its initial indication in the United States have been costly and
are not yet complete. We require substantial working capital to develop,
manufacture and sell our products and to finance our operations. We will need
additional funding to maintain operations until such time, if ever, as we can
generate positive cash flow. To reach that point, we must continue working on
issues raised by the FDA about our BLA for Hemopure, including additional
pre-clinical animal studies and any clinical trials that the FDA may request or
we decide we need. As we continue to analyze our data and respond to the FDAs complete
response letter, we anticipate that we may propose to the FDA one or more
additional human clinical trials prior to obtaining initial FDA approval. In
determining our clinical trial needs, we expect to evaluate all of our clinical
and regulatory options, not just the orthopedic surgical anemia indication, for
which the biologics licensing application was filed. We will need additional
funding to continue operating until such time, if ever, as the FDA approves the
BLA for Hemopure. Even if Hemopure is approved by the FDA, we cannot be
profitable until we increase manufacturing capacity, for which we will require
funding. We expect our cash position to fund operations into September 2004 per
our current operating plan. We require an additional $7,500,000 to fund our
planned operations through December 31, 2004. If additional financing is not available when needed or is not available
on acceptable terms, we may be unable to develop products, build manufacturing
capacity or fulfill other important goals. A sustained period in which
financing is not available could force us to go out of business. 25




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) If We Cannot Hire the Personnel We Need, Both Our Costs and Our Ability to
Conduct Operations May Be Adversely Affected We have an interim Chief Executive Officer and do not have a senior
regulatory employee. We need to recruit and retain personnel for these and
other positions. To the extent that our ability to fund future operations
depends on raising additional capital, our ability to recruit qualified
personnel may be adversely affected. This means that we may need to rely on
outside consultants who may be less cost-effective than employees. If We Fail to Obtain FDA Approval, We Cannot Market Hemopure in the United
States We will not be able to market Hemopure in the United States unless and
until we receive FDA approval. We submitted to the FDA a biologics license
application, or BLA, for approval to market Hemopure. On July 30, 2003, the FDA
sent us a complete response letter, stating that the agency had completed its
review of the BLA and requesting additional information. We are working on our
responses to the FDA questions. The questions require considerable data
gathering and analysis. We must rely on contractors to complete some of the
work. We could be delayed in responding either by the contractors failure or
inability to complete their tasks when we require or by other unanticipated
delays or difficulties. Furthermore, the FDA may find that our responses to the
letter and the results of preclinical animal studies the FDA has asked for do
not address its safety and efficacy issues adequately. We anticipate that we
will require one or more further human clinical trials prior to approval of
Hemopure, and as we are considering other indications as possible alternatives
to surgery as our first indication, it is possible that such trials and our
resubmission to the FDA would be for a different indication from the original
filing.. Trials are expensive and time-consuming, as is the FDA review process,
and we may not have the financial resources to fund any such trials and our
operations until FDA approval. Despite all of our efforts, the FDA could refuse
to grant a marketing authorization. If We Fail to Obtain Regulatory Approvals in Foreign Jurisdictions, We Will Not
Be Able to Market Hemopure Abroad We also intend to market our products in international markets, including
Europe. We must obtain separate regulatory approvals in order to market our
products in Europe and many other foreign jurisdictions. The regulatory
approval processes differ among these jurisdictions. Approval in any one
jurisdiction does not ensure approval in a different jurisdiction. As a result,
obtaining foreign approvals will require additional expenditures and
significant amounts of time. We Cannot Expand Indications for Our Products Unless We Receive FDA Approval
for Each Proposed Indication The FDA requires a separate approval for each proposed indication for the
use of Hemopure in the United States. If our BLA is approved, we will be
limited in our marketing to the indication as approved. This approval, if and
when obtained, could be for a limited market, even more limited than the
orthopedic surgery indication we applied for. In order to expand Hemopures
indications, we will have to design additional clinical trials, submit the
trial designs to the FDA for review and complete those trials successfully. The
FDA may require a label cautioning against Hemopures use for indications for
which it has not been approved. We cannot guarantee that the FDA will ever
approve Hemopure for any indication. The FDA has approved the use of our veterinary product, Oxyglobin, for the
treatment of anemia in dogs, regardless of the cause of the anemia.
Supplemental approvals are required to market Oxyglobin for any new indications
or additional species. We cannot guarantee that we will receive such approvals. We may choose initially to market Hemopure using an independent
distributor. Any such distributor:  
    
    might not be successful in marketing Hemopure;  
    
    might, at its discretion, limit the amount and timing of resources it devotes to marketing Hemopure; and  
    
    might terminate its agreement with us and abandon our products at any time whether or not permitted by
the applicable agreement. 26




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) If we do not enter into a satisfactory distributorship agreement, we may
not be successful in entering into alternative arrangements, whether seeking an
alliance with a pharmaceutical company, or recruiting, training and retaining a
marketing staff and sales force of our own. If We Cannot Generate Adequate, Profitable Sales of Hemopure, We Will Not Be
Successful To succeed as a company, we must develop Hemopure commercially and sell
adequate quantities of Hemopure at a high enough price to generate a profit. We
may not accomplish either of these objectives. To date, we have focused our
efforts on developing our products, establishing their safety and efficacy and
seeking marketing approval. Uncertainty exists regarding the potential size of
the market for Hemopure and the price that we can charge for it. Additionally,
the size of the market will be affected by the indication(s) for which Hemopure
is approved and will be greatly reduced if reimbursement for the cost of
Hemopure is not available from health insurance companies or government
programs like Medicaid. If We Cannot Obtain Market Acceptance of Hemopure, We Will Not Be Able to
Generate Adequate, Profitable Sales Even if we succeed in obtaining marketing approval for Hemopure, a number
of factors may affect future sales of our product. These factors include:  
    
    whether and how quickly physicians accept Hemopure as a cost-effective
and therapeutic alternative to other products, in particular, donated
human blood. It may take longer than we anticipate to obtain market
acceptance; and  
    
    whether medical care providers or the public accept the use of a
bovine-derived protein in transfusions, particularly in light of
public perceptions in the United States, Europe and elsewhere about
the risk of mad cow disease. If We Fail to Comply with Good Manufacturing Practices, We May Not Be Able to
Sell Our Products To obtain FDA approval to sell our products, we must demonstrate to the
FDA that we can manufacture our products in compliance with the FDAs good
manufacturing practices, commonly known as GMPs. GMPs are stringent
requirements that apply to all aspects of the manufacturing process. We are
subject to FDA inspections at any time to determine whether we are in
compliance with GMP requirements. If we fail to manufacture in compliance with
GMPs, the FDA may refuse to approve our products or take other enforcement
action with respect to products that we are distributing commercially. Because the Manufacturing Process for Our Products Is Complicated and
Time-Consuming, We May Experience Problems that Would Limit Our Ability to
Manufacture and Sell Our Products As with any manufactured product, problems can occur during our production
processes. These problems can result in increased production scrap, which can
reduce operating margins. These problems could also require us to delay
shipments, recall previously shipped product or be unable to supply product for
a period of time, all of which could negatively impact our results of
operations. Contamination or defects could result in a material recall in the
future, which could adversely affect our results of operations. We Manufacture Our Products at a Single Location and, If We Were Unable to
Utilize this Facility, We Would Not Be Able to Manufacture and Sell these
Products for an Extended Period of Time We manufacture our products at a single location located in Massachusetts
with ancillary facilities in Pennsylvania and New Hampshire. Damage to any of
these manufacturing facilities due to fire, contamination, natural disaster,
power loss, riots, unauthorized entry or other events could cause us to cease
the manufacturing of our products. For example, if our Massachusetts
manufacturing facility were destroyed, it could take approximately two years or
more to rebuild and qualify it. In the reconstruction period, we would not be
able to make our products and thus would have no sales following exhaustion of
finished goods in inventory. A new facility would take longer to construct. A
large manufacturing facility we propose to build in South Carolina is expected
to take 30 to 36 months or more to build, qualify and obtain facility approval
from the FDA. 27




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) We Are Dependent on Third Parties to Finance Expansion of Our Manufacturing
Capacity, and Failure to Increase Manufacturing Capacity May Impair Hemopures
Market Acceptance and Prevent Us from Achieving Profitability The construction of our proposed new manufacturing facility in Sumter,
South Carolina is dependent upon financing from third parties. Groundbreaking
for this facility has been significantly delayed and is likely to be delayed
further as a result of delays in obtaining such financing. Third parties can
be expected to be unwilling to commit to finance the facility so long as we do
not have FDA approval to market Hemopure. We cannot assure you that sufficient
financing for this facility will be available, or if available, will be on
terms that are acceptable to us. The completion of this facility or the
addition of comparable manufacturing capacity is a key milestone in our plan
for future operations. The later the date of completion of additional
manufacturing capacity, the more financing we will need for working capital. We Will Face Risks, Including the Risk of Scale-Up of Our Processes, in Any New
Construction, and in Turn Could Encounter Delays, Higher than Usual Rejects,
Additional Reviews and Tests of Units Produced and Other Costs Attendant to an
Inability to Manufacture Saleable Product We believe we will need to construct additional manufacturing facilities
to meet annual demand in excess of our current capacity. If Hemopure receives
market acceptance, we may experience difficulty manufacturing enough of the
product to meet demand. If we cannot manufacture sufficient quantities of
Hemopure, we may not be able to operate profitably. In addition, if we cannot
fill orders for Hemopure, customers might turn to alternative products and may
choose not to use Hemopure even after we have addressed our capacity shortage. Our Lack of Operating History Makes Evaluating Our Business Difficult Proceeds from the sales of equity securities, payments to fund our research and
development activities, and licensing fees have provided almost all of our
funding to date. We have no operating history of selling our products in large
quantities upon which to base an evaluation of our business and our prospects.
Consequently, we have no experience on which to predict future commercial
success. We Have a History of Losses and Expect Future Losses We have had annual losses from operations since our inception in 1984. In
the fiscal years ended October 31, 2001, 2002 and 2003, we had losses from
operations of $52,957,000, $46,657,000 and $47,312,000, respectively, and we
had an accumulated deficit of $451,655,000 as of April 30, 2004. We expect to
continue to incur losses from operations until we are able to develop Hemopure
commercially and generate a profit. We cannot ensure that we will ever be able
to achieve profitable operations. If We Are Not Able to Protect Our Intellectual Property, Competition Could
Force Us to Lower Our Prices, which Might Reduce Profitability We believe that our patents, trademarks and other intellectual property
rights, including our proprietary know-how, will be important to our success.
Our business position will depend, in part, upon our ability to defend our
existing patents against infringement by third parties. We will need to obtain
additional patents for our products, the processes utilized to make our
products and our product uses. We cannot guarantee that our existing patents
will protect us adequately from competition from similar products or that
additional products or processes will achieve patent protection. In addition,
third parties may successfully challenge our patents. We have not filed patent
applications in every country. In certain countries, obtaining patents for our
products, processes and uses may be difficult or impossible. Patents issued in
regions other than the United States and Europe may be harder to enforce than,
and may not provide the same protection as, patents obtained in the United
States and Europe. 28




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) Failure to Avoid Infringement of Others Intellectual Property Rights Could
Impair Our Ability to Manufacture and Market Our Products We cannot guarantee that our products and manufacturing process will be free of
claims by third parties alleging that we have infringed their patents. Any such
claim could be expensive and time-consuming to defend, and an adverse
litigation result or a settlement of litigation could require us either to
obtain a license from the complaining party or to change our manufacturing
process. Either result could be expensive or result in a protracted plant
shutdown, in turn adversely affecting our ability to make a profit. A third party could also allege that our products are used in a manner
that violates a use patent. Such a claim, if valid, would also be expensive to
defend, and either an adverse litigation result or a settlement could limit or
preclude us from marketing our product for the patented use and, in turn,
adversely affect our sales revenues. Our Profitability Will Be Affected If We Incur Product Liability Claims in
Excess of Our Insurance Coverage The testing and marketing of medical products, even after FDA approval,
have an inherent risk of product liability. We maintain limited product
liability insurance coverage in the total amount of $20,000,000. However, our
profitability will be adversely affected by a successful product liability
claim in excess of our insurance coverage. We cannot guarantee that product
liability insurance will be available in the future or be available on
reasonable terms. Replacing Our Sole Source Suppliers for Key Materials Could Result in
Unexpected Delays and Expenses We obtain some key materials, including membranes and chemicals, and
services from sole source suppliers. All of these materials are commercially
available elsewhere. If such materials or services were no longer available at
a reasonable cost from our existing suppliers, we would need to purchase
substitute materials from new suppliers. If we need to locate a new supplier,
the substitute or replacement materials or facilities will need to be tested
for equivalency. Such equivalency tests could significantly delay development
of a product, delay or limit commercial sales of FDA-approved products and
cause us to incur additional expense. We obtain bovine hemoglobin from one abattoir and from herds that are
located in two states of the United States. We cannot predict the future
effect, if any, on us of the recent discovery of mad cow disease in the
United States. Any quarantine affecting herds that supply us or a shut down of
the abattoir we source from could have a material adverse effect on us, as we
would have to find, validate and obtain FDA approval of new sources of supply
or new facilities. Provisions of Our Restated Certificate of Incorporation and By-Laws Could
Impair or Delay Shareholders Ability to Replace or Remove Our Management and
Could Discourage Takeover Transactions that a Stockholder Might Consider to Be
in Its Best Interest Provisions of our Restated Certificate of Incorporation and by-laws, as
well as our stockholders rights plan, could impede attempts by shareholders to
remove or replace our management or could discourage others from initiating a
potential merger, takeover or other change of control transaction, including a
potential transaction at a premium over market price that a stockholder might
consider to be in its best interest. In particular:  
    
    Our restated Certificate of Incorporation does not permit stockholders
to take action by written consent and provides for a classified Board
of Directors, and our by-laws provide that stockholders who wish to
bring business before an annual meeting of shareholders or to nominate
candidates for election of directors at an annual meeting of
stockholders must deliver advance notice of their proposals to us
before the meeting. These provisions could make it more difficult for
a party to replace our board of directors by requiring two annual
stockholder meetings to replace a majority of the directors, making it
impossible to remove or elect directors by written consent in lieu of
a meeting and making it more difficult to introduce business at
meetings. 29




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued)  
    
    Our shareholder rights plan may have the effect of discouraging any
person or group that wishes to acquire more than 20% of our Class A
Common Stock from doing so without obtaining our agreement to redeem
the rights; if our agreement to redeem the rights is not obtained, the
acquiring person or group would suffer substantial dilution. Industry Risks Intense Competition Could Harm Our Financial Performance The biotechnology and pharmaceutical industries are highly competitive.
There are a number of companies, universities and research organizations
actively engaged in research and development of products that may be similar to
or alternatives to Hemopure. We are aware of at least two competitors that make periodic disclosures to
the public; Northfield Laboratories Inc. and Hemosol Inc. are in advanced
stages of developing hemoglobin-based oxygen carriers produced from expired
human blood. Northfields product is in a Phase III clinical trial. Two
privately held companies are conducting clinical trials of hemoglobin-based
oxygen carriers in Europe. The products being developed by these companies are
intended for use in humans and as such could compete, if approved by regulatory
authorities, with Hemopure. Increased competition could diminish our ability to become profitable or
affect our profitability in the future. Our existing and potential competitors:  
    
    are conducting clinical trials of their products;  
    
    might have or be able to access substantially greater resources than we have and be better equipped to develop,
manufacture and market their products;  
    
    may have their products approved for marketing prior to Hemopure; and  
    
    may develop superior technologies or products rendering our technology and products non-competitive or obsolete. Stringent, Ongoing Government Regulation and Inspection of Our Products Could
Lead to Delays in the Manufacture, Marketing and Sale of Our Products The FDA continues to review products even after they receive FDA approval.
If the FDA approves Hemopure, its manufacture and marketing will be subject to
ongoing regulation, including compliance with current good manufacturing
practices, adverse event reporting requirements and the FDAs general
prohibitions against promoting products for unapproved or off-label uses. We
are also subject to inspection and market surveillance by the FDA for
compliance with these and other requirements. Any enforcement action resulting
from failure, even by inadvertence, to comply with these requirements could
affect the manufacture and marketing of Hemopure. In addition, the FDA could
withdraw a previously approved product from the market upon receipt of newly
discovered information. Furthermore, the FDA could require us to conduct
additional, and potentially expensive, studies in areas outside our approved
indications. We will be subject to a variety of regulations governing clinical trials
and sales of our products outside the United States. Whether or not FDA
approval has been obtained, we must secure approval of a product by the
comparable non-U.S. regulatory authorities prior to the commencement of
marketing of the product in a country. The approval process varies from country
to country and the time needed to secure additional approvals may be longer
than that required for FDA approval. These applications may require the
completion of additional preclinical and clinical studies and disclosure of
information relating to manufacturing and controls. Unanticipated changes in
existing regulations or the adoption of new regulations could affect the
manufacture and marketing of our products. 30




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) Health Care Reform and Controls on Health Care Spending May Limit the Price We
Can Charge for Hemopure and the Amount We Can Sell The federal government and private insurers have considered ways to
change, and have changed, the manner in which health care services are provided
in the United States. Potential approaches and changes in recent years include
controls on health care spending and the creation of large purchasing groups.
In the future, it is possible that the government may institute price controls
and limits on Medicare and Medicaid spending. These controls and limits might
affect the payments we collect from sales of our products. Assuming we succeed
in bringing Hemopure to market, uncertainties regarding future health care
reform and private market practices could affect our ability to sell Hemopure
in large quantities at profitable pricing. Uncertainty of Third-Party Reimbursement Could Affect Our Profitability Sales of medical products largely depend on the reimbursement of patients
medical expenses by governmental health care programs and private health
insurers. There is no guarantee that governmental health care programs or
private health insurers will reimburse our sales of Hemopure, or permit us to
sell our product at high enough prices to generate a profit. Investment Risks If We Sell Additional Shares our Stock Price May Decline Further Potential Our cash on hand is estimated to be sufficient to continue operations into
September 2004 under our current operating plan. We will need additional funds
to operate beyond this point and are assessing our ability to raise capital. Any additional sales of shares of our common stock are likely to have a
dilutive effect on our existing stockholders. Subsequent sales of these shares
in the open market could also have the effect of lowering our stock price,
thereby increasing the number of shares we may need to issue in the future to
raise the same dollar amount and consequently further diluting our outstanding
shares. These future sales could also have an adverse effect on the market
price of our shares and could result in additional dilution to the holders of
our shares. The perceived risk associated with the possible sale of a large number of
shares could cause some of our stockholders to sell their stock, thus causing
the price of our stock to decline. In addition, actual or anticipated downward
pressure on our stock price due to actual or anticipated sales of stock could
cause some institutions or individuals to engage in short sales of our common
stock, which may itself cause the price of our stock to decline. If our stock price declines, we may be unable to raise additional capital.
A sustained inability to raise capital could force us to go out of business.
Significant declines in the price of our common stock could also impair our
ability to attract and retain qualified employees, reduce the liquidity of our
common stock and result in the delisting of our common stock from The Nasdaq
Stock Market. Potential for Adverse Effect of Litigation We received a Wells Notice from the Securities and Exchange Commission
staff on December 22, 2003, indicating the staffs preliminary determination to
recommend that the SEC bring a civil injunctive proceeding against us.
Following our announcement about those notices, a number of class action
lawsuits were filed against us. We have responded to the Wells Notice in
writing, but do not know what action, if any, the SEC staff may finally
recommend. We believe the class action lawsuits are without merit, and we will
defend against them vigorously. However, the uncertainty about the possible
effect of these matters on our financial condition may adversely affect our
stock price and our ability to raise capital through equity offerings. Details
about the SEC investigation and the class actions are contained in Note 9 to
the consolidated financial statements included in this report 31




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued) If Our Stock Price Does Not Increase Our Stock Could Be Delisted from the
Nasdaq Stock Market If our stock price stays below $1.00 per share for a protracted period of
time, the stock could be delisted from the Nasdaq Stock Market. Delisting
would further reduce liquidity and eliminate from the market investors that
only acquire stock in larger capitalization companies, thereby further
depressing the price of our stock. Shares Eligible for Future Sale May Cause the Market Price for Our Common Stock
to Drop Significantly, Even If Our Business Is Doing Well We cannot predict the effect, if any, that future sales of our common
stock or the availability of shares for future sale will have on the market
price of our common stock from time to time. Substantially all of our
outstanding shares of Class A Common Stock are freely tradable in the public
market, unless acquired by our affiliates. Other shares of our common stock
issued in the future, including shares issued upon exercise of outstanding
options and warrants, may become available for resale in the public market from
time to time, and the market price of shares of our common stock could drop
significantly if the holders of these shares sell them or are perceived by the
market as intending to sell them. Our Stock Price Has Been and May Continue to Be Highly Volatile, which May
Adversely Affect Holders of Our Stock and Our Ability to Raise Capital The trading price of our common stock has been and is likely to continue
to be extremely volatile. During the period from November 1, 2001 through June
10, 2004, the trading price of our stock has ranged from a low of $0.61 per
share (on May 24, 2004) to a high of $20.30 per share (on November 6, 2001).
Our stock price and trading volume could be subject to wide fluctuations in
response to a variety of factors, including, but not limited to, the following:  
    
    Failure to identify and hire a permanent Chief Executive Officer or key personnel;
    
    An inability to obtain or the perception that we will be unable to obtain adequate financing to fund our operations;
    
    FDA action or delays in FDA action on Hemopure or competitors products;
    
    the outcome of litigation and threatened litigation referred in Item 1 of this report;
    
    publicity regarding actual or potential medical results relating to products under development by us or our competitors;
    
    actual or potential clinical trial results relating to products under development by us or our competitors;
    
    delays in our testing and development schedules;
    
    events or announcements relating to our relationships with others, including the status of potential transactions with
investors, licensees and other parties;
    
    announcements of technological innovations or new products by our competitors.
    
    developments or disputes concerning patents or proprietary rights;
    
    regulatory developments in the United States and foreign countries;
    
    economic and other factors, as well as period-to-period fluctuations in our financial results; and 32




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BIOPURE CORPORATION Part II  Other Information
April 30, 2004
(continued)  
    
    market conditions for pharmaceutical and biotechnology stocks;  
    
    communications from the Nasdaq Stock Market concerning potential delisting External factors may also adversely affect the market price for our common
stock. Our common stock currently trades on The Nasdaq Stock Market. The price
and liquidity of our common stock may be significantly affected by the overall
trading activity and market factors on The Nasdaq Stock Market. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    The exhibits are listed in the accompanying Exhibit Index.A report on Form 8-K was filed on February 20, 2004, to furnish under Item 9
an update on regulatory developments and to furnish under Item 12 the
Companys press release announcing its results of operations for the quarter
ended January 31, 2004..A report on Form 8-K was filed on February 26, 2004, including the Companys
press release, to report under Item 5 the resignation of the Companys
President and Chief Executive Officer.A report on Form 8-K was filed on February 27, 2004, including the Companys
press release, to furnish under Item 9 its annual shareholder letter. 33




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. BIOPURE CORPORATIONDate: June 14, 2004
    By:
    /s/ Ronald F. RichardsRonald F. RichardsDuly authorized officer
of the Registrant and
Chief Financial Officer 34




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EXHIBIT INDEX Number
    
    Description31.1
    
    Certification of Francis H. Murphy pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Ronald F. Richards pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Francis H. Murphy pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of Ronald F. Richards pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200210.1
    
    Employment Agreement dated as of February 25, 2004 between the
Company and Francis H. Murphy
 35