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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 July 31, 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 September 10, 2004 was: Class A Common Stock, $.01 par value
    
    
    48,573,521Class 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 July 31, 2004 and October 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2004 and July 31, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2004 and July 31, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3 - Quantitative and Qualitative Disclosure of Market Risk
    
    
    22Item 4 - Controls and Procedures
    
    
    23Part II  Other Information:Item 1 - Legal Proceedings
    
    
    24Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    26Item 3 - Defaults Upon Senior Securities
    
    
    26Item 4  Submission of Matters to a Vote of Security Holders
    
    
    26Item 5 - Other Information
    
    
    27Item 6 - Exhibits and Reports on Form 8-K
    
    
    38Signatures
    
    
    39Exhibit IndexEX-10.1 ENGAGEMENT LETTEREX-31.1 CERTIFICATION OF CEOEX-31.2 CERTIFICATION OF CFOEX-32.1 CERTIFICATION OF CEOEX-32.2 CERTIFICATION OF CFO
  Biopure®, Hemopure® and Oxyglobin® are registered trademarks of Biopure
Corporation. 2




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##### Table of Contents



Part I 
 Item 1 BIOPURE CORPORATION 
 
 July 31, 2004
    
    October 31, 2003Assets:Current assets:Cash and cash equivalents
    
    $
    4,025
    
    
    $
    26,862Accounts receivable, net
    
    
    204
    
    
    
    762Inventories
    
    
    7,264
    
    
    
    8,985Other current assets
    
    
    554
    
    
    
    1,233Total current assets
    
    
    12,047
    
    
    
    37,842Property, plant and equipment, net
    
    
    32,916
    
    
    
    36,861Other assets
    
    
    902
    
    
    
    10,922Total assets
    
    $
    45,865
    
    
    $
    85,625Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    259
    
    
    $
    1,159Accrued expenses
    
    
    3,522
    
    
    
    6,100Total current liabilities
    
    
    3,781
    
    
    
    7,259Long-term debt
    
    
    
    
    
    
    9,847Deferred compensation
    
    
    121
    
    
    
    142Total long-term liabilities
    

    
    121
    
    
    
    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, 48,573,521
shares outstanding at July 31, 2004 and 44,494,050 at October 31, 2003
    
    
    486
    
    
    
    445Class B, $1.00 par value, 179 shares authorized, 117.7 shares outstanding
    
    
    
    
    
    
    Capital in excess of par value
    
    
    478,209
    
    
    
    472,287Contributed capital
    
    
    24,574
    
    
    
    24,574Notes receivable
    
    
    (257
    )
    
    
    (256
    )Accumulated deficit
    
    
    (461,049
    )
    
    
    (428,673
    )Total stockholders equity
    
    
    41,963
    
    
    
    68,377Total liabilities and stockholders equity
    
    $
    45,865
    
    
    $
    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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##### Table of Contents



BIOPURE CORPORATION 
 
 Three Months Ended
    
    Nine Months EndedJuly 31, 2004
    
    July 31, 2003
    
    July 31, 2004
    
    July 31, 2003Revenues:Oxyglobin
    
    $
    333
    
    
    $
    885
    
    
    $
    1,976
    
    
    $
    2,867Total revenues
    
    
    333
    
    
    
    885
    
    
    
    1,976
    
    
    
    2,867Cost of revenues
    
    
    3,726
    
    
    
    4,608
    
    
    
    12,978
    
    
    
    15,429Gross loss
    
    
    (3,393
    )
    
    
    3,723
    
    
    
    (11,002
    )
    
    
    12,562Operating expenses:Research and development
    
    
    2,505
    
    
    
    2,380
    
    
    
    7,901
    
    
    
    7,462Sales and marketing
    
    
    321
    
    
    
    1,969
    
    
    
    2,113
    
    
    
    4,591General and administrative
    
    
    3,207
    
    
    
    3,342
    
    
    
    11,489
    
    
    
    9,595Total operating Expenses
    
    
    6,033
    
    
    
    7,691
    
    
    
    21,503
    
    
    
    21,648Loss from operations
    
    
    (9,426
    )
    
    
    (11,414
    )
    
    
    (32,505
    )
    
    
    (34,210
    )Other income, net
    
    
    32
    
    
    
    108
    
    
    
    129
    
    
    
    170Net loss
    
    $
    (9,394
    )
    
    $
    (11,306
    )
    
    $
    (32,376
    )
    
    $
    (34,040
    )Per share data:Basic and diluted net loss per common share
    
    $
    (0.19
    )
    
    $
    (0.28
    )
    
    $
    (0.69
    )
    
    $
    (0.98
    )Weighted-average shares used in computing
basic and diluted net loss per common
share
    
    
    48,542
    
    
    
    39,887
    
    
    
    46,786
    
    
    
    34,605
 See accompanying notes. 4




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##### Table of Contents



BIOPURE CORPORATION 
 
 Nine Months EndedJuly 31, 2004
    
    July 31, 2003Operating activities:Net loss
    
    $
    (32,376
    )
    
    $
    (34,040
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    4,191
    
    
    
    3,992Equity compensation
    
    
    37
    
    
    
    244Deferred compensation
    
    
    (21
    )
    
    
    (42
    )Accrued interest on stockholders notes receivable
    
    
    (1
    )
    
    
    (1
    )Non-cash charges related to issuance of stock
    
    
    967
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    558
    
    
    
    (460
    )Inventories
    
    
    1,721
    
    
    
    (1,145
    )Other current assets
    
    
    679
    
    
    
    51Accounts payable
    
    
    (900
    )
    
    
    (1,209
    )Accrued expenses
    
    
    (2,579
    )
    
    
    550Net cash used in operating activities
    
    
    (27,724
    )
    
    
    (32,060
    )Investing activities:Purchases of property, plant and equipment
    
    
    (204
    )
    
    
    (2,092
    )Escrow for South Carolina plant
    
    
    153
    
    
    
    Other assets
    
    
    (22
    )
    
    
    (25
    )Net cash used in investing activities
    
    
    (73
    )
    
    
    (2,117
    )Financing activities:Net proceeds from sales of common stock
    
    
    4,960
    
    
    
    43,858Proceeds from exercise of options and warrants
    
    
    
    
    
    
    450Net cash provided by financing activities
    
    
    4,960
    
    
    
    44,308Net decrease in cash and cash equivalents
    
    
    (22,837
    )
    
    
    10,131Cash and cash equivalents at beginning of period
    
    
    26,862
    
    
    
    19,710Cash and cash equivalents at end of period
    
    $
    4,025
    
    
    $
    29,841
 See accompanying notes. 5




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##### Table of Contents



BIOPURE CORPORATION 
 
 1. Basis of Presentation The 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 nine
month periods ended July 31, 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
presentation of the unaudited condensed consolidated financial
statements contained in the Companys earnings release for the
third fiscal quarter of 2004 (filed as an exhibit to the
Companys report on Form 8-K of August 18, 2004) contained
prior period reclassifications affecting cost of revenues, research and
development expenses and general and administrative expenses with consequent changes
in gross loss and total operating expenses but not affecting net loss.
Subsequent to filing the Form 8-K, the reclassifications were determined to be unnecessary.
The unaudited condensed consolidated financial statements in this
report contain no reclassifications of prior period amounts. The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Biopure Netherlands, BV,
Biopure South Africa, Ltd., Reperfusion Systems Incorporated, DeNovo Technologies
Corporation and Biopure Overseas Holding Company, and NeuroBlok
Incorporated, a 60% owned
subsidiary. 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 $461,049,000 as of July 31, 2004. At July 31, 2004,
the Company had $4,025,000 in cash and cash equivalents (not including
accounts receivable from the U.S. Army of approximately
$2.5 million) and
total current liabilities of approximately $3.8 million (not including
approximately $1.6 million annual premium payable for renewal of director and
officer insurance). The Company expects its cash and cash equivalents on hand
at July 31, 2004, and the approximately $2.5 million received on September 8,
2004 from the U.S. Army, will be sufficient to fund operations under the Companys
current operating plan into October 2004. To continue to operate, the Company
will require significant additional funding. The Company expects to incur
additional operating losses over the next several years while seeking
regulatory approvals, conducting clinical trials and pre-marketing or
marketing Hemopure in South Africa. The
Company is assessing opportunities to raise capital, and expects to continue
financing operations through sales of securities,
strategic alliances and other financing vehicles, if any, that might become
available. There can be no assurance that any such additional financing will
be available to the Company on terms that it deems acceptable, if at all.
Failure to timely obtain additional funding could force
the Company to go out of business and/or file for bankruptcy protection. 2. Net Loss per Share Basic 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
11,955,710 common-equivalent shares for the three and nine months ended July
31, 2004 and 9,489,138 common-equivalent shares for the three and nine months
ended July 31, 2003 as their effect would have been anti-dilutive. 6




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
July 31, 2004
(Unaudited)
(Continued) 3. Stock Based Compensation The 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 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
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,In thousands (except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (9,394
    )
    
    $
    (11,306
    )
    
    $
    (32,376
    )
    
    $
    (34,040
    )Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (308
    )
    
    
    (1,121
    )
    
    
    (899
    )
    
    
    (3,296
    )Pro forma net loss
    
    $
    (9,702
    )
    
    $
    (12,427
    )
    
    $
    (33,275
    )
    
    $
    (37,336
    )Net loss per share:Basic and diluted  as reported
    
    $
    (0.19
    )
    
    $
    (0.28
    )
    
    $
    (0.69
    )
    
    $
    (0.98
    )Basic and diluted  pro forma
    
    $
    (0.20
    )
    
    $
    (0.31
    )
    
    $
    (0.71
    )
    
    $
    (1.08
    )
 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
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.12
    %
    
    
    4.70
    %
    
    
    3.18
    %
    
    
    4.68
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected lives
    
    5 years
    
    7 years
    
    5 years
    
    7 yearsExpected volatility
    
    
    82
    %
    
    
    80
    %
    
    
    82
    %
    
    
    80
    %
 7




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
July 31, 2004
(Unaudited)
(Continued) 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
    
    July 31, 2004
    
    October 31, 2003Raw materials
    
    $
    742
    
    
    $
    1,270Work-in-process
    
    
    379
    
    
    
    885Finished goods-Oxyglobin
    
    
    1,521
    
    
    
    1,937Finished goods-Hemopure
    
    
    4,622
    
    
    
    4,893$
    7,264
    
    
    $
    8,985
 5. Accrued Expenses and Cost Reduction Plan Accrued expenses consisted of the following: In thousands
    
    July 31, 2004
    
    October 31, 2003Accrued payroll and related employee expenses
    
    $
    261
    
    
    $
    487Accrued vacation
    
    
    417
    
    
    
    629Accrued legal and audit fees
    
    
    556
    
    
    
    451Accrued health and dental premiums
    
    
    340
    
    
    
    340Financing fees
    
    
    537
    
    
    
    537South Carolina project
    
    
    
    
    
    
    650Accrued severance
    
    
    325
    
    
    
    875Other
    
    
    1,086
    
    
    
    2,131$
    3,522
    
    
    $
    6,100
 On June 23, 2004 the Company announced a restructuring plan which included
the termination of 25 employees. Almost half of the employees terminated were
from the Companys manufacturing division and the remainder were
from the
research and development, sales and marketing and administration departments.
During the third fiscal quarter ended July 31, 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
$584,000 related to this reduction in force. The charge primarily represented
severance costs and fees for outplacement services. Through July 31, 2004,
the Company paid $403,000 for costs related to this reduction in force and,
as a result, had an accrual of $181,000 at July 31, 2004. It is anticipated
that these costs will be paid by the end of the first fiscal quarter of 2005. At the
beginning of the third fiscal quarter of fiscal 2004, the Company had an accrual of
$578,000 for costs related to the reduction in force announced on February
19, 2004, which became effective on April 23, 2004. During the third quarter
of fiscal 2004, the Company paid $434,000 in severance costs and fees for
outplacement services relating to this reduction in force. At
July 31, 2004,
the Company had a remaining accrual of $144,000 relating to this workforce
reduction which is expected to be paid in its entirety during the fourth
fiscal quarter of 2004. 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 this 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 second fiscal quarter ended April 30, 2004. 8




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
July 31, 2004
(Unaudited)
(Continued) 6. Commitments In 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 to the extent partnership assets are not
sufficient to satisfy such obligations. EHSAs liabilities as of July 31,
2004 consist of a promissory note to a bank with a principal balance of
$1,075,570. The note accrues interest at 8.63% and matures on January 30,
2006. As of July 31, 2004, the maximum potential amount of future payments
under the note would be $1,204,000. 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 Realty In 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 Sumter, 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. In fiscal 2001, Biopure recorded
on its balance sheet as a deposit a $10 million escrow of cash and began investing in the design and
engineering of the proposed new manufacturing facility to be located in Sumter,
S.C. Under the letter of intent with Sumter Realty Group, LLC, Biopure was
to be reimbursed for up to $10 million upon FDA approval of Hemopure. As
funds were invested the deposit remained at $10 million and Biopure recorded
a fixed asset representing the investment and long-term debt of an equal
amount representing the expected capital lease obligation if financing was
obtained. However, Sumter Realty Groups inability to obtain financing for
the proposed facility, the lack of FDA approval of the Companys previously
submitted biologics license application (BLA) for Hemopure in an orthopedic surgery indication and
Biopures new clinical focus on the development of Hemopure for a cardiac
ischemia indication and a trauma indication have delayed the need for
increased manufacturing capacity and make the terms of any future plant
financing uncertain. These changes in circumstances have caused the Company
to conclude that it could no longer expect to execute a financing agreement
whereby the Company would finance 100% of the
facility, or that the $10 million would be refundable. Therefore, the $10
million deposit and offsetting long-term debt of approximately $9.8 million
have been eliminated. Biopure had invested approximately $14.3 million in the proposed new South
Carolina manufacturing facility before work on the plant design and
engineering was suspended. This expenditure is recorded as a fixed asset
and, beginning in the third fiscal quarter of 2004, is being depreciated to
account for the probability that portions of the design may need to be
re-engineered as time elapses and technology changes. 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 its
lack of financing for this facility to date, the potential timing of
construction activities, the extent to which the asset is site specific, and
the Companys ongoing plan 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, delays in obtaining FDA approval for
Hemopure and a change in the Companys
clinical focus are significant and therefore indicators of potential
impairment, the sales resulting from an approval of
Hemopure in a cardiac indication, if obtained, would, in the 9




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
July 31, 2004
(Unaudited)
(Continued) Companys view, ultimately exceed its
current manufacturing capability. Based upon FAS 146, using an estimated
undiscounted cash flow of the proposed facility, the Company believes that,
if it obtains FDA approval of Hemopure for a cardiac ischemia indication, its plan for the South Carolina manufacturing facility
should still be viable, it should be able to finance the proposed facility in
the future on commercially reasonable terms and
it should be able to generate sufficient positive future cash flows to recover the Companys
investment in the facility. Therefore, the Company has determined that no
impairment exists at July 31, 2004. Modification of the
Companys clinical plans could, however, trigger impairment of
certain long-term assets. Research
Agreement(1) In March 2003, the Company entered into a Cooperative Research and
Development Agreement (CRADA) with the United States Naval Medical Research
Center (NMRC). Under the CRADA, as amended, the Naval Medical Research Center
has primary responsibility for designing, seeking FDA acceptance of and
conducting a planned two-stage Phase II/III clinical trial of Hemopure in
trauma patients with severe hemorrhagic shock (acute blood loss) in the
out-of-hospital setting. 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. On August 5, 2004,
President Bush signed the FY2005 Defense Appropriations Bill, which includes $7
million for the U.S. Navy to continue research and development of Hemopure
for potential use in military and civilian trauma indications. To date,
Congress has appropriated a total of $18.5 million to the U.S. Army and Navy
for the development of Hemopure for potential use in military and civilian
trauma indications and to cover some military administrative costs. Of this
amount, approximately $5 million is being administered by the Army to fund
key ongoing preclinical animal studies of Hemopure and to help fund the
Companys obligations under the CRADA.(2) Currently, the NMRC is addressing
FDA questions arising from a pre-investigational new drug
(IND) meeting with the FDA held
in April 2004 to discuss a proposed two-stage Phase II/III trauma trial
protocol entitled Restore Effective Survival in Shock (RESUS). 7. Subsequent Events On September 8, 2004, the Company received payment of approximately $2.5
million from the U.S. Military for reimbursement of expenses and pre-payment
of clinical trial samples related to the Hemopure trauma development program
described in Note 6 under Research Agreement. 8. Recently Issued Accounting Standards 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 and, in December 2003, FASB issued a revision to FIN
46(FIN46R). Prior to FIN 46, 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   (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 by the U.S. Military in trauma is contingent
upon further government funding.(2)
    
    $5,102,900 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. 10




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
July 31, 2004
(Unaudited)
(Continued) 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. 9. Litigation 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 each 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 have each responded in writing to the notices and
explained why the SEC ought not to initiate a proceeding. To our knowledge,
no formal recommendation has been made to date and we do not know what
action, if any, the SEC staff may finally recommend. Biopure believes the notices relate to Company disclosures concerning
communications with the FDA about a clinical hold imposed on a proposed
clinical trial protocol the Company submitted to the agency in March 2003 and
about the status of the Companys BLA to market Hemopure in the United States
for the treatment of acutely anemic patients undergoing orthopedic surgery.
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 (IND) application on clinical hold,
meaning the trial could not begin as proposed. The FDA cited safety concerns
based on, among other things, 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. The Company did not disclose the clinical hold
because it did not consider, and does not consider, correspondence with the
agency about data interpretation in the development of a proposed 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 the Companys receipt of the FDAs letter regarding
the BLA dated July 30, 2003. The Company has been cooperating throughout the
investigation with the SEC Staff. At this time, the Company cannot estimate
the extent of the impact 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 former 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 and an amended complaint has been filed against the Company, the
previously named individuals and several of our current and former directors
and officers. The complaint claims that Biopure violated the federal
securities laws by publicly disseminating materially false and misleading
statements regarding the status of its Hemopure BLA with the FDA and of its
trauma development program, resulting in the artificial inflation of Biopures common stock price during the purported class period. The
complaint 11




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BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
July 31, 2004
(Unaudited)
(Continued) does not specify the amount of alleged damages plaintiffs seek to
recover. The complaint sets forth a class period of March 2003 through
December 24, 2003. The defendants believe that the complaint is without merit
and intend to defend the actions vigorously. At this time, the Company cannot
estimate what impact these cases may have on its financial position
or results of operations. The seven 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. A
consolidated, amended complaint has now been filed. 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 consolidated, amended
complaint alleges that the individual directors breached fiduciary duties in
connection with the same disclosures referenced in the purported securities
class action. The complaint does 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. A different shareholder also made demand on the
Companys directors on June 30, 2004 that they pursue similar claims on
behalf of the Company, which the Board is addressing. 12




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##### Table of Contents



Part I 
 Item 2 BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 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. Forward-looking statements
include those that imply that the Company will be able to commercially develop
Hemopure, that in pursuing the cardiovascular and trauma indications the
Company will be able to successfully address the safety and other questions of
the FDA arising out of its previously submitted BLA for an orthopedic surgery
indication, that the Companys expectations regarding the NMRC assuming and
carrying out primary responsibility for conducting a two-stage Phase II/III
clinical trial in the out-of-hospital setting will be met, that the Company
will be able to obtain regulatory approvals required for the marketing and sale
of Hemopure or any other product in a major market, that anticipated milestones
will be met in the expected timetable, that any pre-clinical or clinical trials
will be successful, that Hemopure, if it receives regulatory approval, will
attain market acceptance and be manufactured and sold in the quantities
anticipated or that the Company will be able to stabilize and enhance
its
financial position. Actual results may differ materially from those set forth
in the forward-looking statements due to risks and uncertainties that exist in
the Companys operations and business environment. These risks include, without
limitation, uncertainties concerning the Companys ability to complete its
proposed offering or future offerings, the availability of sufficient financing
to continue operations, changes in the Companys limited manufacturing
capability, marketing, market acceptance and competition and the other factors
identified under Risk Factors in this report. All forward-looking statements
included or incorporated by reference in the report are based on information
available to the Company on the date such statements were made. 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 update any
forward-looking statement or to release publicly the results of revisions to
any forward-looking statements to reflect events or circumstances after the
date hereof. Reference is made in particular to the risk factors in Part II and
the discussions set forth below in this report under Managements Discussion
and Analysis of Financial Condition and Results of Operations. Overview On June 23, 2004, the Company announced that its board of directors had
appointed Zafiris G. Zafirelis as the new president and chief executive officer
and a board member, restructured the executive management team, eliminated an
additional 25 positions to further reduce costs, and decided upon a change in
corporate strategy to focus on the development of Hemopure for a cardiovascular
disease indication, while also supporting our collaborative research and
development agreement with the U.S. Naval Medical Research Center for a
potential trauma indication. To facilitate this transition, Zafirelis has
formed an interim operating team that includes several experienced senior
advisors and has established a Medical Advisory Board of six persons with
specialties in cardiovascular research, interventional cardiology and cardiac
care. As described in Note 7 to the financial statements, on September 8, 2004 the
Company received approximately $2.5 million from the U.S.
Military. We believe that these funds, together with the
Companys cash on hand at July 31, 2004, will be sufficient
to fund operations into October 2004. 13




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Part IItem 2 BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 2004 Significant
additional capital will be required to fund our operations until such
time, if ever, that the Company becomes profitable. We intend to seek additional capital through
sales of equity securities, strategic alliances and/or other financing
vehicles, if any, that might become available, including potential corporate
collaborations for sharing development and commercialization costs. We also
plan to continue to aggressively manage expenses. Since September 2003, we have
reduced our workforce by more than two-thirds, from 246 employees at September
30, 2003 to 70 employees at July 31, 2004, and have significantly decreased
marketing and manufacturing-related expenditures and deferred capital
expenditures. We expect that our activities and expenditures for the next seven months will
be associated primarily with developing Hemopure for a cardiovascular disease
indication and for a trauma indication, replying to the FDAs safety and
certain other questions, in particular those related to our strategic focus on cardiovascular and
trauma indications that arise out of our previously-filed BLA to market Hemopure
in the United States for an orthopedic surgery indication, conducting
preclinical animal studies, and maintaining some manufacturing capability. In
June 2004, we received notice from the Nasdaq National Market (Nasdaq
NM) that the daily
minimum bid price of our Class A common stock fell, and remained
below, $1.00 for 30 consecutive business days. As a result, we are
out of compliance with the $1.00 minimum bid price for continued
inclusion of our Class A common stock in the Nasdaq NM. We have
180 calendar days (until December 14, 2004) to regain
compliance, and we will have an additional 180 calendar days, if
at December 14, 2004 we meet the initial listing criteria for
the Nasdaq NM other than the bid price requirement. We may not be
able to regain compliance with the minimum bid price requirement of
the Nasdaq NM. If we are unable to regain compliance within the
required period, and are further unable to meet the criteria for
initial inclusion on the Nasdaq NM through other measures to increase
our per share bid price, our Class A common stock may be
delisted from the Nasdaq NM. A number of factors pose uncertainties in estimating the amount of funds we may
need to sustain operations, including:  
    
    The process of obtaining FDA marketing approval of Hemopure 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 previously filed BLA for Hemopure for an orthopedic
surgery indication, but since it is likely that we will need to conduct
one or more additional human clinical trials, including a Phase III
trial, before the FDA will consider approving Hemopure for any
indication, we are evaluating all of our clinical and regulatory
options. To that end, we are in the early stages of clinical
development of Hemopure for indications in both trauma and cardiology.
In Europe, a 45-patient Phase II clinical trial, assessing the safety
of Hemopure in patients undergoing coronary angioplasty, has reached
approximately 45 percent enrollment. In South Africa, 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, has commenced enrollment.
    
    Although Hemopure is already approved for commercial sale in South
Africa for the treatment of acutely anemic surgery patients, the
product has not yet been offered for sale in South Africa. Since we
obtained marketing approval for Hemopure in South Africa clinicians have treated more than 330
patients in South Africa 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. We cannot predict when our first sales of
Hemopure might occur in South Africa.
    
    As described in Note 9 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. 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. 14




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BIOPURE
CORPORATION
Managements Discussion and Analysis of 
Financial Condition and Results of Operations
July 31, 2004
(Continued) 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. Finished
goods inventories 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. Finished goods inventories, including
Oxyglobin and Hemopure, are also reviewed
against sales forecasts, including anticipated sales of Hemopure to the NMRC
for their use in the proposed RESUS trial and forecasts of Hemopure
sales in South Africa, to determine if amounts in inventory
exceed expected demand or if they are planned to be used in Company sponsored
clinical trials. Inventories are also subject to quality compliance
investigations. Reserves are established for inventory based on these reviews
and investigations. The value of finished goods inventories on our financial
statements reflect the standard cost of our product, net of these reserves. 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 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 third
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 the review, the Company considered its lack
of financing for this facility to date, the potential timing of construction
activities, the extent to which the asset is site specific, and the
Companys ongoing
plan 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, delays in obtaining FDA approval for Hemopure and
a change in the Companys clinical
focus are significant and therefore indicators of potential impairment, the sales resulting from an approval of Hemopure in a cardiac
indication, if obtained, would, in the Companys view, ultimately exceed its current manufacturing
capability. Based upon FAS 146, using an estimated undiscounted cash flow of
the proposed facility, the Company believes that, if it obtains FDA approval of
Hemopure for a cardiac ischemia indication, its plan for
the South Carolina manufacturing facility should still be viable, it should be able
to finance the proposed facility in the future on commercially reasonable terms
and it should be able to generate sufficient positive future cash flows to
recover the Companys investment in the facility. Therefore, the Company has
determined that no impairment exists at July 31, 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
the 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. Although Hemopure is already approved for
commercial sale in South Africa for the treatment of acutely anemic
surgery patients, the product has not yet been offered for sale in
South Africa. Until substantial transactions have occurred and
circumstances of distribution, storage and dispensing at medical facilities are
experienced, revenues from Hemopure that is sold for clinical use in South
Africa or for use in third party sponsored clinical trials will not be
recognized until the units are actually used. 15




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##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 2004
(Continued) Research and Development Since its founding in 1984, Biopure has been primarily a research and
development company focused on developing and obtaining U.S. regulatory
approval of Hemopure, our oxygen therapeutic under development for human use.
Our research and development expenses have been for basic research,
product development, process development, pre-clinical studies, clinical trials
and filing with the FDA a Hemopure BLA for an orthopedic surgery
indication. 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 compared 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 FDA 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,
we have fully reserved for any clinical trial material units planned
for use in Company-sponsored projects. 16




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##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 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 nine month periods
ended July 31, 2004 and 2003, these items were as follows: Three Months Ended
    Nine Months EndedJuly 31, 2004
    
    July 31, 2003
    
    July 31, 2004
    
    July 31, 2003Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percentof
    
    
    
    
    
    of
    
    
    
    
    
    of
    
    
    
    
    
    ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Costs
    
    Amount
    
    Costs
    
    Amount
    
    Costs
    
    Amount
    
    CostsRevenues
    
    $
    333
    
    
    
    
    
    
    $
    885
    
    
    
    
    
    
    $
    1,976
    
    
    
    
    
    
    $
    2,867Cost of RevenuesOxyglobin
    
    
    710
    
    
    
    7
    %
    
    
    1,692
    
    
    
    14
    %
    
    
    3,455
    
    
    
    10
    %

    
    
    5,133
    
    
    
    14
    %Hemopure
    
    
    3,016
    
    
    
    31
    %
    
    
    2,916
    
    
    
    24
    %
    
    
    9,523
    
    
    
    28
    %
    
    
    10,296
    
    
    
    28
    %Total Cost of Revenues
    
    
    3,726
    
    
    
    38
    %
    
    
    4,608
    
    
    
    38
    %
    
    
    12,978
    
    
    
    38
    %
    
    
    15,429
    
    
    
    42
    %Research and Development
    
    
    2,505
    
    
    
    26
    %
    
    
    2,380
    
    
    
    19
    %
    
    
    7,901
    
    
    
    23
    %
    
    
    7,462
    
    
    
    20
    %Sales and MarketingOxyglobin
    
    
    53
    
    
    
    
    
    
    
    632
    
    
    
    5
    %
    
    
    777
    
    
    
    2
    %
    
    
    1,841
    
    
    
    5
    %Hemopure
    
    
    268
    
    
    
    3
    %
    
    
    1,337
    
    
    
    11
    %
    
    
    1,336
    
    
    
    4
    %
    
    
    2,750
    
    
    
    7
    %Total Sales and Marketing
    
    
    321
    
    
    
    3
    %
    
    
    1,969
    
    
    
    16
    %
    
    
    2,113
    
    
    
    6
    %
    
    
    4,591
    
    
    
    12
    %General and
Administrative
    
    
    3,207
    
    
    
    33
    %
    
    
    3,342
    
    
    
    27
    %
    
    
    11,489
    
    
    
    33
    %
    
    
    9,595
    
    
    
    26
    %Total Costs
    
    $
    9,759
    
    
    
    100
    %
    
    $
    12,299
    
    
    
    100
    %
    
    $
    34,481
    
    
    
    100
    %
    
    $
    37,077
    
    
    
    100
    %
 The
presentation of the unaudited condensed consolidated financial
statements contained in the Companys earnings release for the
third fiscal quarter of 2004 (filed as an exhibit to the
Companys report on Form 8-K of August 18, 2004)
contained prior period reclassifications affecting cost of revenues,
research and development expenses and general and administrative
expenses with consequent changes in gross loss and total operating expenses but not
affecting net loss. Subsequent to filing the Form 8-K, the reclassifications were
determined to be unnecessary. The unaudited condensed consolidated
financial statements in this report contain no reclassifications of
prior period amounts. Three months ended July 31, 2004 compared to three months ended July 31, 2003 Total revenues, consisting almost entirely of sales of the Companys veterinary
product Oxyglobin, were $333,000 for the third quarter of fiscal 2004 compared
to $885,000 for the same period in 2003. Due to fixed manufacturing costs,
Biopure expects that costs to produce Oxyglobin will continue to exceed
Oxyglobin revenues and result in losses unless and until the Company is in a
position to fully utilize its manufacturing capacity by generating substantial
sales of Hemopure, our product under development for human use. To reduce
losses, the Company implemented workforce and cost reductions that took effect
in October 2003 and in April and June 2004, significantly reduced sales,
marketing and manufacturing expenditures, and is limiting Oxyglobin sales. As
a result, Biopure expects substantially lower product sales for the foreseeable
future than it had in fiscal 2003. Cost of revenues was $3,726,000 for the third quarter of fiscal 2004, compared
to $4,608,000 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 $710,000 for the third quarter of fiscal 2004 compared to $1,692,000 for
the same period in 2003. The decrease was primarily due to
decreased production and the decreased number of Oxyglobin units sold in the
third quarter of fiscal 2004. Hemopure cost of revenues, consisting of the
allocation of unabsorbed fixed manufacturing costs, was $3,016,000 for the
third quarter of fiscal 2004 compared to $2,916,000 for the same period in
2003. Even though overall manufacturing costs decreased compared to
last year, Hemopure cost of revenues was higher. More costs were charged to
cost of revenues, rather than inventory, because of lower
production levels compared to last year. Research and development expenses include engineering, pre-clinical studies,
clinical trials and clinical trial materials. Our research and development
expenses have, to date, been primarily for Hemopure development for use in
patients undergoing surgery. In
late June 2004 the Company announced that its board of directors
had determined to change the Companys corporate strategy to
focus on the clinical
development of Hemopure as an oxygen therapeutic for potential applications in
cardiac disease, while also continuing, under our agreement with the Naval Medical Research Center, the development of Hemopure for use in trauma patients. The Company
has prioritized its efforts in responding to the FDA questions and requests for
additional information arising out of our previously submitted
Hemopure BLA for an orthopedic surgery indication to those that will support the cardiovascular and trauma
projects. We account for the efforts in responding to the FDA questions and
requests for additional information as an R&D project not allocable directly to
either the cardiovascular or trauma projects. 17




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##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 2004
(Continued) A breakdown of our research and development expenses by major activity is as
follows: Three Months EndedJuly 31, 2004
    
    July 31, 2003Percent of
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    Total R&D Costs
    
    Amount
    
    Total R&D CostsSupport of BLA Review Process
    
    $
    1,775
    
    
    
    71
    %
    
    $
    2,170
    
    
    
    91
    %Phase II European Trial (Cardiovascular project)
    
    
    341
    
    
    
    14
    %
    
    
    64
    
    
    
    3
    %Trauma Project
    
    
    327
    
    
    
    13
    %
    
    
    81
    
    
    
    3
    %Other Projects
    
    
    62
    
    
    
    2
    %
    
    
    65
    
    
    
    3
    %Total
    
    $
    2,505
    
    
    
    100
    %
    
    $
    2,380
    
    
    
    100
    %
 Surgery/BLA Project The completed Phase III Hemopure 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 for an orthopedic surgery indication 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. The FDA letter of July 30, 2003 consisted of questions and
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 three animal 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. The three preclinical animal studies are currently underway.
Subsequent to the January meeting, the FDA requested a fourth preclinical study
which is required only if the Company pursues an indication in medical
procedures, in a hospital setting, with a high risk of uncontrolled
hemorrhage. As described above, although our primary strategic focus is now the development of Hemopure for cardiac disease and trauma indications, we may, in the future as resources allow, continue to pursue the indication in orthopedic surgery, and/or pursue other potential
indications where blood is the standard of care. Cardiovascular and Trauma Projects Both the cardiovascular and the trauma projects are in early stages (i.e.,
safety clinical trials and preclinical animal studies). Total cardiovascular
expenditures of $1,182,000, as of July 31, 2004, consist of the costs of
preparing and carrying out the ongoing Phase II clinical trial in
Europe. Total trauma
expenditures of $720,000. as of July 31, 2004, 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 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. Of the research and development expenses for the third quarter of fiscal 2004,
$1,775,000 was for BLA support costs, $341,000 for costs associated with the Phase II clinical trial in Europe
and $327,000 for costs associated with the Trauma project, including costs for
the Phase II clinical trial in South Africa, explained above. In the
corresponding quarter of fiscal 2003, expenditures included $2,170,000 for BLA
support costs, $64,000 for the Phase II clinical trial in Europe and $81,000
for Trauma project costs. Due to the extensive additional information the FDA
has requested in connection with the Companys previously submitted
BLA for Hemopure for an orthopedic surgery indication, the Company expects research and development expenses in fiscal
2004 to continue at a higher rate than experienced last year. 18




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 2004
(Continued) Sales and marketing expenses consist of Hemopure-related expenses and
Oxyglobin-related expenses. Hemopure-related sales and marketing expenses were
$268,000 for the third quarter of fiscal 2004, compared to $1,337,000 for the
same period in 2003. Oxyglobin-related sales and marketing expenses were
$53,000 for the third quarter of fiscal 2004 compared to $632,000 for the same
period in 2003. These decreases are primarily due to the reduction of
marketing and educational activities in fiscal 2004 consistent with the
Companys cost-cutting measures. Past Hemopure marketing activities were
primarily related to market research and medical education activities. The
Company expects both Hemopure and Oxyglobin sales and marketing expenses to be
significantly lower in fiscal 2004 compared to fiscal 2003. Marketing expenses
in South Africa have also been reduced from the prior year. General and administrative expenses were $3,207,000 for the third quarter of
fiscal 2004, compared to $3,342,000 for the same period in 2003. This decrease
is mostly due to a $344,000 reduction in consulting expenses and a $159,000
reduction in financing fees compared to last year partially offset by
a $308,000 increase in legal fees. Employee related expenses,
including salaries, incentives, recruiting and relocation were lower compared
to last year but were offset by $575,000 in severance costs related to the June
23, 2004 workforce reduction. Nine months ended July 31, 2004 compared to nine months ended July 31, 2003 Total
revenues were $1,976,000 for the first nine months of fiscal 2004
compared to $2,867,000 for the same period in 2003. Due to fixed manufacturing
costs, Biopure expects that costs to produce Oxyglobin will continue to exceed
Oxyglobin revenues and result in losses unless and until the Company is in a
position to fully utilize its manufacturing capacity by generating substantial
sales of Hemopure, its product under development for human use. Revenues for
the first nine months of fiscal 2003 include approximately $1,300,000 in
backorders, the result of a temporary shutdown of production during the
expansion of the Companys manufacturing facility in 2002, that were filled. In
our efforts to conserve cash, we are limiting manufacturing capacity and
thus 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 $12,978,000 for the first nine months of fiscal 2004,
compared to $15,429,000 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 $3,455,000 for the first nine months of
fiscal 2004 compared to $5,133,000 in 2003. This decrease is largely due to
decreased production and the decreased number of units sold in the first nine
months of fiscal 2004 compared to the same period last year. Hemopure cost of
revenues decreased $773,000 during the first nine months of fiscal 2004
compared to the corresponding period last year primarily due to lower
manufacturing costs resulting from the workforce and cost reductions. Research and development expenses include engineering, pre-clinical studies,
clinical trials and clinical trial materials. Our research and development
expenses have, to date, been primarily for Hemopure development for use in
patients undergoing surgery. 19




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 2004
(Continued) A breakdown of our research and development expenses by major activity is as
follows: Nine Months EndedJuly 31, 2004
    
    July 31, 2003Percent of
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    Total R&D Costs
    
    Amount
    
    Total R&D CostsSupport of BLA Review Process
    
    $
    6,301
    
    
    
    80
    %
    
    $
    6,898
    
    
    
    93
    %Phase II European Trial
(Cardiovascular project)
    
    
    942
    
    
    
    12
    %
    
    
    111
    
    
    
    1
    %Trauma Project
    
    
    494
    
    
    
    6
    %
    
    
    141
    
    
    
    2
    %Other Projects
    
    
    164
    
    
    
    2
    %
    
    
    312
    
    
    
    4
    %Total
    
    $
    7,901
    
    
    
    100
    %
    
    $
    7,462
    
    
    
    100
    %
 Of the research and development expenses for the first nine months of fiscal
2004, $6,301,000 was for BLA support costs, $942,000 was for costs associated
with the Phase II clinical trial in Europe and $494,000 was for costs associated
with the Trauma project, including costs for the Phase II clinical trial in
South Africa, explained above. In the corresponding period of fiscal 2003,
expenditures included $6,898,000 for BLA support costs, $111,000 and $141,000,
respectively, for costs associated with the European trial and the trauma project. The
balance of expenses was for various expenditures not allocable to any major
project. Due to the extensive additional information the FDA has
requested in connection with the Companys previously filed
Hemopure BLA for an orthopedic surgery indication, 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
$1,336,000 for the first nine months of fiscal 2004, compared to $2,750,000 for
the same period in 2003. Oxyglobin-related sales and marketing expenses were
$777,000 for the first nine months of fiscal 2004 compared to $1,841,000 for
the same period in 2003. These decreases are primarily due to the reduction of
marketing and educational activities in fiscal 2004 consistent with the
Companys cost-cutting measures. The Company expects both Hemopure and
Oxyglobin sales and marketing expenses to be significantly lower in fiscal 2004
compared to fiscal 2003. General and administrative expenses were $11,489,000 for the first nine months
of fiscal 2004, compared to $9,595,000 for the same period in 2003. This
increase is mostly due to $1,326,000 in severance costs incurred during the
period, a $948,000 increase in legal fees compared to the same period last year
and an increase in financing fees of $411,000 primarily consisting of a
one-time, non-cash expense related to the settlement of litigation with
Steelhead Investments, Ltd. These costs were partially offset by a
$561,000
decrease in consulting fees and a $372,000 reduction in salaries during the
first nine months of fiscal 2004 compared to last year. Liquidity and Capital Resources At July 31, 2004, we had $4,025,000 in cash and cash equivalents. We believe
our cash and cash equivalents at July 31, 2004, together with approximately $2.5
million received on September 8, 2004 from the U.S. Army, will be sufficient to fund
operations under the Companys current operating plan into October 2004. The Company expects to continue financing our operations, until such
time, if ever, that it becomes profitable, through sales of securities,
strategic alliances and other
financing vehicles, if any, that might become available, including
potential corporate collaborations for sharing development and
commercialization costs. For the Company to
continue to operate we require significant additional funding. To
fund operations into February, the Company expects it will need to
raise approximately $8,000,000. The Company is currently
in the process of trying to raise funds in an offering of its Class A
common stock and warrants to purchase its Class A common stock.
Even if the Company
is 20




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BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
July 31, 2004
(Continued) successful
in raising net proceeds of approximately $8,000,000 in this offering, the Company expects that
it will need to raise significant additional funding before February 2005 in
order to be able to continue to operate thereafter. The Company may raise
substantially less than $8,000,000 in net proceeds, if any, in this offering; and the smaller the net
proceeds from this offering, the shorter the time period during which the
proceeds of this offering will support the Companys operations. The Company
cannot assure you that sufficient funds will be available to it in the current
offering or subsequently, if they are available at all, to enable it to
continue to operate and avoid bankruptcy. As well, the
Company will need to obtain stockholder approval before its 2005 annual meeting
to increase its authorized common stock to raise funds through additional
common stock offerings and, under the Nasdaq Stock Markets Marketplace rules,
to obtain stockholder approval for any issuance of additional equity securities
that would comprise more than 20 percent of the Companys total shares of
common stock outstanding at such time. The Company cannot assure you that it will
be successful in obtaining any required stockholder approval. The
Companys funds on hand at October 31, 2003 and forecast
sales were not sufficient to fund our operations into fiscal 2005
and, accordingly, the audit report of Ernst & Young, LLP, the
Companys independent auditor, on our fiscal 2003 financial
statements includes a going concern modification. We expect that the
audit report of our independent auditor on our consolidated financial
statements for fiscal 2004 will also include a going concern
modification. The inclusion of this modification may materially and
adversely affect our ability to raise new capital. If
Hemopure were approved by the FDA, the Companys revenue will be limited by
manufacturing capacity unless it can achieve economies of scale by constructing
new manufacturing capacity. The Company has not been profitable since inception and had
an accumulated deficit of $461,049,000 as of July 31, 2004. The
Company anticipates that
it will continue to generate losses for the next several years. Failure to
secure additional funding or modification of our clinical plans also could
trigger impairment of certain long-term assets. Net
cash used in operating activities decreased $4,336,000 in the first nine
months of 2004 compared to the corresponding period last year. Cash provided by
inventories increased by $2,866,000 compared to last year due mostly to lower production
during the first nine months of fiscal 2004 compared to the same period last
year. Cash provided by accounts receivable increased by $1,018,000 compared to last year
because the Company is now selling most of its product directly to the end
customer, rather than distributors, who are required to pay at the time of
purchase and the Company is no longer extending credit to customers. Non-cash
charges related to issuance of stock in 2004 resulted from settlements. Cash
provided by other current assets, consisting of prepaid expenses, increased by
$628,000 due to an increase in insurance premiums paid for in the prior fiscal
year. Accrued expenses consumed $3,129,000 more cash during the first nine
months of 2004 than in 2003 mostly due to payments made to consultants no longer
retained by the Company and severance payments, including accrued vacation,
made during the first nine months of fiscal 2004. Recently Issued Accounting Standards 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 and in December 2003 FASB issued a revision to FIN 46(FIN46R).
Prior to FIN 46, 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. 21




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BIOPURE CORPORATION July 31, 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. 22




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BIOPURE CORPORATION July 31, 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 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 July 31, 2004.
Based on this evaluation, our 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. 23




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BIOPURE CORPORATION 
 Part II  Other Information
July 31, 2004
(Continued) 
 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 each 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 have each responded in writing to the notices and
explained why the SEC ought not to initiate a proceeding. To our knowledge,
no formal recommendation has been made to date and we do not know what
action, if any, the SEC staff may finally recommend. Biopure believes the notices relate to Company disclosures concerning
communications with the FDA about a clinical hold imposed on a proposed
clinical trial protocol the Company submitted to the agency in March 2003 and
about the status of the Companys BLA to market Hemopure in the United States
for the treatment of acutely anemic patients undergoing orthopedic surgery.
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 (IND) application on clinical hold,
meaning the trial could not begin as proposed. The FDA cited safety concerns
based on, among other things, 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. The Company did not disclose the clinical hold
because it did not consider, and does not consider, correspondence with the
agency about data interpretation in the development of a proposed 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 the Companys receipt of the FDAs letter regarding
the BLA dated July 30, 2003. The Company has been cooperating throughout the
investigation with the SEC Staff. At this time, the Company cannot estimate
the extent of the impact 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 former 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 and an amended complaint has been filed against the Company, the
previously named individuals and several of our current and former directors
and officer. The complaint claims that Biopure violated the federal
securities laws by publicly disseminating materially false and misleading
statements regarding the status of its Hemopure BLA with the FDA and of its
trauma development program, resulting in the artificial inflation of
Biopures common stock price during the purported class period. The complaint
does not specify the amount of alleged damages plaintiffs seek to recover.
The complaint sets forth a class period of March 2003 through December 24,
2003. The defendants believe that the complaint is without merit and intend
to defend the actions vigorously. At this time, the Company cannot estimate
what impact these cases may have on its financial position or
results of operations. The seven 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. A
consolidated, amended complaint has now been filed. 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 consolidated, amended complaint alleges that the individual directors
breached fiduciary duties in connection 24




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##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(Continued) with the same disclosures
referenced
in the purported securities class action. The complaint does 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. A different shareholder also
made demand on the Companys directors on June 30, 2004 that they pursue
similar claims on behalf of the Company, which the Board is addressing. 25




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##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
July 31, 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 None 26




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) 
 Item 5. Other Information The risks and uncertainties described below are not the only ones we face. Others that we do
not know about now, or that we do not now believe are important or material, may also impair our
business, financial condition or results of operations or the trading price of our securities. Company Risks 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. We had a
loss from operations of $32,505,000 in the nine-month period ended July 31,
2004, and we had an accumulated deficit of $461,049,000 as of July 31, 2004.
We anticipate that we will continue to generate losses for the next several
years. We cannot ensure that we will ever be able to achieve profitable
operations even if Hemopure were to be approved by the FDA or the analogous
European regulatory authorities. We require significant funding in the near term, in order to continue to
operate. We will require stockholder approval to increase our authorized
common stock prior to our 2005 annual meeting in order to raise funds to
continue to operate. For us to continue to operate
we require significant additional funding. To fund operations into February,
 we expect we will need to raise approximately $8,000,000. We are
currently in the process of trying to raise funds in an offering of our
Class A common stock and warrants to purchase our Class A common stock. Even if we
are successful in raising net proceeds in this offering of $8,000,000, we expect that we will
need to raise significant additional funding before February 2005 in order to
be able to continue to operate thereafter. The Company may raise substantially
less than $8,000,000 in net proceeds, if any, in this offering, and the smaller the net proceeds from this
offering, the shorter the time period during which the proceeds of this
offering will support our operations. We cannot assure you that sufficient
funds will be available to us in the current offering or subsequently, if they
are available at all, to enable us to continue to operate and avoid bankruptcy. In addition, we will need to obtain stockholder approval before our 2005
annual meeting to increase our authorized common stock to raise funds through
additional common stock offerings and, under the Nasdaq Stock Markets
Marketplace rules, to obtain stockholder approval for any issuance of
additional equity securities that would comprise more than 20 percent of our
total shares of common stock outstanding at such time. We currently have an
exemption from the stockholder approval requirement of Nasdaq Stock Markets
Marketplace rules only for one transaction made on specified terms. We cannot
assure you that we will be successful in obtaining any required stockholder
approval. Our auditors have modified their report on our most recently completed
fiscal year with respect to our ability to continue as a going concern. We
expect that the audit report of our independent auditor on our consolidated
financial statements for fiscal 2004 will include a going concern modification,
which may adversely affect our ability to raise new capital. Our funds on hand and forecast sales at October 31, 2003 were not
sufficient to fund our operations through the third quarter of fiscal 2004 and,
as a result, the audit report of Ernst & Young LLP, our independent auditor, on
our fiscal 2003 consolidated financial statements includes a going concern
modification. This modification 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. 27




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) For us to remain a going concern we require significant funding. We
cannot assure you that sufficient funds will be available us on terms that we
deem acceptable, if they are available at all, to enable us to continue as a
going concern. We expect that the audit report of our independent auditor on
our consolidated financial statements for fiscal 2004 will include a going
concern modification. 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 consolidated 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 consolidated financial statements as a result of the
going concern modification to the report of our independent auditor. If we
became unable to continue as a going concern, we would have to liquidate our
assets and we might receive significantly less than the values at which they
are carried on our consolidated financial statements. Any shortfall in the
proceeds from the liquidation of our assets would directly reduce the amounts,
if any, that holders of our common stock could receive in liquidation. Failure to raise additional funds will adversely affect the development,
manufacture and sale of our product. The development and regulatory processes for seeking and obtaining
approval to market Hemopure in the United States and the European Union have
been and will continue to be costly. We will require substantial working
capital to develop, manufacture and sell Hemopure and to finance our operations
until such time, if ever, as we can generate positive cash flow. We will also
require substantial additional funding to continue working on questions raised
by the FDA arising out of our previously-submitted BLA for an orthopedic
surgery indication and to conduct additional human clinical trials for
Hemopure. If Hemopure is approved by the FDA or the analogous European
regulatory authorities, we expect that we will need to increase our
manufacturing capacity, for which we will require significant additional
funding. If additional financing is not available when needed or is not
available on acceptable terms, we may be unable to successfully develop or
commercialize Hemopure or to continue to operate. A sustained period in which
financing is not available could force us to go out of business and/or to file
for bankruptcy protection. If we cannot hire the personnel we need, both our costs and our ability to
conduct operations may be adversely affected. We have recently appointed a new president and chief executive officer and
formed an interim operating team, which includes our CEO and outside
consultants, to assist us in our clinical, regulatory and operations functions.
Thus, we currently rely to a significant extent on outside consultants for
several key positions, which may be a less cost-effective alternative than
hiring employees for these positions. We expect that, in the future, we will
need to recruit and retain personnel for several important 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. We may fail to obtain FDA approval for Hemopure, in which event 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. In pursuing both the cardiac and trauma
indications for Hemopure, as a prerequisite to further clinical trials for
Hemopure sponsored by us in the United States, we intend to continue to
address, and will seek to respond as soon as practicable to, the FDAs safety
and other questions arising out of our previously-submitted BLA for an
orthopedic surgery indication. Addressing these questions requires
considerable data gathering and analysis. We must rely on contractors to
complete some of the work. We have been delayed, and could be further delayed,
in responding either by the contractors failure or inability to timely
complete their tasks or by other unanticipated delays or difficulties. For
example, one of the four preclinical studies we are addressing was delayed by
the unavailability of the investigator. Accordingly, we cannot assure
investors as to if or when we will be able to respond fully to all of these
questions. Furthermore, the FDA may find that our responses do not adequately
address its questions and that the results of pre-clinical animal studies the FDA has
asked for do not adequately address its concerns. 28




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) Moreover, even if we adequately address the FDAs questions, we will need
to obtain FDA approval for, and complete, human clinical trials to obtain FDA
marketing authorization for Hemopure for the cardiac and trauma indications,
and most likely to obtain FDA approval for the orthopedic surgery indication
proposed in our previously-submitted BLA. In the case of the cardiovascular
indication, because it would be a new indication for Hemopure, we will most
likely need to file with the FDA an investigational new drug application, or
IND, and may only commence human clinical trials for this indication if we are
able to satisfy any objections the FDA raises. Accordingly, we cannot assure
investors if or when we will be able to commence a U.S. clinical trial of
Hemopure for a cardiac indication, or that we will be able to conduct or
satisfactorily conclude additional clinical trials required to obtain FDA
marketing authorization for this indication. In the case of the trauma
indication the NMRC is taking primary responsibility for designing and seeking
FDA acceptance of a two-stage Phase II/III clinical protocol for trauma in the
out-of-hospital setting, and is expected to be principally responsible for
conducting the trial. The FDA may delay or withhold such acceptance, or if it
grants such acceptance and the trial is commenced and concluded, the results of
the trial may not support marketing authorization of Hemopure for the proposed
trauma indication. Similarly, in the case of our previously-submitted BLA for
the orthopedic surgery indication, we would most likely be required to conduct
additional clinical trials, the design of which would be subject to FDA review,
and the results of such trials may not support marketing authorization. In addition, future governmental action or existing or changes in FDA
policies or precedents may result in delays or rejection of an application for
marketing approval. The FDA has considerable discretion in determining whether
to grant marketing approval for a drug, and may delay or deny approval even in
circumstances where the applicants clinical trials have proceeded in
compliance with FDA procedures and regulations and have met the established end
points of the trials. Despite all of our efforts, the FDA could refuse to
grant marketing authorization for Hemopure. Challenges to FDA determinations
are generally time consuming and costly, and rarely succeed. We can give no
assurance that we will obtain FDA marketing authorization for Hemopure in any
indication. If we fail to obtain regulatory approvals in foreign jurisdictions, we
will not be able to market Hemopure abroad. We also intend to seek to market Hemopure in international markets,
including the European Union. Whether or not FDA marketing authorization has
been obtained, we must obtain separate regulatory approvals in order to market
our products in the European Union and many other foreign jurisdictions. The
regulatory approval processes differ among these jurisdictions, and the time
needed to secure marketing approvals may be longer than that required for FDA
approval. These applications may require the completion of additional
pre-clinical and clinical studies and disclosure of information relating to
manufacturing and controls. 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 can
give no assurance that we will obtain marketing authorization for Hemopure in
any foreign jurisdiction other than South Africa. Clinical trials are extremely costly and subject to numerous risks and
uncertainties. To gain regulatory approval from the FDA and analogous European regulatory
authorities for the commercial sale of any product, including Hemopure, we must
demonstrate in clinical trials, and satisfy the FDA and foreign regulatory
authorities as to, the safety and efficacy of the product. Clinical trials are
expensive and time-consuming, as is the regulatory review process. Clinical
trials are also subject to numerous risks and uncertainties not within our
control. For example, data we obtain from pre-clinical and clinical studies
are susceptible to varying interpretations that could impede regulatory
approval. Further, some patients in our clinical trials may have a high risk
of death, age-related disease or other adverse medical events that may not be
related to our product. These events may affect the statistical analysis of
the safety and efficacy of our product. If we obtain marketing authorization
for a product, the authorization will be limited to the indication for which
our clinical trials have demonstrated the product is safe and effective. 29




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) In addition, many factors could delay or result in termination of ongoing
or future clinical trials. Results from ongoing or completed pre-clinical or
clinical studies or analyses could raise concerns over the safety or efficacy
of a product candidate. For example, in April, 2003, the FDA placed our
proposed Phase II clinical trial of Hemopure for the treatment of trauma on
clinical hold citing safety concerns based on a review of data from our Phase
III clinical trial in patients undergoing surgery. We cannot assure investors
that the FDA will not place other clinical trials we sponsor on hold in the
future. A clinical trial may also experience slow patient enrollment or
insufficient drug supplies. Patients may experience adverse medical events or
side effects, and there may be a real or perceived lack of effectiveness of, or
of safety issues associated with, the product we are testing. We may not have the financial resources to fund required trials and our
operations until FDA marketing authorization for Hemopure is obtained, if ever. We cannot expand indications for Hemopure 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. In order to market Hemopure for more
than one indication, we will have to design additional clinical trials, submit
the trial designs to the FDA for review and complete those trials successfully.
If the FDA approves Hemopure for an indication, it may require a label
cautioning against Hemopures use for indications for which it has not been
approved. The Securities and Exchange Commission staff has preliminarily determined
to recommend a civil injunctive proceeding against us and several of our former
and current officers and directors. We and several of our former and current
directors and officers are subject to consolidated class action lawsuits and we
and seven of our former and current directors are subject to consolidated
derivative actions. These proceedings could result in one or more substantial
fines, judgments or settlements that may exceed the amount of, or not be
covered by, our insurance policies. During the fourth quarter of fiscal 2003, we were notified of a
confidential investigation by the Securities and Exchange Commission. On
December 22, 2003, we and our former chief executive officer and board member
and our former senior vice president, regulatory and operations, each received
a Wells Notice from the SEC staff indicating the staffs preliminary
determination to recommend that the SEC bring a civil injunctive proceeding
against the Company and such former officers. On April 29, 2004, our current
chairman, a former director, our current chief technology officer and our
current general counsel each also received a Wells Notice from the SEC staff
indicating the staffs preliminary determination to recommend that the SEC
bring a civil injunctive proceeding against them. We have responded in writing
to the Wells Notice received by the Company. To our knowledge, no formal
recommendation has been made to date and we do not know what action, if any,
the SEC staff may finally recommend. Following our announcement of the Wells Notices, a number of class action
lawsuits, subsequently consolidated, were filed against us and several of our
former and current executive officers. In addition, all members of our board
of directors as of December 22, 2003 and the Company are named as defendants in
two derivative actions filed in January of 2004, and subsequently consolidated,
claiming that such directors breached fiduciary duties in connection with the
same disclosures that are the subject of the class action lawsuits. We believe the class action lawsuits and derivative actions are
without merit, and we intend to defend against them vigorously. There can be no assurance as to the outcome of any of these proceedings.
Members of our board of directors and management may spend considerable time and effort
cooperating with the SEC in its investigation and defending the class action
lawsuits and derivative actions, which may adversely affect our business,
results of operations and financial condition. We may incur substantial costs
in connection with these proceedings, including significant legal expenses,
fines, judgments or settlements that exceed the amount of, or are not covered
by, our insurance policies. In addition, 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. 30




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) The limitations of our director and officer liability insurance may
materially harm our business and financial condition. Our director and officer liability insurance policies provide limited
liability protection relating to the SEC investigation, the securities class
actions and derivative lawsuits against us and certain of our current and
former officers and directors. If these policies do not adequately cover
expenses and liabilities relating to these proceedings, our financial condition
could be materially harmed. The lawsuits and SEC investigation may make renewal
of our director and officer liability insurance in July 2005 or thereafter
expensive or unavailable. Increased premiums could materially harm our
financial results in future periods. The inability to obtain this coverage due
to its unavailability or prohibitively expensive premiums would make it more
difficult to retain and attract officers and directors and expose us to
potentially self-funding potential future liabilities ordinarily mitigated by
director and officer liability insurance. If we cannot find appropriate marketing partners, we may not be able to
market and distribute Hemopure effectively. Our success depends, in part, on our ability to market and distribute
Hemopure effectively. We have no experience in the sale or marketing of
medical products for humans. In the event that we obtain FDA approval of
Hemopure, 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. If we do not enter into a satisfactory distributorship agreement, we may
be required to seek an alternative arrangement such as an alliance with a
pharmaceutical company, or recruiting, training and retaining a marketing staff
and sales force of our own. We may not be successful in obtaining satisfactory
distributorship agreements or entering into alternative arrangements. If we cannot generate adequate, profitable sales of Hemopure, we will not
be successful. To succeed, 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 Hemopure, establishing its 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. 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: 31




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued)  
    
    whether and how quickly physicians accept Hemopure as a
cost-effective and therapeutic alternative to other products, in
particular, donated human blood; and
    
    whether medical care providers or the public accept the use
of a bovine-derived protein in transfusions or as a therapeutic in
cardiovascular disease, 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 the approval of the FDA and analogous European regulatory
authorities to sell Hemopure, we must demonstrate to them that we can
manufacture Hemopure in compliance with the applicable good manufacturing
practices, commonly known as GMPs. GMPs are stringent requirements that apply
to all aspects of the manufacturing process. We are subject to inspections of
the FDA and analogous European regulatory authorities at any time to determine
whether we are in compliance with GMP requirements. If we fail to manufacture
in compliance with GMPs, these regulatory authorities may refuse to approve
Hemopure or may take other enforcement actions with respect to Hemopure. The manufacturing process for Hemopure is complicated and time-consuming
and we may experience problems that would limit our ability to manufacture and
sell Hemopure. Our products are biologics and require product characterization steps that
are more complicated, time-consuming and onerous than those required for most
chemical pharmaceuticals. Accordingly, we employ multiple steps to attempt to
control the manufacturing processes. Minor deviations in these manufacturing
processes or other problems could result in unacceptable changes in the
products that result in lot failures, increased production scrap, shipment
delays, product recalls or product liability, all of which could negatively
impact our results of operations. We manufacture at a single location and, if we were unable to utilize this
facility, we would not be able to manufacture for an extended period
of time. We manufacture 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
manufacturing. 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 manufacture product
and thus would have no supply of Hemopure for research and development,
clinical trials or sales following exhaustion of finished goods in inventory. If Hemopure receives regulatory approval, we must expand our manufacturing
capacity to develop our business, which will require substantial third party
financing. Failure to increase our manufacturing capacity may impair
Hemopures market acceptance and prevent us from achieving
profitability. If Hemopure is approved by the FDA or the analogous European regulatory
authorities, we will need to construct new manufacturing capacity in order to
develop our business. The increase in our manufacturing capacity is dependent
upon our obtaining substantial financing from third parties. Third parties can
be expected to be unwilling to commit to finance a new manufacturing facility
so long as we do not have approval of the FDA or the analogous European
regulatory authorities to market Hemopure. We cannot assure you that
sufficient financing for new manufacturing capacity will be available or, if
available, will be on terms that are acceptable to us. We expect that, once we
have the required significant financing in place, it would take 30 to 36
months, or more, to build a large Hemopure manufacturing facility and to
qualify and obtain facility approval from the FDA and analogous European
regulatory authorities. 32




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) We will face risks, including the risk of scale-up of our processes, in
the construction of any new manufacturing capacity, 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. If Hemopure is approved for marketing in a major market and receives
market acceptance, we may experience difficulty manufacturing enough of the
product to meet demand. The manufacturing processes we currently employ to
produce small quantities of material for research and development activities
and clinical trials may not be successfully scaled up for production of
commercial quantities at a reasonable cost or at all. If we cannot manufacture
sufficient quantities of Hemopure, we may not be able to build our business or
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, licensing fees, and interest income have
provided almost all of our funding to date. We have no operating history of
selling Hemopure upon which to base an evaluation of our business and our
prospects. 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.
Accordingly, the success of our business will depend, in part, upon our ability
to defend our intellectual property against infringement by third parties. We
cannot guarantee that our intellectual property rights will protect us
adequately from competition from similar products or that additional products
or processes we discover or seek to commercialize will receive adequate
intellectual property protection. In addition, third parties may successfully
challenge our intellectual property. For example, one of our European patents
was the subject of an opposition proceeding. A competitor may seek to employ
arguments made during the opposition to challenge claims in other issued
patents that are in the same patent family, including United States 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. 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
intellectual property rights. Several third parties hold patents with claims
to compositions comprising polymerized hemoglobin and their methods of
manufacture and use. One or more of these third parties may assert that our
activities infringe claims under an existing patent. Such a claim could be
asserted while we are still developing or marketing Hemopure. Any such claim
could be expensive and time-consuming to defend, and an adverse litigation
result or a settlement of litigation could require us to pay damages, obtain a
license from the complaining party or a third party, develop non-infringing
alternatives or cease using the challenged trademark, product or manufacturing
process. Any such result could be expensive or result in a protracted plant
shutdown, in turn adversely affecting our ability to operate profitably. There can be no assurance that we would prevail in any intellectual
property infringement action, will be able to obtain a license to any third
party intellectual property on commercially reasonable terms, successfully
develop non-infringing alternatives on a timely basis, or license alternative
non-infringing trademarks, products, or manufacturing processes, if any exist, on commercially reasonable terms.
Any significant intellectual property impediment to our ability to develop and
commercialize Hemopure would seriously harm our business and prospects. 33




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) Our profitability will be adversely 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, if any,
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. Recently enacted changes in the securities laws and regulations are likely
to increase our costs. The Sarbanes-Oxley Act of 2002, which became law in July 2002, has
required changes in some of our corporate governance, securities disclosure and
compliance practices. In response to the requirements of that Act, the SEC and
the Nasdaq have promulgated new rules and listing standards covering a variety
of subjects. Compliance with these new rules and listing standards has
increased our legal and financial and accounting costs, and we expect these
increased costs to continue. These developments may make it more difficult and
more expensive for us to obtain director and officer liability insurance.
Likewise, these developments may make it more difficult for us to attract and
retain qualified members of our board of directors, particularly independent
directors, or qualified executive officers. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC
adopted rules requiring public companies to include a report of management on
the Companys internal controls over financial reporting in their annual
reports on Form 10-K that contains an assessment by management of the
effectiveness of the companys internal controls over financial reporting. In
addition, the public accounting firm auditing the Companys financial
statements must attest to and report on managements assessment of the
effectiveness of the Companys internal controls over financial reporting.
This requirement will first apply to our annual report on Form 10-K for our
fiscal year ending October 31, 2005. If our independent auditors are unable to
provide us with an unqualified report as to the effectiveness of our internal
controls over financial reporting as of October 31, 2005 and future year-ends
as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could
lose confidence in the reliability of our financial statements, which could
result in a decrease in the value of your securities. 34




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) Provisions of our restated certificate of incorporation and by-laws could
impair or delay stockholders 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 stockholders 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
stockholders 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.
    
    Our stockholder 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 for orthopedic surgery, trauma or cardiac
disease indications. We are aware that at least one public company competitor,
Northfield Laboratories Inc., is in the advanced stages of developing a
hemoglobin-based oxygen carrier produced from human blood that has passed its
expiration date for human transfusion. Northfields product is in a Phase III
clinical trial for a trauma indication. We are also aware that companies are
conducting clinical trials of hemoglobin-based or perfluorocarbon oxygen
carriers. 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. We could also encounter competition in the cardiovascular
indication from certain medical devices currently under development.
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. 35




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) Stringent, ongoing government regulation and inspection of our products
could lead to delays in the manufacture, marketing and sale of our
products. The FDA and comparable foreign regulatory authorities continue to regulate
products even after they receive marketing authorization. If the FDA or
comparable foreign regulatory authorities approve 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 and comparable foreign regulatory authorities 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 or comparable foreign
regulatory authorities could withdraw a previously approved product from the
applicable market(s) upon receipt of newly discovered information.
Furthermore, the FDA or comparable foreign regulatory authorities could require
us to conduct additional, and potentially expensive, studies in areas outside
our approved indications. Also, unanticipated changes in existing regulations
or the adoption of new regulations could affect and make more expensive the
continued manufacturing and marketing of our products. 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. Even if Hemopure is approved for marketing, there is no guarantee
that governmental health care programs or private health insurers would
reimburse for purchases of Hemopure, or reimburse a sufficient amount to permit
us to sell Hemopure at high enough prices to generate a profit. Investment Risks We may not continue to qualify for listing on the Nasdaq National Market,
which may cause the value of your investment in our Company to substantially
decrease. We may be unable to meet the listing requirements of the Nasdaq National
Market, or Nasdaq NM, in the future. To maintain our listing on the Nasdaq NM,
we are required, among other things, to maintain a minimum bid price per share
of at least $1.00. In June 2004, we received notice from the Nasdaq NM that
the daily minimum bid price of our Class A common stock fell, and remained
below, $1.00 for 30 consecutive business days. As a result, we are out of
compliance with the $1.00 minimum bid price for continued inclusion of our
Class A common stock in the Nasdaq NM. We have 180 calendar days (until
December 14, 2004) to regain compliance, and we will have an additional 180
calendar days, if at December 14, 2004 we meet the initial listing criteria for
the Nasdaq NM other than the bid price requirement. We may not be able to
regain compliance with the minimum bid price requirement of the Nasdaq NM. If
we are unable to regain compliance within the required period, and are further
unable to meet the criteria for initial inclusion on the Nasdaq NM through
other measures to increase our per share bid price, our Class A common stock may be delisted from the Nasdaq NM. Delisting from the
Nasdaq NM would adversely affect the trading price and limit the liquidity of
our common stock and therefore cause the value of your investment in our
Company to substantially decrease. 36




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued) If
we sell additional shares, our stock price may decline. Until we are profitable, we will need significant additional funds to
develop our business and sustain our operations. Any sales of shares of our
common stock are likely to have a dilutive effect on our then 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
NM. 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 tradeable 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
September 10, 2004, the trading price of our stock has ranged from a low of
$0.32 per share (on September 10, 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 permanent 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 SEC investigations, or any litigation or threatened litigation;
    
    publicity regarding actual or potential medical results
relating to products under development by us or our competitors; 37




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BIOPURE CORPORATION Part II  Other Information
July 31, 2004
(continued)  
    
    actual or potential pre-clinical or 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;
    
    market conditions for pharmaceutical and biotechnology stocks; and
    
    communications from the Nasdaq NM concerning delisting or potential delisting. External factors may also adversely affect the market price for our common
stock. Our common stock currently trades on the Nasdaq NM under the symbol
BPUR. The price and liquidity of our common stock may be significantly
affected by the overall trading activity and market factors on the Nasdaq NM. 
 Item 6. Exhibits and Reports on Form 8-K (a)  The exhibits are listed in the accompanying Exhibit Index (b)  A report on Form 8-K was filed on May 26, 2004, to furnish under Item 12
the Companys press release and transcript announcing results of operation
for the quarter ended April 30, 2004 38




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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: September 13, 2004
    
    By:
    
    /s/ Francis H. MurphyFrancis H. MurphyDuly authorized officer of the Registrant andChief Financial Officer
 39




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EXHIBIT INDEX Number
    
    Description10.1
    
    Engagement letter with C.E. Unterberg, Towbin LLC dated August 4, 2004, as amended, September
8, 200431.1
    
    Certification of Zafiris G. Zafirelis pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Francis H. Murphy pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Zafiris G. Zafirelis pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    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 2002
 40