##### Table of Contents



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 January 31, 2004 o
    
    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
(State of Incorporation)
    
    04-2836871
(IRS Employer Identification Number)11 Hurley Street, Cambridge, Massachusetts
(Address of principal executive offices)
    
    02141
(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. Yes x  No o The number of shares outstanding of each of the issuers classes of common
stock as of March 12, 2004 was: Class A Common Stock, $.01 par value
    
    
    48,170,521Class B Common Stock, $1.00 par value
    
    
    117.7
    1




---



BIOPURE CORPORATION INDEX TO FORM 10-Q PagePart I  Financial Information:Item 1 - Financial Statements (Unaudited)Condensed
Consolidated Balance Sheets at January 31, 2004 and October 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the
three months ended January
31, 2004 and January 31, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 2004
and January 31, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3 - Quantitative and Qualitative Disclosure of Market Risk
    
    
    19Item 4 - Controls and Procedures
    
    
    20Part II  Other Information:Item 1 - Legal Proceedings
    
    
    21Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    22Item 3 - Defaults Upon Senior Securities
    
    
    22Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    22Item 5 - Other Information
    
    
    23Item 6 - Exhibits and Reports on Form 8-KSignatures
    
    
    32EX-31.1 CERTIFICATION OF FRANCIS H. MURPHYEX-31.2 CERTIFICATION OF RONALD F. RICHARDSEX-32.1 SEC 906 CERTIFICATION - FRANCIS H. MURPHYEX-32.2 SEC 906 CERTIFICATION - RONALD F. RICHARDS
  Biopure®, Hemopure® and Oxyglobin® are registered trademarks of Biopure Corporation. 2




---



##### Table of Contents



BIOPURE CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited) January 31, 2004
    
    October 31, 2003Assets:Current assets:Cash and cash equivalents
    
    $
    17,291
    
    
    $
    26,862Accounts receivable, net
    
    
    513
    
    
    
    762Inventories
    
    
    7,800
    
    
    
    8,985Other current assets
    
    
    1,239
    
    
    
    1,233Total current assets
    
    
    26,843
    
    
    
    37,842Property, plant and equipment, net
    
    
    35,681
    
    
    
    36,861Other assets
    
    
    10,925
    
    
    
    10,922Total assets
    
    $
    73,449
    
    
    $
    85,625Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    739
    
    
    $
    1,159Accrued expenses
    
    
    5,322
    
    
    
    6,100Total current liabilities
    
    
    6,061
    
    
    
    7,259Long-term debt
    
    
    9,847
    
    
    
    9,847Deferred compensation
    
    
    142
    
    
    
    142Total long-term liabilities
    
    
    9,989
    
    
    
    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,
44,494,050 shares outstanding at
January 31, 2004 and
October 31, 2003
    
    
    445
    
    
    
    445Class B, $1.00 par value, 179
shares authorized, 117.7 shares
outstanding
    
    
    
    
    
    
    Capital in excess of par value
    
    
    472,287
    
    
    
    472,287Contributed capital
    
    
    24,574
    
    
    
    24,574Notes receivable
    
    
    (256
    )
    
    
    (256
    )Accumulated deficit
    
    
    (439,651
    )
    
    
    (428,673
    )Total stockholders equity
    
    
    57,399
    
    
    
    68,377Total liabilities
and stockholders
equity
    
    $
    73,449
    
    
    $
    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




---



##### Table of Contents



BIOPURE CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited) Three Months EndedJanuary 31, 2004
    
    January 31, 2003Revenues:Oxyglobin
    
    $
    750
    
    
    $
    21Total revenues
    
    
    750
    
    
    
    21Cost of revenues
    
    
    4,805
    
    
    
    4,848Gross loss
    
    
    (4,055
    )
    
    
    (4,827
    )Operating expenses:Research and development
    
    
    2,999
    
    
    
    2,546Sales and marketing
    
    
    843
    
    
    
    1,016General and administrative
    
    
    3,137
    
    
    
    2,727Total operating
expenses
    
    
    6,979
    
    
    
    6,289Loss from operations
    
    
    (11,034
    )
    
    
    (11,116
    )Other income, net
    
    
    56
    
    
    
    34Net loss
    
    $
    (10,978
    )
    
    $
    (11,082
    )Per share data:Basic and diluted net loss per
common share
    
    $
    (0.25
    )
    
    $
    (0.36
    )Weighted-average shares used in
computing basic and diluted net
loss per common share
    
    
    44,494
    
    
    
    30,535
 See accompanying notes. 4




---



##### Table of Contents



BIOPURE CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) Three Months EndedJanuary 31, 2004
    
    January 31, 2003Operating activities:Net loss
    
    $
    (10,978
    )
    
    $
    (11,082
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    1,348
    
    
    
    1,326Equity compensation
    
    
    
    
    
    
    (7
    )Accrued interest on stockholders
notes receivable
    
    
    
    
    
    
    (1
    )Changes in assets and liabilities:Accounts receivable
    
    
    249
    
    
    
    68Inventories
    
    
    1,185
    
    
    
    (375
    )Other current assets
    
    
    (6
    )
    
    
    (132
    )Accounts payable
    
    
    (420
    )
    
    
    (1,070
    )Accrued expenses
    
    
    (778
    )
    
    
    (84
    )Net cash used in operating activities
    
    
    (9,400
    )
    
    
    (11,357
    )Investing activities:Purchases of property, plant and equipment
    
    
    (154
    )
    
    
    (742
    )Other assets
    
    
    (17
    )
    
    
    (26
    )Net cash used in investing activities
    
    
    (171
    )
    
    
    (768
    )Financing activities:Net proceeds from sales of common stock
    
    
    
    
    
    
    1,885Net cash provided by financing
activities
    
    
    
    
    
    
    1,885Net decrease in cash and cash equivalents
    
    
    (9,571
    )
    
    
    (10,240
    )Cash and cash equivalents at beginning of period
    
    

    26,862
    
    
    
    19,710Cash and cash equivalents at end of period
    
    $
    17,291
    
    
    $
    9,470
 See accompanying notes. 5




---



##### Table of Contents



BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)  1.
    
    Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended January 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 accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Biopure Netherlands, BV,
Biopure South Africa, Pty, Ltd., Neuroblok Incorporated, Reperfusion Systems
Incorporated, DeNovo Technologies Corporation and Biopure Overseas Holding
Company. All intercompany accounts and transactions have been eliminated in
consolidation.Reclassifications have been made to the prior periods financial statements
presented to conform to the current periods presentation.These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our 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 $439,651,000 as of January 31, 2004. To remain a
going concern, the Company will require significant funding. The Company
expects to incur additional operating losses over the next several years
seeking regulatory approvals, conducting clinical trials and marketing
Hemopure. The Company is assessing opportunities to raise capital, and
expects to continue financing operations until it is profitable through sales
of securities, strategic alliances and other financing vehicles, if any, that
might become available. However, 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. At January 31, 2004, the Company had $17,291,000 in
cash and cash equivalents. Since January 31, 2004, the Company has raised
approximately $5,000,000 in additional funding (See Note 7 Subsequent
Events). The Company expects this funding, in addition to the cash and cash
equivalents at January 31, 2004, to be sufficient to fund
operations into September 2004 under the Companys current operating plan.2.
    
    Net Loss per ShareBasic net loss per common share is computed based on the weighted-average
number of common shares outstanding during the period. Diluted net loss per
common share is computed based upon the weighted-average number of common
 shares outstanding during the period, adjusted for the dilutive effect of the
Companys common stock equivalents, including the shares issuable upon the
conversion of Class B Common Stock outstanding and the exercise of common
stock options and warrants determined based upon the average market price of
common stock for the period. However, basic and diluted net loss per common
share is computed the same for all periods presented as the Company had
losses for all periods presented and, consequently, the effect of Class B
Common Stock, options and warrants is anti-dilutive. Dilutive weighted
average shares outstanding do not include 8,119,828 common-equivalent shares
for the three months ended January 31, 2004 and 6,449,830
common-equivalent shares for the three months ended January 31, 2003 as their effect would have
been anti-dilutive.3.
    
    Stock Based CompensationThe Company applies the intrinsic value method pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for its stock-based compensation
plans. Accordingly, no 6




---



##### Table of Contents



BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)  compensation expense has been recognized for stock-based awards to employees.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123(SFAS No. 148). Had compensation expense for the Companys stock option
plans been determined based on the fair value at the grant date for awards
under these plans, consistent with the methodology prescribed under SFAS No.
148, the Companys net loss and net loss per share would have approximated
the pro forma amounts indicated below: Three Months EndedJanuary 31,
    
    January 31,In thousands (except per share data)
    
    2004
    
    2003Net loss, as
reported
    
    $
    (10,978
    )
    
    $
    (11,082
    )Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (728
    )
    
    
    (544
    )Pro forma net loss
    
    $
    (11,706
    )
    
    $
    (11,626
    )Net loss per share:Basic and diluted 
as reported
    
    $
    (0.25
    )
    
    $
    (0.36
    )Basic and diluted 
pro forma
    
    $
    (0.26
    )
    
    $
    (0.38
    )
  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 EndedJanuary 31,
    
    January 31,2004
    
    2003Risk-free interest
rate
    
    
    4.24
    %
    
    
    4.59
    %Expected dividend
yield
    
    
    
    
    
    
    Expected lives
    
    7 years
    
    7 yearsExpected volatility
    
    
    80
    %
    
    
    80
    %
  4.
    
    InventoriesInventories are valued at the lower of cost (determined using the first-in,
first-out method) or market. Inventories were as follows: In thousands
    
    January 31, 2004
    
    October 31, 2003Raw materials
    
    $
    1,150
    
    
    $
    1,270Work-in-process
    
    
    327
    
    
    
    885Finished goods-Oxyglobin
    
    
    1,363
    
    
    
    1,937Finished goods-Hemopure
    
    
    4,960
    
    
    
    4,893$
    7,800
    
    
    $
    8,985
 7




---



##### Table of Contents



BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)  5.
    
    Accrued Expenses and Cost Reduction PlanAccrued expenses consisted of the following: In thousands
    
    January 31, 2004
    
    October 31, 2003Accrued payroll and related employee
expenses
    
    $
    922
    
    
    $
    487Accrued vacation
    
    
    591
    
    
    
    629Accrued legal and audit fees
    
    
    822
    
    
    
    451Accrued health and dental premiums
    
    
    340
    
    
    
    340Financing fees
    
    
    537
    
    
    
    537South Carolina project
    
    
    450
    
    
    
    650Accrued severance
    
    
    107
    
    
    
    875Other
    
    
    1,553
    
    
    
    2,131$
    5,322
    
    
    $
    6,100
  On October 31, 2003 the Company announced a cost reduction plan to decrease
its ongoing cash burn. Under the plan, the Company terminated 72 employees.
The employees terminated were primarily employees from the Companys
manufacturing division. During the fiscal year ended October 31, 2003 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 $875,000 related to this reduction in force. The charge
recorded represented primarily severance costs and fees for outplacement
services. During the first fiscal quarter of 2004, the Company paid
approximately $768,000 of these costs. The remaining balance of $107,000 will
be paid over the next 5 months.6.
    
    CommitmentsGuaranteeIn 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 a general partner, would be liable for all
partnership obligations. EHSAs liabilities as of January 31, 2004 consist of
a promissory note to a bank with a balance of $1,102,077. The note accrues
interest at 8.63% and matures on January 30, 2006. As of January 31, 2004,
the maximum potential amount of future payments the Company would be required
to make under its guarantee would be $1,278,000. 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 for the fiscal year ended
October 31, 2002.Sumter RealtyIn December 2001, the Company signed an amended letter of intent with Sumter
Realty Group, LLC for the construction and financing of a manufacturing plant
in South Carolina, which is designed to produce 500,000 Hemopure units per
year and expected to cost approximately $120,000,000. Under the letter of
intent the financing would be in the form of a capital lease.The terms of any new lease, as outlined in the letter of intent, would be:
(i) lease payments to start at substantial completion of the facility; (ii)
annual lease payments of $13,750,000 per year for the first two years; and
(iii) lease payments of $17,158,000 per year for the balance of a 240-month
term. The Company would own the facility at the end of the lease term. The
Company is 8




---



##### Table of Contents



BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)  committed to pay a finders fee, of approximately 2 percent of the net amount
financed, to CB Richard Ellis, a real estate consulting firm, when financing
for the facility is completed if financing is provided through Sumter Realty
Group or any of its principals. However, there is no assurance that the
Company will be able to obtain financing under the terms set forth in the
letter of intent.As of January 31, 2004, $14,348,000 has been included in property, plant and
equipment and $9,847,000 in long-term debt reflecting capital costs to date
for the engineering and design costs of the planned manufacturing facility,
as well as for permits and acquisition of land. No additional expenditures
will be incurred until a financing proposal has been accepted and a closing
schedule has been developed.We examined our long-lived assets for potential impairment, with a particular
emphasis on the asset related to the planned South Carolina manufacturing
facility. As part of our review, we considered lack of financing for this
facility to date, the potential timing of construction activities, the extent
to which the asset is site specific, and our ongoing commitment to ultimately
build our new facility in South Carolina. Based upon our analysis, we
determined that while the delays in obtaining financing for this facility and
FDA approval are significant and therefore indicators of potential
impairment, we believe our plan for the South Carolina manufacturing facility
is still valid and we fully expect we will be able to finance it on
commercially reasonable terms in the future. Therefore, we determined that no
impairment exists at January 31, 2004.Research AgreementOn March 4, 2003, the Company entered into a Cooperative Research and
Development Agreement (CRADA) with the United States Naval Medical Research
Center (NMRC). The intent of the CRADA is to support a pivotal, randomized,
standard therapy controlled clinical trial of Hemopure in the out-of-hospital
setting in the resuscitation of patients with severe hemorrhagic shock (acute
blood loss). Under the terms of the CRADA, the NMRC will contribute
$4,000,000 and the Company is committed to contribute $8,753,000, exclusive
of Biopure employee costs and expenses, through 2006. These amounts are
estimates based upon a preliminary assessment of the current trial protocol.
Completion of this pivotal trauma trial is contingent upon both parties
securing the required funding. The CRADA has been modified to grant the Naval
Medical Research Center primary responsibility for the design and conduct of
the trial, which will require a separate investigational new drug application
(IND) and the FDAs agreement to the proposed study design.7.
    
    Subsequent EventsOn February 19, 2004, the Company announced it had adjusted its operating plan
to reduce expenses and conserve cash while it works to achieve FDA approval of
Hemopure. Under the plan, the Company terminated 55 employees, primarily from
the Companys manufacturing division. This workforce reduction will take
effect in mid to late April. This reduction in force, in addition to other
cost reductions is intended to reduce the companys ongoing cash burn rate by
approximately $8.0 million annually. The company expects to save
approximately $3.0 million during the remainder of fiscal 2004, offset by
approximately $1.5 million in additional anticipated expenses for the FDA
response activities, described below, which will be charged to research and
development.On February 20, 2004, the Company raised approximately $5,000,000 in net
proceeds from the sale of 3,333,333 shares of common stock and
warrants to purchase an aggregate of 833,333 shares of its
Class A Common Stock at an exercise price of $2.50 per share. On
February 26, 2004, the Company issued an additional 343,168
shares as a purchase price adjustment to the February 20
transaction and will incur a non-cash charge of approximately
$467,000 in the second fiscal quarter of 2004 in connection with this
issuance. 9




---



##### Table of Contents



BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)  On February 24, 2004 the Company announced the resignation of Thomas A. Moore
from his positions as President, Chief Executive Officer and a member of the
Board of Directors, effective immediately. Francis H. Murphy, the Companys
Senior Vice President of Engineering and Process Technology and former Chief
Financial Officer, is serving as interim CEO until Mr. Moores replacement is
named.8.
    
    Recently Issued Accounting StandardsIn May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
150, Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity(SFAS 150), which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Companys adoption of the initial recognition and
initial measurement provisions of SFAS 150, effective June 1, 2003, did not
have an impact on the Companys results of operations or financial position.In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities,to expand upon and strengthen existing accounting guidance
that addresses when a company should include in its financial statements the
assets, liabilities and activities of another entity; in December 2003 FASB
issued a revision to FIN 46(FIN46R). Until now, one company generally has
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN No. 46 changes that by
requiring a variable interest entity, as defined, to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. FIN No. 46 also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. In October 2003, the FASB
issued Proposed Interpretation of FIN No. 46, which would require
consolidation of variable interest entities created before February 1, 2003
for financial statements issued for the first reporting period ending after
December 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company believes the adoption of
FIN 46 will not have a material adverse impact on its overall financial
position or results of operations. See Note 6 for additional information.9.
    
    LitigationSEC Investigation.During the fourth quarter of fiscal 2003, the Company was
notified of a confidential investigation by the Securities and Exchange
Commission (SEC). On December 22, 2003, the Company, its former Chief
Executive Officer and its former Senior Vice President, Regulatory and
Operations, 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 responded in writing to the notices on January 9, 2004. The
staff is continuing to gather information.Biopure believes the notices relate to Company disclosures concerning
communications with the FDA about a clinical hold imposed on a clinical study
protocol the Company submitted to the agency in March 2003 and the status of
the Companys BLA. In March 2003, the Company filed a proposed protocol for a
Phase II clinical trial in trauma patients in a hospital setting. The FDA put
the protocol and its related investigational new drug application (IND) on
clinical hold, meaning the trial could not begin as proposed. The FDA cited
safety concerns based on a preliminary review of data from the Companys
Phase III clinical trial in patients undergoing orthopedic surgery. After the
Company responded in two written submissions, the clinical hold was
reasserted twice in writing, most recently on July 30, 2003. The Company did
not disclose the clinical hold because the Company did not consider
correspondence with the agency about data interpretation in the development
of a protocol to be material, notwithstanding the references to data in the
BLA. The staffs investigation also concerns the Companys disclosures
concerning the FDAs review of the BLA, after receipt of the complete
response letter dated July 30, 2003. The Company has been cooperating
throughout the investigation with the SEC staff. At this time, the Company
cannot estimate what impact, if any, this inquiry may have on its financial
position or results of operations. 10




---



##### Table of Contents



BIOPURE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 2004
(Unaudited)
(continued)  Litigation.Biopure, its former Chief Executive Officer, its Chief Technology
Officer and its Chief Financial Officer were named as defendants in a number
of similar, purported class action complaints, filed between December 30,
2003 and January 28, 2004 (the complaints), in the U.S. District Court for
the District of Massachusetts (the Court) by alleged purchasers of
Biopures common stock. The complaints claim that Biopure violated the
federal securities laws by publicly disseminating materially false and
misleading statements regarding the status of its biologic license
application pending with the U.S. Food and Drug Administration and of its
trauma development program, resulting in the artificial inflation of
Biopures common stock price during the purported class period. The
complaints do not specify the amount of alleged damages plaintiffs seek to
recover. The complaints set forth varying class periods but generally focus
on March 2003 through December 24, 2003. The defendants believe that the
complaints are without merit and intend to defend the actions vigorously. At
this time, the Company cannot estimate what impact, if any, these cases may
have on its financial position or results of operations.The seven board members of Biopures Board of Directors, including its
former Chief Executive Officer, now a former board member, were named as
defendants in two shareholder derivative actions filed on January 26, 2004
and January 29, 2004 in the same Court. The Company is named as a defendant,
even though in a derivative action any award is for the benefit of the
Company, not individual stockholders. The complaints allege in derivative
actions brought by shareholders on behalf of the Company that the individual
directors breached fiduciary duties in connection with the same disclosures
set forth in the purported securities class action complaints. The
complaints do not specify the amount of the alleged damages plaintiffs seek
to recover. At this time, the Company cannot estimate what impact, if any,
these cases may have on its financial position or results of operations.The Company is a defendant in a case filed on or about June 16, 2003, by
plaintiff Steelhead Investments, Ltd. The complaint alleges that the Company
breached a contract with the plaintiff by giving insufficient notice and
failing to give notice of offerings of common stock and warrants by the
Company in March and April 2003. The complaint states that the plaintiff has
suffered monetary damages in an amount to be determined, but not less than
$15.5 million. On September 5, 2003, the Company filed an Amended Answer,
Counterclaims, and Third Party Compliant that denied the material allegations
of the complaint, asserted defenses, and brought counterclaims against the
plaintiff and an affiliate for fraud and other misconduct in connection with
execution and performance of the contract described in the complaint. On
September 24, 2003, plaintiff and its affiliate filed a motion to dismiss the
counterclaims. On October 2, 2003, plaintiff filed an amended complaint that
asserts the same claims for breach of contract against the Company that were
asserted in the original complaint filed on June 16, 2003. In addition to
those claims, the amended complaint asserts tort claims against Thomas A.
Moore, former President and Chief Executive Officer of Biopure; David N.
Judelson, Vice Chairman of Biopures Board of Directors; and HTV Industries,
Inc., a company affiliated with one of Biopures directors. Plaintiff alleges
that Moore, Judelson, and HTV intentionally interfered with plaintiffs
contractual rights and caused Biopure to breach the contract. On November 12,
2003, the Company and the individual defendants filed an answer denying the
material allegations of the amended complaint and interposing defenses. The
Company re-asserted its counterclaims and third party claims against plaintiff and its affiliate described above. On January 26, 2004, the court
denied the plaintiffs motion to dismiss the counterclaims and third-party
claims in its entirety. The Company and the individual defendants intend to
defend this case vigorously. At this time, the Company cannot estimate what
impact this case may have on it. However, the Company believes resolution of
this case will not have a material adverse impact on its overall financial
position or results of operations. 11




---



##### Table of Contents



BIOPURE CORPORATION

Managements Discussion and Analysis of
Financial Condition and Results of Operations
January 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. There can be no assurance that
Biopure will be able to commercially develop Hemopure, that necessary
regulatory approvals will be obtained, that anticipated milestones will be met
in the expected timetable, that any clinical trials will be successful, or that
any approved product will attain market acceptance and be manufactured and sold
in the quantities anticipated. Actual results may differ from those projected
in forward-looking statements due to risks and uncertainties that exist in the
Companys operations and business environment. These risks include, without
limitation, the availability of sufficient financing to support operations, the
Companys stage of product development, history of operating losses,
accumulated deficit, and uncertainties and possible delays related to clinical
trials and regulatory approvals, possible healthcare reform, manufacturing
capability, market acceptance and competition. In light of the substantial
risks and uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be regarded as
representations by the Company that the objectives or plans of the Company will
be achieved. The Company undertakes no obligation to release publicly the
results of revisions to these forward-looking statements to reflect events or
circumstances after the date hereof. Reference is made in particular to the
risk factors and the discussions set forth below in this report under
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Overview Since inception, we have devoted substantially all of our resources to our
research and development programs and manufacturing. We have been dependent
upon funding from equity financings, strategic alliances, interest income and
debt. We have not been profitable since inception and had an accumulated
deficit of $440 million as of January 31, 2004. We expect to incur additional
operating losses over the next several years seeking regulatory approvals,
conducting clinical trials and marketing Hemopure. We began generating revenue
from the sale of Oxyglobin in fiscal 1998, but these sales are not profitable
because the fixed and variable manufacturing costs allocated to producing
Oxyglobin exceed the corresponding revenues. We believe our cash and cash equivalents, as of January 31, 2004, in addition
to the cash raised on February 20, 2004 (See Liquidity and Capital Resources)
to be sufficient to fund our operations into September 2004. Under this plan,
our activities and expenditures for the balance of fiscal 2004 will be
associated primarily with maintaining our manufacturing capability, our
activities in replying to the FDAs complete response letter for our Hemopure
biologics license application (BLA), conducting FDA-requested preclinical
animal studies and continuing clinical development of Hemopure. Because the Companys funds on hand at January 31, 2004 and
forecasted sales are insufficient to fund our operations into fiscal 2005, the
audit report of Ernst & Young LLP, the Companys independent auditor, on our
fiscal 2003 financial statements includes a going concern modification, which
states that the Companys recurring losses from operations and the current lack
of sufficient funds to sustain its operations through the end of fiscal 2004
raise substantial doubt about our ability to continue as a going concern. A number of factors pose uncertainties in estimating the amount of funds we may
need to sustain operations: 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. The process of obtaining U.S. marketing approval for a first indication for
Hemopure also has risks of delays that make the ultimate development cost
unpredictable. 12




---



##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued) We may decide to or be required to do additional clinical investigation before the FDA will
grant marketing approval. Even a small clinical trial would have
the effect of delaying regulatory approval to market the product
in the United States. Our one major research and development project continues to be developing
Hemopure for a surgery indication. We monitor our spending on trauma and other
programs, but none has yet to become substantial in aggregate or annual
spending. Although Hemopure is approved for commercial sale in South Africa, the product
has not yet been offered for sale. Surgeons continue to administer Hemopure
units that we had previously provided without charge. We gave notice to our
exclusive distributor in South Africa that we were terminating our distribution
agreement according to its terms and intend, following completion of a
termination arrangement with the former distributor, to market through a
wholly-owned subsidiary. We cannot predict when our first sales might occur. On October 30, 2003, the Company announced a cost reduction plan to decrease
its ongoing cash burn. Under the plan, the Company terminated 72 employees. The
employees terminated were primarily employees from the Companys manufacturing
division. On February 19, 2004 the Company announced that it will reduce its
workforce by an additional 55 employees (See Note 7, Subsequent Events). This
reduction and other cost cutting measures are expected to reduce manufacturing
and marketing expenses. The workforce reduction will take effect in mid to
late April 2004. The Company is considering additional measures to reduce its
cash burn, but significant additional capital will be required to fund the
Companys operations until the Company becomes profitable. The Company is
assessing opportunities to raise capital, and expects to continue financing
operations until we are profitable through sales of securities, strategic
alliances and other financing vehicles, if any, that might become available. Critical Accounting Policies The Companys significant accounting policies are described in the Notes to the
Consolidated Financial Statements, as disclosed in our Form 10-K/A for the
fiscal year ended October 31, 2003. The application of our critical accounting
policies is particularly important to the accurate portrayal of the Companys
financial position and results of operations. These critical accounting
policies require the Company to make subjective judgements in determining
estimates about the effect of matters that are inherently uncertain. The
following critical accounting policies are considered most significant: Inventories Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market. Inventories consist of raw material,
work-in-process and Hemopure and Oxyglobin finished goods. Both Oxyglobin and
Hemopure have a shelf life of 3 years from the date of manufacture. Inventories
of these products are reviewed periodically to identify expired units and units
with a remaining life too short to be commercially viable based on projected
and historical sales activity. Inventories are also subject to quality
compliance investigations. Reserves are established for inventory that falls
into these categories. 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. Pursuant to SFAS 144, during the
first quarter we assessed our long-lived assets for potential impairment, with
a particular emphasis on the asset related to the planned South Carolina
manufacturing facility. As part of our review, we considered lack of financing
for this facility to date, the potential timing of construction activities, the
extent to which the asset is site specific, and our ongoing commitment to
ultimately build our new facility in South Carolina. Based upon our analysis we
believe that, while the delays in obtaining financing for this facility and FDA
approval are significant and therefore indicators of potential impairment, we
believe our plan for the South Carolina manufacturing facility is 13




---



##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued) still valid and we fully expect we will be able to finance it on commercially
reasonable terms in the future. Therefore, we determined that no impairment
exists at January 31, 2004. 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 to veterinarians in the United States through
veterinary product distributors, who purchase product for immediate and direct
resale to veterinary practices. The Company sells Oxyglobin to a distributor in
the United Kingdom that sells product in selected European countries through
local veterinary distributors in Germany, France and the UK. Collectibility is
reasonably assured once pricing arrangements are established, as these
agreements establish the distributors intent to pay. The Companys customers
do not have a right to return product. The Company and its distributors have an
ongoing business relationship, and the Company monitors creditworthiness on a
regular basis. The Company believes collectibility of product revenues is
reasonably assured at the time of sale. Research and Development Since its founding in 1984, Biopure has been primarily a research and
development company focused on developing Hemopure, our oxygen therapeutic for
human use, and obtaining regulatory approval in the United States. Our research
and development expenses have been devoted to basic research, product
development, process development, pre-clinical studies, clinical trials and
filing a Hemopure BLA with the FDA. In addition, our development expenses
historically have included the design, construction, validation and maintenance
of a large-scale pilot manufacturing plant in Cambridge, Massachusetts. The
existing pilot plant was completed in 1995, expanded in 1998 and expanded again
in 2002. Such a facility is a necessary part of developing a product like Hemopure.
Hemopure is classified by the FDA as a biologic, because it is derived from
animal-source material. Unlike drugs that are chemical compounds, biologics are
defined by their manufacturing process and composition. Any change in the
manufacturing process could be considered, under FDA regulations, to produce an
altered, possibly different product. Therefore, demonstration of manufacturing
capability at greater than laboratory scale is necessary for an application for
regulatory approval of a biologic to be accepted for review. This requirement
results in high manufacturing research and development costs in the development
of a biologic relative to other types of drugs. The only product made in our plant prior to 1998 was product for use in
pre-clinical and clinical trials. As an offshoot of the research and
development for Hemopure, Oxyglobin, a similar product, gained approval for
veterinary use in 1998. This product was then produced for sale in the pilot
manufacturing plant built and maintained for the development of Hemopure.
Consequently, costs of production of Oxyglobin for sale and an allocation of
overhead based on capacity used for Oxyglobin are charged to inventory and to
cost of revenues. The remaining costs of the pilot plant continued to be
included in research and development expenses through May 2002. Beginning in May 2002, when we began to make Hemopure for sale under our
regulatory approval in South Africa, the primary function of the pilot plant
changed from support of the development of Hemopure to production of goods for
sale. Since then, all costs of maintaining and operating the pilot plant have
been charged to inventory and cost of revenues. Any actual future use of the
facility for research and development activities will be expensed. In addition,
clinical trial materials taken from inventory for use in research and
development are charged to research and development. 14




---



##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
January 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. Oxyglobin revenues are an offset to
these expenses. For
the first fiscal quarters of 2004 and 2003, these items were as follows: Three Months EndedJanuary 31, 2004
    
    January 31, 2003Percent
    
    
    
    
    
    PercentIn thousands
    
    Amount
    
    of Total Costs
    
    Amount
    
    of Total CostsRevenues
    
    $
    750
    
    
    
    
    
    
    $
    21Cost of RevenuesOxyglobin
    
    
    1,570
    
    
    
    13
    %
    
    
    733
    
    
    
    7
    %Hemopure
    
    
    3,235
    
    
    
    27
    %
    
    
    4,115
    
    
    
    37
    %Total Cost of Revenues
    
    
    4,805
    
    
    
    41
    %
    
    
    4,848
    
    
    
    44
    %Research and Development
    
    
    2,999
    
    
    
    25
    %
    
    
    2,546
    
    
    
    23
    %Sales and MarketingOxyglobin
    
    
    448
    
    
    
    4
    %
    
    
    357
    
    
    
    3
    %Hemopure
    
    
    395
    
    
    
    3
    %
    
    
    659
    
    
    
    6
    %Total Sales and Marketing
    
    
    843
    
    
    
    7
    %
    
    
    1,016
    
    
    
    9
    %General and Administrative
    
    
    3,137
    
    
    
    27
    %
    
    
    2,727
    
    
    
    24
    %Total Costs
    
    $
    11,784
    
    
    
    100
    %
    
    $
    11,137
    
    
    
    100
    %
 Three months ended January 31, 2004 compared to three months ended January 31, 2003  Total revenues, consisting of sales of the companys veterinary product
Oxyglobin, were $750,000 for the first quarter of fiscal 2004 compared to
$21,000 for the same period in 2003. During the first quarter of fiscal 2003,
Oxyglobin sales were constrained by limited product availability resulting from
a temporary shutdown of production during the expansion of the companys
manufacturing facilities in 2002. Oxyglobin shipments resumed in February 2003
after the U.S. Food and Drug Administration (FDA) completed its review of the
validation data for the expanded facilities. For the first quarter of fiscal
2002, total revenues were $728,000. In our efforts to conserve cash, we are
limiting manufacturing capacity and 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 basically unchanged for the first quarter of fiscal 2004
compared to the same period in 2003. Cost of revenues includes costs of both
Oxyglobin and Hemopure, the companys product for human use, although Hemopure
is not currently being offered for sale. Oxyglobin cost of revenues was
$1,570,000 for the first quarter of fiscal 2004 compared to $733,000 for the
same period in 2003. The increase for the quarter was primarily due to the
increased number of Oxyglobin units sold in 2004. Due to fixed manufacturing
costs, Biopure expects that costs to produce Oxyglobin will exceed Oxyglobin
revenues until the company more fully utilizes its manufacturing capacity.
Hemopure cost of revenues, consisting of the allocation of unabsorbed fixed
manufacturing costs, 15




---



##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued)  was $3,235,000 for the first quarter of fiscal 2004 compared to $4,115,000 for
the same period in 2003. This decrease is primarily due to lower manufacturing
costs resulting from the October 2003 workforce reduction. The
workforce reductions of October 2003 and February 2004 will result in
the total cost of revenues for fiscal 2004 being substantially lower
than for fiscal 2003.Research and development expenses include product and process development and
engineering, pre-clinical studies, clinical trials and clinical trial
materials. Our research and development expenses have continued to be primarily
for our one major projectHemopure development for use in patients undergoing
surgery. A breakdown of our research and development expenses by major
activity is as follows: Three Months EndedJanuary 31, 2004
    
    January 31, 2003Percent of
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    Total R&D Costs
    
    Amount
    
    Total R&D CostsBLA Preparation and Support of Review Process
    
    $
    2,664
    
    
    
    89
    %
    
    $
    2,232
    
    
    
    88
    %Other Projects
    
    
    335
    
    
    
    11
    %
    
    
    314
    
    
    
    12
    %Total
    
    $
    2,999
    
    
    
    100
    %
    
    $
    2,546
    
    
    
    100
    %
 The completed Phase III orthopedic surgery trial cost approximately $37,000,000
over the four years from protocol development to the final report on July 26,
2002. These trial costs include costs incurred at 46 hospitals, trial site
monitoring, data management, regulatory consulting, statistical analysis,
medical writing and clinical materials and supplies as well as Company
personnel engaged in these activities. Costs incurred in submitting the
Hemopure BLA include Company personnel and payments to third parties for
manufacturing process documentation, medical consultants, regulatory
consultants, integrating the safety and efficacy databases for all clinical
trials and pre-clinical studies. Research and development expenses continue to
include amounts for support of the BLA review process including responding to
FDA inquiries. If the FDA grants a marketing license for Hemopure, this major
project will be substantially complete. However, the FDA complete response
letter of July 30, 2003 consisted of requests for extensive additional
information. In addition, during a meeting with the FDA on January 6, 2004
regarding the BLA, the FDA said that it would also require the results of three
preclinical studies previously requested for the trauma program to be submitted
for its review of the BLA and discussed a possible fourth animal study. The
Company has now decided to conduct all four studies. After the Company submits
to the FDA its formal written reply to the complete response letter, the Agency
may then take up to six months from the date of Biopures reply to review and
act on the BLA amendment based on FDA performance goals in the Prescription
Drug User Fee Act (PDUFA III). It is currently unclear whether the
results of the requested preclinical animal studies and the
Companys formal written reply to the complete response letter
will be sufficient for FDA approval or whether additional information
and additional human clinical trials will be required. Therefore, the
timetable for obtaining FDA approval of Hemopure remains uncertain. Regardless of when Hemopure is
approved we do not anticipate that we will attain profitability until we are
able to achieve economies of scale associated with a significant increase in
our manufacturing capacity. There are substantial risks and uncertainties
relating to whether and when we will obtain FDA approval for Hemopure, the
timing of the construction of additional capacity and other factors that may
affect our ability to generate a profit from our research and development of
Hemopure. Of the research and development expenses for the first quarter of fiscal 2004,
$2,664,000 were for BLA support costs and the balance for various expenditures
not allocable to any major project. In the corresponding quarter of fiscal
2003, expenditures included $2,232,000 for BLA filing preparation and the
balance for various expenditures not allocable to any major project. Due to
the extensive additional information the FDA has requested, the Company expects
research and development expenses to continue at a higher rate than experienced
last year. 16




---



##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued) Sales and Marketing expenses consist of Hemopure-related expenses and
Oxyglobin-related expenses. Hemopure-related sales and marketing expenses were
$395,000 for the first quarter of fiscal 2004, compared to $659,000 for the
same period in 2003. This decrease is primarily due to the reduction of
marketing and educational activities in fiscal 2004 consistent with the
Companys other
cost-cutting measures. The Company anticipates that Hemopure and
Oxyglobin-related sales and marketing expenses will be substantially lower in fiscal 2004
compared to fiscal 2003 because of cost-cutting. Oxyglobin-related sales and
marketing expenses were $448,000 for the first quarter of fiscal 2004 compared
to $357,000 for the same period in 2003. During the first quarter of fiscal
2003, sales were constrained by limited product availability, as explained
above. During this time the company postponed certain sales activities until
product shipments resumed in February 2003. The increase in general and administrative expenses for the first quarter of
fiscal 2004 compared to the same period in fiscal 2003 is primarily due to
increased legal fees in fiscal 2004 related to a previously announced
Securities and Exchange Commission investigation of the Company and to other
legal matters. Liquidity and Capital Resources At January 31, 2004, we had $17,291,000 in cash and cash equivalents. We
believe our cash and cash equivalents at January 31, 2004, and the
approximately $5,000,000 raised since that time are sufficient to fund
operations into September 2004 under the Companys adjusted operating plan. To
fund operations through December 31, 2004, we estimate that we will need to
raise approximately $7,000,000. The fiscal 2004 planned capital expenditures of $1,2000,000 are included in the cash
requirements identified above. We plan to spend approximately $1,100,000 for
the remainder of fiscal 2004 on capital projects for our existing facilities.
Our current operating plan does not
budget for additional clinical trials that we may need for initial
FDA approval of Hemopure, but does include our European Phase II
clinical trial in angioplasty patients and a clinical trial
anticipated to be done in hospitalized trauma patients in South
Africa. To undertake any additional clinical trials, we would
increase our rate of operating losses and funding requirements
beginning in fiscal 2005. Because the Companys funds on hand at October
31, 2003 and forecast sales were not sufficient to fund our operations into
fiscal 2005, the audit report of Ernst & Young LLP, the Companys independent
auditor, on our fiscal 2003 financial statements includes a going concern
modification. For us to remain a going concern we will require significant
funding. We continue to assess opportunities to raise capital. However, we do
not know whether adequate additional financing will be available to the Company
on terms that it deems acceptable, if at all. If Hemopure is approved by the
FDA the Companys revenue will be limited by manufacturing capacity, and the
Company does not expect to become profitable unless it can achieve economies of
scale by increasing that capacity. We expect to continue financing our operations, until we are profitable,
through sales of securities and joint venture, leasing or licensing
arrangements, if available. We have not been profitable since inception and had
an accumulated deficit of $439,651,000 as of January 31, 2004. We anticipate
that we will continue to generate losses for the next several years. Net cash used in operating activities went down $1,957,000 in the first fiscal
quarter of 2004 compared to the corresponding period last year. Cash provided
by inventories increased compared to last year due mostly to the lack of sales
during the first fiscal quarter of 2003, mentioned above. Accounts payable
used $650,000 less cash compared to last year mostly due to expenditures during
the first fiscal quarter of 2003 associated with the proposed manufacturing
facility in Sumter, South Carolina (See Note 6  Guarantees) for which there
are no comparable charges during the same period in fiscal 2004. Accrued
expenses consumed $694,000 more cash during the first quarter of 2004 than in
2003 mostly due to severance payments made during the first fiscal quarter of
2004 (See Note 5  Accrued Expenses and Cost Reduction Plan). Recently Issued Accounting Standards In May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
150, Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity(SFAS 150), which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Companys adoption of the initial recognition and
initial measurement provisions of SFAS 150, effective June 1, 2003, did not
have an impact on the Companys results of operations or financial position. 17




---



##### Table of Contents



BIOPURE CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operations
January 31, 2004
(continued) In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities,to expand upon and strengthen existing accounting guidance
that addresses when a company should include in its financial statements the
assets, liabilities and activities of another entity; in December 2003 FASB
issued a revision to FIN 46(FIN46R). Until now, one company generally has
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN No. 46 changes that by
requiring a variable interest entity, as defined, to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. FIN No. 46 also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. In October 2003, the FASB
issued Proposed Interpretation of FIN No. 46, which would require consolidation
of variable interest entities created before February 1, 2003 for financial
statements issued for the first reporting period ending after December 15,
2003. Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. The Company believes the adoption of FIN 46 will not have a
material adverse impact on its overall financial position or results of
operations. See Note 6 for additional information. 18




---



##### Table of Contents



BIOPURE CORPORATION January 31, 2004 
 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. 19




---



##### Table of Contents



BIOPURE CORPORATION January 31, 2004 
 Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. Under the supervision and
with the participation of our management, including our interim Chief Executive
Officer and our Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of January 31, 2004.
Based on this evaluation, our interim Chief Executive Officer and Chief
Financial Officer concluded as of the evaluation date that our disclosure
controls and procedures were effective to ensure that information required to
be disclosed by us in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. (b) Changes in Internal Control Over Financial Reporting. There have been no
changes in our internal control over financial reporting (as defined under
Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently
completed fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. 20




---



##### Table of Contents



BIOPURE CORPORATION 
 Part II  Other Information
January 31, 2004 
 Item 1. Legal Proceedings  SEC Investigation.During the fourth quarter of fiscal 2003, the Company was
notified of a confidential investigation by the Securities and Exchange
Commission (SEC). On December 22, 2003, the Company, its former Chief
Executive Officer and its former Senior Vice President, Regulatory and
Operations, 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 responded in writing to the notices on January 9, 2004. The
staff is continuing to gather information.Biopure believes the notices relate to Company disclosures concerning
communications with the FDA about a clinical hold imposed on a clinical study
protocol the Company submitted to the agency in March 2003 and the status of
the Companys BLA. In March 2003, the Company filed a proposed protocol for a
Phase II clinical trial in trauma patients in a hospital setting. The FDA put
the protocol and its related investigational new drug application (IND) on
clinical hold, meaning the trial could not begin as proposed. The FDA cited
safety concerns based on a preliminary review of data from the Companys
Phase III clinical trial in patients undergoing orthopedic surgery. After the
Company responded in two written submissions, the clinical hold was
reasserted twice in writing, most recently on July 30, 2003. The Company did
not disclose the clinical hold because the Company did not consider
correspondence with the agency about data interpretation in the development
of a protocol to be material, notwithstanding the references to data in the
BLA. The staffs investigation also concerns the Companys disclosures
concerning the FDAs review of the BLA, after receipt of the complete
response letter dated July 30, 2003. The Company has been cooperating
throughout the investigation with the SEC staff. At this time, the Company
cannot estimate what impact, if any, this inquiry may have on its financial
position or results of operations.Litigation.Biopure, its former Chief Executive Officer, its Chief Technology
Officer and its Chief Financial Officer were named as defendants in a number
of similar, purported class action complaints, filed between December 30,
2003 and January 28, 2004 (the complaints), in the U.S. District Court for
the District of Massachusetts (the Court) by alleged purchasers of
Biopures common stock. The complaints claim that Biopure violated the
federal securities laws by publicly disseminating materially false and
misleading statements regarding the status of its biologic license
application pending with the U.S. Food and Drug Administration and of its
trauma development program, resulting in the artificial inflation of
Biopures common stock price during the purported class period. The
complaints do not specify the amount of alleged damages plaintiffs seek to
recover. The complaints set forth varying class periods but generally focus
on March 2003 through December 24, 2003. The defendants believe that the
complaints are without merit and intend to defend the actions vigorously. At
this time, the Company cannot estimate what impact, if any, these cases may
have on its financial position or results of operations.The seven board members of Biopures Board of Directors, including its former
Chief Executive Officer, now a former board member, were named as defendants
in two shareholder derivative actions filed on January 26, 2004 and January
29, 2004 in the same Court. The Company is named as a defendant, even though
in a derivative action any award is for the benefit of the Company, not
individual stockholders. The complaints allege in derivative actions brought
by shareholders on behalf of the Company that the individual directors
breached fiduciary duties in connection with the same disclosures set forth
in the purported securities class action complaints. The complaints do not
specify the amount of the alleged damages plaintiffs seek to recover. At
this time, the Company cannot estimate what impact, if any, these cases may
have on its financial position or results of operations.The Company is a defendant in a case filed on or about June 16, 2003, by
plaintiff Steelhead Investments, Ltd. The complaint alleges that the Company
breached a contract with the plaintiff by giving insufficient notice and
failing to give notice of offerings of common stock and warrants by the
Company in March and April 2003. The complaint states that the plaintiff has
suffered monetary damages in an amount to be determined, but not less than
$15.5 million. On September 5, 2003, the Company filed an Amended Answer,
Counterclaims, and Third Party Compliant that denied the material allegations
of the complaint, asserted defenses, and brought counterclaims against the
plaintiff and an affiliate for fraud and other misconduct in connection with
execution and performance of the contract described in the complaint. On
September 24, 2003, plaintiff and its affiliate filed a motion to dismiss the
counterclaims. On October 2, 2003, plaintiff filed an amended complaint that
asserts the same claims for breach of contract against the Company that were
asserted in the original complaint filed on June 16, 2003. In addition to
those 21




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued)  claims, the amended complaint asserts tort claims against Thomas A. Moore,
former President and Chief Executive Officer of Biopure; David N. Judelson,
Vice Chairman of Biopures Board of Directors; and HTV Industries, Inc., a
company affiliated with one of Biopures directors. Plaintiff alleges that
Moore, Judelson, and HTV intentionally interfered with plaintiffs
contractual rights and caused Biopure to breach the contract. On November 12,
2003, the Company and the individual defendants filed an answer denying the
material allegations of the amended complaint and interposing defenses. The
Company re-asserted its counterclaims and third party claims against
plaintiff and its affiliate described above. On January 26, 2004, the court
denied the motion to dismiss the counterclaims and third-party claims in its
entirety. The Company and the individual defendants intend to defend this
case vigorously. At this time, the Company cannot estimate what impact this
case may have on it. However, the Company believes resolution of this case
will not have a material adverse impact on its overall financial position or
results of operations. 
 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 22




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued) 
 Item 5. Other Information RISK FACTORS These risks and uncertainties are not the only ones we face. Others that
we do not know about now, or that we do not now think are important, may impair
our business or the trading price of our securities. Company Risks We May Not Be Able to Continue as a Going Concern, as Our Funds Are Only
Sufficient to Fund Operations Into September 2004 Ernst & Young LLP, our independent auditors, have included a going concern
modification in their audit opinion on our consolidated financial statements
for the fiscal year ended October 31, 2003, which states that the Companys
recurring losses from operations and the current lack of sufficient funds to
sustain its operations through the third quarter of fiscal 2004 raise
substantial doubt about its ability to continue as a going concern. We expect our cash position at January 31, 2004 and the additional funds
raised in the beginning of the second fiscal quarter of 2004 to fund operations
into September 2004 per our current operating plan. We are assessing our
ability to raise additional capital through equity offerings, strategic
alliances and other financing vehicles, but we cannot assure you that
sufficient funds will be available to us on terms that we deem acceptable, if
they are available at all. The inclusion of a going concern modification in
Ernst & Young LLPs audit opinion may materially and adversely affect our stock
price and our ability to raise new capital. Our financial statements have been prepared on the basis of a going
concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. We have not made any adjustments
to our financial statements as a result of the going concern opinion. If we
cannot continue as a going concern, we may have to liquidate our assets and we
may receive significantly less than the values at which they are carried on our
financial statements. Any shortfall in the proceeds from the liquidation of our
assets would directly reduce the amounts that holders of our common stock could
receive in liquidation. Failure to Raise Additional Funds Will Affect the Development, Manufacture and
Sale of Our Products The development and regulatory processes for obtaining approval to market
Hemopure for its initial indication in the United States have been costly and
are not yet complete. We require substantial working capital to develop,
manufacture and sell our products and to finance our operations. We will need
additional funding to maintain operations until such time, if ever, as we can
generate positive cash flow. To reach that point, we must continue working on
issues raised by the FDA about our BLA for Hemopure, including
additional pre-clinical animal studies and any clinical trials that
the FDA may request or we decide we need. As
we continue to analyze our data and respond to the FDAs complete
response letter, we anticipate that we will also clarify whether we
need to perform additional human clinical trials to obtain initial
FDA approval, and if so, the parameters of such trials. We will need additional funding
to continue operating until such time, if ever, as the FDA approves the BLA for
Hemopure. Even if Hemopure is approved by the FDA, we cannot be profitable
until we increase manufacturing capacity, for which we will require funding. We
expect our cash position to fund operations into September 2004 per our current
operating plan. We require an additional $7,000,000 to fund our planned
operations through December 31, 2004. If additional financing is not available when needed or is not available on
acceptable terms, then we may be unable to develop products, 23




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued) build manufacturing capacity or fulfill other important goals. A sustained
period in which financing is not available could force us to go out of
business. If We Cannot Hire the Personnel We Need, Both Our Costs and Our Ability to
Conduct Operations May Be Adversely Affected We have an interim Chief Executive Officer and do not have a senior
regulatory employee. We need to recruit and retain personnel for these and
other positions. To the extent that our ability to fund future operations
depends on raising additional capital, our ability to recruit qualified
personnel may be adversely affected. This means that we may need to rely on
outside consultants who may be less cost-effective than employees. If We Fail to Obtain FDA Approval, We Cannot Market Hemopure in the United
States We will not be able to market Hemopure in the United States unless and
until we receive FDA approval. We submitted to the FDA a biologics license
application, or BLA, for approval to market Hemopure. On July 30, 2003, the
FDA sent us a complete response letter, stating that the agency had completed
its review of the BLA and requesting additional information. We are working on
our responses to the FDA questions. The questions require considerable data
gathering and analysis. We must rely on contractors to complete some of the
work. We could be delayed in responding either by the contractors failure or
inability to complete their tasks when we require or by other unanticipated
delays or difficulties. Furthermore, the FDA may find that our responses to the
letter and the results of preclinical animal studies the FDA has asked for do
not address its safety and efficacy issues adequately. Thus, we may require one
or more further human clinical trials prior to approval of Hemopure. Trials are
expensive and time-consuming, as is the FDA review process, and we may not have
the financial resources to fund any such trials and our operations until FDA
approval. Despite all of our efforts, the FDA could refuse to grant a marketing
authorization. If We Fail to Obtain Regulatory Approvals in Foreign Jurisdictions, We Will Not
Be Able to Market Hemopure Abroad We also intend to market our products in international markets, including
Europe. We must obtain separate regulatory approvals in order to market our
products in Europe and many other foreign jurisdictions. The regulatory
approval processes differ among these jurisdictions. Approval in any one
jurisdiction does not ensure approval in a different jurisdiction. As a result,
obtaining foreign approvals will require additional expenditures and
significant amounts of time. We Cannot Expand Indications for Our Products Unless We Receive FDA Approval
for Each Proposed Indication The FDA requires a separate approval for each proposed indication for the
use of Hemopure in the United States. We have applied for an indication for
Hemopure that would only involve its perioperative use in patients undergoing
orthopedic surgery who are acutely anemic. If this application is approved, we
expect to apply to expand Hemopures indications. To do so, we will have to
design additional clinical trials, submit the trial designs to the FDA for
review and complete those trials successfully. We cannot guarantee that the FDA
will approve Hemopure for any indication. We can only promote Hemopure in the
United States for indications that have been approved by the FDA. The FDA may
require a label cautioning against Hemopures use for indications for which it
has not been approved. The FDA has approved the use of our veterinary product, Oxyglobin, for the
treatment of anemia in dogs, regardless of the cause of the anemia.
Supplemental approvals are required to market Oxyglobin for any new indications
or additional species. We cannot guarantee that we will receive such approvals. 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
will require assistance to distribute Hemopure effectively. 24




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued)  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
not be successful in entering into alternative arrangements, whether seeking an
alliance with a pharmaceutical company, or recruiting, training and retaining a
marketing staff and sales force of our own. If We Cannot Generate Adequate, Profitable Sales of Hemopure, We Will Not Be
Successful To succeed as a company, we must develop Hemopure commercially and sell
adequate quantities of Hemopure at a high enough price to generate a profit. We
may not accomplish either of these objectives. To date, we have focused our
efforts on developing our products, establishing their safety and efficacy and
seeking marketing approval. Uncertainty exists regarding the potential size of
the market for Hemopure and the price that we can charge for it. Additionally,
the size of the market will be affected by the indication(s) for which Hemopure
is approved and will be greatly reduced if reimbursement for the cost of
Hemopure is not available from health insurance companies or government
programs like Medicaid. If We Cannot Obtain Market Acceptance of Hemopure, We Will Not Be Able to
Generate Adequate, Profitable Sales Even if we succeed in obtaining marketing approval for Hemopure, a number
of factors may affect future sales of our product. These factors include:  
    
    whether and how quickly physicians accept Hemopure as a
cost-effective and therapeutic alternative to other products, in
particular, donated human blood. It may take longer than we anticipate
to obtain market acceptance; and  
    
    whether medical care providers or the public accept the use of a
bovine-derived protein in transfusions, particularly in light of public
perceptions in the United States, Europe and elsewhere about the risk of
mad cow disease. If We Fail to Comply with Good Manufacturing Practices, We May Not Be Able to
Sell Our Products To obtain FDA approval to sell our products, we must demonstrate to the
FDA that we can manufacture our products in compliance with the FDAs good
manufacturing practices, commonly known as GMPs. GMPs are stringent
requirements that apply to all aspects of the manufacturing process. We are
subject to FDA inspections at any time to determine whether we are in
compliance with GMP requirements. If we fail to manufacture in compliance with
GMPs, the FDA may refuse to approve our products or take other enforcement
action with respect to products that we are distributing commercially. Because the Manufacturing Process for Our Products Is Complicated and
Time-Consuming, We May Experience Problems that Would Limit Our Ability to
Manufacture and Sell Our Products As with any manufactured product, problems can occur during our production
processes. These problems can result in increased production scrap, which can
reduce operating margins. These problems could also require us to delay
shipments, recall previously shipped product or be unable to supply product for
a period of time, all of which could negatively impact our results of
operations. Contamination or defects could result in a material recall in the
future, which could adversely affect our results of operations. 25




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued) We Manufacture Our Products at a Single Location and, If We Were Unable to
Utilize this Facility, We Would Not Be Able to Manufacture and Sell these
Products for an Extended Period of Time We manufacture our products at a single location located in Massachusetts
with ancillary facilities in Pennsylvania and New Hampshire. Damage to any of
these manufacturing facilities due to fire, contamination, natural disaster,
power loss, riots, unauthorized entry or other events could cause us to cease
the manufacturing of our products. For example, if our Massachusetts
manufacturing facility were destroyed, it could take approximately two years or
more to rebuild and qualify it. In the reconstruction
period, we would not be able to make our products and thus would have no sales
following exhaustion of finished goods in inventory. A new facility would take
longer to construct. A large manufacturing facility we propose to build in
South Carolina is expected to take 30 to 36 months or more to build, qualify
and obtain facility approval from the FDA. We Are Dependent on Third Parties to Finance Expansion of Our Manufacturing
Capacity, and Failure to Increase Manufacturing Capacity May Impair Hemopures
Market Acceptance and Prevent Us from Achieving Profitability The construction of our proposed new manufacturing facility in Sumter,
South Carolina is dependent upon financing from third parties. Groundbreaking
for this facility has been significantly delayed and is likely to be delayed
further as a result of delays in obtaining such financing. Third parties can be
expected to be unwilling to commit to finance the facility so long as we do not
have FDA approval to market Hemopure. We cannot assure you that sufficient
financing for this facility will be available, or if available, will be on
terms that are acceptable to us. The completion of this facility or the
addition of comparable manufacturing capacity is a key milestone in our plan
for future operations. The later the date of completion of additional
manufacturing capacity, the more financing we will need for working capital. We Will Face Risks, Including the Risk of Scale-Up of Our Processes, in Any New
Construction, and in Turn Could Encounter Delays, Higher than Usual Rejects,
Additional Reviews and Tests of Units Produced and Other Costs Attendant to an
Inability to Manufacture Saleable Product We will need to construct additional manufacturing facilities to meet
annual demand in excess of our current capacity. If Hemopure receives market
acceptance, we may experience difficulty manufacturing enough of the product to
meet demand. If we cannot manufacture sufficient quantities of Hemopure, we may
not be able to operate profitably. In addition, if we cannot fill orders for
Hemopure, customers might turn to alternative products and may choose not to
use Hemopure even after we have addressed our capacity shortage. Our Lack of Operating History Makes Evaluating Our Business Difficult Licensing fees, proceeds from the sales of equity securities and payments
to fund our research and development activities comprise almost all of our
funding to date. We have no operating history of selling our products in large
quantities upon which to base an evaluation of our business and our prospects.
Consequently, we have no experience on which to predict future commercial
success. We Have a History of Losses and Expect Future Losses We have had annual losses from operations since our inception in 1984. In
the fiscal years ended October 31, 2001, 2002 and 2003, we had losses from
operations of $52,957,000, $46,657,000 and $47,312,000, respectively, and we
had an accumulated deficit of $439,651,000 as of January 31, 2004. We expect to
continue to incur losses from operations until we are able to develop Hemopure
commercially and generate a profit. We cannot ensure that we will ever be able
to achieve profitable operations. 26




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued) If We Are Not Able to Protect Our Intellectual Property, Competition Could
Force Us to Lower Our Prices, which Might Reduce Profitability We believe that our patents, trademarks and other intellectual property
rights, including our proprietary know-how, will be important to our success.
Our business position will depend, in part, upon our ability to defend our
existing patents against infringement by third parties. We will need to obtain
additional patents for our products, the processes utilized to make our
products and our product uses. We cannot guarantee that our existing patents
will protect us adequately from competition from similar products or that
additional products or processes will achieve patent protection. In addition,
third parties may successfully challenge our patents. We have not filed patent
applications in every country. In certain countries, obtaining patents for our
products, processes and
uses may be difficult or impossible. Patents issued in regions other than the
United States and Europe may be harder to enforce than, and may not provide the
same protection as, patents obtained in the United States and Europe. Failure to Avoid Infringement of Others Intellectual Property Rights Could
Impair Our Ability to Manufacture and Market Our Products We cannot guarantee that our products and manufacturing process will be
free of claims by third parties alleging that we have infringed their patents.
Any such claim could be expensive and time-consuming to defend, and an adverse
litigation result or a settlement of litigation could require us either to
obtain a license from the complaining party or to change our manufacturing
process. Either result could be expensive or result in a protracted plant
shutdown, in turn adversely affecting our ability to make a profit. A third party could also allege that our products are used in a manner
that violates a use patent. Such a claim, if valid, would also be expensive to
defend, and either an adverse litigation result or a settlement could limit or
preclude us from marketing our product for the patented use and, in turn,
adversely affect our sales revenues. Our Profitability Will Be Affected If We Incur Product Liability Claims in
Excess of Our Insurance Coverage The testing and marketing of medical products, even after FDA approval,
have an inherent risk of product liability. We maintain limited product
liability insurance coverage in the total amount of $20,000,000. However, our
profitability will be adversely affected by a successful product liability
claim in excess of our insurance coverage. We cannot guarantee that product
liability insurance will be available in the future or be available on
reasonable terms. Replacing Our Sole Source Suppliers for Key Materials Could Result in
Unexpected Delays and Expenses We obtain some key materials, including membranes and chemicals, and
services from sole source suppliers. All of these materials are commercially
available elsewhere. If such materials or services were no longer available at
a reasonable cost from our existing suppliers, we would need to purchase
substitute materials from new suppliers. If we need to locate a new supplier,
the substitute or replacement materials or facilities will most likely be
tested for equivalency. Such equivalency tests could significantly delay
development of a product, delay or limit commercial sales of FDA-approved
products and cause us to incur additional expense. We obtain bovine hemoglobin from one abattoir and from herds that are
located in two states of the United States. We cannot predict the future
effect, if any, on us of the recent discovery of mad cow disease in the
United States. Any quarantine affecting herds that supply us or a shut down of
the abattoir we source from could have a material adverse effect on us, as we
would have to find, validate and obtain FDA approval of new sources of supply
or new facilities. 27




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued) Provisions of Our Restated Certificate of Incorporation and By-Laws Could
Impair or Delay Shareholders Ability to Replace or Remove Our Management and
Could Discourage Takeover Transactions that a Stockholder Might Consider to Be
in Its Best Interest Provisions of our Restated Certificate of Incorporation and by-laws, as
well as our stockholders rights plan, could impede attempts by shareholders to
remove or replace our management or could discourage others from initiating a
potential merger, takeover or other change of control transaction, including a
potential transaction at a premium over market price that a stockholder might
consider to be in its best interest. In particular:  
    
    Our restated Certificate of Incorporation does not permit
stockholders to take action by written consent and provides for a
classified Board of Directors, and our by-laws provide that stockholders
who wish to bring business before an annual meeting of shareholders or
to nominate candidates for election of directors at an annual meeting of
stockholders must deliver advance notice of their proposals to us before
the meeting. These provisions could make it more difficult for a party
to replace our board
of directors by requiring two annual stockholder meetings to replace a
majority of the directors, making it impossible to remove or elect
directors by written consent in lieu of a meeting and making it more
difficult to introduce business at meetings.  
    
    Our shareholder rights plan may have the effect of discouraging any
person or group that wishes to acquire more than 20% of our Class A
Common Stock from doing so without obtaining our agreement to redeem the
rights; if our agreement to redeem the rights is not obtained, the
acquiring person or group would suffer substantial dilution. Industry Risks Intense Competition Could Harm Our Financial Performance The biotechnology and pharmaceutical industries are highly competitive.
There are a number of companies, universities and research organizations
actively engaged in research and development of products that may be similar to
or alternatives to Hemopure. We are aware of at least two competitors that make periodic disclosures to
the public; Northfield Laboratories Inc. and Hemosol Inc. are in advanced
stages of developing hemoglobin-based oxygen carriers produced from expired
human blood. Northfields product is in a Phase III clinical trial. Two
privately held companies are conducting clinical trials of hemoglobin-based
oxygen carriers in Europe. The products being developed by these companies are
intended for use in humans and as such could compete, if approved by regulatory
authorities, with Hemopure. Increased competition could diminish our ability to become profitable or
affect our profitability in the future. Our existing and potential competitors:  
    
    are conducting clinical trials of their products;  
    
    might have or be able to access substantially greater resources than
we have and be better equipped to develop, manufacture and market their
products;  
    
    may have their products approved for marketing prior to Hemopure; and  
    
    may develop superior technologies or products rendering our technology and products non-competitive or obsolete. 28




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 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 continues to review products even after they receive FDA approval.
If and when the FDA approves Hemopure, its manufacture and marketing will be
subject to ongoing regulation, including compliance with current good
manufacturing practices, adverse event reporting requirements and the FDAs
general prohibitions against promoting products for unapproved or off-label
uses. We are also subject to inspection and market surveillance by the FDA for
compliance with these and other requirements. Any enforcement action resulting
from failure, even by inadvertence, to comply with these requirements could
affect the manufacture and marketing of Hemopure. In addition, the FDA could
withdraw a previously approved product from the market upon receipt of newly
discovered information. Furthermore, the FDA could require us to conduct
additional, and potentially expensive, studies in areas outside our approved
indications. We will be subject to a variety of regulations governing clinical trials
and sales of our products outside the United States. Whether or not FDA
approval has been obtained, we must secure approval of a product by the
comparable non-U.S. regulatory authorities prior
to the commencement of marketing of the product in a country. The approval
process varies from country to country and the time needed to secure additional
approvals may be longer than that required for FDA approval. These applications
may require the completion of additional preclinical and clinical studies and
disclosure of information relating to manufacturing and controls. Unanticipated
changes in existing regulations or the adoption of new regulations could affect
the manufacture and marketing of our products. Health Care Reform and Controls on Health Care Spending May Limit the Price We
Can Charge for Hemopure and the Amount We Can Sell The federal government and private insurers have considered ways to
change, and have changed, the manner in which health care services are provided
in the United States. Potential approaches and changes in recent years include
controls on health care spending and the creation of large purchasing groups.
In the future, it is possible that the government may institute price controls
and limits on Medicare and Medicaid spending. These controls and limits might
affect the payments we collect from sales of our products. Assuming we succeed
in bringing Hemopure to market, uncertainties regarding future health care
reform and private market practices could affect our ability to sell Hemopure
in large quantities at profitable pricing. Uncertainty of Third-Party Reimbursement Could Affect Our Profitability Sales of medical products largely depend on the reimbursement of patients
medical expenses by governmental health care programs and private health
insurers. There is no guarantee that governmental health care programs or
private health insurers will reimburse our sales of Hemopure, or permit us to
sell our product at high enough prices to generate a profit. Investment Risks Potential for Dilution and Decline of the Price of Our Shares Our cash on hand is estimated to be sufficient to continue operations into
September 2004 under our current operating plan. We will need additional funds
to operate beyond this point and are assessing our ability to raise capital. Any additional sale of shares of our common stock are likely to have a
dilutive effect on our existing stockholders. Subsequent sales of these shares
in the open market could also have the effect of lowering our stock price,
thereby increasing the number of shares we may need to issue in the future to
raise the same dollar amount and consequently further diluting our outstanding
shares. These future sales could also have an adverse effect on the market
price of our shares and could result in additional dilution to the holders of
our shares. 29




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued) 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 impede our
ability to attract and retain qualified employees, reduce the liquidity of our
common stock and result in the delisting of our common stock from The Nasdaq
Stock Market. Potential for Adverse Effect of Litigation We received a Wells Notice from the Securities and Exchange Commission
staff on December 22, 2003, indicating the staffs preliminary determination to
recommend that the SEC bring a civil injunctive proceeding against us.
Following our announcement about those notices, a number of class action
lawsuits were filed against us. We have responded to the Wells Notice in
writing, but do not know what action, if any, the SEC staff may finally
recommend. We believe the class action lawsuits are without merit, and we will
defend against them vigorously. However, the uncertainty about the possible
effect of these matters on our financial condition may adversely affect our
stock price and our ability to raise capital through equity offerings. Two of
our former officers also received Wells Notices at the same time and responded
to them. Details about the SEC investigation and the class actions are
contained in Note 9 to the consolidated financial statements included in this
report. Another lawsuit against us, filed in June 2003 and described in Note 9
to the consolidated financial statements, could also have a material adverse
effect if it results in a judgment against us or a settlement on unfavorable
terms. Shares Eligible for Future Sale May Cause the Market Price for Our Common Stock
to Drop Significantly, Even If Our Business Is Doing Well We cannot predict the effect, if any, that future sales of our common
stock or the availability of shares for future sale will have on the market
price of our common stock from time to time. Substantially all of our
outstanding shares of Class A Common Stock are freely tradable in the public
market, unless acquired by our affiliates. Other shares of our common stock
issued in the future, including shares issued upon exercise of outstanding
options and warrants, may become available for resale in the public market from
time to time, and the market price of shares of our common stock could drop
significantly if the holders of these shares sell them or are perceived by the
market as intending to sell them. Our Stock Price Has Been and May Continue to Be Highly Volatile, which May
Adversely Affect Holders of Our Stock and Our Ability to Raise Capital The trading price of our common stock has been and is likely to continue
to be extremely volatile. During the period from November 1, 2001 through March
9, 2004, the trading price of our stock has ranged from a low of $1.26 per
share (on February 24, 2004) to a high of $20.30 per share (on November 6,
2001). Our stock price and trading volume could be subject to wide fluctuations
in response to a variety of factors, including the following:  
    
    FDA action or delays in FDA action on Hemopure or competitors products;  
    
    the outcome of litigation and threatened litigation referred in Item 1 of this report;  
    
    publicity regarding actual or potential medical results relating to products under development by us or our competitors; 30




---



##### Table of Contents



BIOPURE CORPORATION Part II  Other Information
January 31, 2004
(continued)  
    
    actual or potential clinical trial results relating to products under development by us or our competitors;  
    
    delays in our testing and development schedules;  
    
    events or announcements relating to our relationships with others,
including the status of potential transactions with investors, licensees
and other parties;  
    
    announcements of technological innovations or new products by our competitors.  
    
    developments or disputes concerning patents or proprietary rights;  
    
    regulatory developments in the United States and foreign countries;  
    
    economic and other factors, as well as period-to-period fluctuations in our financial results; and  
    
    market conditions for pharmaceutical and biotechnology stocks; External factors may also adversely affect the market price for our common
stock. Our common stock currently trades on The Nasdaq Stock Market. The price
and liquidity of our common stock may be significantly affected by the overall
trading activity and market factors on The Nasdaq Stock Market. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    The exhibits are listed in the accompanying Exhibit Index.  A report on Form 8-K was furnished on January 8, 2004, to report under Item 9
an update on the U.S. regulatory status of Hemopure.A report on Form 8-K was furnished on December 24, 2003, including the
Companys press release, to report under Item 9 the receipt of Wells
Notices from the Securities and Exchange Commission.A report on Form 8-K was furnished on December 11, 2003, including the
Companys press release, to report under Item 12 its financial results for
the year ended October 31, 2003. 31




---



##### Table of Contents



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: March 15, 2004
    
    By:
    
    /s/ Ronald F. RichardsRonald F. RichardsDuly authorized officer of the Registrant andChief Financial Officer
 32




---



##### Table of Contents



EXHIBIT INDEX Number
    
    Description31.1
    
    Certification of Francis H. Murphy pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Ronald F. Richards pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Francis H. Murphy pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of Ronald F. Richards pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 33