##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended January 31, 2006
 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)
 þ o
  o o þ
 o þ
  Class A Common Stock, $.01 par value
Class B Common Stock, $1.00 par value
    
    38,947,170
117.7




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##### 



BIOPURE CORPORATION
 INDEX TO FORM 10-Q
 PagePart I  Financial Information:Item 1 - Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at January 31, 2006 and October 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three months ended
January 31, 2006 and January 31, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended
January 31, 2006 and January 31, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3 - Quantitative and Qualitative Disclosure of Market Risk
    
    
    20Item 4 - Controls and Procedures
    
    
    20Part II  Other Information:Item 1 - Legal Proceedings
    
    
    21Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3 - Defaults Upon Senior Securities
    
    
    33Item 4  Submission of Matters to a Vote of Security Holders
    
    
    33Item 5 - Other Information
    
    
    33Item 6 - Exhibits
    
    
    33Signatures
    
    
    34Exhibit IndexEx-3.(i) Restated Certificate of IncorporationEx-3.(ii) By-laws of Biopure, as amendedEX-31.1 SECTION 302 CERTIFICATION OF THE C.E.O.EX-31.2 SECTION 302 CERTIFICATION OF THE C.F.O.EX-32.1 SECTION 906 CERTIFICATION OF THE C.E.O.EX-32.2 SECTION 906 CERTIFICATION OF THE C.F.O.
  ® ® ®
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##### Table of Contents



January 31, 2006
    
    
    October 31, 2005Assets:Current assets:Cash and cash equivalents
    
    $
    15,151
    
    
    $
    10,542Accounts receivable, net
    
    
    148
    
    
    
    144Inventories
    
    
    3,215
    
    
    
    3,449Other current assets
    
    
    1,209
    
    
    
    1,440Total current assets
    
    
    19,723
    
    
    
    15,575Property, plant and equipment, net
    
    
    25,035
    
    
    
    26,000Other assets
    
    
    846
    
    
    
    860Total assets
    
    $
    45,604
    
    
    $
    42,435Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    512
    
    
    $
    547Accrued expenses
    
    
    3,354
    
    
    
    3,096Current portion of deferred revenue
    
    
    65
    
    
    
    190Current
portion of restructuring charges
    
    
    219
    
    
    
    219Total current liabilities
    
    
    4,150
    
    
    
    4,052Deferred revenue, net of current portion
    
    
    1,112
    
    
    
    987Restructuring
charges, net of current portion
    
    
    174
    
    
    
    221Other long-term liabilities
    
    
    41
    
    
    
    41Total long-term liabilities
    
    
    1,327
    
    
    
    1,249Stockholders equity:Preferred stock, $0.01 par value, 30,000,000 shares authorized, no shares
outstanding
    
    
    
    
    
    
    Common stock:Class A, $0.01 par value, 200,000,000 shares authorized, 38,589,170
shares outstanding at January 31, 2006 and 24,359,170 at October 31,
2005
    
    
    386
    
    
    
    244Class B, $1.00 par value, 179 shares authorized, 117.7 shares outstanding
    
    
    
    
    
    
    Capital in excess of par value
    
    
    520,851
    
    
    
    511,560Contributed capital
    
    
    24,574
    
    
    
    24,574Notes receivable
    
    
    (235
    )
    
    
    (235
    )Accumulated deficit
    
    
    (505,449
    )
    
    
    (499,009
    )Total stockholders equity
    
    
    40,127
    
    
    
    37,134Total liabilities and stockholders equity
    
    $
    45,604
    
    
    $
    42,435
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Three Months EndedJanuary 31, 2006
    
    
    January 31, 2005Revenues:Product Revenue
    
    $
    348
    
    
    $
    293Research and development revenues
    
    
    129
    
    
    
    386Total revenues
    
    
    477
    
    
    
    679Cost of product revenues
    
    
    3,074
    
    
    
    3,082Gross loss
    
    
    (2,597
    )
    
    
    (2,403
    )Operating expenses:Research and development
    
    
    1,474
    
    
    
    1,518Sales and marketing
    
    
    172
    
    
    
    116General and administrative
    
    
    2,300
    
    
    
    3,614Total operating expenses
    
    
    3,946
    
    
    
    5,248Loss from operations
    
    
    (6,543
    )
    
    
    (7,651
    )Other income, net
    
    
    103
    
    
    
    105Net loss
    
    $
    (6,440
    )
    
    $
    (7,546
    )Per share data:Basic and diluted net loss per common share
    
    $
    (0.22
    )
    
    $
    (0.46
    )Weighted-average shares used in computing
basic and diluted net loss per common
share
    
    
    28,989
    
    
    
    16,580
  4




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Three Months EndedJanuary 31, 2006
    
    
    January 31, 2005Operating activities:Net loss
    
    $
    (6,440
    )
    
    $
    (7,546
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    979
    
    
    
    1,087Stock compensation expense
    
    
    284
    
    
    
    Cancellation of note receivable and accrued interest
    
    
    
    
    
    
    24Accretion of restructuring charge
    
    
    10
    
    
    
    Accrued interest on stockholders note receivable
    
    
    
    
    
    
    1Changes in assets and liabilities:Accounts receivable
    
    
    (4
    )
    
    
    (43
    )Inventories
    
    
    234
    
    
    
    458Other current assets
    
    
    231
    
    
    
    406Accounts payable
    
    
    (35
    )
    
    
    (22
    )Accrued expenses
    
    
    258
    
    
    
    119Restructuring charges
    
    
    (57
    )
    
    
    Net cash used in operating activities
    
    
    (4,540
    )
    
    
    (5,516
    )Investing activities:Purchases of property, plant and equipment
    
    
    
    
    
    
    (27
    )Other assets
    
    
    
    
    
    
    23Net cash used in investing activities
    
    
    
    
    
    
    (4
    )Financing activities:Net proceeds from sales of common stock
    
    
    9,149
    
    
    
    21,060Proceeds from the exercise of warrants
    
    
    
    
    
    
    3,285Net cash provided by financing activities
    
    
    9,149
    
    
    
    24,345Net increase in cash and cash equivalents
    
    
    4,609
    
    
    
    18,825Cash and cash equivalents at beginning of period
    
    
    10,542
    
    
    
    6,448Cash and cash equivalents at end of period
    
    $
    15,151
    
    
    $
    25,273Supplemental disclosure of cash flow information:Fair value of warrants issued related to sales of common stock
    
    $
    8,263
    
    
    $
    4,857
  5




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1.
    Basis of Presentation
       2.
    Net Loss per Share
  6




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3.

    Stock Based Compensation
      7




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Three Months EndedJanuary 31,In
thousands (except per share data)
    
    2005Net loss, as reported
    
    $
    (7,546
    )Deduct: Total stock-based compensation expense determined
under fair value based method for all employee awards
    
    
    (893
    )Pro forma net loss
    
    $
    (8,439
    )Net loss per common equivalent share:Basic and diluted  as reported
    
    $
    (0.46
    )Basic and diluted  pro forma
    
    $
    (0.51
    )
  Three Months EndedJanuary 31,
    
    January 31,2006
    
    2005Risk-free interest rate
    
    
    4.31
    %
    
    
    3.81
    %Expected volatility
    
    
    85
    %
    
    
    82
    %Expected lives (years)
    
    
    5.42
    
    
    
    5.0Expected dividend yield
    
    
    
    
    
    
    
   Weighted-
    
    
    Weighted-Number
    
    
    Average
    
    
    Averageof Stock
    
    
    Exercise
    
    
    Remaining
    
    
    AggregateOptions
    
    
    Price
    
    
    Life in Years
    
    
    Intrinsic ValueOutstanding at October 31, 2005
    
    
    2,582
    
    
    $
    12.74Granted
    
    
    32
    
    
    
    0.88Exercised
    
    
    
    
    
    
    Forfeited/Cancelled/Expired
    
    
    (130
    )
    
    
    26.67Outstanding at January 31, 2006
    
    
    2,484
    
    
    
    11.86
    
    
    
    7.83
    
    
    
    Exercisable at January 31, 2006
    
    
    889
    
    
    $
    29.26
    
    
    
    5.06
    
    
    
    
  8




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Weighted-Average grantShares
    
    
    date fair valueNonvested at October 31, 2005
    
    
    1,698
    
    
    
    1.48Granted
    
    
    32
    
    
    
    0.62Vested
    
    
    (87
    )
    
    
    0.98Forfeited
    
    
    (48
    )
    
    
    1.54Nonvested at January 31, 2006
    
    
    1,595
    
    
    
    1.45
  4.
    Inventories
  In thousands
    
    January 31, 2006
    
    
    October 31, 2005Raw materials
    
    $
    743
    
    
    $
    619Work-in-process
    
    
    283
    
    
    
    388Finished goods-Oxyglobin
    
    
    703
    
    
    
    792Finished goods-Hemopure
    
    
    1,486
    
    
    
    1,650$
    3,215
    
    
    $
    3,449
 ®
 5.
    Accrued ExpensesAccrued expenses consisted of the following:
 In thousands
    
    January 31, 2006
    
    
    October 31, 2005Accrued payroll and related employee expenses
    
    $
    435
    
    
    $
    318Accrued vacation
    
    
    276
    
    
    
    321Accrued legal and audit fees
    
    
    269
    
    
    
    277Accrued severance
    
    
    843
    
    
    
    935Financing fees
    
    
    537
    
    
    
    537Other
    
    
    994
    
    
    
    708$
    3,354
    
    
    $
    3,096
  9




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6.
    Restructuring
   Balance at October 31, 2005
    
    $
    440Accretion of liability
    
    
    10Payments
    
    
    (57
    )Balance at January 31, 2006
    
    $
    393
 7.
    CommitmentsResearch Agreement(1)In 2003, the Company entered into a Cooperative Research and Development Agreement (CRADA) with
the NMRC. Under the CRADA, as amended, the NMRC has primary responsibility for designing, seeking
U.S. Food and Drug Administration (FDA) acceptance of and conducting a planned two-stage Phase
2/3 clinical trial of Hemopure in trauma patients with severe hemorrhagic shock (acute blood loss)
in the out-of-hospital setting. Biopure and the NMRC are each expected to fund the activities for
which it is responsible. The Company believes that all or most of its costs could be covered by
government funding. To date, Congress has appropriated a total of $22.5 million to the U.S.
Navy and Army for the development of Hemopure for potential use in military and civilian trauma
indications and to cover military administrative costs. Of this amount, approximately $5 million
is being administered by the Army.(2)8.
    Recently Issued Accounting StandardsIn November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS No. 151), to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material. This standard requires that such items be recognized as current-period charges. This
standard also establishes the concept of normal capacity and requires the allocation of fixed
production overhead to inventory based on the normal capacity of the production facilities. Any
unallocated overhead must be recognized as an expense in the period incurred. This standard is
effective for inventory costs incurred starting November 1, 2005. The adoption of SFAS No. 151
has not had a significant impact on the results of operations or financial position.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No.
154). This statement establishes new standards on accounting for changes in accounting
principles. Pursuant to
SFAS No. 154, all such changes must be accounted for by retrospective application to the
financial statements of
 
 (1)
    
    The content of this document does not necessarily reflect the position or the policy of
the U.S. Government or the Department of Defense, and no official endorsement should be inferred.
Completion of the proposed RESUS clinical trial of Hemopure in trauma is contingent upon further
funding.(2)
    
    $5,102,306 is from Grant DAMD17-02-1-0697. The U.S. Army Medical Research Acquisition
Activity, 820 Chandler Street, Fort Detrick MD 21702-5014 is the awarding and administering
acquisition office. 10




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9. Litigation
 SEC Civil Injunctive Proceeding
        11




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Private Class Action and Derivative Litigation
   12




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Management s Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statement Regarding Forward-Looking Information
    Overview
  13




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®
  Critical Accounting Policies
       14




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15




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Results of Operations
  Three Months EndedJanuary 31, 2006
    
    
    January 31, 2005Percent of
    
    
    
    
    
    
    Percent ofAmount
    
    
    Total Costs
    
    
    Amount
    
    
    Total CostsOxyglobin Product Sales
    
    $
    341
    
    
    
    
    
    
    $
    292Hemopure Product Sales
    
    
    4
    
    
    
    
    
    
    
    Research and Development Revenues
    
    
    129
    
    
    
    
    
    
    
    386Other Revenues
    
    
    3
    
    
    
    
    
    
    
    1Total Revenues
    
    
    477
    
    
    
    
    
    
    
    679Cost of RevenuesOxyglobin
    
    
    698
    
    
    
    10
    %
    
    
    609
    
    
    
    7
    %Hemopure
    
    
    2,376
    
    
    
    34
    %
    
    
    2,473
    
    
    
    30
    %Total Cost of Revenues
    
    
    3,074
    
    
    
    44
    %
    
    
    3,082
    
    
    
    37
    %Research and Development
    
    
    1,474
    
    
    
    21
    %
    
    
    1,518
    
    
    
    18
    %Sales and MarketingOxyglobin
    
    
    18
    
    
    
    0
    %
    
    
    6
    
    
    
    0
    %Hemopure
    
    
    154
    
    
    
    2
    %
    
    
    110
    
    
    
    1
    %Total Sales and Marketing
    
    
    172
    
    
    
    2
    %
    
    
    116
    
    
    
    1
    %General and Administrative
    
    
    2,300
    
    
    
    33
    %
    
    
    3,614
    
    
    
    44
    %Total Costs
    
    $
    7,020
    
    
    
    100
    %
    
    $
    8,330
    
    
    
    100
    %
 Three months ended January 31, 2006 compared to three months ended January 31, 2005
  16




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Three Months EndedJanuary 31, 2006
    
    
    January 31, 2005Percent of
    
    
    
    
    
    
    Percent ofIn thousands
    
    Amount
    
    
    Total R&D Costs
    
    
    Amount
    
    
    Total R&D CostsBLA Preparation and Support of Review Process
    
    $
    275
    
    
    
    19
    %
    
    $
    824
    
    
    
    55
    %EU Submission
    
    
    233
    
    
    
    16
    %
    
    
    
    
    
    
    Ischemia Program
    
    
    283
    
    
    
    19
    %
    
    
    322
    
    
    
    21
    %Trauma Program
    
    
    198
    
    
    
    13
    %
    
    
    309
    
    
    
    20
    %CABG Trial
    
    
    92
    
    
    
    6
    %
    
    
    
    
    
    
    Other Projects
    
    
    393
    
    
    
    27
    %
    
    
    63
    
    
    
    4
    %Total
    
    $
    1,474
    
    
    
    100
    %
    
    $
    1,518
    
    
    
    100
    %
 Orthopedic Surgery/BLA Project
  Ischemia and Trauma Projects
    17




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Liquidity and Capital Resources
     Recently Issued Accounting Standards
   18




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19




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Item 3. Quantitative and Qualitative Disclosure About Market Risk
  
 Item 4. Controls and Procedures
 
 
 20




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Item 1. Legal Proceedings
  21




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Item 1A. Risk Factors
  Company Risks
 We have a history of losses and expect future losses.
  We require significant funding in order to continue to operate.
   Failure to raise sufficient additional funds will significantly impair or possibly cause us
to cease the development, manufacture and sale of our products and our ability to operate.
  22




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We
may not be able to continue as a going concern, as our funds are only
sufficient to fund operations into August 2006.
   If we cannot retain the personnel we need, our costs will rise significantly. If we cannot
hire or retain the best people, our operations will suffer.
  We may fail to obtain FDA approval for Hemopure, in which event we cannot market Hemopure in
the United States, which would have negative consequences for the Company.
   23




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If we fail to obtain regulatory approvals in foreign jurisdictions, we will not be able to
market Hemopure abroad.
  Clinical trials are extremely costly and subject to numerous risks and uncertainties.
   24




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If we do not have the financial resources to fund trials required to develop Hemopure for
multiple potential indications, our success as a company will be adversely affected.
  The Securities and Exchange Commission has filed a civil injunctive proceeding against us,
two of our former officers and one of our current officers. We and several of our former officers
and former and current directors are subject to consolidated class action lawsuits, and we and
several of our former and current directors and officers are subject to consolidated derivative
actions.
   The litigation matters described under Item 3. Legal Proceedings in our 2005 Annual Report
on Form 10-K , and any other litigation matters with which we become involved, may harm our
business and financial condition if they result in substantial fines, judgments or settlements
that exceed the amount of coverage under our insurance policies, or if such fines, judgments or
settlements are not covered by our insurance policies.
  25




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If we cannot find appropriate marketing partners, we may not be able to market and distribute
Hemopure effectively.
  
    
    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 cannot generate adequate, profitable sales of Hemopure, we will not be successful.
  If we cannot obtain market acceptance of Hemopure, we will not be able to generate adequate,
profitable sales.
  
    
    whether and how quickly physicians accept Hemopure as a cost-effective and therapeutic
alternative to other products;
    
    whether medical care providers or the public accept the use of a bovine-derived protein
as a therapeutic in ischemia or any other indication particularly in light of public
perceptions in the United States, Europe and elsewhere about the risk of mad cow disease.
    
    product price, which we believe is an important factor in South Africa and could be
elsewhere.
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If we fail to comply with good manufacturing practices, we may not be able to sell our
products.
  The manufacturing process for Hemopure is complicated and time-consuming, and we may
experience problems that would limit our ability to manufacture and sell Hemopure.
   If we were unable to use our manufacturing facilities in Massachusetts or Pennsylvania, we
would not be able to manufacture for an extended period of time.
  If Hemopure receives regulatory approval, we must expand our manufacturing capacity to
develop our business, which will require substantial third party financing. Failure to increase
our manufacturing capacity may impair Hemopures market acceptance and prevent us from achieving
profitability.
  27




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If we are not able to finance additional manufacturing capacity, we will incur a substantial
write-off of assets.
  Our lack of operating history makes evaluating our business difficult.
  If we are not able to protect our intellectual property, competition could force us to lower
our prices, which might reduce profitability.
   Failure to avoid infringement of others intellectual property rights could impair our
ability to manufacture and market our products.
   28




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Our profitability will be adversely affected if we incur product liability claims in excess
of our insurance coverage.
   Replacing our sole source suppliers for key materials could result in unexpected delays and
expenses.
   Changes in the securities laws and regulations are likely to increase our costs.
   29




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Provisions of our restated certificate of incorporation and by-laws could impair or delay
stockholders ability to replace or remove our management and could discourage takeover
transactions that a stockholder might consider to be in its best interest.
  
    
    Our restated certificate of incorporation does not permit stockholders to take action by
written consent and provides for a classified board of directors, and our by-laws provide
that stockholders who wish to bring business before an annual meeting of stockholders or to
nominate candidates for election of directors at an annual meeting of stockholders must
deliver advance notice of their proposals to us before the meeting. These provisions could
make it more difficult for a party to replace our board of directors by requiring two annual
stockholder meetings to replace a majority of the directors, making it impossible to remove
or elect directors by written consent in lieu of a meeting and making it more difficult to
introduce business at meetings.
    
    Our stockholder rights plan may have the effect of discouraging any person or group that
wishes to acquire more than 20 percent 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.
   
    
    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.
 30




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Stringent, ongoing government regulation and inspection of our products could lead to delays
in the manufacture, marketing and sale 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.
  Uncertainty of third-party reimbursement could affect our profitability.
  Investment Risks
 We may not continue to qualify for continued listing on the Nasdaq National Market, which may
cause the value of an investment in our company to substantially decrease.
  31




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As we sell additional shares, our stock price may decline as a result of the dilution which
will occur to existing stockholders.
    Shares eligible for future sale may cause the market price for our common stock to drop
significantly, even if our business is doing well.
  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.
  
    
    failure to identify and hire key personnel or the loss of key personnel;
    
    an inability to obtain or the perception that we will be unable to obtain adequate
financing to fund our operations;
 32




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
    
    FDA action or delays in FDA action on Hemopure or competitors products;
    
    the outcome of litigation;
    
    publicity regarding actual or potential medical results relating to products under
development by us or our competitors;
    
    actual or potential preclinical or clinical trial results relating to products under
development by us or our competitors;
    
    delays in our testing and development schedules;
    
    announcements of technological innovations or new products by our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    regulatory developments in the United States and foreign countries;
    
    economic and other factors, as well as period-to-period fluctuations in our financial results;
    
    market conditions for pharmaceutical and biotechnology stocks; and
    
    additional, future communications from the Nasdaq Stock Market concerning delisting or
potential delisting.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information.
  
 Item 6. Exhibits
  33




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##### Table of Contents



SIGNATURES
  BIOPURE CORPORATIONDate: March 13, 2006
    
    By:
    
    /s/ Francis H MurphyFrancis H. MurphyChief Financial Officer
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##### Table of Contents



EXHIBIT INDEX
 Number
    
    Description3 (i)
    
    Restated Certificate of Incorporation and amendments through May 27, 2005*3 (ii)
    
    By-laws of Biopure, as amended**31.1
    
    Certification of Zafiris G. Zafirelis pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Francis H. Murphy pursuant to Section 302 of the Sarbanes-Oxley Act
of 200232.1
    
    Certification of Zafiris G. Zafirelis pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Francis H. Murphy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for
the quarter ended April 30,
2005, and incorporated herein by reference thereto.**
    
    Previously filed as an exhibit to the Companys Registration Statement on Form
S-1 (File No. 333-78829) and
incorporated herein by reference thereto.
 35