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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[ ] 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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2836871
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11 HURLEY STREET, CAMBRIDGE, MA 02141
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 234-6500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing price on January 14, 2000, and assumptions relating to
the privately held non-voting Class B Common Stock, the aggregate market value
of the voting and non-voting common equity held by nonaffiliates of the
registrant was $303,246,620.
The number of shares outstanding of the registrant's Class A Common Stock
was 22,282,532 on January 14, 2000; the number of shares of the Class B Common
Stock was 117.7.
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN FORM 10-K INCORPORATED DOCUMENT
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Part I Specifically identified portions of the registrant's
definitive proxy statement to be filed in connection with
the registrant's Annual Meeting to be held on April 5, 1999.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements concerning, among other things,
our clinical trials, plans for the development of Hemopure and business
strategies. These forward-looking statements are identified by the use of such
terms as "intends," "expects," "plans," "estimates," "anticipates," "should" and
"believes."
These forward-looking statements involve risks and uncertainties. Actual results
may differ materially from those predicted by the forward-looking statements
because of various factors and possible events, including Company risks, such as
lack of FDA or any other regulatory approval for our human product, uncertainty
about future physician and market acceptance of our product, our limited
manufacturing capacity and capital resources and our lack of commercial
experience as a pharmaceutical company. In addition, we are subject to industry
risks such as: our industry is highly regulated, keenly competitive and subject
to uncertainty of pricing because of controls on health care spending and
uncertainty of third-party reimbursement.
PART I
ITEM 1. BUSINESS
Biopure develops, manufactures and markets oxygen therapeutics. Its products are
Hemopure, for human use, and Oxyglobin, for veterinary use. Biopure is
developing Hemopure as an alternative to red blood cell transfusions as well as
for use in the treatment of other critical care conditions. Hemopure is
currently in a pivotal Phase III clinical trial in the United States. In 1998,
following FDA approval, Biopure began selling Oxyglobin in the United States.
Oxyglobin was approved for sale in the European Union in December 1999.
SCIENTIFIC OVERVIEW
Oxygen is indispensable to the life of all human tissues. Hemoglobin, a protein
normally contained within red blood cells, is the molecule responsible for
carrying and releasing oxygen to the body's tissues. Hemoglobin's protein
structure is similar in many different animal species, including humans. Under
normal conditions, hemoglobin contained within red blood cells carries
approximately 98% of the body's oxygen and the remaining two percent is
dissolved in the plasma, or fluid part of the blood.
As the heart pumps blood, hemoglobin within the red blood cells takes up oxygen
in the lungs and carries it to various parts of the body. Blood travels through
progressively smaller blood vessels to the capillaries, some of which are so
narrow that red blood cells can only pass through them in single file. Most of
the oxygen release occurs in the capillaries. Blood then returns to the lungs to
reload the red blood cells with oxygen. Adequate blood pressure and red blood
cell counts are crucial to this process. Oxygen deprivation, even for several
minutes, can result in cell damage, organ dysfunction and, if prolonged, death.
The causes of inadequate tissue oxygenation generally can be classified into
three categories:
- - anemia -- insufficient hemoglobin. Blood loss from injury or surgery or
disorders that affect red blood cell production or maintenance, such as bone
marrow disease, can cause anemia;
- - ischemia -- inadequate red blood cell flow for tissue oxygenation. Obstructed
or constricted blood vessels can result in ischemia. Ischemia can lead to
stroke, heart attack or other organ or tissue dysfunction; and
- - cardiopulmonary failure -- impaired function of the heart or lungs. The
heart's inability to pump sufficient quantities of blood to meet the needs of
the tissues or the failure of the lungs to oxygenate blood adequately can
cause cardiopulmonary failure.
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Biopure(R), Hemopure(R) and Oxyglobin(R) are registered trademarks of Biopure.
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A red blood cell transfusion is the standard therapy for anemia resulting from
blood loss. Sources of red blood cells for transfusions include stored supplies
of donated blood or of the recipient's own pre-donated blood. Health care
professionals also may use medications that stimulate red blood cell production
if anemia is anticipated, for example, as a result of planned surgery.
Red blood cell transfusions have certain risks and limitations. As HIV,
hepatitis and other diseases have infected the world's blood supply, the need
for a sterile blood product has become increasingly apparent. There is currently
no 100% effective method for detecting blood-borne diseases or for sterilizing
donated blood. As a result, the risk of disease transmission from donated blood
is an ongoing concern to physicians and patients, although less so than in the
past. Handling errors in typing and cross-matching blood, as well as the
inadvertent introduction of pathogens, can also result in significant medical
problems. Blood typing and handling requirements, particularly refrigeration,
limit the feasibility of red blood cell transfusions in pre-hospital emergency
treatment situations. Shortages of certain types of blood can occur due to
seasonal factors or disasters. Donated red blood cells are available for use in
transfusions for only 42 days after collection and this limitation affects the
ability to stockpile red blood cell supplies. Although freezing can extend the
life of red blood cells, the freezing and thawing processes require chemical
treatment of the red blood cells and reduce the efficacy of those red blood
cells. Finally, the longer red blood cells are stored, the longer it takes them
to reach their maximum oxygen-releasing capacity and the more they break down,
limiting their effectiveness in delivering oxygen. Red blood cells lose
approximately 75% of their oxygen-releasing ability after eight days of storage.
Blood banks generally release the oldest stored blood first to prevent outdating
after 42 days.
Red blood cell transfusions generally are not effective for ischemic conditions.
In such situations, an obstructed or constricted blood vessel that is too narrow
to permit the normal passage of red blood cells can prevent oxygen from reaching
the body's tissues.
Similarly, red blood cell transfusions are generally not effective in overcoming
poor oxygenation due to impaired heart or lung function.
Existing alternatives to red blood cell transfusions are limited. In trauma
situations, victims may experience massive bleeding resulting in rapid loss of
blood volume and oxygen-carrying capacity. In an effort to stabilize trauma
patients, emergency caregivers typically administer commonly used intravenous
fluids, such as Ringer's lactate or saline. Ringer's lactate consists of water
and electrolytes and is generally administered to patients who have lost
substantial amounts of bodily fluids as a result of bleeding, vomiting or
diarrhea. Both Ringer's lactate and saline restore blood volume, but do not
carry oxygen.
For anemia in non-acute situations, there are currently two biological products
on the market. Both of these products are formulations of a protein called
erythropoietin. Erythropoietin stimulates the body's ability to produce its own
red blood cells. This stimulation is called an erythropoietic effect. In a
surgical setting, these products are administered in anticipation of blood loss
during surgery, thereby potentially reducing the need for red blood cell
transfusions. However, erythropoietin does not deliver oxygen to the body's
tissues and does not act as a blood volume expander. As a result, these products
are not effective in treating acute blood loss and are generally not used in
cases of unplanned surgeries or emergency need. In addition, the labels on these
products caution against their use in cardiac surgery patients.
BIOPURE'S OXYGENATION TECHNOLOGY
Biopure has two proprietary oxygen therapeutic products that are identical
except for their molecular size distributions. Biopure defines its products as
therapeutics because they remediate oxygen deprived tissues. One administers
these products intravenously. Biopure's products consist of red cells extracted
from bovine hemoglobin that has been purified, chemically modified and
cross-linked for stability. The resulting hemoglobin solutions do not contain
red blood cells and are formulated in a balanced salt solution similar to
Ringer's lactate.
The average Hemopure molecule is less than 1/1000th the size of a red blood
cell. Once infused into a patient, the Hemopure molecules disperse throughout
the entire plasma space, including the area between
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and around red blood cells, and are in continuous contact with the blood vessel
wall where oxygen transport to tissues takes place.
Hemopure, by filling plasma with hemoglobin molecules, immediately turns the
plasma into an oxygen-delivering substance. Plasma containing Hemopure flows
everywhere that blood ordinarily flows and can also bypass partial blockages or
pass through constricted vessels that impede the normal passage of red blood
cells. Furthermore, introducing Hemopure into the bloodstream enables red blood
cells to release more oxygen to the tissues than they otherwise would. In
addition to delivering oxygen to tissues, Hemopure also acts as a blood volume
expander and may have an erythropoietic effect, supporting the body's ability to
produce red blood cells.
Hemopure molecules hold the same amount of oxygen as the hemoglobin molecules in
red blood cells on a gram-for-gram basis. Hemopure molecules, however, are
chemically modified to have less affinity for oxygen than red blood cells,
enabling Hemopure to release oxygen to tissues more efficiently than red blood
cells. Human hemoglobin, unlike bovine hemoglobin, depends on the action of 2,3
diphosphoglycerate, or 2,3 DPG, a substance found in high concentrations only
within the red blood cell, for optimal offloading, or release, of oxygen to
tissues. The 2,3 DPG breaks down rapidly in stored blood causing red blood cells
to lose approximately 75% of their ability to release oxygen after eight days of
storage.
The 2,3 DPG breakdown reduces the oxygen offloading efficiency of transfused red
blood cells until its levels are restored. Transfused red blood cells can
require hours to regain their oxygen offloading capability. Biopure's bovine
hemoglobin permits the efficient offloading of oxygen in the absence of 2,3 DPG,
thereby allowing Hemopure to be at its optimal oxygen offloading effectiveness
immediately upon infusion.
Hemoglobin molecules in different species have demonstrated low antigenicity,
which means that they do not readily elicit an immune or allergic response.
Biopure has confirmed Hemopure's low antigenicity, as indicated by the absence
of certain effects, through in vitro and in vivo studies. No clinically
significant levels of antibodies were observed in Biopure's trials, including
one human study lasting more than a year with multiple doses.
The following chart lists Hemopure's characteristics in comparison to transfused
red blood cells:
CHARACTERISTIC HEMOPURE TRANSFUSED RED BLOOD CELLS
-------------- -------- --------------------------
Onset of action Immediate -- not 2,3 DPG- Initially limited -- 2,3 DPG-
dependent dependent
Oxygen affinity More efficient oxygen release Less efficient oxygen release
to tissues to tissues
Oxygen transport Red blood cells and plasma Red blood cells only
Risk of disease transmission Product purity maintained Risk minimized by testing,
through a reproducible and donor selection and
controllable manufacturing administration protocols, and
process that complies with ongoing surveillance for
current Good Manufacturing emerging pathogens; leukocyte
Practices; no leukocyte, or exposure
white blood cell, exposure
Storage Room temperature; no loss of Refrigeration required; loss
efficacy of efficacy
Shelf life 30 months 42 days
Compatibility Universal Type-specific
Preparation Ready-to-use Requires typing and cross-
matching
Viscosity Low High
Raw material source Controlled Not controlled
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In addition to Hemopure's use as an alternative to red blood cell transfusions
in surgery, human clinical testing and preclinical studies suggest that Hemopure
also could be a readily available therapeutic with a broad range of potential
applications. These applications include the treatment of trauma, ischemic
conditions, including stroke and heart attack, and malignant hypoxic tumors.
Hemopure has a 30-month shelf life at room temperature, is universally
compatible and can be stocked well in advance of anticipated use. Consequently,
when blood is not available, Hemopure could be used to maintain a patient until
the needed type and quantity of red blood cells arrive, until the patient can be
transported to a hospital or until a patient's body produces its own red blood
cells. Hemopure thus could be an effective "oxygen bridge" to a red blood cell
transfusion or the body's ability to regenerate its own fresh red blood cells.
Hemopure may be particularly well-suited for this "oxygen bridge" function
because the duration of action of a single infusion is about two to three days
with 50% of the Hemopure molecules retained in the circulatory system for 24 to
36 hours following administration. In clinical trial data, Biopure has observed
that the redosing of Hemopure over several days can prolong Hemopure's "oxygen
bridge" effect.
Transfused red blood cells, however, have some advantages when compared to
Hemopure. Transfused red blood cells have a longer duration of action and can
persist in the body for up to 120 days. Hemopure, on the other hand, depending
on the amount infused, can last between one and three days and may require
repeat administration. Biopure has also observed slight increases in blood
pressure and abdominal discomfort in Hemopure-infused patients. Fluctuations in
a patient's blood pressure can affect the manner in which health care
professionals, who are accustomed to transfusing red blood cells, manage a
patient's care. Furthermore, Biopure cannot be certain that Hemopure will not
elicit an immune response in some individuals as do some other proteins. In
addition, it is anticipated that the cost of Hemopure will be significantly
greater to the patient than the cost of transfused red blood cells.
PRODUCTS
Biopure's two products are oxygen therapeutics. Hemopure, for human use, is
currently in a U.S. pivotal Phase III clinical trial. Biopure expects that this
trial, together with the results of prior clinical trials, will form the basis
for an FDA marketing application in the year 2000 for the use of Hemopure as an
alternative to red blood cell transfusions before, during or after elective
orthopedic surgery. The FDA and the European Medicines Evaluation Agency have
approved the use of Oxyglobin, Biopure's veterinary product, for the treatment
of anemia in dogs, regardless of cause. Oxyglobin is marketed and sold to
veterinary hospitals and to small animal veterinary practices. Biopure has
tested Hemopure and Oxyglobin in approximately 19 completed clinical trials and
150 completed preclinical studies involving more than 400 humans and 1,500
animals from 10 species.
HEMOPURE
Biopure is pursuing the development and approval of Hemopure both as an
alternative to red blood cell transfusions and as a therapeutic for indications
such as trauma, ischemic conditions, including stroke and heart attack, and
malignant hypoxic tumors.
Red Blood Cell Transfusion Alternative
Biopure filed an application for human approval in South Africa in 1999 for
Hemopure's use as an alternative to red blood cell transfusions for elective
surgery. Hemopure would serve as an alternative to a red blood cell transfusion
or as an "oxygen bridge" pending the acquisition or production of suitable red
blood cells. Biopure does not expect Hemopure to replace all red blood cell
transfusions. However, Hemopure's oxygen-carrying properties, storage and
infusion advantages address many of the limitations associated with red blood
cell transfusions. The National Blood Data Resource Center, a subsidiary of the
American Association of Blood Banks, estimated that approximately 11.5 million
units of red blood cells and whole blood, including the patient's own previously
donated blood, were transfused in the United States in 1997.
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Biopure's clinical trials have demonstrated Hemopure's efficacy as an
alternative to red blood cell transfusions in surgery patients as measured by
the elimination of red blood cell transfusions. In all of Biopure's advanced
clinical trials, Biopure evaluated Hemopure's efficacy as an oxygen therapeutic
by determining, within the context of a written set of guidelines known as a
protocol, the percentage of patients given Hemopure who did not require a
subsequent transfusion of red blood cells. In these trials, Hemopure was
administered only to patients who needed a red blood cell transfusion. Trial
design limited the amount of Hemopure that could be infused and the number of
post-operative days during which it could be infused. Elimination was deemed to
occur if the patient did not require a subsequent red blood cell transfusion.
Elimination was deemed not to occur if the patient was administered the maximum
number of Hemopure units permitted by the particular trial design and
subsequently needed a red blood cell transfusion. Despite these trial
limitations, Hemopure's clinical trials demonstrate clinically significant
elimination of red blood cell transfusions.
In 1998, the FDA agreed to a protocol with a primary endpoint of 35% elimination
for Biopure's ongoing U.S. pivotal Phase III clinical trial in orthopedic
surgery patients. The most recently completed trial, a Phase III clinical trial
conducted in Europe and South Africa with non-cardiac surgery patients, showed
elimination of 43%.
The following chart summarizes Biopure's advanced clinical trials that Biopure
will use for the initial applications for marketing approval of Hemopure as an
alternative to red blood cell transfusions.
NO. OF TOTAL
DOSING: GRAMS PATIENTS/NO. OF
HEMOGLOBIN PATIENTS TREATED
TYPE OF SURGERY DEVELOPMENT STATUS (UNITS HEMOPURE) WITH HEMOPURE RESULTS
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Elective orthopedic U.S. pivotal Phase Up to 300 grams 640/320 Trial ongoing
surgery (ongoing) III trial ongoing (10 units) over 6
days
Non-cardiac elective Phase III trial Up to 210 grams 160/83 43% elimination
surgery (1998) completed in (7 units) over 6 of red blood cell
Europe and South days transfusions
Africa; the basis
for filing in
South Africa in
1999
Post cardiopulmonary Phase II trial Up to 120 grams 98/50 34% elimination
bypass surgery completed in the (4 units) over 3 of red blood cell
(1996) U.S.; supportive days; first dose transfusions
trial for the administered
South African 1999 post- surgery
Filing
Aortic aneurysm Intraoperative Up to 150 grams 72/48 27% elimination
reconstruction Phase II trial (5 units) over 4 of red blood cell
surgery (1996) completed in the days; first dose transfusions
U.S.; supportive administered
trial for the during surgery,
South African 1999 if required
filing
U.S. Pivotal Phase III Orthopedic Surgery Trial. Biopure, with FDA agreement,
began a pivotal Phase III trial in the United States in March 1999 in elective
orthopedic surgery. Elective orthopedic surgery includes non-emergency surgery
involving bones and joints. The primary objective of this trial is
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the avoidance of red blood cell transfusions for six weeks after orthopedic
surgery. Biopure designed this randomized, red blood cell controlled,
multi-center study to enroll a total of 640 patients in the United States,
Europe, Canada and South Africa, of whom approximately one-half will be in the
Hemopure treatment group and the other half will receive red blood cells. Up to
300 grams of hemoglobin, or ten units of Hemopure, may be infused before, during
or after surgery for a total of up to six treatment days. The primary efficacy
endpoint of this trial is the elimination of red blood cell transfusions in 35%
of the patients who receive Hemopure.
Non-U.S. Phase III Non-cardiac Surgery Trial. Biopure completed a Phase III
trial in Europe and South Africa in 1998 in non-cardiac surgery. Non-cardiac
surgery refers to surgery that does not involve the heart and can include
surgery of the digestive or urinary tract as well as orthopedic surgery. The
primary objective of this trial was the avoidance of red blood cell transfusions
for 28 days after non-cardiac surgery. This randomized, red blood cell
controlled, multi-center study enrolled 160 patients, 83 of whom were infused
with Hemopure. Up to 210 grams of hemoglobin, or seven units of Hemopure, were
permitted during a six-day treatment period. The trial resulted in the
clinically significant elimination of red blood cell transfusions in 43% of the
patients who received Hemopure.
U.S. Phase II Post Cardiopulmonary Bypass Surgery Trial. Human testing was
completed in 1997 in a double-blind, randomized, red blood cell controlled,
multi-center study in post cardiopulmonary bypass surgery patients. During
cardiopulmonary bypass surgery, patients are connected to a heart and lung
machine that replaces functions of the heart and lungs during surgery. The
primary objective of this trial was the avoidance of red blood cell transfusions
for 28 days after surgery. The study treated 98 patients, 50 of whom were
infused with Hemopure. Up to 120 grams of hemoglobin, or four units of Hemopure,
were administered over a three-day treatment period following surgery. The trial
resulted in the clinically significant elimination of red blood cell
transfusions in 34% of the patients that received Hemopure. In this study, 100%
of the patients who received Hemopure did not require any red blood cells during
the day of surgery.
Additionally, Biopure observed that the hematocrit, or packed red blood cell
volume as a percentage of total blood volume, of the patients treated with
Hemopure recovered to a degree that was indistinguishable from the red blood
cell treated patients at both six and 28 days post-surgery. This observation
supports the potential use of Hemopure as an erythropoietic support.
U.S. Phase II Aortic Aneurysm Reconstruction Surgery Trial. In 1998, Biopure
completed a randomized, red blood cell controlled, multi-center trial in
abdominal aortic aneurysm reconstruction surgery. Aortic aneurysm reconstruction
surgery involves repairing a damaged segment of the aorta, the body's principal
artery. This study treated 72 patients, 48 of whom were infused with Hemopure.
The maximum dosage was 150 grams of hemoglobin, 30 grams more than the post
cardiopulmonary bypass trial. Usually aortic aneurysm reconstruction surgery
involves much more blood loss than post cardiopulmonary bypass surgery. In this
trial, Hemopure was used during the surgery in contrast to the post
cardiopulmonary bypass trial, where use began after surgery. The trial resulted
in the clinically significant elimination of red blood cell transfusions in 27%
of the patients that received Hemopure.
Trauma
Biopure has observed a 100% elimination of red blood cell transfusions on the
day of surgery in patients infused with Hemopure. As a result, Biopure believes
that Hemopure could be infused immediately at the site of an accident,
potentially extending the time that a trauma patient could be supported awaiting
definitive hospital care. Hemopure also acts as an expander of blood volume, a
common therapy used to stabilize trauma patients. Biopure has initiated a Phase
II trial in non-cardiac surgery patients, including stabilized trauma patients.
This trial includes both military and civilian hospitals. In this Phase II
trial, Biopure may administer Hemopure to a maximum dose of 10 units or 300
grams of hemoglobin. Biopure expects this trial to provide information useful in
designing a clinical development plan for trauma.
In addition, preclinical animal model studies performed in academic and military
research laboratories have shown the benefit of using Hemopure in situations
involving severe trauma, hemorrhagic shock,
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hemorrhagic shock with tissue injury and resuscitation from cardiac arrest
resulting from severe hemorrhage.
Ischemia
The ability of Hemopure molecules to circumvent partial occlusions could
potentially benefit patients suffering from ischemic conditions by supplying
oxygen to tissues that are receiving inadequate numbers of red blood cells.
Inadequate tissue oxygenation due to partial vessel blockage or constriction can
cause heart attack, angina and transient ischemic attack, which is a precursor
to stroke. In these situations, treatment with red blood cell transfusions would
not be effective because red blood cells are too large to navigate around
blockages. Biopure has completed preclinical studies with results supporting
these potential indications. One preclinical study demonstrated that infusing
Hemopure before there is a blockage in a coronary artery leading to a heart
attack can limit potential damage to the heart. Although Hemopure would not
attack the root cause of the ischemia, such as a clot or plaque in the arteries,
it could maintain oxygenation under certain circumstances and thereby sustain
tissue pending a correction of the blockage or could lessen the damage from
ischemia if infused in time. In 1996, the American Heart Association reported
that approximately 900,000 people in the United States each year experience
heart attacks, of which approximately one quarter are fatal. In its 1999 Heart
and Stroke Statistical Update, the American Heart Association reported that
approximately 600,000 people suffer a new or recurrent stroke each year.
Cancer Therapy Adjunct
Radiation therapy and many types of chemotherapy depend on the adequate
oxygenation of tumors to kill cancer cells. Malignant cancer tumors, such as
breast, prostate and other solid tumors, are dense tumors which often outgrow
their blood supply, leaving much of the tumor without oxygen. Consequently, they
resist chemotherapy and radiation treatment. Biopure, in collaboration with the
Dana-Farber Cancer Institute in Boston, has developed a patented method for
oxygenating hypoxic, or oxygen deficient, tumor cells that could potentially
increase the tumor-killing effects of radiation and chemotherapy. Preclinical
studies have shown the feasibility of this application. In 1999, Biopure
initiated clinical development of this indication.
Plasma-Expanding Agent
After blood loss, health care professionals typically administer human serum
albumin, or HSA, or other volume expanding fluids to restore blood volume.
Adequate blood volume is necessary to maintain effective blood pressure and
heart rate. HSA is a naturally occurring protein that is part of the plasma.
Hemopure molecules are also proteins. Hemopure maintains the volume of blood in
a manner similar to HSA. In patients suffering from severe blood loss, Biopure
believes that Hemopure would be preferable to currently available plasma
expanding agents, which do not carry or offload oxygen.
Hemodilution Agent
Acute normovolemic hemodilution, or ANH, is a technique that reduces the need
for donated blood. ANH refers to a practice where the patient donates one to
three units of blood immediately before surgery and is infused with a non-oxygen
plasma expander such as Ringer's lactate. The patient is then transfused with
his or her own blood during or after surgery. Biopure has administered Hemopure
in three clinical safety trials involving humans undergoing ANH. As an oxygen
carrier and a plasma-expanding agent, Hemopure could potentially temporarily
replace the oxygen-carrying support and volume lost from donating blood. Used in
this manner, Hemopure may enhance the safety of ANH or allow more units to be
safely withdrawn prior to surgery. Additionally, use of Hemopure in ANH
procedures would also allow for greater blood conservation, which could be
particularly valuable in times of shortages. At present, ANH is not widely used
in the United States but is more commonly used in Europe.
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Erythropoietic Agent
In Biopure's Phase II post cardiopulmonary bypass clinical trial, which compared
the post-operative use of Hemopure to donated red blood cells in cardiac
surgery, the hematocrit, or packed red blood cell volume as a percentage of
total blood volume, was similar for both the Hemopure-infused and the control
patients on the sixth day following surgery. Both groups maintained this
similarity when measured again at a follow-up visit 28 days after surgery,
suggesting that Hemopure may support the regeneration of red blood cells. In
addition, in one "compassionate use" case, a patient with a critically low
hematocrit, who received Hemopure but not red blood cells, was stabilized for
several days and then was able to restore her hematocrit. As such, Hemopure
could potentially be used in conjunction with, or as an alternative to,
erythropoietin, a hormone that enhances the production of red blood cells. A
preclinical study supports the use of Hemopure as an erythropoietic agent. This
study involved eight conscious sheep, all of which underwent an exchange
transfusion involving the replacement of at least 95% of their blood with an
early formulation of Hemopure. Even with critically low hematocrits, these
animals achieved stable hemodynamics, demonstrated no clinical signs of distress
and survived long term with a rapid resynthesis of their red blood cells.
OXYGLOBIN
Oxyglobin is identical to Hemopure except for its molecular size distribution,
and has the same advantages over red blood cells as Hemopure. The FDA Center for
Veterinary Medicine approved Oxyglobin in January 1998 and the European
Medicines Evaluation Agency approved Oxyglobin in December 1999 for the
treatment of canine anemia, regardless of cause. Oxyglobin's characteristics are
well suited for use by small animal practitioners for treatment of anemia and
other critical care situations involving acute blood loss. Acute blood loss
often results from surgery, trauma, hemolysis, gastrointestinal blood loss,
which is most frequently a result of parasitism or intestinal infection, urinary
tract blood loss, iron deficiency and rodenticide toxicity. Biopure estimates
that there are at least 15,000 small animal veterinary practices in the United
States and another 4,000 mixed animal practices treating small and large
animals. Biopure believes that the average veterinary practice treats only a
small percentage of canine anemia cases with a red blood cell transfusion. The
remainder receive either cage rest or a minimally effective treatment such as
fluid administration, iron supplements, nutritional supplements or inspired
oxygen.
Biopure obtained FDA approval in January 2000 to modify its product label to
provide for flexible dosing. Oxyglobin sales were $2.7 million in fiscal 1999
and $942,000 in fiscal 1998. Its strategy to increase the market for Oxyglobin
includes further expanding the Oxyglobin label as follows:
- - educating veterinarians on the range of uses for Oxyglobin and demonstrating
that using Oxyglobin represents better medical practice;
- - add Japanese and other foreign approvals;
- - add the opportunity for repeat dosing -- expected FDA filing in 2000;
- - add other applications;
- - offer a smaller package size;
- - add other species; and
- - increase shelf life to three years.
MANUFACTURING
Biopure uses proprietary and patented purification and polymerization processes
in the manufacture of its oxygen therapeutic products. Biopure believes its
processes comply with current Good Manufacturing Practices established by the
FDA and comparable standards required in the European Union for
biopharmaceutical and chemical manufacturing and permit large-scale production
of the products for commercial use. Biopure's scientific and engineering team
has designed and built much of its large-scale
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critical equipment. A proprietary computer software system operates and monitors
most aspects of this process. Biopure has produced consistent product, both
Hemopure and Oxyglobin, since 1991 and its facilities currently have the
capacity to produce 40,000 units of Hemopure or 140,000 units of Oxyglobin per
year. Through the installation of additional water supply and the completion of
its automated filling line, Biopure can attain capacity to produce 120,000 units
of Hemopure or 360,000 units of Oxyglobin per year in its current facilities.
This capacity can be used for any combination of Oxyglobin and Hemopure units.
Raw Material Source
Biopure's products consist of bovine hemoglobin that has been purified,
chemically modified and cross-linked for stability. Controlled herds of U.S.
cattle destined for meat processing provide the raw material used in Biopure's
products. Biopure monitors the source, health, location, feed consumption and
quality of the cattle to be used as a raw material source, a safety standard
that is not and cannot be established for donated human blood. Suppliers to
Biopure contract to maintain traceable records on animal origin, health, feed
and care to assure the use of known, healthy animals.
Raw Material Collection
At a high volume slaughterhouse, Biopure collects bovine whole blood into
individual presanitized containers and transports them to a separation facility.
Following blood collection, the animals pass U.S. Department of Agriculture, or
USDA, inspection for use as beef for human consumption. If an animal is not
approved for human consumption, Biopure also rejects the corresponding container
of whole blood. The USDA considers the United States to be free of pathogens
associated with "mad cow disease".
Safety
In addition to safety from bacterial and viral pathogens, such as those leading
to AIDS and hepatitis, Biopure's sourcing and manufacturing processes safeguard
humans from potential risks associated with diseases including transmissible
spongiform encephalopathies, more commonly known as the cause of diseases such
as "mad cow disease". Health and regulatory authorities have given guidance
directed at three factors to control these diseases: source of animals, nature
of tissue used and manufacturing process. Biopure complies with, and believes it
exceeds, all current guidelines regarding such risks for human pharmaceutical
products. Bovine red blood cells are considered to be safe, and blood generally
has been found to have little or no potential for transmitting transmissible
spongiform encephalopathies. Furthermore, Biopure's patented purification and
manufacturing process has been tested to demonstrate that the potential risk of
infectious disease transmission is insignificant.
Manufacturing Processes
At Biopure's separation facility, a filtration process removes plasma proteins
in the bovine blood. Washed cells are next placed in a centrifuge that separates
the red blood cells from the rest of the blood. The hemoglobin is extracted from
the red blood cells and is then diafiltered to remove red blood cell wall debris
and other contaminants. The resulting material is a cell-free hemoglobin
intermediate. A semi-continuous purification process involving a high
performance liquid chromatography process purifies the hemoglobin intermediate.
Next, the purified hemoglobin is polymerized, or linked, by the addition of a
cross-linking agent. Polymerized and stabilized material is then fractionated
and concentrated. The final product is filtered into sterilized batch holding
tanks until it is sterile filled into bags.
MARKETING
HEMOPURE
Upon receipt of FDA approval, if granted, Biopure expects to market Hemopure to
physician practices and hospitals. It also believes that military customers will
be significant. Biopure recognizes that it is crucial to establish a core belief
among opinion leaders that Hemopure fills an important medical need and that
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systematic development of opinion leader advocacy is necessary for capturing and
maintaining a leadership position. Consequently, Biopure contracted with a
medical education agency to build product awareness and to position the company
in a leadership role through the development of advocates at the national and
regional levels. As part of this process, Biopure engaged a medical advisory
board consisting of 13 leading physicians who participated in an educational
program and forum with Biopure. This activity is not ongoing. Biopure expects to
reach anesthesiologists, surgeons, oncologists, critical care and other
physician-specialists through publications and educational forums, such as
seminars and presentations at meetings of specialists.
Biopure will explore various means of selling Hemopure. Among other options,
Biopure may seek to enter into licensing or co-marketing agreements for parts or
all of the world in order to avail itself of the marketing expertise of one or
more seasoned pharmaceutical companies. Alternatively, it could engage
"contract" sales organizations from vendors, contract pharmaceutical companies
that supply sales services or recruit and train its own marketing and sales
force.
OXYGLOBIN
Biopure began selling Oxyglobin in March 1998 to a discrete number of emergency
and specialty practices in the United States. Biopure began selling Oxyglobin
nationally in October 1998. Since October 1, 1998, Biopure has sold
approximately 34,000 units of Oxyglobin. Veterinarians report successful use of
Oxyglobin in critical care situations involving blood loss, destruction of red
blood cells and ineffective production of red blood cells. In 1999, Biopure
received veterinary approval to market Oxyglobin to treat canine anemia in the
European Union.
Biopure sells Oxyglobin directly to veterinarians in the United States through
veterinary product distributors -- one national and eight regional. Orders are
then drop shipped by Biopure directly. Biopure coordinates marketing and
distribution activities through five full-time sales employees.
Marketing programs have included advertising, direct mail, educational seminars,
conference calls and attendance at trade shows. Biopure has established a core
group of veterinary practices that use the product regularly. These
veterinarians are effective advocates of the product when interacting with other
veterinarians. Biopure sponsors evening seminars featuring these veterinarians.
Most veterinarians who buy the product reserve its use for the most severe
clinical situations. In May 1999, veterinarians paid an average of $124 per
15-gram hemoglobin unit. Biopure may seek one or more marketing alliances for
marketing and distribution of Oxyglobin in selected geographic areas.
COMPETITION
Hemopure will compete with traditional therapies and with other oxygen
therapeutics. Comparisons with traditional therapies, including red blood cell
transfusions, are described under "-- Scientific Overview", "-- Biopure's
Oxygenating Technology" and "-- Biopure's Products". Oxygen therapeutics under
development fall into two categories:
- - hemoglobin-based oxygen carriers, including Hemopure and Oxyglobin, consist of
natural hemoglobin from a mammal or genetically engineered source that has
been modified to improve stability, efficacy and safety; and
- - perfluorocarbon emulsions are chemicals administered intravenously.
Perfluorocarbon emulsions are effective principally under conditions of high
oxygen partial pressure to assist in oxygen delivery by forcing dissolved
oxygen into the plasma space.
Biopure believes that the competitive factors for its oxygen therapeutics will
be efficacy, safety, ease of use and cost. Biopure believes that it has
significant advantages as compared to its competitors including:
- - patents covering its processes, its products and their uses;
- - large molecule size resulting in longer duration of action than most other
oxygen therapeutics under development;
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- - long-term room temperature stability;
- - completed and operational large-scale manufacturing facility compliant with
current Good Manufacturing Practices;
- - safe, ample, inexpensive source of raw material;
- - FDA approval of Oxyglobin in 1998; and
- - EMEA approval of Oxyglobin in 1999.
Many of Biopure's competitors and potential competitors in the development of
oxygen therapeutic products have significantly greater financial and other
resources to develop, manufacture and market their products. Existing
competitors in the development of hemoglobin-based investigational products use
outdated human red blood cells or bovine hemoglobin as their raw material.
Biopure is aware of one first generation, genetically engineered investigational
product that advanced to human clinical trials, but its development was
discontinued. Biopure believes that its use of bovine red blood cells is an
advantage over products made from outdated donated human red blood cells because
of the availability, abundance, ability to control source, cost and relative
safety of bovine red blood cells. However, the use of bovine derived blood
products may encounter resistance from physicians and patients. Among other
things, public perceptions about the risk of "mad cow disease" may affect market
acceptance of Hemopure. Biopure also believes that competitors may find it
difficult to make or offer a hemoglobin-based oxygen carrier product having the
product characteristics of Hemopure without infringing on one or more Biopure
patents. In addition, the relatively low viscosity of Hemopure is a potential
advantage, particularly in large doses, in permitting perfusion at low blood
pressure.
Biopure is aware of one perfluorocarbon oxygen carrier in advanced clinical
trials. This product is a chemical fluid infused into the body. This chemical
attracts oxygen and takes it into the plasma. The patient needs an oxygen mask
for this process because perfluorocarbons require high oxygen environments in
order to be effective. The perfluorocarbon solution does not persist in the
body, so repeat dosing is necessary. These limitations may reduce the number of
potential applications for the product. As far as Biopure is aware, applications
pursued for this product do not include any of the applications Biopure might
pursue other than acute normovolemic hemodilution.
Biopure knows of no companies developing oxygen therapeutics intended to compete
with Oxyglobin in the veterinary market.
INTELLECTUAL PROPERTY
Patents, trademarks, trade secrets, technological know-how and other proprietary
rights are important to Biopure's business. Biopure actively seeks patent
protection both in the United States and abroad. Biopure filed its initial
patent in 1986 in the United States. Three U.S. patents have issued from this
filing. These patents describe and claim ultra-pure semi-synthetic blood
substitutes and methods for their preparation.
In total, Biopure has 17 U.S. patents granted and seven applications pending
relating to oxygen therapeutics. Biopure's granted U.S. patents relating to
oxygen therapeutics include:
- - two patents covering an ultra-purification process for hemoglobin solutions,
regardless of the source of hemoglobin, which expire in 2011 and 2012, and
three patents covering the ultra-pure oxygen therapeutic solutions produced by
this process expiring in 2009, 2014 and 2019;
- - three patents regarding compositions having improved stability, of which two
expire in 2015 and the third expires in 2016;
- - two patents, which expire in 2015 and 2016, covering improvements in
preservation of such hemoglobin solutions;
- - two patents, which expire in 2015 and 2016, covering improved methods for
separating polymerized from unpolymerized hemoglobin;
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- - one patent, which expires in 2015, covering methods of oxygenating tissue
affected by inadequate red blood cell flow;
- - one patent, which expires in 2016, covering the removal of pathogens, if
present, from Biopure's source material; and
- - three patents, which expire in 2011, 2014 and 2015, covering methods for
treating tumors.
Biopure also filed its original patent in Europe. Although granted, third
parties subsequently opposed Biopure's European patent. As a result of the
opposition proceeding, the patent was revoked. However, Biopure filed an appeal
that reinstated the patent during the appeal and is awaiting a decision on the
appeal. In the opposition process, Biopure narrowed its claims. Despite the
narrowing, Biopure believes that these claims provide protection for Biopure's
existing process and products. Biopure further believes that a narrowed European
patent should be sustained. During the opposition proceeding, some pre-existing
patents and articles not presented to the United States Patent Office during the
prosecution of patents already issued in the United States were presented to the
European Patent Office by the opponents. These preexisting patents and articles
are not expected to affect claims of Biopure patents in the rest of the world.
Biopure also has other foreign patents and patent applications.
Biopure believes that it is not economically practicable to determine in advance
whether its products, product components, manufacturing processes or the uses
infringe the patent rights of others. It is likely that, from time to time,
Biopure will receive notices from others of claims or potential claims of
intellectual property infringement or Biopure may be called upon to defend a
customer, vendee or licensee against such third-party claims. Responding to
these kinds of claims, regardless of merit, could consume valuable time, result
in costly litigation or cause delays, all of which could harm Biopure's
business. Responding to these claims could also require Biopure to enter into
royalty or licensing agreements with the third parties claiming infringement.
Such royalty or licensing agreements, if available, may not be available on
terms acceptable to Biopure.
EMPLOYEES
As of January 13, 2000, Biopure employed 163 persons. Of its total work force,
94 employees are engaged in manufacturing and related manufacturing support
services, 29 are engaged in research and development activities, 12 are engaged
in sales and marketing, primarily veterinary, and 28 are engaged in support and
administrative activities. None of Biopure's employees are covered by a
collective bargaining agreement. Biopure believes its relations with its
employees are good.
PAST COLLABORATIONS
In December 1990, Biopure and The Upjohn Company entered into an alliance to
develop and market Biopure's human and veterinary products. From that time until
1996, Biopure benefited from equity investment and development expenditures of
approximately $140.0 million and from the experience, personnel and facilities
of The Upjohn Company. From 1987 until 1996, Biopure had a license agreement
with B. Braun Melsungen AG, a German hospital supply company. This license
agreement and certain related agreements contemplated the product testing,
approval, manufacture and marketing of Biopure's products by B. Braun Melsungen
AG in Europe.
GOVERNMENT REGULATION
New Drug or Biologic Approval for Human Use
Governmental authorities in the United States and other countries extensively
regulate the testing, manufacturing, labeling, advertising, promotion, export
and marketing, among other things, of Biopure's oxygen therapeutic products. Any
oxygen therapeutic product administered to human patients is regulated as a drug
or a biologic drug and requires regulatory approval before it may be
commercialized.
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In the United States, Hemopure is regulated as a human biologic. The FDA will
require Biopure to file and obtain approval of a Biologics License Application
covering both Hemopure and the facility in which it is manufactured.
The steps required before approval of a biologic for marketing in the United
States generally include:
- - preclinical laboratory tests and animal tests;
- - the submission to the FDA of an Investigational New Drug, or IND, application
for human clinical testing, which must become effective before human clinical
trials may lawfully commence;
- - adequate and well-controlled human clinical trials to establish the safety and
efficacy of the product;
- - the submission to the FDA of a Biologics License Application;
- - FDA review of the Biologics License Application; and
- - satisfactory completion of an FDA inspection of the manufacturing facilities
at which the product is made to assess compliance with current Good
Manufacturing Practices which includes elaborate testing, control,
documentation and other quality assurance procedures.
The testing and approval process requires substantial time, effort and financial
resources. After approval is obtained, a supplemental approval is generally
required for each proposed new indication, often accompanied by data similar to
that submitted with the original Biologics License Application.
Preclinical studies include laboratory evaluation of the product and animal
studies to assess the safety and potential efficacy of the product. The results
of the preclinical studies, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND. The IND
automatically will become effective in 30 days unless the FDA, before that time,
raises concerns or questions and imposes a "clinical hold". In such case, the
IND sponsor and the FDA must resolve any outstanding concerns before the trial
can proceed. Once trials have commenced, the FDA may stop the trials, or
particular types of trials, by imposing a clinical hold because of concerns
about, for example, the safety of the product being tested or the adequacy of
the trial design.
Clinical trials involve the administration of investigational products to
healthy volunteers or patients under the supervision of a qualified principal
investigator consistent with an informed consent. An independent Institutional
Review Board, or IRB, or ethics committee must review and approve each clinical
trial at each institution at which the study will be conducted. The IRB or
ethics committee will consider, among other things, ethical factors, the safety
of human subjects and the possible liability of the institution.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is usually tested for safety or adverse effects, dosage
tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
Phase II clinical trials usually involve studies in a limited patient population
to evaluate the efficacy of the drug for specific, targeted indications,
determine dosage tolerance and optimal dosage and identify possible adverse
effects and safety risks. Phase III clinical trials generally further evaluate
clinical efficacy and test further for safety within an expanded patient
population and at multiple clinical sites. Phase IV clinical trials are
conducted after approval to gain additional experience from the treatment of
patients in the intended therapeutic indication. If the FDA approves a product,
additional clinical trials may be necessary. A company may be able to use the
data from these clinical trials to meet all or part of any Phase IV clinical
trial requirement. These clinical trials are often referred to as Phase III/IV
post-approval clinical trials.
Biopure believes that its ongoing U.S. pivotal Phase III clinical trial is
consistent with the FDA's most recent guidance on the design and efficacy and
safety endpoints required for approval of products such as Hemopure. However,
the FDA could change its view or require a change in study design, additional
data or even further clinical trials prior to approval of Hemopure.
The results of the preclinical studies and clinical trials, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the application requesting
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approval to market the product. Before approving a Biologics License
Application, the FDA will inspect the facilities at which the product is
manufactured and will not approve the product unless the manufacturing facility
is in compliance with current Good Manufacturing Practices. The FDA may delay
approval of a Biologics License Application if applicable regulatory criteria
are not satisfied, require additional testing or information, and/or require
postmarketing testing and surveillance to monitor safety, purity or potency of a
product. It may also limit the indicated uses for which an approval is given.
New Drug Approval for Veterinary Use
New drugs for companion animals must receive New Animal Drug Application, or
NADA, approval prior to marketing in the U.S. The requirements for approval are
similar to those for new human drugs. Obtaining NADA approval often requires
clinical field trials and the submission of an Investigational New Animal Drug
Application, which for non-food animals becomes effective upon acceptance for
filing.
Pervasive and Continuing Regulation
Any product approvals that are granted remain subject to continual FDA review,
and newly discovered or developed safety or efficacy data may result in
withdrawal of products from marketing. Moreover, if and when such approval is
obtained, the manufacture and marketing of Biopure's products remain subject to
extensive regulatory requirements administered by the FDA and other regulatory
bodies, 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. Biopure is subject to
inspection and market surveillance by the FDA for compliance with these
regulatory requirements. Failure to comply with the requirements can, among
other things, result in warning letters, product seizures, recalls, fines,
injunctions, suspensions or withdrawals of regulatory approvals, operating
restrictions and criminal prosecutions. Any such enforcement action could have a
material adverse effect on Biopure. Unanticipated changes in existing regulatory
requirements or the adoption of new requirements could also have a material
adverse effect on Biopure.
Biopure also is subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and hazardous substance disposal.
Foreign Regulation
Biopure will be subject to a variety of regulations governing clinical trials
and sales of its products outside the United States. Biopure must obtain
approval of its products by the comparable non-U.S. regulatory authorities prior
to the commencement of product marketing in the country whether or not Biopure
has obtained FDA approval. The approval process varies from country to country
and the time needed to secure approval may be longer or shorter than that
required for FDA approval. The European Union requires approval of a Marketing
Authorization Application by the European Medicines Evaluation Agency. These
applications require the completion of extensive preclinical and clinical
studies and manufacturing and controls information.
Reimbursement
Biopure's ability to successfully commercialize its human product will depend in
significant part on the extent to which reimbursement of the cost of such
product and related treatment will be available from government health
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and there can be no assurance that adequate
third-party coverage will be available to enable Biopure to maintain price
levels sufficient for realization of an appropriate return on its investment in
product development. The public and the federal government have recently focused
significant attention on reforming the health care system in the United States.
A number of health care reform measures have been suggested, including price
controls on
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therapeutics. Public discussion of such measures is likely to continue, and
concerns about the potential effects of different possible proposals have been
reflected in the volatility of the stock prices of companies in the health care
and related industries.
RESEARCH AND DEVELOPMENT
In fiscal 1999, 1998 and 1997 our research and development expenses, including
clinical trials, were $24.2 million, $23.0 million and $23.5 million.
ITEM 2. PROPERTIES
Biopure has manufacturing facilities in Pennsylvania for the collection and
separation of blood and in Cambridge, Massachusetts where processing is
completed. The FDA has inspected these facilities and determined that they
comply with current Good Manufacturing Practices. The Medicines Control Agency,
on behalf of the European Medicines Evaluation Agency, has also inspected
Biopure's facilities.
Biopure manufactures separation materials in a 10,000 square foot plant in New
Hampshire. The current annual lease payment for this facility is $38,000. The
lease expires on March 31, 2000. Biopure has an option to extend this lease for
an additional five years.
Biopure leases two facilities for office and research space in Massachusetts.
One lease covers 24,000 square feet, and its current annual lease payment is
$239,000. This lease expires on December 31, 2007. Biopure has an option to
extend this lease for ten five-year periods, or an additional 50 years. The
other lease covers 13,000 square feet, and its current annual lease payment is
$378,000. This lease expires on August 31, 2001. Biopure does not have an option
to extend this lease. It leases 18,000 square feet of warehouse space in
Massachusetts. The current annual lease payment for this facility is $95,000.
The lease expires on September 30, 2001. Biopure has an option to extend this
lease for two five-year periods, or an additional ten years.
Biopure leases 32,000 square feet of manufacturing space under three leases in
Massachusetts. The current annual lease payments for these facilities is
$236,000. The leases expire on November 30, 2000. Biopure has an option to
extend these leases for five five-year periods, or an additional 25 years, with
an exclusive right to negotiate for an additional 25 years. Biopure also leases
18,000 square feet of manufacturing space in Pennsylvania. The current annual
payment for a ground lease for this facility is $21,000. The lease expires on
October 20, 2014. Biopure has an option to extend this lease for nine years.
Biopure's current process is designed to be scalable, such that additional
capacity can be obtained by adding duplicate equipment and additional raw
material including power and water. However, Biopure is space constrained at its
existing facility in Cambridge, Massachusetts, so it anticipates that it will
need to add a new facility at a new location prior to large-scale
commercialization of Hemopure.
ITEM 3. LEGAL PROCEEDINGS
Biopure is a party to an action filed on July 18, 1990 in the United States
District Court for the District of Massachusetts under the caption Peter Fisher,
et al. v. William P. Trainor, et al. In this litigation, the plaintiffs alleged
breach of agreements by Biopure and against one another. Biopure is also a party
to a related action filed on November 8, 1990 in the United States District
Court for the District of Massachusetts under the caption Bio-Vita Ltd., et al.
v. Carl W. Rausch, et al.
Summary judgments were entered against the plaintiffs in both of these actions
in 1994. The plaintiffs appealed. One appeal filed in Bio-Vita Ltd., et al. v.
Carl W. Rausch, et al. was voluntarily dismissed and the other was remanded to
the trial court. The other appeal was remanded to the trial court for further
findings based on lack of jurisdiction. This jurisdictional issue has been
briefed following additional discovery and is before the trial court. The
remaining plaintiff is seeking $250.0 million in damages. Biopure believes that
the ultimate resolution of this matter will not have a material adverse effect
on its financial position or results of operations.
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In addition, proceedings in Europe are ongoing with regard to Biopure's European
patent. Biopure was granted a patent on April 1, 1992 by the European Patent
Office. Within the nine-month period from the grant date for the filing of
oppositions, six parties filed oppositions requesting that all of the claims of
this patent be revoked. Of these, three opposing parties remain: Baxter
International, Enzon, Inc. and Northfield Laboratories, Inc. Following oral
proceedings conducted by the Opposition Division at the European Patent Office
in November 1995, the Opposition Division revoked the patent.
Biopure has appealed this decision of the Opposition Division and is currently
awaiting a decision on its appeal. The appeal has the technical result of
reinstating the patent during the appeal process. Prior to filing its appeal
papers, Biopure narrowed its claims further to increase the probability of
winning at the appeal level. Biopure further believes that a narrowed patent
should be sustained.
Future claims against Biopure may arise and, if they do, there can be no
assurance that they will be successfully defended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of Biopure are as follows:
NAME AGE TITLE
- --------------------------------------- --- ---------------------------------------
Carl W. Rausch......................... 51 Chairman and Chief Executive Officer
Paul A. Looney......................... 59 President
Francis H. Murphy...................... 61 Chief Financial Officer
Maria S. Gawryl, Ph.D. ................ 45 Senior Vice President, Research and
Development
Edward E. Jacobs, Jr., M.D. ........... 59 Senior Vice President
Jane Kober............................. 56 Senior Vice President, General Counsel
and Secretary
Bing L. Wong, Ph.D. ................... 52 Senior Vice President, International
Bernadette L. Alford, Ph.D. ........... 50 Vice President, Regulatory Affairs
Geoffrey J. Filbey..................... 56 Vice President, Engineering
Carolyn R. Fuchs....................... 47 Vice President, Human Resources
William D. Hoffman, M.D. .............. 46 Chief Medical Officer
Andrew W. Wright....................... 40 Vice President, Veterinary Products
CARL W. RAUSCH is a co-founder and has served as Chairman and Chief Executive
Officer of Biopure since 1984. From 1984 until July 1, 1999, Mr. Rausch was also
President of Biopure. Prior to Biopure's founding, Mr. Rausch was Vice
President, Preparative and Process, at Millipore Corporation. He holds an M.S.
degree in chemical engineering from Tufts University, an M.S. degree in chemical
engineering from the Massachusetts Institute of Technology and a B.S. degree in
chemical engineering from Tufts University.
PAUL A. LOONEY became President of Biopure on July 1, 1999. Since May 1995, Mr.
Looney has been a consultant to various biotechnology companies. Between
September 1993 and May 1995, Mr. Looney was the Chief Executive Officer, Chief
Operating Officer and President of Corning Costar Inc. Between 1987 and
September 1993, Mr. Looney was President of Costar Inc.
FRANCIS H. MURPHY became Chief Financial Officer of Biopure on November 30,
1999. Most recently Mr. Murphy had been International Vice President and
business manager for Japan, Latin America and Asia Pacific for the Corning
Science Product Division of Corning Incorporated. He holds an M.B.A. degree from
Boston University and a B.S. degree in industrial engineering and a B.A. degree
from Rutgers University.
MARIA S. GAWRYL, PH.D. has been Senior Vice President, Research and Development
of Biopure since April 1999. From September 1990 to April 1999, she was Vice
President, Research and Development. Dr. Gawryl holds a Ph.D. in immunology from
the University of Connecticut. She did post-doctoral work at the University of
Connecticut Health Center and Rush Presbyterian, St. Luke's Medical Center. She
holds a B.S. degree in math and chemistry from Antioch College.
EDWARD E. JACOBS, JR., M.D. has been a Senior Vice President of Biopure since
August 1997. From April 1995 to August 1997, he was Senior Medical Advisor of
Biopure. Since 1988, he has been an Assistant Clinical Professor at Harvard
Medical School. He holds an M.D. degree from Harvard Medical School and a B.A.
degree in philosophy from Princeton University.
JANE KOBER has been Senior Vice President, General Counsel and Secretary of
Biopure since May 1998. From June 1989 to April 1998, she was a partner in
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Ms. Kober holds a J.D. degree from Case
Western Reserve University, an M.A. degree from the University of Chicago and a
B.A. in English from the Pennsylvania State University. She serves as a director
of HTV Industries, Inc.
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BING L. WONG, PH.D. has been a Senior Vice President, International of Biopure
since May 1999. From June 1992 to May 1999, Dr. Wong was a Senior Vice
President, Development of Strategic Business Ventures. Dr. Wong taught in the
Chemical Engineering Department at Tufts University as Assistant Professor and
Adjunct Associate Professor while he served as Associate and Acting Director of
the New England Enzyme Center. He holds M.S. and Ph.D. degrees from the
Department of Chemical Engineering, Tufts University and a B.S. degree from the
Department of Chemical Engineering, National Taiwan University.
BERNADETTE L. ALFORD, PH.D. has been Vice President, Regulatory Affairs of
Biopure since September 1998. From September 1994 to September 1998, she was
Senior Vice President, Product Development for Alexion Pharmaceuticals Inc. She
holds a Ph.D. degree in molecular biology and an M.S. degree in biochemistry
from Texas University and a B.S. degree in biology from Marywood University.
GEOFFREY J. FILBEY joined Biopure in 1985 and has served as Vice President,
Engineering since 1995. Mr. Filbey holds a B.Sc. degree in engineering from the
City University in London, England.
CAROLYN R. FUCHS has served as Vice President, Human Resources since June 1998.
From October 1996 to June 1998, she was an independent consultant. From May 1991
to October 1996, she worked at National Medical Care. Ms. Fuchs holds an M.Ed.
degree in counseling and a B.S. degree in psychology from the University of
Massachusetts at Amherst.
WILLIAM D. HOFFMAN, M.D. joined Biopure in January 1998 as Director of Medical
Affairs and was named Chief Medical Officer in March 1999. From 1994 until
January 1998, Dr. Hoffman was Director of Surgical Intensive Care at The
Cleveland Clinic Foundation. He holds an M.D. degree from the University of
Massachusetts Medical School and a B.S. degree in physics from Carnegie-Mellon
University.
ANDREW W. WRIGHT has been Vice President, Veterinary Products of Biopure since
August 1996. From March 1992 to August 1996, Mr. Wright worked with IDEXX
Laboratories, Inc. where he held several management positions, including
Director of Corporate Development, Director of Marketing and Senior Product
Manager. He holds an M.B.A. degree from the University of Chicago and a B.A.
degree in economics from Carleton College.
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20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The Company's Class A Common Stock is traded in the over-the-counter market
and is quoted on the NASDAQ National Market under the trading symbol "BPUR".
The following table sets forth the high and low sale prices for the Class A
Common Stock for each of the quarters in the year ended October 31, 1999, as
reported by the NASDAQ National Market beginning July 30, 1999, when the Class A
Common Stock was first traded. The quotations shown represent inter-dealer
prices without adjustments for retail markups, markdowns or commissions, and may
not necessarily reflect actual transactions.
HIGH LOW
------ -----
Year Ended October 31, 1999
Third Quarter (July 30 - 31) $11.25 $9.75
Fourth Quarter 14.19 6.31
As of December 31, 1999 there were 337 holders of record of the Class A Common
Stock.
The Company did not pay dividends on its Class A Common Stock during the two
fiscal years ended October 31, 1999 and does not plan to pay dividends on its
Class A Common Stock in the foreseeable future.
(b) The effective date of Biopure's first registration statement filed under the
Securities Act of 1933, file No. 333-78829, was July 29, 1999. Proceeds of the
offering were applied from August 4, 1999 through October 31, 1999 as follows:
repayment of a loan from Pharmacia & Upjohn, Inc. -- $4.5 million; repurchase of
1,694,273 shares of Class A Common Stock from a stockholder -- $4.0 million;
funding clinical trials -- $3.4 million; working capital -- $3.0 million; and
temporary investments in high grade commercial paper.
20
21
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected financial data for Biopure for the five fiscal
years ended October 31, 1999.
--------------------------------------------------------
FISCAL YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
In thousands, except per share data
STATEMENTS OF OPERATIONS DATA:
Total revenues................................ $ 2,866 $ 1,131 $ -- $ 71 $ 46
Cost of revenues.............................. 6,814 1,543 -- -- --
-------- -------- -------- -------- --------
Gross profit (loss)........................... (3,948) (412) -- 71 46
Operating expenses:
Research and development.................... 24,166 22,950 23,494 18,924 16,498
Sales and marketing......................... 2,922 2,444 694 -- --
General and administrative.................. 5,266 4,660 2,920 3,506 3,945
-------- -------- -------- -------- --------
Total operating expenses...................... 32,354 30,054 27,108 22,430 20,443
-------- -------- -------- -------- --------
Income (loss) from operations................. (36,302) (30,466) (27,108) (22,359) (20,397)
Total other income (expense).................. 772 419 (310) 765 (623)
-------- -------- -------- -------- --------
Net income (loss)............................. (35,530) (30,047) (27,418) (21,594) (21,020)
Stock dividends on preferred stock............ (17,915) -- -- -- --
-------- -------- -------- -------- --------
Net loss applicable to common stockholders.... $(53,445) $(30,047) $(27,418) $(21,594) $(21,020)
======== ======== ======== ======== ========
Historical basic net income (loss) per common
share....................................... $ (3.61) $ (2.41) $ (2.23) $ (1.77) $ (1.73)
Historical weighted-average common shares
outstanding................................. 14,813 12,460 12,300 12,215 12,171
Pro forma basic net income (loss) per common
share....................................... $ (2.62) $ (1.65)
Pro forma weighted-average common shares
outstanding................................. 20,369 18,237
---------------------------------------------------
AT OCTOBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
In thousands
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $30,778 $ 6,063 $13,527 $12,772 $ 7,924
Total current assets............................... 38,277 13,175 15,221 13,636 10,453
Working capital.................................... 27,872 1,986 5,368 8,111 3,406
Net property and equipment......................... 27,447 29,606 27,408 29,438 28,272
Total assets....................................... 66,230 44,848 44,054 43,462 40,218
Long-term debt (including current portion)......... -- 6,000 8,000 9,000 --
Common stock to be repurchased..................... -- 6,300 6,300 -- --
Total stockholders' equity......................... 54,037 21,449 20,222 26,417 31,875
21
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the Consolidated Financial Statements and the
related Notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements.
OVERVIEW
We are a leading developer, manufacturer and marketer of oxygen therapeutics.
Our oxygen therapeutics are pharmaceuticals that one administers intravenously
into the circulatory system to increase oxygen delivery to the body's tissues.
We have developed and manufacture, using a proprietary process and patented
technology, two hemoglobin-based oxygen carriers. Hemopure, for human use, is
currently in a pivotal Phase III clinical trial in the United States. Oxyglobin,
for veterinary use, is the only hemoglobin-based oxygen carrier approved by the
FDA and the European Medicines Evaluation Agency.
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 debt and equity financings, strategic corporate alliances,
licensing agreements and interest income. We have not been profitable since
inception and had an accumulated deficit of $250.4 million as of October 31,
1999. We expect to incur additional operating losses over the next several years
in connection with clinical trials, pre-marketing expenditures for Hemopure,
expanded marketing of Oxyglobin and increases in production. We began generating
revenue from the sale of Oxyglobin in fiscal 1998.
RESULTS OF OPERATIONS
Fiscal Years Ended October 31, 1999 and 1998
Total revenues were $2.9 million in fiscal 1999, as compared to $1.1 million in
fiscal 1998, an increase of approximately 153.4%. Revenues in fiscal 1999
included $2.8 million of Oxyglobin sales as compared to $942,000 in fiscal 1998,
an increase of approximately 191.8%. Product sales of Oxyglobin represent
approximately 95.9% of the Company's total revenues in fiscal 1999 as compared
to 83.3% in fiscal 1998. Oxyglobin sales commenced in mid-March 1998 to
emergency and specialty practices in the United States. We launched Oxyglobin
nationally in October 1998. Total revenues also reflect $117,000 and $189,000 in
fiscal 1999 and 1998 respectively, from license and development activities,
grants and product sales unrelated to our oxygen therapeutic products.
Cost of revenues totaled $6.8 million in fiscal 1999, an increase of $5.3
million or 341.6% as compared to fiscal 1998. We did not record any cost of
revenues in the first nine months of fiscal 1998. Cost of revenues in fiscal
1999 reflects the direct costs associated with the production of Oxyglobin and
allocation of a portion of the fixed costs of the unused production capacity.
The remainder of these fixed costs and the direct costs of production of
clinical trial materials were allocated to research and development.
Research and development expenses increased 5.3% to $24.2 million in fiscal 1999
from $23.0 million in fiscal 1998. The increase was primarily due to the
expenses associated with an increase in Phase III clinical trial activities for
Hemopure and an increase in other development efforts related to ongoing
research and development programs. Increases in research and development
expenses are offset to an extent by the reduction in the allocation of
manufacturing expenses previously charged against it. We expect that in the
near-term, research and development expenses will remain stable as we continue
our development efforts with respect to potential uses for Hemopure.
Sales and marketing expenses increased 19.6% to $2.9 million in fiscal 1999 from
$2.4 million in fiscal 1998. This increase was primarily due to increased sales
and marketing personnel, as well as selling, advertising, marketing and
distribution expenses related to the national product launch of Oxyglobin.
22
23
General and administrative expenses increased 13.0% to $5.3 million in fiscal
1999 from $4.7 million in fiscal 1998. This was attributable to increased
management personnel, in part attendant to Biopure's becoming publicly traded,
partially offset by decreased market research, public relations and other
consulting expenses.
Total other income (expense) consists primarily of interest income and other
non-product related income partially offset by interest expense and other
non-operating expenses. Total other income (expense) was income of $772,000 in
fiscal 1999 compared to $419,000 in fiscal 1998. This increase of $353,000 was
primarily attributable to a reduction in interest expense resulting from the
retirement of long term debt with proceeds utilized from the public offering.
Historical basic net loss per common share for fiscal 1999 was $3.61, compared
to $2.41 for the same period in 1998. The pro forma basic net loss per common
share for fiscal 1999 was $2.62, compared with $1.65 for the same period in
1998. The 1999 historical and pro forma basic net loss per common share include
a one-time charge of $1.21 and $0.88, respectively, associated with $17,915,000
in common stock dividends issued to preferred stockholders. Historical basic net
loss per share is computed based on the weighted-average number of common shares
outstanding during the period. Pro forma basic net loss per share is computed
using the weighted-average number of outstanding shares assuming conversion of
all convertible preferred shares into common shares at date of original
issuance.
Fiscal Years Ended October 31, 1998 and 1997
Total revenues were $1.1 million in fiscal 1998. We did not realize any revenues
in fiscal 1997. Revenues in fiscal 1998 included $942,000 of Oxyglobin sales.
Oxyglobin sales commenced in mid-March of fiscal 1998 to a discrete number of
emergency and specialty practices in the United States. We launched Oxyglobin
nationally in October 1998. Total revenues in fiscal 1998 also reflect $189,000
from license and development activities and product sales unrelated to our
oxygen therapeutic products.
Cost of revenues was $1.5 million in fiscal 1998. We did not realize any cost of
revenues in fiscal 1997. Cost of revenues in fiscal 1998 reflects the allocation
of a portion of the manufacturing costs after FDA approval for Oxyglobin and
completion of a process expansion project in August 1998. These costs were
entirely allocated to research and development expenses prior to August 1998.
Research and development expenses decreased 2.3% to $23.0 million in fiscal 1998
from $23.5 million in fiscal 1997. This decrease was attributable to the $1.5
million allocation of manufacturing expenses associated with the production of
Oxyglobin to cost of revenues from research and development expenses. This
decrease was partially offset by an increase in preclinical activities during
fiscal 1998 as compared to fiscal 1997.
Sales and marketing expenses increased 252.2% to $2.4 million in fiscal 1998
from $694,000 in fiscal 1997. This increase was primarily attributable to
increased sales and marketing personnel and product launch, selling, marketing
and distribution expenses related to Oxyglobin.
General and administrative expenses increased 59.6% to $4.7 million in fiscal
1998 from $2.9 million in fiscal 1997. This increase was primarily attributable
to the addition of five people in the general and administrative department, in
part in anticipation of Biopure's initial public offering, and expenses related
to Hemopure market research and public relations activities.
Total other income (expense) was income of $419,000 in fiscal 1998 compared to
an expense of $310,000 in fiscal 1997. This change of $729,000 was primarily
associated with increased interest income from higher average cash balances
which were approximately $21.6 million in fiscal 1998 compared to $10.6 million
in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, we had current assets of $38.3 million, which consisted
primarily of $30.8 million in cash and cash equivalents, $3.2 million in net
inventory and $3.5 million held in an escrow account by
23
24
Biopure as a settlement payment by which we reacquired shares of class A common
stock and license rights. At October 31, 1999, current liabilities were $10.4
million. The $30.8 million in cash and cash equivalents at October 31, 1999 is a
net increase of $24.7 million since October 31, 1998. The increase in cash and
cash equivalents is primarily attributable to $67.8 million in net proceeds from
the sale of preferred and common stock offset by $30.2 million used in
operations, $6.0 million used to repay long-term debt, $6.0 million used to
repurchase common stock and $1.8 million invested in property and equipment.
We have financed operations from inception primarily through sales of equity
securities, development and license agreement payments, interest income and
debt. Our primary investment objective is preservation of principal and
currently we invest in high grade commercial paper. We have not been profitable
since inception and had an accumulated deficit of $250.4 million as of October
31, 1999. We will continue to generate losses for the foreseeable future. We
believe our current cash and cash equivalents should be sufficient to meet our
projected requirements until July 2000, including the anticipated completion of
our pivotal Phase III trial. Our cash requirements may vary significantly from
current projections. In order for us to remain a going concern we will require
significant funding. We are exploring opportunities to raise capital through
equity offerings, the issuance of debt securities, strategic alliances and other
financing vehicles. However, additional financing or strategic alliances may not
be available when needed, or, if available, may not be on favorable terms. Our
forecast of the period of time through which our financial resources would be
adequate to support our operations is forward-looking information and, as such,
actual results may vary.
On August 4, 1999 the Company received $39.06 million of proceeds from its
initial public offering (IPO) of 3,500,000 shares of class A common stock, at a
price of $12.00 per share, before estimated expenses of $1.36 million. Upon the
closing of the IPO, all shares of preferred stock converted into shares of class
A common stock and reflected a reverse two for three stock split. The holders of
the series B convertible preferred stock received an additional 280,000 shares
in the aggregate upon conversion and the holders of the series C convertible
preferred stock received an additional 1,200,000 shares in the aggregate upon
conversion. The fair market value of such additional shares has been treated,
for accounting purposes, as a dividend. Consequently, the Company recorded a
dividend of $17.76 million in the third quarter of 1999.
On August 5, 1999 the Company paid $4.0 million, which was in addition to an
existing balance of $1.0 million in an escrow account, to complete the
repurchase of 1,694,273 shares of its class A common stock from a shareholder.
We plan to spend approximately $8.0 million on capital projects for our existing
facilities over the next two years. We will also need to construct additional
manufacturing facilities to attain annual capacity in excess of 120,000 units of
Hemopure. We may incur additional costs in fiscal 2000 to begin engineering and
design work for these facilities.
As of October 31, 1999, we had net operating loss carryforwards of approximately
$161.0 million to offset future federal and state taxable income through 2019.
Due to the degree of uncertainty related to the ultimate realization of such
prior losses, no benefit has been recognized in our financial statements as of
October 31, 1999. Utilization of such losses in future years may be limited
under the change of stock ownership rules of the Internal Revenue Service.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective for the Company in
the first quarter of fiscal 2001. The Company is currently evaluating the effect
that implementation of the new standard will have on its financial statements
but believes the effect will be immaterial.
24
25
YEAR 2000 COMPLIANCE
Some currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
State of Readiness
We have made an assessment of the ability of our critical information and
non-critical information systems to function properly with respect to dates in
the year 2000 and thereafter. We have based this assessment upon communications
with equipment and software vendors, literature supplied with software and in
connection with maintenance contracts and test evaluations of our systems. Our
critical systems are defined as: transactional systems affecting product
manufacturing, delivery and quantity; systems which play an infrastructure role
in supporting our business and scientific operations; and systems which use
forward-looking or date-based forecasting such as sample or batch expiration
dates.
We have identified potential problems in some of our critical systems and began
repairing, upgrading or replacing such systems in the second quarter of fiscal
1999. We completed the process of repairing, upgrading or replacing both
critical and non-critical systems by the end of calendar year 1999. The rollover
to the year 2000 occurred with no disruption to our business. We will continue
to monitor and remediate any problems that occur in the first calendar quarter
of 2000.
Costs
As of January 7, 2000, we have incurred approximately $230,000 in costs in
connection with Year 2000 compliance issues. These costs include certain
information systems equipment purchased on a three-year lease agreement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report
commencing on Page F-1.
Schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
26
PART III
The information required by Item 10 -- Directors and Executive Officers of the
Registrant; Item 11 -- Executive Compensation; Item 12 -- Security Ownership of
Certain Beneficial Owners and Management; and Item 13 -- Certain Relationships
and Related Transactions is incorporated into Part III of this Annual Report on
Form 10-K by reference to the Company's Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on April 5, 2000.
26
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
EXHIBIT INDEX
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE
- ------- ----------- ------------
3(i) Restated Certificate of Incorporation of Biopure #
3(ii) By-laws of Biopure, as amended *
10.1 Purchase Agreement between Biopure and INPACO Corporation, *
dated August 28, 1997
10.2 Agreement between Biopure and Moyer Packing Company dated *
October 21, 1994
10.3 Agency Agreement between Biopure and The Butler Company *
dated March 29, 1999
10.4 Promissory Note dated July 31, 1995, from Carl Rausch in *
favor of Biopure in the amount of $1,009,772.01
10.5 Promissory Note dated July 31, 1995, from Carl Rausch in *
favor of Biopure in the amount of $216,033.05
10.6 Promissory Note dated July 31, 1995, from Edward Jacobs, *
Jr., in favor of Biopure in the amount of $262,120.10
10.7 Promissory Note dated July 31, 1995, from Bing Wong in favor *
of Biopure in the amount of $70,714.82
10.8 Promissory Note dated July 31, 1995, from Maria Gawryl in *
favor of Biopure in the amount of $12,601.93
10.9 Promissory Note dated July 31, 1995, from Geoff Filbey in *
favor of Biopure in the amount of $47,707.30
10.10 Lease Agreement dated October 12, 1990, between Biopure and *
Tarvis Realty Trust
10.11 Lease Agreement dated May 23, 1997, between Biopure and *
Karpowicz Family Trust
10.12 Lease Agreement dated March 31, 1995, between Biopure and *
New England Innovatins Corp.
10.13 Lease Agreement dated April 29, 1994, between Biopure and *
Eleven Hurley Street Associates
10.14 Lease Agreement dated May 10, 1994, between Biopure and *
Tarvis Realty Trust
10.15 Lease Agreement dated August 23, 1994, between Biopure and *
Tarvis Realty Trust
10.16 Lease Agreement dated October 21, 1994, between Biopure and *
Moyer Packing Company
10.17 Deferred Compensation Agreement with Carl Rausch dated *
August 8, 1990, as amended December 12, 1995
10.18 1993 Incentive Compensation Plan *
10.19 1998 Stock Option Plan *
10.20 1999 Omnibus Securities and Incentive Plan *
10.21 Employment Agreement between Biopure and Daniel R. Davis *
dated December 3, 1998 and as amended and restated as of
June 24, 1999
10.22 Employment Agreement between Biopure Corporation and Paul A. *
Looney dated as of June 9, 1999
10.23 Employment Agreement Concerning Protection of Company *
Property and the Arbitration of Legal Disputes
27
28
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE
- ------- ----------- ------------
10.24 1990 Incentive Compensation and Company Stock Purchase *
Agreement
10.25 Rights Agreement between Biopure and American Stock Transfer **
& Trust Company dated September 21, 1999
24.1 Powers of Attorney #
27.1 Financial Data Schedule #
99.0 Factors to Consider in Connection with Forward-Looking #
Statements
- ---------------
# Filed herewith.
* Previously filed as a exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-78829) and incorporated herein by reference thereto.
** Previously filed as an exhibit to the Company's Report on Form 8-A dated
November 4, 1999 and incorporated herein by reference thereto.
28
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1994, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: January 28, 2000 BIOPURE CORPORATION
By: /s/ Francis H. Murphy
------------------------------------
Francis H. Murphy
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Carl W. Rausch* Chairman and January 28, 2000
- --------------------------------------------------- Chief Executive Officer
Carl W. Rausch
/s/ David N. Judelson* Director, Vice Chairman January 28, 2000
- ---------------------------------------------------
David N. Judelson
/s/ Paul A. Looney* Director, President January 28, 2000
- ---------------------------------------------------
Paul A. Looney
/s/ Daniel P. Harrington* Director January 28, 2000
- ---------------------------------------------------
Daniel P. Harrington
/s/ Stephen A. Kaplan* Director January 28, 2000
- ---------------------------------------------------
Stephen A. Kaplan
/s/ C. Everett Koop, M.D.* Director January 28, 2000
- ---------------------------------------------------
C. Everett Koop, M.D.
/s/ Charles A. Sanders, M.D.* Director January 28, 2000
- ---------------------------------------------------
Charles A. Sanders, M.D.
/s/ Francis H. Murphy Chief Financial Officer January 28, 2000
- ---------------------------------------------------
Francis H. Murphy
*By: /s/ Francis H. Murphy
- --------------------------------------------------
Francis H. Murphy
Attorney-in-Fact
29
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets at October 31, 1999 and, October
31, 1998.................................................... F-3
Consolidated Statements of Operations for the Years Ended
October 31, 1999, 1998 and 1997........................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended October 31, 1999, 1998 and 1997............... F-5
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1999, 1998 and 1997........................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Biopure Corporation
We have audited the accompanying consolidated balance sheets of Biopure
Corporation (the Company) as of October 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended October 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Biopure
Corporation at October 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1999, in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 2 to the consolidated financial statements, the Company's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans as to these matters are
described in Note 2. The 1999 consolidated financial statements do not include
any adjustment that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
December 10, 1999
F-2
32
BIOPURE CORPORATION
CONSOLIDATED BALANCE SHEETS
---------------------
OCTOBER 31,
---------------------
1999 1998
--------- ---------
In thousands, except share and per share data
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 30,778 $ 6,063
Accounts receivable, less allowance of $65 and $28 at
October 31, 1999 and 1998, respectively................. 321 346
Inventory, net............................................ 3,182 3,072
Current portion of restricted cash........................ 3,508 3,508
Other current assets...................................... 488 186
--------- ---------
Total current assets.................................... 38,277 13,175
Property and equipment:
Equipment................................................. 24,699 23,021
Leasehold improvements.................................... 13,567 13,330
Furniture and fixtures.................................... 1,100 1,078
Construction in progress.................................. 4,979 5,144
--------- ---------
44,345 42,573
Accumulated depreciation and amortization................. (16,898) (12,967)
--------- ---------
Net property and equipment.................................. 27,447 29,606
Investment in affiliate..................................... 101 131
Other assets................................................ 405 1,936
--------- ---------
Total assets............................................ $ 66,230 $ 44,848
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................... $ 741 $ 1,523
Accrued expenses.......................................... 9,664 7,666
Current portion of long-term debt......................... -- 2,000
--------- ---------
Total current liabilities............................... 10,405 11,189
Long-term debt.............................................. -- 4,000
Deferred compensation....................................... 1,788 1,910
Commitments and contingencies............................... -- --
Common stock to be repurchased (No shares of Class A common
stock at October 31, 1999 and 2,013,956 shares at 1998)... -- 6,300
Stockholders' equity:
Preferred stock, $0.01 par value, 30,000,000 shares
authorized at October 31, 1999 and 5,900,000 at 1998....
Series A, 346,663 shares designated, issued and
outstanding at October 31, 1998......................... -- 3
Series B, 2,358,490 shares designated; 2,127,251 shares
issued and outstanding at October 31, 1998.............. -- 22
Series C, 2,830,188 shares designated, issued and
outstanding at October 31, 1998......................... -- 28
Common stock:
Class A, $0.01 par value, 100,000,000 shares authorized at
October 31, 1999 and 35,000,000 at 1998, 22,280,867 and
10,742,503 shares issued, 22,280,867 and 10,539,225
shares outstanding at October 31, 1999 and 1998,
respectively............................................ 223 107
Class B, $1.00 par value, 179 shares authorized, 117.7
shares issued and outstanding........................... -- --
Capital in excess of par value............................ 282,054 197,495
Contributed capital....................................... 24,574 24,574
Notes receivable.......................................... (2,463) (2,291)
Treasury stock, at cost (No shares of Class A common stock
at October 31, 1999 and 203,278 shares at 1998)......... -- (1,583)
Accumulated deficit....................................... (250,351) (196,906)
--------- ---------
Total stockholders' equity.............................. 54,037 21,449
--------- ---------
Total liabilities and stockholders' equity.............. $ 66,230 $ 44,848
========= =========
See accompanying notes.
F-3
33
BIOPURE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
In thousands, except share and per share data
Revenues:
Oxyglobin......................................... $ 2,749 $ 942 $ --
Other............................................. 117 189 --
----------- ----------- -----------
Total revenues...................................... 2,866 1,131 --
Cost of revenues.................................... 6,814 1,543 --
----------- ----------- -----------
Gross profit (loss)................................. (3,948) (412) --
Operating expenses:
Research and development.......................... 24,166 22,950 23,494
Sales and marketing............................... 2,922 2,444 694
General and administration........................ 5,266 4,660 2,920
----------- ----------- -----------
Total operating expenses....................... 32,354 30,054 27,108
----------- ----------- -----------
Income (loss) from operations....................... (36,302) (30,466) (27,108)
Other income (expense):
Interest income................................... 1,041 1,417 705
Interest expense.................................. (469) (799) (1,015)
Other............................................. 200 (199) --
----------- ----------- -----------
Total other income (expense)................... 772 419 (310)
----------- ----------- -----------
Net income (loss)................................... (35,530) (30,047) (27,418)
Stock dividends on preferred stock.................. (17,915) -- --
----------- ----------- -----------
Net loss applicable to common stockholders.......... $ (53,445) $ (30,047) $ (27,418)
=========== =========== ===========
Historical:
Basic net income (loss) per common share.......... $ (3.61) $ (2.41) $ (2.23)
=========== =========== ===========
Weighted-average shares used in computing basic
net income (loss) per common share............. 14,813,045 12,460,070 12,299,716
=========== =========== ===========
Pro forma (unaudited):
Pro forma basic net income (loss) per common
share.......................................... $ (2.62) $ (1.65)
=========== ===========
Weighted-average shares used in computing pro
forma basic net income (loss) per common
share.......................................... 20,368,860 18,236,894
=========== ===========
See accompanying notes.
F-4
34
BIOPURE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------------------- CAPITAL IN
PREFERRED STOCK CLASS A CLASS B EXCESS
------------------- ------------------- --------------- OF PAR CONTRIBUTED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT VALUE CAPITAL
---------- ------ ---------- ------ ------ ------ ---------- -----------
In thousands, except share and per
share data
Balance at October 31, 1996............ 346,663 $ 3 12,432,609 $124 114.5 $-- $145,015 $24,245
Exercise of stock options............ 50,434 1 45
Sale of preferred stock.............. 2,127,251 22 21,715
Sale of common stock................. 130,208 1 3.2 5,574
Common stock to be repurchased....... (2,013,956) (20) (6,280)
Services contributed by
stockholder........................ 329
Accrued interest.....................
Net loss.............................
---------- ---- ---------- ---- ----- -- -------- -------
Balance at October 31, 1997............ 2,473,914 25 10,599,295 106 117.7 -- 166,069 24,574
Exercise of stock options............ 27,783 68
Sale of preferred stock.............. 2,830,188 28 28,181
Sale of common stock................. 92,592 1 2,463
Common stock issued in exchange for
release of debt obligation......... 22,833 438
Equity compensation.................. 276
Accrued interest.....................
Net loss.............................
---------- ---- ---------- ---- ----- -- -------- -------
Balance at October 31, 1998............ 5,304,102 53 10,742,503 107 117.7 -- 197,495 24,574
Exercise of stock options............ 17,117 88
Sale of preferred stock.............. 2,610,264 26 30,099
Sale of common stock................. 3,500,000 35 37,667
Conversion of preferred stock to
common stock....................... (7,914,366) (79) 8,224,525 82 17,912
Stock repurchase adjustment.......... 300
Retirement of treasury stock......... (203,278) (1) (1,582)
Equity compensation.................. 75
Accrued interest.....................
Net loss.............................
---------- ---- ---------- ---- ----- -- -------- -------
Balance at October 31, 1999............ -- $ -- 22,280,867 $223 117.7 $-- $282,054 $24,574
========== ==== ========== ==== ===== == ======== =======
TOTAL
NOTES TREASURY ACCUMULATED STOCKHOLDERS'
RECEIVABLE STOCK DEFICIT EQUITY
---------- -------- ----------- -------------
In thousands, except share and per
share data
Balance at October 31, 1996............ $(1,946) $(1,583) $(139,441) $ 26,417
Exercise of stock options............ 46
Sale of preferred stock.............. 21,737
Sale of common stock................. 5,575
Common stock to be repurchased....... (6,300)
Services contributed by
stockholder........................ 329
Accrued interest..................... (164) (164)
Net loss............................. (27,418) (27,418)
------- ------- --------- --------
Balance at October 31, 1997............ (2,110) (1,583) (166,859) 20,222
Exercise of stock options............ 68
Sale of preferred stock.............. 28,209
Sale of common stock................. 2,464
Common stock issued in exchange for
release of debt obligation......... 438
Equity compensation.................. 276
Accrued interest..................... (181) (181)
Net loss............................. (30,047) (30,047)
------- ------- --------- --------
Balance at October 31, 1998............ (2,291) (1,583) (196,906) 21,449
Exercise of stock options............ 88
Sale of preferred stock.............. 30,125
Sale of common stock................. 37,702
Conversion of preferred stock to
common stock....................... 17,915
Stock repurchase adjustment.......... 300
Retirement of treasury stock......... 1,583 --
Equity compensation.................. 75
Accrued interest..................... (172) (172)
Net loss............................. (53,445) (53,445)
------- ------- --------- --------
Balance at October 31, 1999............ $(2,463) $ -- $(250,351) $ 54,037
======= ======= ========= ========
See accompanying notes.
F-5
35
BIOPURE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
In thousands
OPERATING ACTIVITIES:
Net income (loss).......................................... $(35,530) $(30,047) $(27,418)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 3,931 3,262 3,090
Equity compensation...................................... 75 276 --
Deferred compensation.................................... (122) 231 192
Accrued interest on stockholders' notes receivable....... (172) (181) (164)
Equity in affiliate's operations......................... 30 35 59
Services contributed by stockholder...................... -- -- 329
Changes in assets and liabilities:
Inventories........................................... (110) (3,072) --
Accounts receivable................................... 25 (346) --
Other receivable (affiliate).......................... -- -- 654
Other current assets.................................. 302 89 (65)
Accounts payable...................................... (782) 441 (769)
Accrued expenses...................................... 1,394 682 2,354
-------- -------- --------
Net cash used in operating activities............... (30,959) (28,630) (21,738)
INVESTING ACTIVITIES:
Purchase of property and equipment......................... (1,772) (4,809) (1,350)
Other assets............................................... 1,531 (341) (78)
Restricted cash............................................ -- (2,425) (2,437)
-------- -------- --------
Net cash used in investing activities............... (241) (7,575) (3,865)
FINANCING ACTIVITIES:
Net proceeds from sale of common stock..................... 37,702 2,464 5,575
Net proceeds from sale of preferred stock.................. 30,125 28,209 21,737
Payment of long-term debt.................................. (6,000) (2,000) (1,000)
Repurchase of common stock................................. (6,000) -- --
Proceeds from exercise of stock options.................... 88 68 46
-------- -------- --------
Net cash provided by financing activities........... 55,915 28,741 26,358
-------- -------- --------
Increase (decrease) in cash and cash equivalents........... 24,715 (7,464) 755
Cash and cash equivalents at beginning of period........... 6,063 13,527 12,772
-------- -------- --------
Cash and cash equivalents at end of period................. $ 30,778 $ 6,063 $ 13,527
======== ======== ========
Interest paid.............................................. $ 435 $ 693 $ 1,131
======== ======== ========
See accompanying notes.
F-6
36
BIOPURE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANIZATION
Biopure Corporation (the Company) develops, manufactures and markets oxygen
therapeutics. Its products are Hemopure, for human use, and Oxyglobin, for
veterinary use. The Company is developing Hemopure as an alternative to red
blood cell transfusions as well as for use in the treatment of other critical
care conditions.
During 1998, the Company began selling Oxyglobin. Initially, sales were made on
a limited basis directly to emergency and specialty veterinary practices. In
October 1998, the Company began selling Oxyglobin nationwide through several
veterinary distributors, who purchase product for immediate and direct sale to
veterinary practices.
Costs of revenues include significant depreciation of production equipment and
other fixed and variable costs associated with the production of Oxyglobin. The
manufacturing process requires certain machinery to run on 24-hour cycles even
when production runs are not occurring. These costs are anticipated to be better
rationalized if demand and production increase.
Additionally, during 1999, the Company continued human clinical trials of its
Hemopure solution in the United States, Europe and South Africa. These clinical
trials are expensive and a significant cause of the Company's operating losses.
Although there cannot be any assurance that its Hemopure solution will be
approved by a country's regulatory authority, the trials to date have produced
satisfactory results, which have allowed the Company to continue clinical
progress.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements reflect the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
On June 24, 1999, the Board of Directors approved a two for three reverse stock
split of common shares which was effected in the form of a reverse stock
dividend on July 21, 1999. All common share and per common share amounts
included in the accompanying consolidated financial statements and notes thereto
have been retroactively restated to give effect to this reverse stock split.
The financial statements of the Company have been presented on the basis of a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. However, the Company may not be
able to continue its operations because it has experienced significant operating
losses, which it expects will continue and has limited sources of funding for
continuing operations. In order to continue as a going concern, the Company's
plans at this time are focused on obtaining new sources of equity financing, if
possible, and securing strategic alliance arrangements that will provide cash
for operations. 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. The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Risks and Uncertainties
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
37
Some of the Company's key materials used in production are obtained from sole
source suppliers. Although such materials are available from other suppliers,
the Company must test materials not previously used in order to assure the
materials meet the Company's requirements.
Cash and Cash Equivalents
The Company considers all liquid securities with original maturities of three
months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market. Inventories are reviewed periodically during the
year for slow-moving, obsolete or off-grade status based on sales activity, both
projected and historical. Appropriate reserves are established for any inventory
that falls into these categories.
Property and Equipment
Property and equipment are recorded at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. The estimated useful
lives of these assets are as follows:
Leasehold improvements.............................. Life of the lease
Major equipment..................................... 12 years
Equipment........................................... 5-7 years
Furniture and fixtures.............................. 5 years
Computer equipment.................................. 3 years
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment. Other
revenues consist primarily of royalties from the sale of an enzyme material
previously licensed to a pharmaceutical company and a Small Business Innovative
Research grant offset by associated costs. The Company recognizes revenue from
royalties when earned upon sale of the licensed products.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares, generally with an
exercise price equal to the market value of the shares at the date of grant, as
determined by the board of directors. The Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), in accounting for its stock-based compensation plans, rather
than the alternative fair value accounting method provided for under Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation (Statement 123), as this alternative requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, when the exercise price of options granted to employees
under these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is required.
Net Income (Loss) Per Share
Historical basic net income (loss) per share is computed based on the
weighted-average number of common shares outstanding during the period. Diluted
net income (loss) per share is computed based upon the weighted-average number
of common shares outstanding during the year, adjusted for the dilutive effect
of shares issuable upon the conversion of preferred stock outstanding and the
exercise of common stock options and warrants determined based upon average
market price of common stock for the period. Diluted net income (loss) per share
are not presented in the accompanying consolidated financial statements because
the Company had losses for all periods presented.
F-8
38
Unaudited Pro Forma Net Income (Loss) Per Common Share
The unaudited pro forma basic net income (loss) per common share is computed
using the weighted-average number of outstanding common shares assuming
conversion of all convertible preferred shares into common shares (at date of
original issuance), which occurred upon completion of the initial public
offering.
Calculation of Net Loss Per Share
-----------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
Historical:
Net income (loss)................................. $ (35,530) $ (30,047) $ (27,418)
Stock dividends on preferred stock................ (17,915) -- --
----------- ----------- -----------
Net income (loss) applicable to common
stockholders................................. $ (53,445) $ (30,047) $ (27,418)
=========== =========== ===========
Weighted-average number of common shares
outstanding.................................... 14,813,045 12,460,070 12,299,716
=========== =========== ===========
Basic net income (loss) per common share............ $ (3.61) $ (2.41) $ (2.23)
=========== =========== ===========
Pro forma (unaudited):
Weighted-average number of common shares:
Historical outstanding......................... 14,813,045 12,460,070
Issued upon assumed conversion of preferred
stock........................................ 5,555,815 5,776,824
----------- -----------
Total weighted-average number of common shares
used in computing basic pro forma net income
(loss) per common share........................ 20,368,860 18,236,894
=========== ===========
Basic pro forma net income (loss) per common
share.......................................... $ (2.62) $ (1.65)
=========== ===========
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, Disclosures About Segments of an Enterprise and Related Information
(Statement 131), which establishes standards for public companies to report
information about operating segments in financial statements. Statement 131
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise; however, Statement 131 retains the requirements to report
information about major customers. The Company adopted this statement effective
November 1, 1998. The Company believes it currently operates in one segment, its
Oxyglobin veterinary product, and consequently, adoption of SFAS No. 131 did not
result in any significant change in the presentation of the Company's
disclosures. As the Company develops new products and expands its operations,
the Company will re-evaluate these disclosures.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP provides guidance for
the capitalization of certain costs incurred to develop or obtain internal-use
software. SOP No. 98-1 is effective for the Company in fiscal 2000. The adoption
of this standard is not expected to have a material effect on the Company's
financial position or operating results.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective for the Company in
the first quarter of Fiscal 2001. The Company is currently evaluating the effect
that implementation of the new standard will have on its financial statements
but believes the effect will be immaterial.
F-9
39
3. TRANSACTIONS WITH RELATED PARTIES
At October 31, 1999, approximately 22% of the outstanding shares of Class A
Common Stock of Biopure were owned by two limited partnerships, Biopure
Associates Limited Partnership and Biopure Associates Limited Partnership II.
The primary purpose of these partnerships is to own shares of common stock of
the Company. The general partners of these partnerships are officers of the
Company, and the limited partners include certain employees, officers, directors
and consultants to the Company.
During 1999, 1998 and 1997, the Company made payments of approximately $270,000,
$344,000 and $301,000, respectively, to directors and consultants who have
ownership interests in the Company.
In August 1990, the Company made loans to certain directors and officers to
allow them to purchase Class A Common Stock. The principal and interest, for all
loans except the loan made to Mr. Rausch, is due on July 31, 2000. The principal
and interest on Mr. Rausch's loan is due on July 31, 2003. The notes receivable,
for all loans except the loan made to Mr. Rausch, bear interest at the prime
rate (8.25% at October 31, 1999) and are included in stockholders' equity in the
accompanying consolidated financial statements. The loan for Mr. Rausch bears
interest at a fixed 4.71% rate.
4. INVENTORIES
Inventories consisted of the following:
----------------
OCTOBER 31,
----------------
1999 1998
------ ------
In thousands
Raw materials...................................... $ 690 $ 935
Work-in-process.................................... 134 542
Finished goods..................................... 2,358 1,595
------ ------
$3,182 $3,072
====== ======
5. INVESTMENTS
The Company accounts for its investments in affiliated companies under the
equity method of accounting. In July 1994, the Company acquired a 50% general
partnership interest in Eleven Hurley Street Associates (EHSA), a real estate
partnership which owns the Company's principal office and research and
development facilities. The Company's lease with EHSA requires annual rental
payments of $239,000 through 2002 and $262,000 from 2003 through 2007. The
partnership's income was not significant for any of the periods presented. At
October 31, 1999 and 1998, the Company's proportionate share of EHSA's net
equity was approximately $101,000 and $131,000, respectively.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
----------------
OCTOBER 31,
----------------
1999 1998
------ ------
In thousands
Settlement......................................... $3,508 $3,508
Phase III clinical trial........................... 2,925 1,039
Initial public offering............................ 619 --
Other.............................................. 2,612 3,119
------ ------
$9,664 $7,666
====== ======
F-10
40
7. LONG-TERM DEBT
Long-term debt consists of a loan from P&U in the original principal amount of
$9,000,000. Principal payments are made in equal quarterly installments of
$500,000 through October 1, 2001. Interest is paid quarterly on the unpaid
principal balance at the prime rate of interest. The prime rate at October 31,
1998 was 8.0%. The note is secured by a substantial portion of the Company's
assets and is required to be repaid on completion of a public offering of the
Company's equity securities or certain other financing events. As of October 31,
1999 the loan had been repaid in full from the proceeds of the initial public
offering.
8. DEFERRED COMPENSATION
The Company has a deferred compensation agreement with an officer/stockholder
requiring a base payment of $700,000 plus accrued interest of $716,000 at
October 31, 1999. In June 1999 the payment date was extended to July 31, 2003,
subject to certain conditions.
The Company has an Incentive Compensation Plan for all employees which provides
for discretionary deferred bonus awards annually. Commencing three years after
grant, awards are paid ratably over a five-year period. No grants were made in
1999. Plan expenses were $160,000 and $130,000 in 1998 and 1997, respectively.
9. STOCKHOLDERS' EQUITY
On August 4, 1999 the Company completed the initial public offering (IPO) of
3,500,000 shares of Class A Common Stock. The Company received proceeds of
$39,060,000 before expenses of $1,358,000 and recorded an increase in
stockholders' equity of $37,702,000.
Convertible Preferred Stock
The Series A Convertible Preferred Stock was convertible into Class A Common
Stock on a three and one-third for one basis, adjusted for certain events. The
Series A shares automatically converted at the time of the IPO.
The Series B Convertible Preferred Stock was convertible into Class A Common
Stock on a two-thirds for one basis, adjusted for certain events. The Series B
shares automatically converted at the time of the IPO.
The Series C Convertible Preferred Stock was convertible into Class A Common
Stock on a two-thirds for one basis, adjusted for certain events. The Series C
shares automatically converted at the time of the IPO.
On December 23, 1998, the Company sold 1,489,498 units at $12.00 per unit, each
consisting of one share of Series D Preferred Stock plus a warrant to purchase
1/15th of a share of Class A Common Stock. In connection with the issuance of
the Series D shares, warrants were issued to the placement agents to purchase
30,667 shares of Class A Common Stock and warrants were issued to the holders of
the Series B and Series C Convertible Preferred Stock to purchase 1/15th of a
share of Class A Common Stock for each share of Series B and Series C
Convertible Preferred Stock held by them. Warrants issued to the placement
agents and the preferred stockholders have an exercise price of $18.00 and
$12.00 per share, respectively. Warrants issued to the placement agents and the
preferred stockholders expire three years and four years, respectively, from the
date of the IPO. Net cash proceeds, after deducting approximately $930,000 in
commissions and expenses associated with the offering, were $16,946,000.
Subsequent to May 1, 1999, an additional 397,250 units of Series D Convertible
Preferred Stock were sold with aggregate net proceeds of $4,700,000.
Each share of Series D Convertible Preferred Stock was convertible into
two-thirds of a share of Class A Common Stock or such greater ratio so that
conversion resulted in a 35% annualized rate of return on the Series D original
offering price of $12 per share.
Upon closing of the IPO (see above), all shares of preferred stock converted
into shares of Class A Common Stock and reflected the two-for-three stock split.
In accordance with the provisions of
F-11
41
EITF 98-5, for those units sold after May 20, 1999, the Company treated any
shares of Class A Common Stock issued upon conversion in excess of two-thirds of
one share of Class A Common Stock for each share of Series D Convertible
Preferred Stock as a dividend for accounting purposes. The Company recorded a
dividend of $155,000 in the third quarter of 1999 for the 12,936 additional
shares of Class A Common Stock issued. The holders of the Series B Convertible
Preferred Stock received an additional 280,000 shares in the aggregate upon
conversion and the holders of the Series C Convertible Preferred Stock received
an additional 1,200,000 shares in the aggregate upon conversion. The fair market
value of such additional shares was, for accounting purposes, treated as a
dividend on such convertible preferred stock in the quarter in which the
offering and conversion occurred. The Company recorded a dividend of $17,760,000
in the third quarter of 1999.
Common Stock
The Class B Common Stock is authorized for issuance only to P&U. The holder of
Class B Common Stock is not entitled to vote or receive dividends. The Class B
Common Stock is convertible into shares of Class A Common Stock according to a
formula that is based upon a future fair market value of the Class A Common
Stock and is dependent upon the Company achieving U.S. FDA approval for its
Hemopure solution.
Consistent with the P&U agreement, the number of shares of Class A Common Stock
to be issued in exchange for the Class B Common Stock will be determined based
upon an independent valuation of the Company, after FDA approval of the
Company's human oxygen therapeutic product, which valuation cannot exceed $3
billion. This valuation is then divided by 13,635,525 shares to arrive at a fair
value per share of Class A Common Stock. P&U's total investment in the Company,
$142.3 million, divided by such per share fair value of Class A Common Stock,
results in the number of shares of Class A Common Stock P&U will receive,
limited to a maximum of 1,272,119 shares.
Dividends
At this time, the Company does not intend to pay dividends.
Stock Accumulation Plan
In August 1990, the Company issued 1,606,000 shares of Class A Common Stock to
certain employees, officers, consultants and directors for $1.35 per share,
which was $4.05 per share less than the then fair market value, as determined by
the Company's Board of Directors, of $5.40 per share. This $4.05 per share
market value differential is associated with a permanent nonlapse restriction on
the value of the stock. Upon the repurchase by the Company or other investors,
the future value will be equal to the then-current fair market value less the
permanent discount of $4.05 per share, adjusted for an annual interest factor.
Contributed Capital
In accordance with the P&U strategic alliance discussed in Note 9 below, the
Company recorded as contributed capital $329,000 of research and development
costs incurred by P&U on behalf of the Company in 1997. These costs are included
in research and development expenses in the accompanying consolidated statements
of operations and were either incurred by Biopure and reimbursed by P&U, or
incurred directly by P&U. All such costs incurred were clinical development
costs specifically identified and contractually agreed to by both parties. Upon
conversion of the Class B Common Stock, the cumulative amount of contributed
capital will be treated as consideration for the Class A Common Stock issued in
the conversion.
Stock Options and Warrants
The Company has two active stock option plans under which key employees,
directors and consultants may be granted options to purchase Class A Common
Stock at a price determined by the Board of Directors at
F-12
42
the date of grant. Under these plans and a previous plan, substantially all
options become exercisable on a pro rata basis over a four-year period and
expire ten years from date of grant.
Presented below is a summary of transactions under the stock option plans during
1999, 1998 and 1997:
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
1999 1998 1997
--------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ------- --------- ------- ---------
Options outstanding at beginning of
year............................... 546,634 $18.54 133,217 $14.94 243,650 $12.02
Granted.............................. 1,558,687 12.00 456,133 18.68 6,667 22.50
Exercised............................ (17,117) 5.19 (27,783) 2.42 (50,433) 1.02
Expired.............................. -- -- -- -- (18,667) 4.43
Forfeited............................ (143,043) 12.48 (14,933) 20.58 (48,000) 19.89
--------- ------- -------
Options outstanding at end of year... 1,945,161 $13.84 546,634 $18.54 133,217 $14.94
========= ======= =======
Options exercisable.................. 192,680 89,350 83,383
========= ======= =======
During 1998, the Company granted 20,000 options with an exercise price of $5.40
to certain consultants to replace options that had expired in March 1996. The
exercise price of the new options is the same as the exercise price of the
expired options, and the new options are fully vested. The Company used an
estimated fair market value of its stock as determined by its Board of Directors
in order to determine the related expense to be recorded as a result of issuing
options to nonemployees. The Company recorded expense and increased capital in
excess of par value by $276,000.
The following table summarizes information about stock options outstanding at
October 31, 1999:
------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE (YRS.) PRICE SHARES PRICE
- -------------- --------- ---------------- --------- ------- ---------
$ 4.50-$ 5.40................... 21,667 3.0 $ 5.33 21,667 $ 5.33
$ 7.50-$13.50................... 1,436,240 9.8 12.01 10,200 12.72
$18.00-$22.50................... 487,254 7.8 19.62 160,813 20.08
--------- -------
1,945,161 9.0 $13.84 192,680 $18.03
========= =======
During 1998, the Company's 1988 stock option plan expired. In March 1998, the
Board of Directors approved the adoption of a 1998 stock option plan to provide
for the granting of options for up to 98,293 shares of Class A Common Stock, the
number of shares remaining in the expired 1988 plan. Options outstanding under
the Company's 1988 plan forfeited in future periods will be available for grant
under the new plan. At October 31, 1999, there were 76,690 shares available for
future grants under stock option plans.
In June 1999, the Company established the 1999 Omnibus Securities and Incentive
Plan (the 1999 Plan), which provides for the granting of incentive stock
options, non-qualified stock options, restricted stock awards, deferred stock
awards, unrestricted stock awards, performance share awards, distribution
equivalent rights, or any combination of the foregoing to key management,
employees and directors. The maximum number of shares of Class A Common Stock
reserved for issuance under the 1999 Plan is 1,866,666. Upon the Company's
initial public offering, the Board of Directors approved the granting of options
under the 1999 Plan to officers, directors and employees for an aggregate of
1,492,020 shares, with an exercise price of $12.00.
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One of the Company's vendors holds an option to acquire 26,667 shares of Class A
Common Stock. The exercise price of $37.50 per share is payable by the
contribution of certain property, equipment and facilities rights. The option
expires in September 2000. The option agreement is being renegotiated. The
Company expects to increase the number of optioned shares and extend the terms
of the option.
In connection with the sale of Series C Convertible Preferred Stock in November
1997, the Company issued to the placement agent warrants to purchase 66,667
shares of Common Stock at a price per share equal to $12.00, adjusted for
certain events. The warrants expire three years from the date of the initial
public offering.
Statement 123 Disclosures
The Company has adopted the disclosure provisions only of Statement 123. The
fair value of options and warrants granted was estimated at the date of grant
using the Black-Scholes option pricing model for 1999 and the minimum value
method for 1998 and 1997 with the following assumptions: risk-free interest
rates ranging from 5.49% to 6.32%; dividend yield of 0% and an expected life of
either two years or seven years. For 1999 a volatility factor of the expected
market price of the Company's Common Stock of .80 was used. If the compensation
cost for options and warrants granted had been determined based on the fair
value of the options and warrants at the date of grant, the Statement 123 pro
forma net loss applicable to common stockholders for 1999, 1998 and 1997 would
have been $55,854,000, $30,712,000 and $27,538,000, respectively. The Statement
123 pro forma net loss per share for 1999, 1998 and 1997 would have been
$(3.77), $(2.46) and $(2.24), respectively. Compensation expense under Statement
123 for 1999, 1998 and 1997 is not representative of future expense, as it
includes one, two and three years of expense, respectively. In future years, the
effect of determining compensation cost using the fair value method will include
additional vesting and associated expense.
The weighted-average fair value per option and warrant of options and warrants
granted during 1999, 1998 and 1997 was $6.50, $6.11 and $8.04, respectively.
Reserved Shares
At October 31, 1999, there were 4,299,928 shares of Class A Common Stock
reserved for issuance under the stock option plans, stock option agreements and
warrants and upon conversion of Class B Common Stock.
Rights Agreement
Effective September 24, 1999 each holder of Class A Common Stock received a
preferred stock purchase right for each share owned. The rights entitle the
holders to acquire preferred stock following an acquisition of more than 20% by
any person or group, if the board of directors does not redeem the rights. If
the rights are not redeemed, their exercise would cause substantial dilution to
the acquiring person or group.
10. CONTRACTS
The Company had a strategic alliance with P&U beginning in 1990. Under the
alliance agreement, P&U purchased $117,700,000 of Class B Common Stock in
increments based generally on the achievement of mutually agreed-upon progress
points or goals. Additionally, in exchange for the future issuance of Class A
Common Stock, as described in Note 8 above, P&U funded clinical development
undertaken by the Company and P&U for the Company's oxygen therapeutic products.
The Company's agreement with P&U was terminated in accordance with its terms in
July 1996. Final payments from P&U were realized in 1997.
11. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan, the Biopure Corporation Capital
Accumulation Plan, qualified under the provisions of Internal Revenue Code
section 401(k). Employees are eligible for
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enrollment upon becoming employed and for discretionary matching after one year
of service. The Company's discretionary contribution vests after a period of
four years from the date of employment. In 1999, 1998 and 1997, the Company
contributed $211,000, $163,000 and $158,000, respectively, to the plan.
12. INCOME TAXES
At October 31, 1999, the Company had available for the reduction of future
years' federal taxable income and income taxes, net operating loss carryforwards
of approximately $161,000,000, expiring from the year ended October 31, 2004
through 2019, along with research and development and investment tax credits of
approximately $5,900,000, expiring from the year ended October 31, 2000 through
2014. Since the Company has incurred only losses since inception and due to the
degree of uncertainty with respect to future profitability, the Company believes
at this time that it is more likely than not that sufficient taxable income will
not be earned to allow for realization of the tax loss and credit carryforwards
and other deferred tax assets. Accordingly, the tax benefit of these items has
been fully reserved. Additionally, the future use of these carryforwards may be
subject to limitations pursuant to sections 382 and 383 of the Internal Revenue
Code.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of October 31, 1999 and
1998 were as follows:
--------------------
1999 1998
-------- --------
In thousands
Deferred tax assets:
Net operating loss carryforward...................... $ 64,259 $ 56,138
Capitalized research and development................. 23,508 17,287
Accruals and reserves................................ 2,685 2,364
Tax credit carryforwards............................. 5,897 3,388
-------- --------
Total deferred tax assets.................... 96,349 79,177
Deferred tax liabilities:
Depreciation......................................... 2,797 2,159
-------- --------
Total deferred tax liabilities............... 2,797 2,159
-------- --------
Net deferred tax assets................................ 93,552 77,018
Valuation allowance for deferred tax assets............ (93,552) (77,018)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
In 1999, the valuation allowance increased by $16,534,000 due primarily to the
increase in net operating losses, capitalized research and development costs,
and research and development tax credits.
13. COMMITMENTS
In 1997, the Company entered into an agreement with B. Braun Melsungen A.G.
(Braun) to repurchase 2,013,956 shares of the Company's common stock for
$6,300,000. The agreement required the Company to place in escrow installment
payments of such purchase price equal to an annual amount of $1,000,000 plus
five percent of the Company's revenues from human product sales and license
fees, if any, in a certain European region. The Company received Braun's
agreement to delay the deposit of $1,000,000 due in August 1998 to February
1999. The aggregate repurchase amount of $6,300,000 (subsequently negotiated to
$6,000,000 as a result of accelerated repurchase) had to be funded by the year
2002. At any time, the stockholder could withdraw funds in escrow to complete
the repurchase in installments by simultaneous delivery out of escrow to the
Company of a pro rata portion of the stock. At October 31, 1998, the Company had
$1,046,000 in escrow in connection with this agreement and included the
restricted cash in
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45
other assets. The accompanying consolidated balance sheet has reclassified the
Class A Common Stock to be repurchased from Braun from stockholders' equity to
temporary equity and included the unpaid purchase price and related shares in
Common Stock to be Repurchased. In December 1998, Braun withdrew all funds from
escrow to complete the repurchase of 319,683 shares of Class A Common Stock. On
August 5, 1999 the Company paid $4,000,000 in addition to the existing balance
of $1,000,000 in escrow and Braun withdrew all funds from escrow to complete the
repurchase of 1,694,273 shares of Class A Common Stock.
The agreement also requires the Company to pay Braun a royalty of two percent of
the Company's revenues from human product sales and license fees in a certain
European region. Payments must be made on a quarterly basis until such amounts
aggregate $7,500,000. In exchange for this royalty commitment, the rights to
manufacture and market specified products in Braun's territory were reacquired
by the Company.
Future minimum lease payments under operating leases for the Company's various
office, laboratory, warehouse and processing facilities, with terms of more than
one year at October 31, 1999 are as follows:
2000..................................................... $ 991,000
2001..................................................... 681,000
2002..................................................... 259,000
2003..................................................... 279,000
2004..................................................... 283,000
Thereafter............................................... 1,040,000
----------
$3,533,000
==========
Rent expense was approximately $1,035,000, $803,000 and $643,000 in 1999, 1998
and 1997, respectively.
14. LITIGATION
The Company is a party to litigation initially filed in 1990 arising from
certain joint venture agreements for development and distribution of product in
Central and South America. Summary judgments were entered against the two
plaintiffs in 1994. The plaintiffs each appealed the judgments; one of the
appeals was voluntarily dismissed. The other appeal was denied in part and
remanded to the trial court for further findings based on lack of jurisdiction.
It is anticipated that the trial court will make the requisite findings in the
calendar year 2000. In connection with the summary judgments, the Company agreed
to a settlement with a third-party intervenor with claims against one of the
plaintiffs. Final payment of the settlement is subject to the outcome of the
pending appeal; however, the Company has provided for such settlement in the
accompanying financial statements. At October 31, 1999, the Company had
$3,508,000 in escrow in connection with this settlement and included this amount
in current portion of restricted cash. The settlement amount has been recorded
as a current obligation.
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