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Accounting Firm
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(State or other jurisdiction
of
incorporation or organization)
(I.R.S. Employer
Identification No.)
11 Hurley Street, Cambridge, MA (Address of principal
executive offices)
02141 (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
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large
accelerated
filer o
Accelerated
filer o
Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Based on 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 non-affiliates of
the registrant on April 30, 2007 was $38,151,349.
The number of shares outstanding of the registrant’s
Class A Common Stock was 34,971,087 on January 23,2008; the number of shares of the Class B Common Stock as
of such date was 117.7.
Specifically identified portions of the registrant’s
definitive proxy statement to be filed in connection with the
registrant’s 2008 Annual Meeting are incorporated into
Part III of this report
This annual report includes forward-looking statements. These
forward-looking statements include, without limitation,
statements about the clinical development program, market
opportunity, strategies, expected activities as the Company
pursues its business plan, and the adequacy of its available
cash resources. Forward-looking statements include those that
imply that the Company will be able to manage its expenses
effectively and raise the funds needed to continue its business,
that the Company will be able to stabilize and enhance its
financial position, that the Company will be able to
commercially develop Hemopure, that in pursuing anemia,
cardiovascular and trauma indications the Company will be able
to address safety and efficacy questions of regulatory agencies,
that the U.S. Naval Medical Research Center (NMRC) may
conduct a clinical trial in trauma patients, that anticipated
milestones will be met in the expected timetable or at all, that
any preclinical or clinical trials will be successful, that
Hemopure, if it receives regulatory approval, will attain market
acceptance and be manufactured and sold in amounts to attain
profitability and that the Company will be able to successfully
increase its manufacturing capacity for Hemopure if it receives
regulatory approval. Forward-looking statements are usually
accompanied by words such as “believe,”“anticipate,”“plan,”“seek,”“expect,”“intend” and similar expressions.
The forward-looking information is based on various factors and
was derived using numerous assumptions and judgments.
Actual results may differ materially from those set forth in the
forward-looking statements due to risks and uncertainties that
exist in the Company’s operations and business environment.
These risks include the factors identified under “Risk
Factors” in this report. All forward-looking statements
included or incorporated by reference in this report are based
on information available to the Company on the date such
statements were made. In light of the substantial risks and
uncertainties inherent in all future projections, the inclusion
of forward-looking statements in this report should not be
regarded as representations by us that the Company’s
objectives or plans will be achieved. The Company undertakes no
obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or
otherwise. You are advised, however, to consult any additional
disclosures the Company makes in its reports to the SEC on
Forms 10-Q,
8-K and
10-K.
The content of this document does not necessarily reflect the
position or the policy of the U.S. Government or the
Department of Defense, and no official endorsement should be
inferred.
We develop, manufacture and market pharmaceuticals, called
oxygen therapeutics, that are intravenously administered to
deliver oxygen to the body’s tissues. We were founded in
1984, and are headquartered and operate a GMP manufacturing
facility in Cambridge, Massachusetts.
Hemopure®
[hemoglobin glutamer — 250 (bovine)], or HBOC-201, is
approved for sale in South Africa for the treatment of surgical
patients who are acutely anemic. Our current clinical
development efforts for Hemopure are focused and expected to be
focused on potential indications in anemia and cardiovascular
ischemia and on supporting the U.S. Navy’s
government-funded efforts to develop a potential out-of-hospital
trauma indication. In the area of anemia, we have an application
for market authorization pending in the United Kingdom for
acutely anemic adult orthopedic surgery patients under
age 80 when blood is not readily available or not an
option. We are also preparing a protocol to conduct a clinical
trial in patients with advanced, life-limiting illness to
evaluate Hemopure on its oxygen-carrying capacity to increase
perfusion and improve the quality of life in these patients.
Our veterinary product
Oxyglobin®
[hemoglobin glutamer — 200 (bovine)], or HBOC-301, the
only oxygen therapeutic approved by the U.S. Food and Drug
Administration (FDA) and the European Commission, is indicated
for the treatment of anemia in dogs. We have sold approximately
200,000 units of Oxyglobin. Since 2004 we have operated our
manufacturing facilities at low production to conserve funds and
have limited Oxyglobin sales. We anticipate increasing Oxyglobin
manufacturing and will seek increased sales in 2008.
Red blood cells carry nearly all of the oxygen in our bodies.
Medical conditions such as anemia or ischemia can compromise the
delivery of oxygen to the body’s tissues. Anemia is a
decrease in the concentration of red blood cells or hemoglobin
in circulation caused by blood loss for example, from injury or
surgery, or by other causes, such as disease or chemotherapy
treatment. Ischemia is a decrease or lack of red blood cell flow
to an organ or area of the body due to obstructed or constricted
blood vessels, as in heart attack, stroke and certain medical
procedures. Oxygen deprivation, even for several minutes, can
result in cell damage, organ dysfunction and, if prolonged,
death.
Research
During the fourth quarter of fiscal 2007, the U.S. Navy
agreed to buy Hemopure and seven different modifications of
Hemopure for preclinical testing. Biopure formulated and
manufactured the modified versions of Hemopure to test
hypotheses concerning changes in formulation in relation to
physiological effects. The Navy has made grants to eight
institutions aggregating in excess of $1.7 million for
testing the modifications and is conducting research at Navy
facilities with Navy preclinical investigators. Based on
information to date, all of which is interim, we do not
anticipate that these modifications will supplant Hemopure.
Proceeds to the Company from the product sales are expected to
aggregate $1.6 million.
Ischemia
We are currently pursuing an ischemia clinical trial program in
Europe and South Africa. Our trials in ischemia are described
below (as of January 23, 2008).
•
Cardiopulmonary Bypass Surgery. In 2006,
patient enrollment began in a Phase 2 clinical trial designed as
a non-randomized, multi-center, trial in patients undergoing
multi-vessel coronary artery bypass graft (CABG) surgery. The
objective of this trial is to assess the safety and feasibility
of Hemopure in reducing heart damage, as measured by cardiac
enzyme elevation, and enhancing tissue preservation during CABG
surgery. Secondary endpoints include measurements of major
adverse cardiac events, kidney function, transfusion
requirements, cognitive impairment and length of hospital stay.
The trial design prescribes a total of 60 patients who
receive either standard-of-care treatment or Hemopure containing
approximately 60 grams of hemoglobin prior to CABG surgery. The
trial has enrolled 51 patients.
Wound Healing. In 2006, patient enrollment
also began in a Phase 2 clinical trial to assess the safety and
feasibility of Hemopure in increasing the incidence of complete
wound healing and reducing the need for subsequent amputations
in patients with severe vascular disease who are undergoing limb
amputation. The rationale for this pilot trial was that the
product might promote wound healing by transporting oxygen
through partially blocked arteries to oxygen-deprived tissues.
Because of slow enrollment, we stopped this trial at the end of
2007 after enrolling 16 of the proposed 100 patients. We
concluded that the slow enrollment in the trial was largely due
to trial design that did not take into account different
clinical practices across institutions and countries.
•
Cardiac Procedures — Percutaneous Coronary
Intervention (PCI). Our first pilot ischemia
trial was designed to assess the product’s safety in
patients with single-vessel coronary artery disease who were
undergoing angioplasty and stenting procedures, or PCI. This
Phase 2 trial, which was completed in 2005, enrolled a total of
45 evaluable patients at five hospitals in Germany, Belgium and
The Netherlands.
A second PCI trial, a study in patients with multi-vessel
coronary artery disease who are undergoing PCI, was designed to
capture additional safety and preliminary efficacy data to
support subsequent trials in patients experiencing a heart
attack. The hypothesis the trial was intended to test is that
Hemopure may improve oxygenation and heart function during times
of coronary artery blockage.
In the trial, patients undergoing coronary balloon angioplasty
were administered Hemopure. A key objective was to study whether
intracoronary delivery of Hemopure lessens ischemia as measured
by standard tests.
This proof of concept trial enrolled five patients, all at the
Erasmus Medical Center in Rotterdam, The Netherlands. The
protocol had allowed for an enrollment of up to 10 subjects.
However, the investigator stopped enrollment at the end of 2007,
after concluding that the results from five patients were
sufficient to show a trend toward proving the principle being
tested.
Trauma
Proposal before FDA. We have been working
under a cooperative research and development agreement (CRADA)
with the U.S. Naval Medical Research Center (NMRC) to
develop Hemopure for use in trauma patients in out-of-hospital
settings (for example, at accident scenes, in ambulances or on
the battlefield). In June 2005, the NMRC submitted an IND
application to the FDA for a clinical trial called RESUS
(Restore Effective SUrvival in Shock). The application, which
has been on clinical hold at the FDA since July 2005, proposes a
government-funded, NMRC-sponsored clinical trial to assess the
safety and efficacy of out-of-hospital administration of
Hemopure in reducing morbidity and mortality in severely injured
patients experiencing hemorrhagic shock (acute blood loss).
Under the CRADA, NMRC has primary responsibility for developing,
seeking FDA acceptance of and conducting the RESUS trial.
Following an
all-day
hearing in December 2006, FDA’s Blood Products Advisory
Committee (BPAC) voted 11 to 8, with one abstention, to
recommend against proceeding with the trial as then designed,
despite all trauma surgeons on the BPAC voting in favor of and
recommending the carrying out of the trial. However, in view of
the product’s potential benefit in this patient population,
committee members suggested, among other things, that RESUS be
modified as a smaller, pre-hospital Phase 2 trial designed to
provide safety and efficacy data in a few hundred patients. The
Navy revised the protocol accordingly, but, during the fourth
quarter of 2007, the FDA has maintained its clinical hold.
In order for RESUS to proceed, the FDA must lift the clinical
hold, and the Department of Defense and the internal review
boards of participating hospitals in the communities where the
study would take place must provide final authorization.
Ongoing Trauma Trial. At the Johannesburg
Hospital Trauma Unit in South Africa, we are sponsoring a
50-patient Phase 2 safety trial of Hemopure, in the hospital
emergency room setting, for treatment of unstable trauma
patients who have significant blood loss and low blood pressure.
In early fiscal 2007, an independent data safety and monitoring
board (DSMB) reviewed the data from the first 21 patients
in this trial and recommended that the trial continue without
modification. The role of the DSMB is to evaluate data from the
ongoing trial to determine whether there are safety issues that
would warrant modification of the protocol or early termination
of the study. The
term “blinded” means that, as the DSMB reviewed the
study data for both groups of patients, those who received
Hemopure and those in the control group who did not receive
Hemopure, it did not know which group received Hemopure.
Blinding is used to reduce potential bias that can occur when
the identity of the treatments is known. We also provided these
patient data to the NMRC for submission to the FDA. Enrollment
in this trial has been slow and intermittent, with 32 of 50
planned patients enrolled to date.
Surgical
Anemia Marketing Application
In July 2006, we submitted a marketing authorization application
(MAA) to the United Kingdom’s Medicines and Healthcare
products Regulatory Agency (MHRA). The application sought
authorization to market Hemopure in the U.K. for the treatment
of acutely anemic adult orthopedic surgery patients less than
80 years of age.
In December 2006, we received a provisional opinion letter from
the United Kingdom Commission on Human Medicines containing
comments and questions based on the MHRA’s review of our
MAA. We met with the MHRA during 2007 and responded in full to
its letter in early November 2007, requesting market
authorization for the treatment of acutely anemic adult
orthopedic surgery patients under 80 years of age when
blood is not readily available or not an option.
The time period for the MHRA’s final decision on the
response is not prescribed by law or regulation and can vary. A
time period of four to six months is typical.
If a marketing authorization is granted in the U.K., we would
have the option to seek registration of Hemopure for the same
indication in other member states in the European Economic Area
through the Mutual Recognition Procedure.
Our application in the U.K. is our first marketing application
for Hemopure in Europe. Like the biologics license application
(BLA) we submitted to the FDA in 2002, the MAA contains
preclinical and clinical study reports and an integrated
database of all of our completed clinical trials of Hemopure.
This information includes data for approximately 1,500 total
subjects, of which more than 800 were administered Hemopure. The
MAA also contains information not in the BLA, including new,
post hoc analyses of existing data from a 688-patient Phase 3
orthopedic surgery trial conducted in the U.S., South Africa,
Europe and Canada and a description of the post-approval
clinical experience with Hemopure in South Africa.
South
Africa
Marketing. In 2007, we began direct sales and
marketing of Hemopure in South Africa, following the
resignation, for financial reasons, of a marketing agent we had
engaged.
We have a small staff in South Africa for training, marketing
and complying with local regulations. Hemopure is now in use in
some government hospitals and most private hospitals. Its use
and our sales are increasing. We continue to believe the
information we gain about how doctors understand and use the
product should help us to plan for larger markets and other
potential indications.
Regulatory. Enrollment in clinical trials in
South Africa was delayed briefly by an annual requirement, under
South African import law, for us to obtain an export certificate
from the U.S. Department of Agriculture (USDA). The USDA
completed a routine inspection of our documents concerning
traceability of raw material and issued us the required
certificate. In January 2008 we resumed shipment of clinical
trial material to South Africa. Product availability for sales
in South Africa was not affected by the delay.
Compassionate
Use
Hemopure has been administered to 21 patients since January
2007 in the U.S. on a “compassionate use” basis
for the treatment of life-threatening anemia when blood
transfusion was not an option. The FDA granted a single patient
IND in each of these emergency situations and approved treatment
for an additional 15 patients where the product was not
administered. Prior to these cases, there had been no
compassionate use of the product since 2000.
Scientific publications regarding Hemopure during 2007 include:
•
A study published in the Journal of Trauma Injury Infection and
Critical Care 2007; 63:1113 — 1119 evaluated the
cardiopulmonary (heart-lung) effects of HBOC-201 and HBOC-201
combined with a concentrated saline solution during
resuscitation of pigs in hemorrhagic shock. Pigs resuscitated
with the HBOC-201-concentrated saline combination had
significantly reduced blood vessel constriction, lower pulmonary
artery pressure and increased cardiac output compared with pigs
treated with HBOC-201 alone. HBOC-201 with concentrated saline
solution may be beneficial in reducing the blood vessel
constrictions that often occur with HBOC-201. The mechanisms of
these beneficial effects still need to be investigated.
•
A case report detailing the treatment of a
23-month old
child with sickle cell anemia was detailed in the March 2007
Pediatric Hematology and Oncology Journal. This is the first
case reported in the literature of a child transfused, in an
emergency situation, with Hemopure.
•
Published in the Research Abstract Program of the
25th Annual
ACVIM Forum, Seattle, WA, June 6-June 9, 2007 was an
abstract describing a study performed over a
4-year
period that evaluated Oxyglobin infusions in cats. During the
period of 2002 to 2006, 46 anemic cats received 61 infusions of
Oxyglobin. The overall survival rate was 84%, with 54% (25 cats)
being discharged. The abstract concludes that Oxyglobin should
be used cautiously in cats with cardiac disease, especially with
concurrent blood transfusions and crystalloid infusion, to avoid
fluid overload.
•
An article published in the journal Shock, Vol. 27, No. 6
pp 652-656,
2007, reported on the study of HBOC-201 as a resuscitation
therapy in a combined hemorrhagic shock and brain injury model.
The results suggest that resuscitation with HBOC-201 protects
auto regulatory mechanisms and may reduce secondary brain injury
in traumatic brain injury.
•
The journal Artificial Cells, Blood Substitutes, and
Biotechnology published a study in September, 2007 that
presented a mathematical model. The study suggests that the use
of HBOCs should result in the overall reduction in blood use
when used to treat surgical patients post operatively.
Board of
Directors
On April 4, 2007, the board of directors of Biopure
Corporation elected Allan Ferguson as a director and a member of
the nominating committee, now the nominating and governance
committee, of the board. Mr. Ferguson is also a director of
Autoimmune Inc., TransMedics Inc., Ulthera Inc., Xthetix Inc.,
and ZONARE Medical Systems. He retired as a senior partner of
3i’s Venture Capital Group in March 2007. He previously
served as a Biopure board member from December 1988 to December
1990, in connection with 3i’s investment in the Company. On
April 4, 2007, Charles A. Sanders M.D. retired from the
board after ten years of service as a board member and, for
several years, as nonexecutive chairman of the board.
Non-Compliance
with Nasdaq Listing Requirements
On April 23, 2007, our common stock became listed on the
Nasdaq Capital Market. We applied for listing on this market
because we were out of compliance with Nasdaq’s $1.00
minimum bid price requirement for continued listing.
Transferring from the Nasdaq Global Market to the Nasdaq Capital
Market averted a delisting notice and permitted us to take
advantage of an additional
180-day
compliance period offered on the Nasdaq Capital Market to
satisfy the minimum bid requirement. On October 15, 2007 we
regained compliance through a reverse stock split that raised
the minimum bid price for our Common Stock above $1.00. On
December 14, 2007 we received notice from the Nasdaq Stock
Market that the closing bid price had again fallen and remained
below $1.00 for 30 consecutive business days. We are now out of
compliance with Nasdaq’s $1.00 minimum bid price
requirement for continued listing set forth in Marketplace
Rule 4310(c)(4). This notification has no effect on the
listing of our Common Stock at this time.
In accordance with Marketplace Rule 4310 (c)(8)(D), we have
180 calendar days or until June 11, 2008, to regain
compliance by having the bid price of our Common Stock close at
$1.00 per share or more for at least 10
consecutive business days. If we do not regain compliance by
June 11, 2008, Nasdaq will determine whether we meet the
initial listing criteria set forth in Marketplace Rule 4310
(c), except for the bid price requirement. If we meet the
initial listing criteria, we expect to be granted an additional
180 calendar day compliance period. If we do not demonstrate
compliance within the compliance period, we will be issued a
delisting letter. According to the letter, if we are deemed not
eligible for an additional compliance period, Nasdaq will
provide written notification that the securities will be
delisted.
The
Company
Biopure was incorporated in Delaware in 1984. We maintain a
website at the following Internet address: www.biopure.com.
Through a link to a third-party content provider, this corporate
website provides free access to our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after electronic filing
with the Securities and Exchange Commission (SEC). No portion of
that website is incorporated into, or part of, this document.
Biopure, Hemopure, Oxyglobin and Oxygen Bridge are registered
trademarks of Biopure.
Scientific
Overview
Oxygen supports life in all of the body’s tissues.
Hemoglobin, a protein normally contained within red blood cells,
is the molecule that transports oxygen to the body’s
tissues. Under normal conditions, hemoglobin contained within
red blood cells carries approximately 98 percent of the
body’s oxygen, and the remaining two percent is dissolved
in the plasma, the fluid part of blood.
As the heart pumps blood, hemoglobin within red blood cells
takes up oxygen in the lungs and carries it to the body’s
tissues and organs. Blood travels through progressively smaller
blood vessels to the capillaries, some of which are so narrow
that red blood cells can only pass through in single file. Most
of the oxygen release occurs in the capillaries. Blood then
returns to the lungs where the hemoglobin in red blood cells
binds 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 — a decrease in the concentration of red
blood cells in the circulation associated with blood loss (for
example from injury or surgery) or other disorders, for example.
•
ischemia — a decrease or lack of red blood cell
flow to an organ or body part due to obstructed or restricted
blood vessels, as in heart attack, stroke and certain medical
procedures.
•
inadequate perfusion — conditions, such as
cardiopulmonary failure, in which the heart’s inability to
pump sufficient quantities of blood to meet the oxygen needs of
the tissues or the failure of the lungs to oxygenate blood
adequately can cause tissue damage.
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. Healthcare professionals
may also use medications that stimulate red blood cell
production if anemia is anticipated, for example, in the case of
planned surgery.
In trauma situations, victims may have massive bleeding
resulting in rapid loss of blood volume and oxygen-carrying
capacity. Blood typing and handling requirements, particularly
refrigeration, limit the feasibility of using red blood cell
transfusions in pre-hospital emergency treatment. Existing
alternatives to red blood cell transfusions are limited. 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 generally is administered into the
veins of 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.
Red blood cell transfusions generally are not effective for
ischemic conditions caused by blockage or narrowing of blood
vessels. In such situations, a blocked or constricted (narrowed)
blood vessel that is too narrow to permit the normal passage of
red blood cells can prevent oxygen from reaching the body’s
tissues.
Biopure’s
Oxygenation Technology
We have two oxygen therapeutic products, Hemopure for human use
and Oxyglobin for veterinary use, which are similar except for
their molecular size. Our products, which are administered
intravenously, are defined as therapeutics because they are
expected to provide help, or therapy, to oxygen-deprived tissues
by transporting oxygen to those tissues. These products consist
of hemoglobin that has been taken out of the red blood cells of
cattle and then purified, chemically cross-linked for stability
and formulated in a balanced salt solution similar to
Ringer’s lactate. The resulting hemoglobin solutions do not
contain any cells.
The average stabilized hemoglobin molecule in Hemopure is less
than 1/100,000,000th the size of a red blood cell. Upon
infusion into a patient’s bloodstream, this stabilized
hemoglobin spreads throughout the plasma, the fluid part of
blood. Thereby Hemopure increases the oxygen content of the
plasma. The plasma containing Hemopure is in continuous contact
with blood vessel walls, where oxygen transport to tissues takes
place. Plasma flows everywhere that blood ordinarily flows and
can also bypass partial blockages or pass through constricted
vessels that are too small for the normal passage of red blood
cells.
The stabilized hemoglobin molecules in Hemopure can hold the
same amount of oxygen as the hemoglobin molecules in red blood
cells, on a gram-for-gram basis, and release oxygen more readily
than red blood cells. In addition, data from preclinical studies
suggest that introducing Hemopure into the bloodstream may help
red blood cells to offload more oxygen to the tissues than they
otherwise would.
The following chart lists the characteristics of Hemopure
insofar as its characteristics may apply to treating anemia and
oxygenating tissue in conditions where ischemia could occur:
Characteristic
Oxygen transport
Red blood cells and Hemopure molecules in plasma
Storage
Room temperature
(2o
to
30o
C); no loss of efficacy during storage
Shelf life
36 months
Compatibility
Universal
Preparation
Ready-to-use
Viscosity
Low
Hemopure is stable without refrigeration for 36 months (2
degrees to 30 degrees centigrade) and for 18 months at
elevated temperature (40 degrees centigrade), and is compatible
with all blood types. These properties permit the product to be
stocked well in advance of anticipated use. Consequently, when
blood is not available, Hemopure could be used to provide
temporary oxygen-carrying support to 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
replenishes its own red blood cells. Also, as described above,
the product’s small molecular size permits it to oxygenate
through the plasma and thereby act as a potential therapeutic in
ischemic conditions, where red blood cell transfusions are
generally not indicated. These factors have contributed to our
focus on cardiovascular ischemia and out-of-hospital trauma.
Until mid 2004, most of our efforts had focused on developing
Hemopure for use as an alternative to red blood cell
transfusions in surgical patients.
Hemopure has certain disadvantages when compared to red blood
cells. Transfused red blood cells have a longer duration of
action and can persist in the body for an estimated 60 to
90 days. Hemopure has an average half-life of 19 hours
and, depending on the degree of the patient’s anemia, may
require repeat administration. In addition, it is anticipated
that Hemopure will be more expensive than transfused red blood
cells when compared on a unit-to-unit basis. Furthermore, the
maximum dose (10 units) of Hemopure studied in clinical
trials to date may provide temporary oxygen-carrying support, or
an Oxygen Bridge, but may not meet the long-term needs required
to completely avoid red blood cell transfusions in patients
experiencing massive blood loss.
Our two products, Hemopure and Oxyglobin, are oxygen-carrying
biological drugs called “oxygen therapeutics.”
In 2001, South Africa’s Medicines Control Council granted
marketing approval for Hemopure for the treatment of adult
surgical patients who are acutely anemic and for the purpose of
eliminating, delaying or reducing the need for red blood cell
transfusions in these patients. Since this approval, over
450 patients in South Africa have received Hemopure. In
2006 we realized our first sale. In 2007 we began to market the
product directly, rather than through a distributor, and now we
are seeing gradual adoption of the product in the market.
We have completed 22 clinical trials investigating the use of
Hemopure, with a total enrollment of 1,512 subjects, of whom 835
were administered Hemopure. Our ongoing trials are described
under “Developments” above. Our research and
development expenditures during the fiscal years 2005 through
2007 were $5,322,000, $6,662,000 and $6,972,000, respectively.
Oxyglobin, our veterinary product, is approved for sale in both
the United States and the European Union for the treatment of
anemia in dogs, regardless of the cause of the anemia. Oxyglobin
is marketed and sold to veterinary hospitals, and commercial
sales of Oxyglobin have resulted in thousands of administrations
in animals.
Hemopure
We believe Hemopure can be developed for several indications. In
addition to the product’s approved surgical anemia
indication in South Africa described above, we believe that
preclinical animal studies and observations from our human
clinical trials and post approval use in South Africa support
clinical investigation of ischemia and trauma as well as other
anemia applications.
Trauma
If the safety and effectiveness of Hemopure in trauma patients
experiencing acute blood loss in the out-of-hospital setting can
be demonstrated to the FDA’s satisfaction, we believe that
the product’s multi-year room temperature stability,
universal compatibility and other properties could allow it to
be stockpiled, positioned abroad, and carried or stored in
remote locations. These attributes may make it well suited for
use on the battlefield, in ambulances, and in the Strategic
National Stockpile, which is a store of medicines kept by the
U.S. Center for Disease Control in case of public health
emergency.
In March 2003, the U.S. Naval Medical Research Center
(NMRC) signed a collaborative research and development agreement
(CRADA) with Biopure to help fund and conduct a two-stage
randomized, standard therapy controlled trial of Hemopure in
out-of-hospital resuscitation of patients in severe hemorrhagic
shock as a result of traumatic injury. Entitled “Restore
Effective Survival in Shock” (RESUS), the trial was
intended to support an indication for out-of-hospital military
and civilian trauma applications. The status of the proposed
RESUS trial is described above under
“Developments —
Trauma.”1
To date, the U.S. Congress has appropriated
$22.5 million to the Department of Defense
($16 million to the Navy, $6.5 million to the Army)
for the development of Hemopure in potential civilian and
military trauma
applications.2
Of this amount, approximately $1.6 million has been
reverted due to delays in initiating the RESUS clinical trial.
The funding is being used for the Navy’s proposed RESUS
clinical trial and has supported preclinical studies of the
product in animal models of hemorrhagic shock (acute blood
loss), including those that mimic military trauma scenarios.
1 Completion
of the proposed RESUS clinical trial of Hemopure in trauma may
be contingent upon further funding.
2 $5,102,306
is from Grant DAMD17-02-1-0697. The U.S. Army Medical Research
Acquisition Activity, 820 Chandler Street,
Fort Detrick, MD
21702-5014,
is the awarding and administering acquisition office.
Biopure is sponsoring a separate, Phase 2 clinical trial in
South Africa that is designed to assess the safety and
tolerability of Hemopure, in a hospital setting, for emergency
treatment of unstable patients who have significant blood loss
as a result of blunt or penetrating trauma. The status of this
ongoing in-hospital trauma trial is described above under
“Developments — Trauma.”
Ischemia
Inadequate tissue oxygenation due to partial vessel blockage or
constriction can cause heart attack, angina, transient ischemic
attack, and stroke. In these situations, treatment with red
blood cell transfusions is generally not indicated because red
blood cells are too large to pass through or around blockages.
In contrast, the ability of Hemopure molecules to circumvent
partial blood vessel occlusions could potentially benefit
patients suffering from ischemic conditions by supplying oxygen
to tissues that red blood cells cannot reach. The status of our
ischemia clinical program is under
“Developments — Ischemia.”
Anemia:
Surgery, Other
Hemopure, if approved, could serve as an alternative to red
blood cell transfusions by providing a temporary Oxygen Bridge
until red blood cells become available or are produced by the
body. We do not expect Hemopure to eliminate the need for red
blood cell transfusions in all situations. However, the
oxygen-carrying properties, storage and other advantages of
Hemopure, described above under “Biopure’s Oxygenation
Technology,” address many of the limitations associated
with red blood cell transfusions.
We believe that our clinical trials have demonstrated the
efficacy of Hemopure as an alternative to red blood cell
transfusions in patients undergoing elective orthopedic surgery,
as measured by the avoidance of red blood cell transfusions in
these patients. Nevertheless, in reviewing our trial results,
the FDA has raised efficacy as an issue. In advanced clinical
trials, the product’s efficacy as an oxygen therapeutic was
evaluated by determining 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. The 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 during a
pre-specified period. Elimination was deemed not to occur if the
patient was administered a red blood cell transfusion for any
reason during a pre-specified period. Despite the protocol
limitations, the clinical trials of Hemopure that have been
completed and analyzed for efficacy, with patients in a control
group receiving red blood cells, met or exceeded their endpoint
of elimination of red blood cell transfusions in a stated
percentage of patients.
The following chart summarizes the red-blood-cell-controlled
Phase 2 and Phase 3 clinical trials of Hemopure that we have
completed.
% of Patients
No. of Total
Treated with
Dosing: Grams
Patients/No. of
Hemopure that
Hemoglobin
Patients Treated
Avoided Red Blood
Type of Surgery
Development Status
(Units Hemopure)
with Hemopure
Cell Transfusion
Elective orthopedic surgery
Phase 3 trial completed in U.S., Canada, Europe and South Africa
Up to 300 grams (10 units) over 6 days before, during
or after surgery
688/350
59
%
Non-cardiac elective surgery
Phase 3 trial completed in Europe and South Africa
Up to 210 grams (7 units) over 6 days before, during
or after surgery
160/83
43
%
Post cardiopulmonary bypass surgery
Phase 2 trial completed in the U.S.
Up to 120 grams (4 units) over 3 days post-surgery
98/50
34
%
Aortic aneurysm reconstruction surgery
Phase 2 trial completed in the U.S. and Europe
Up to 150 grams (5 units) over 4 days; first dose
administered during or after surgery
72/48
27
%
Safety Summary. In 21 clinical trials
completed prior to filing our orthopedic surgery BLA,
797 patients received Hemopure and 661 control group
patients received donated (also referred to as
“allogenic”) red blood cells
and/or
colloidal or crystalloid fluids. Some patients in the
Hemopure-treated group subsequently received allogenic red blood
cells and/or
other fluids.
Based on the integrated safety database in our orthopedic
surgery BLA, which combines data from 21 clinical trials, 93% of
the patients in the Hemopure group and 88% of the control group
patients experienced at least one adverse event (AE), and 23% of
the Hemopure patients and 18% of the control group patients
experienced at least one serious adverse event (SAE). As
expected, the incidence of AEs and serious AE’s (SAEs)
increased in both groups as patients’ transfusion needs
increased. Many of these events are commonly experienced by
surgery patients.
AEs that occurred in the Hemopure group at greater than or equal
to 5% increased incidence compared with the control group
included transient yellow skin discoloration (not associated
with liver dysfunction), nausea, mild to moderate increase in
blood pressure (10 to 20 mm/Hg), vomiting, low urine output,
difficulty swallowing, flatulence, and low red blood cell count.
These AEs were generally transient and manageable.
SAEs that occurred statistically significantly more often (p is
less than or equal to 0.1) in the Hemopure group were
postoperative bleeding (0.9% vs. 0%, p=0.018) and stroke (1.0%
vs. 0.2%, p=0.046), none of which were reported by the treating
investigator as associated with Hemopure. The increased
incidence of reported postoperative bleeding in the Hemopure
group may be attributable to wound seepage of plasma that has a
pinkish discoloration due to the presence of Hemopure. When
stroke is combined with other clinically relevant syndromes
(transient ischemic attack and other reversible ischemic
neurological events) the incidence is comparable (not
statistically significantly different) between the two groups
(1% vs. 0.5%, p=0.363). The incidence of heart attack (1.1%
Hemopure vs. 0.5% control, p=0.244), acute renal failure (0.6%
vs. 0.5%, p=0.735) and death (3.1% vs. 2.1%, p=0.257) was also
comparable between patient groups. The SAE of intestinal
infection occurred statistically significantly more often in the
control group (0% Hemopure vs. 0.5% control, p=0.093). The
p-value is a measure of statistical significance, indicating the
probability of the observations happening by chance. The
difference in the incidence of SAEs between the treatment groups
is deemed statistically significant when “p” is less
than or equal to 0.1.
The FDA expressed concerns about the Hemopure marketing
application, or BLA, based on safety and efficacy questions
arising primarily from the FDA’s analysis of the Phase 3
orthopedic surgery trial data submitted in the BLA. Our
application in the U.K. is our first marketing application for
Hemopure in Europe. Like the BLA we
submitted to the FDA in 2002, the MAA contains preclinical study
reports and an integrated database of all of our completed
clinical trials of Hemopure. The MAA also contains information
not in the BLA, including new, post hoc analyses of existing
data from our Phase 3 orthopedic surgery trial,
•
interim data from our ongoing trauma trial and
•
data from our percutaneous coronary intervention trial completed
in 2005 and
•
a description of the post-approval clinical experience with
Hemopure in South Africa.
Additional
Anemia Research
The Company has also decided to draw on the body of research it
has amassed in preclinical and clinical studies involving anemia
in surgery patients to develop new indications. Thus, the
Company is assessing the feasibility of two other possible
trials. One possible trial would examine Hemopure’s
potential, owing to its oxygen-carrying capacity, to increase
perfusion and improve the quality of life in patients with
advanced life-limiting illness. The study would measure, using
well established methods, both quantitative and qualitative
outcomes. Anemia is a significant but understudied problem in
terminally ill patients. In a recent study of 105 palliative
care patients, of whom 95 had advanced cancer, anemia was found
in 77% of men and 68% of women.
Another possible trial would examine the potential
erythropoietic effect of Hemopure as an alternative to or in
conjunction with erythropoietin stimulating agents (ESAs) such
as the marketed drugs Aranesp or Procrit, which enhance the
production of red blood cells. Recently the FDA has required a
label warning about the use of ESAs, and reported sales of those
products have declined. The proposed Hemopure study would
collect safety and preliminary efficacy data. Biopure has
observed evidence in previous clinical trials that Hemopure may
have such an effect. This would be our first clinical trial to
test the hypothesis.
In the Phase 2 multicenter, double-blinded, post-cardiopulmonary
bypass clinical trial described above, 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 red blood cell-infused patients on the
sixth day following surgery. Both groups maintained this
similarity when measured again at the
follow-up
visit 28 days after surgery. A red blood cell transfusion
infuses red blood cells into the patient’s blood stream. An
infusion of Hemopure does not. Consequently, the similarity of
red blood cell volume in both groups of patients suggests that
Hemopure may promote the regeneration of red blood cells. The
use of Hemopure as an erythropoietic agent is also supported by
at least one Biopure preclinical study.
Oxyglobin
Our veterinary product, Oxyglobin, is similar to Hemopure except
for its molecular size. The FDA Center for Veterinary Medicine
approved Oxyglobin in 1998 and the European Commission approved
it in 1999, in both cases for the treatment of canine anemia,
regardless of the cause of the anemia. Anemia in dogs often
results from blood loss, disease or ineffective red blood cell
production. Oxyglobin sales were $2.1 million in fiscal
2007, $1.3 million in fiscal 2006 and $1.2 million in
fiscal 2005. Although one of our customers accounts for more
than 10 percent of Oxyglobin sales, we are not dependent
upon a single customer or group of customers, the loss of which
would have a material adverse effect on our Oxyglobin business.
We use proprietary and patented purification and polymerization
processes in the manufacture of our oxygen therapeutic products.
Our scientific and engineering team has designed and managed the
construction of our large-scale process specific equipment and
our commercial scale manufacturing facilities. In addition, this
team developed the proprietary computer program that operates
and monitors most aspects of this process. We have produced both
Hemopure and Oxyglobin since 1991.
Our products consist of bovine hemoglobin that has been
purified, chemically modified and cross-linked for stability.
Controlled herds of U.S. cattle raised for beef provide the
raw material, bovine hemoglobin, used in our products. Cattle
must meet the requirements of a herd management program we have
in place to assure the origin, health, feed and quality of the
cattle to be used as a raw material source. Our suppliers
contract to maintain traceable records on animal origin, health,
feed and care as part of our effort to assure the use of
controlled, healthy animals.
Raw
Material Collection and Safety
We collect bovine whole blood into individual pre-sanitized
containers, and then transport the containers to a separation
facility. Prior to collection, the animals undergo live
inspection. Then, following blood collection, each animal
carcass undergoes U.S. Department of Agriculture (USDA)
inspection for use as beef for human consumption. If an animal
carcass is retained for further inspection by the USDA
veterinarian, we reject the corresponding container of whole
blood.
Our process has been validated, in accordance with regulatory
agency guidelines, to remove potential pathogens in the raw
material. Validation requires repeated testing to document that
the process consistently meets performance requirements.
Pathogens include bacteria, viruses such as those leading to
hepatitis and AIDS, and the transmissible spongiform
encephalopathy (TSE) agents that cause rare neurological
disorders such as “mad cow disease” and its human
equivalent. 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. We comply with, and believe we exceed, all current
guidelines regarding such risks for human pharmaceutical
products, including raw material safeguards proposed by the FDA
in January 2007. In addition, the European Directorate for the
Quality of Medicines (EDQM) granted a “Certification of
Suitability of Monographs of the European Pharmacopoeia”
for our veterinary product, Oxyglobin, in 2001 and for Hemopure
in fiscal 2003. In August 2005, the European Directorate
issued updated certificates for both products. This
certification is required for all human and veterinary medicinal
products that are manufactured from ruminant materials and
marketed in the European Union, and it represents the Council of
Europe’s official acknowledgment of the acceptability of
Oxyglobin and Hemopure with regard to TSE agents.
Manufacturing
Processes
Manufacture of Hemopure and Oxyglobin occurs in four major
steps: First, bovine blood is processed to remove plasma and
then to remove the hemoglobin protein from red blood cells. The
hemoglobin is then purified of other red cell proteins. Next,
the purified hemoglobin is stabilized by the addition of a
cross-linking agent to form hemoglobin polymers, or masses of
molecules bound together. For Hemopure there is an additional
filtering step to remove the smaller hemoglobin molecules. For
both Hemopure and Oxyglobin the polymers are then placed in a
solution suitable for infusion. Finally, we put the product
through sterilizing filters and into sterile bags.
Marketing
Hemopure
Our plan is to market Hemopure to hospitals and for pre-hospital
environments where needed and permitted. We also recognize that
it is crucial to establish a core understanding among opinion
leaders that Hemopure fills an important medical need and that
systematic development of opinion leader support is necessary.
We expect to use publications and educational forums, such as
seminars and presentations at meetings of medical specialists.
Following marketing approval in South Africa, we trained
approximately 400 doctors and nurses there in the use of the
product. We also made units available for use in South Africa
without charge.
We have a small staff in South Africa. In January 2006, we
shipped product to South Africa to support the start of sales
and marketing activities for Hemopure in that country and began
selling. A marketing agent we appointed in 2005 for South Africa
decided not to continue to market Hemopure effective in early
2007. Consequently, we hired representatives and have been
marketing Hemopure direct since April 2007. Hemopure revenues in
South Africa were $143,000 in 2007 and $37,000 in 2006, when the
first sale occurred.
If Hemopure is approved for marketing elsewhere, we will explore
various means of selling. Among other options, we may seek to
enter into licensing or co-marketing agreements for parts of or
the entire world. Alternatively, we could engage contract sales
organizations, contract pharmaceutical companies that supply
sales services or recruit and train our own marketing and sales
force.
Oxyglobin
We estimate that there are at least 15,000 small animal
veterinary practices in the United States, another 4,000 mixed
animal practices treating small and large animals in the United
States and approximately 22,000 small animal practices in
Europe. We believe that the average veterinary practice treats
only a small percentage of canine anemia cases with red blood
cell transfusion. The remaining animals receive either cage rest
or treatment such as fluid administration, iron supplements,
nutritional supplements or inspired oxygen.
We sell Oxyglobin direct to veterinarians in the United States,
although we expect to enter into marketing arrangements with one
or more third parties in order to expand Oxyglobin sales. We
sell Oxyglobin through distributors in Europe. Total foreign
revenues from Oxyglobin sales were $614,000 in fiscal 2007,
$278,000 in fiscal 2006 and $277,000 in fiscal 2005. Oxyglobin
revenues in the United States were $1.5 million in 2007,
$990,000 in 2006 and $883,000 in 2005.
Competition
We expect Hemopure to compete with traditional therapies and
with other oxygen delivery pharmaceuticals. Comparisons with
traditional therapies, including red blood cell transfusions,
are described under “Business — Scientific
Overview,”“— Biopure’s Oxygenation
Technology” and “— Biopure’s
Products.” In addition, cost may be a competitive factor in
traditional therapies.
Oxygen therapeutics under development fall into two categories:
•
hemoglobin-based oxygen carriers, including Hemopure and
Oxyglobin, are intravenously administered biological drugs
consisting of natural hemoglobin from an animal or human or
genetically engineered source that has been modified to improve
stability, efficacy and safety; and
•
perfluorocarbon emulsions are intravenously administered
chemical drugs, which are effective principally under conditions
of high oxygen partial pressure to assist in oxygen delivery by
forcing dissolved oxygen into the plasma space.
We expect the competitive factors for our oxygen therapeutics to
be efficacy, safety, ease of use and cost. We believe that we
have significant advantages as compared to our competitors’
pharmaceuticals, including:
•
patents covering our processes, our products and their uses;
•
long-term room and elevated temperature stability;
•
an operational manufacturing facility;
•
marketing approval in South Africa; and
•
FDA and European Commission approvals of Oxyglobin and the
facilities that produce it, and usage of the product by
veterinarians.
Some of our competitors and potential competitors may have
greater financial and other resources to develop, manufacture
and market their products. We believe the most immediate
competition comes from companies currently conducting clinical
trials of investigational hemoglobin solutions. Publicly traded
Northfield Laboratories Inc. and privately held Sangart Inc. use
hemoglobin extracted from human red blood cells as the raw
material for their respective products. Northfield has completed
a pivotal, U.S. Phase 3 trial in trauma patients, and has
stated its intention to file a BLA in 2008. Sangart reports that
it has completed a 90-patient clinical safety trial in Sweden in
patients undergoing hip replacement and is conducting a
single-center Phase 2 safety trial in the U.S. in cancer
patients undergoing total prostatectomy. Sangart also reports
that it has initiated in Sweden a Phase 2 clinical study in
chronic critical limb ischemia (CCLI) patients and has
started in Europe a Phase III study in elective orthopedic
patients to determine whether Hemospan can reduce hypotension.
It also appears that a privately held company may begin a Phase
2 trial of a human-derived hemoglobin solution in the
U.S. in cardiogenic shock.
We are aware generally that there are other companies
researching the use of hemoglobin as a therapeutic, including
programs in China and Japan. We believe that these programs are
in the preclinical stage of development, although China’s
government-funded initiative may enter clinical testing as early
as this year.
We believe that our 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 cattle 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. We are
aware of another company that reports that it is developing a
blood substitute product from bovine blood. Some 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 of our patents.
In the field of perfluorocarbons, publicly traded Synthetic
Blood International Inc. has completed an open-label,
proof-of-concept Phase 2a clinical trial in eight patients with
traumatic brain injury. They have announced plans to initiate
three pre-clinical studies in sickle cell disease, spinal cord
injury and stroke. Publicly traded Alliance Pharmaceutical
Corporation received in May 2007 regulatory authorization in
France to initiate a Phase 2 clinical trial to prevent
post-operative gastrointestinal disruption resulting from lack
of oxygen during major surgery.
In the area of cardiovascular ischemia, we can expect to
encounter competition from medical devices and drugs on the
market or currently under development. For example, privately
held KAI Pharmaceuticals Inc. has reported the completion of a
Phase 1/2 clinical trial of its product to reduce ischemia and
reperfusion injury during treatment of heart attack. Competitive
factors in ischemia indications could include cost, ease of use
and efficacy, as well as financial ability to market the device
or therapy.
Biopure knows of no companies developing oxygen therapeutic
products intended to compete with Oxyglobin in the veterinary
market. Oxyglobin may compete with donated blood, however.
Intellectual
Property
Patents, trademarks, trade secrets, technological know-how and
other proprietary rights are important to our business. We
actively seek patent protection both in the United States and
abroad. We filed our initial patent in 1986 in the United
States. Five U.S. patents have been issued from this
filing. These patents describe and claim ultra-pure
semi-synthetic blood substitutes and methods for their
preparation.
In total, we have 21 U.S. patents granted and two
applications pending relating to our oxygen therapeutics. Our
granted U.S. patents include:
•
One patent covering an ultra-purification process for hemoglobin
solutions, regardless of the source of hemoglobin expiring in
2014; two patents covering the ultra-pure oxygen therapeutic
solutions produced by this process expiring in 2009; one patent
covering the chromatography purification of the hemoglobin
solution, expiring in 2015; and two patents expiring in 2021
that covers the use of defibrinated bovine blood;
•
three patents regarding compositions having improved stability,
of which two expire in 2015 and the third expires in 2016, and
one patent covering processes for producing these compositions
which expires in 2016;
•
four patents, all of which expire in 2015, 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;
•
two patents, which expire in 2015, covering methods of
oxygenating tissue affected by inadequate red blood cell flow;
one patent, which expires in 2023, covering a method for
improving oxygen transport by stored red blood cells;
•
one patent, which expires in 2016, covering the removal of
pathogens, if present, from Biopure’s source material;
•
one patent, which expires in 2010, covering a sample valve for
sterile processing.
Research
and Development Expenses
We spent $6,972,000 in fiscal 2007 and $6,662,000 in fiscal 2006
on research and development, of which $281,000 and $410,000 was
funded by the U.S. Government. Further discussion and the
definition of “research and development” as reported
in our financial statements are set forth in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Governmental authorities in the United States and other
countries extensively regulate the testing, manufacturing,
labeling, advertising, promotion, export and marketing, among
other things, of our 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.
In the United States, Hemopure is regulated as a human biologic.
The steps required before approval of a biologic for marketing
in the United States generally include:
•
preclinical laboratory tests including 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 or
BLA;
•
FDA review of the BLA; 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
include 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 generally is required for each proposed
new indication, often accompanied by data similar to that
submitted with the original BLA.
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 becomes
effective automatically in 30 days unless the FDA, before
that time, raises concerns or questions and imposes a
“clinical hold.” In such a case, the IND sponsor, in
our case Biopure, 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 trial
design.
Clinical trials involve the administration of investigational
products to healthy volunteers or patients under the supervision
of a principal investigator consistent with an informed consent.
The RESUS trial would require an exception from informed consent
and include a community consultation and disclosure program
contemplated
under federal regulations 21 CFR 50.24-25. 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 1, 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 2 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 3 clinical trials generally
further evaluate clinical efficacy and test further for safety
within an expanded patient population and at multiple clinical
sites. A company may be able to use the data from these clinical
trials to meet all or part of any Phase 4 clinical trial
requirement.
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 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 or deny approval of a biologics license application if
applicable regulatory criteria are not satisfied or may require
additional testing or information,
and/or
require post-marketing testing and surveillance to monitor
safety, purity or potency of a product. It also generally limits
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 being marketed in the
United States. The requirements for approval are similar to
those for new human drugs. Obtaining NADA approval requires
preclinical studies and clinical field trials and the submission
of an Investigational New Animal Drug Application. Manufacturing
compliance with GMP and inspection of the manufacturing facility
are also required.
Pervasive
and Continuing Regulation
Any product approvals that are granted remain subject to
continual FDA review, and newly developed safety or efficacy
data may result in withdrawal of products from the market.
Moreover, if and when FDA approval is obtained, the manufacture
and marketing of Hemopure would remain subject to extensive
regulatory requirements administered by the FDA and other
regulatory bodies, including continuing compliance with current
good manufacturing practices, adverse event reporting
requirements and the FDA’s general prohibitions against
promoting products for unapproved or “off-label” uses.
We would be subject to inspection and market surveillance by the
FDA for compliance with these 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.
We are also 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
We are subject to a variety of regulations governing clinical
trials and sales of our products outside the United States,
including in South Africa and the European Union. Prior to the
commencement of product marketing in a country, we must obtain
approval of our products by the comparable
non-U.S. regulatory
authorities whether or not we have 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. These applications require the
completion of extensive preclinical and clinical studies and
manufacturing and controls information. If marketing
authorization is
granted in a European Union country, the Company could then seek
registration of the product in other member states in the
European Economic Area through the Mutual Recognition Procedure.
Reimbursement
Our ability to commercialize our human product successfully 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 prices 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 us to maintain price levels
sufficient for us to become profitable. 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 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.
Zafiris G. Zafirelis, 63, has been President, Chief
Executive Officer and a director of Biopure since June 2004. In
January 2006 he was appointed Chairman of the Board. From 2002
to 2004, he was Chief Executive Officer and a director of
MedQuest Products, a developer of implantable ventricular assist
devices. From 1996 until 2002, he was Chief Executive Officer of
Cardiac Assist, Inc., where he also served as a director
beginning in 2000. He holds a graduate diploma in chemistry from
the University of Rhodesia and an M.B.A. from the University of
Southern California.
Jane Kober, 64, has been Senior Vice President, General
Counsel and Secretary of Biopure since 1998. From June 1989 to
April 1998, she was a partner in LeBoeuf, Lamb,
Greene & MacRae, LLP. 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.
David A. Butler, 63, was appointed Interim Chief
Financial Officer of the Company effective December 17,2007. Mr. Butler’s experience includes the position of
Vice President, Finance and Administration (Chief Financial
Officer) of Millard Group, Inc., a services and consulting
company, from 2000 to 2007. From 1997 until 2000 he was Vice
President, Finance, Chief Financial Officer and Treasurer of
Circe Biomedical, Inc., a development-stage medical device
manufacturer.
Geoffrey J. Filbey, 64, joined Biopure in 1985 and has
served as Vice President, Engineering since 1995.
Mr. Filbey previously worked at Stone & Webster
Engineering Corporation for 14 years as a project manager
and process engineer. He holds a B.Sc. degree in engineering
from the City University in London, England.
Barry L. Scott, 58, has been Vice President, Business
Development since June 2002. From 1998 until 2002;
Mr. Scott worked for Bristol-Myers Squibb Company, most
recently as Vice President, International Business Development,
Europe. From 1996 until 1998 he was the general manager of
Bristol-Myers Squibb, Ltd., South Africa. Mr. Scott holds
the Diploma in Education from the University of Rhodesia and the
Diploma in Marketing Management from the Institute of Marketing
Management, South Africa.
Item 1A.
Risk
Factors
Company
Risks
We
have a history of losses and expect future losses.
We have had annual losses from operations since our inception.
In the fiscal years ended October 31, 2005, 2006 and 2007,
we had losses from operations of $29.1 million,
$26.9 million and $36.8 million, respectively. We had
an accumulated deficit of $562.0 million as of October
2007. We anticipate that we will continue to generate
losses for the next several years. Even if Hemopure were to be
approved by the FDA or we obtain marketing authorization in
another major market, we might not be able to achieve profitable
operations.
We
could fail to remain a going concern.
We expect that our cash on hand and forecasted sales will fund
operations into July 2008. Additional funds may not be available
to us thereafter or on terms that we deem acceptable, if they
are available at all. Our independent registered public
accounting firm has modified their report for our fiscal year
ended October 31, 2007 with respect to our ability to
continue as a going concern.
This type of modification typically would indicate that our
recurring losses from operations and current lack of sufficient
funds to sustain operations through the end of the following
fiscal year raise substantial doubt about our ability to
continue as a going concern. Our consolidated financial
statements have been prepared on the basis of a going concern,
which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. If
we became unable to continue as a going concern, we would have
to liquidate our assets and we might receive significantly less
than the values at which they are carried on our consolidated
financial statements. Any shortfall in the proceeds from the
liquidation of our assets would directly reduce the amounts, if
any, that holders of our common stock could receive in
liquidation.
To remain a going concern, we require significant funding. The
inclusion of a going concern modification in Ernst &
Young LLP’s audit opinion for fiscal 2007 may
materially and adversely affect our stock price and our ability
to raise new capital.
We
could fail in financing efforts if we fail to receive
stockholder approval when needed.
We are required under the Nasdaq Marketplace Rules to obtain
stockholder approval for any issuance of additional equity
securities that would comprise more than 20% of our total shares
of common stock outstanding before the issuance of the
securities at a discount to the greater of book or market value
in an offering that is not deemed to be a “public
offering” by Nasdaq. If we remain listed on Nasdaq, funding
of our operations in the future may require stockholder approval
for purposes of complying with the Nasdaq Marketplace Rules. We
could require such approval to raise additional funds, but might
not be successful in obtaining any such required stockholder
approval. If we remain listed on Nasdaq and we fail to obtain
approval prior to a financing for which the Nasdaq believes we
need stockholder approval, we may be delisted.
Failure
to raise sufficient additional funds will significantly impair
or possibly cause us to cease the development, manufacture and
sale of our products and our ability to operate.
The development and regulatory processes for seeking and
obtaining regulatory approval to market Hemopure has been and
will continue to be costly. We will require substantial working
capital to develop, manufacture and sell Hemopure and to finance
our operations until such time, if ever, as we can generate
positive cash flow. If Hemopure is approved for sale in the
U.S. or the European Union, we expect that we will need to
increase our manufacturing capacity, for which we will require
significant additional funding. If additional financing is not
available when needed or is not available on acceptable terms,
we may be unable to successfully develop or commercialize
Hemopure or to continue to operate. A sustained period in which
financing is not available could force us to go out of business.
If the U.S. Navy does not continue its development of
Hemopure for a trauma indication, we will likely cease
development of Hemopure for that indication because of limited
resources.
If we
fail to obtain FDA approval to market Hemopure, we will be
highly adversely affected.
We will not be able to market Hemopure in the U.S. unless
and until we receive FDA approval. In pursuing both the ischemia
and anemia indications for Hemopure, as a prerequisite to
further clinical trials for Hemopure in the U.S., we must
address ongoing FDA questions. We have been delayed, and could
be further delayed, in responding, either by outside
contractors’ failure or inability to complete their tasks
in a timely manner, our own staff limitations or by other
unanticipated delays or difficulties and lack of resources. The
FDA to date has found inadequate the responses of the
U.S. Naval Medical Research Center (NMRC) to questions
raised in connection with its proposal to conduct a trial of
Hemopure in trauma patients in the out-of-hospital setting. If
the FDA finds future responses made
by us or the NMRC to be inadequate, we would be unable to pursue
indefinitely development of Hemopure in the U.S., a very large,
key market.
Moreover, even if we adequately address the FDA’s
questions, we will need to obtain FDA acceptance of the
protocols for, and to complete, human clinical trials before
applying for FDA approval to market Hemopure for an ischemia
indication. We cannot predict whether or when we will submit an
Investigational New Drug application (IND) for an ischemia
indication. Consequently, we do not know whether or when we will
be able to commence a U.S. clinical trial of Hemopure for
an ischemia indication or that we will be able to conduct or
satisfactorily conclude additional clinical trials required to
obtain FDA marketing approval for this indication.
In the case of the trauma indication, the NMRC has primary
responsibility for designing, seeking FDA acceptance of and
conducting a clinical trial of Hemopure for out-of-hospital
treatment of trauma patients in hemorrhagic shock. In 2005, it
proposed a two-stage Phase 2b/3 clinical trial, which was placed
on an FDA clinical hold. The FDA’s Blood Products Advisory
Committee in December 2006 recommended that the trial be
redesigned as a Phase 2 trial. The NMRC submitted a Phase 2
protocol, which continues to be on clinical hold. The FDA may
not approve the redesigned Phase 2 trial. If the FDA ultimately
lifts the clinical hold and the RESUS trial, as it may be
redesigned, is commenced and concluded, the trial results may
not lead to FDA marketing approval for the proposed trauma
indication because of poor outcome or need for additional
trials. Usually a Phase 2 trial is not adequate for market
approval.
In addition, future or existing governmental action or changes
in FDA policies or precedents may result in delays or rejection
of an application for marketing approval. The FDA has
considerable discretion in determining whether to grant
marketing approval for a drug and may delay or deny approval
even in circumstances where the applicant’s clinical trials
have proceeded in compliance with FDA procedures and regulations
and have met the established end points of the trials. Despite
all of our efforts, the FDA could refuse to grant marketing
approval for Hemopure for any indication.
Challenges to FDA determinations are generally time consuming
and costly, and rarely succeed. We can give no assurance that we
will obtain FDA marketing approval for Hemopure for any
indication. The failure to obtain any approval would have severe
adverse consequences.
If we
fail to obtain regulatory approvals in foreign jurisdictions, we
will not be able to market Hemopure abroad.
We are seeking marketing approval in the U.K. and we intend to
seek to market Hemopure in other international markets,
including other European Union countries. Whether or not FDA
marketing approval has been obtained, we must obtain separate
regulatory approvals in order to market our products in the
European Union and many other foreign jurisdictions. The
regulatory approval processes differ among these jurisdictions,
and the time needed to secure marketing approvals may be even
longer than that required for FDA approval. Marketing approval
in any one jurisdiction does not ensure approval in a different
jurisdiction. As a result, obtaining foreign approvals will
require additional expenditures and significant amounts of time.
We can give no assurance that we will obtain marketing approval
for Hemopure in any foreign jurisdiction other than that already
obtained in South Africa.
Clinical
trials are extremely costly and subject to numerous risks and
uncertainties.
To gain regulatory approval from the FDA and European regulatory
authorities for the commercial sale of any product, including
Hemopure, we must demonstrate in clinical trials, and satisfy
the regulatory authorities as to, the safety and efficacy of the
product. Like the regulatory review process, clinical trials are
expensive and time-consuming. Clinical trials are also subject
to numerous risks and uncertainties not within our control. For
example, data we obtain from preclinical and clinical studies
are susceptible to varying interpretations that could impede
regulatory approval.
In addition, many factors could delay or result in termination
of ongoing or future clinical trials. Results from ongoing or
completed preclinical or clinical studies or analyses could
raise concerns, real or perceived, over the safety or efficacy
of a product candidate. We cannot assure investors that the FDA
will not delay the development of
Hemopure by further continuing its current hold or placing other
clinical trials we sponsor or others may sponsor on hold in the
future. A clinical trial may be delayed by slow patient
enrollment. There may be limited availability of patients who
meet the criteria for certain clinical trials. Delays in planned
patient enrollment can result in increased development costs and
delays in regulatory approvals. Further, we rely on
investigating physicians and the hospital trial sites to enroll
patients. In addition, patients may experience adverse medical
events or side effects resulting in delays, whether or not the
events or the side effects relate to our product.
If we
do not have the financial resources to fund trials required to
develop Hemopure for multiple potential indications, our success
will be adversely affected.
In general, we cannot sell Hemopure for any indication unless we
receive regulatory approval for that indication. Regulatory
authorities generally require a separate marketing approval for
each proposed indication for the use of a drug. In order to
market Hemopure for more than one indication, we will have to
design additional clinical trials, submit the trial designs to
applicable regulatory authorities for review and complete those
trials successfully. If any applicable regulatory authority
approves Hemopure for an indication, it may require a label
cautioning against the product’s use for indications or
classes of patients for which it has not been approved. We may
not have funds available to try to exploit Hemopure for all of
its potential indications. Our potential revenues will be
impaired by limitations on the use of Hemopure.
If the
Navy were to abandon its attempt to develop Hemopure for a
trauma indication, it would have a serious adverse effect on our
prospects.
Our current clinical development activities involve the pursuit
of two indications: ischemia and trauma. We are pursuing the
latter in the U.S. because the NMRC has agreed to be
responsible for virtually all aspects of an advanced trauma
trial. The FDA has prevented the start of the proposed NMRC
trial since June 2005. If the Navy were to decide not to
continue to pursue this project, we would not have the benefit
of this alliance and would be required to delay indefinitely
work on this indication.
If we
cannot retain the personnel we need or if we cannot hire or
retain highly qualified people, our operations will
suffer.
We may experience the loss of personnel, including executives
and other employees, as a result of attrition, which we have
previously experienced. We expect that in the future we will
need to recruit and retain personnel for important positions. We
may be unable to do so, in particular if we are unable to
improve our financial position.
If we
cannot generate adequate, profitable sales of Hemopure, we will
not be successful.
To succeed, we must develop Hemopure commercially and sell
adequate quantities of Hemopure at a profit. We may not
accomplish either of these objectives. To date, we have focused
our efforts on developing Hemopure, establishing its safety and
efficacy. Uncertainty exists regarding the potential size of any
geographic market for Hemopure and the price that we can charge
for it. Additionally, the size of the market will be affected by
the indication(s) for which Hemopure is approved and will be
greatly reduced if reimbursement for the cost of Hemopure is not
available from health insurance companies or government programs.
If we
cannot find appropriate marketing partners, we may not be able
to market and distribute Hemopure effectively.
Our success depends, in part, on our ability to market and
distribute Hemopure effectively in major markets. We have no
experience in the sale or marketing of medical products for
humans in a major market. In the event that we obtain FDA
approval of Hemopure, we may choose initially to market Hemopure
using an independent distributor. Any such distributor:
•
might not be successful in marketing Hemopure;
•
might, at its discretion, limit the amount and timing of
resources it devotes to marketing Hemopure; and/or
might terminate its agreement with us and abandon our products
at any time whether or not permitted by the applicable agreement.
We may instead seek an alternative arrangement, such as an
alliance with a pharmaceutical company, or may be required to
recruit, train and retain a marketing staff and sales force of
our own. We may not be successful in obtaining satisfactory
distributorship agreements or entering into alternative
arrangements.
If we
cannot obtain market acceptance of Hemopure, we will not be able
to generate adequate, profitable sales.
Even if we succeed in obtaining marketing approval for Hemopure,
a number of factors may affect future sales of our product.
These factors include:
•
whether and how quickly physicians and third party payers accept
Hemopure as a cost-effective therapeutic;
•
whether medical care providers or the public accept the use of a
bovine-derived protein as a therapeutic in ischemia or any other
indication, particularly in light of public perceptions in the
U.S., Europe and elsewhere about the risk of “mad cow
disease”; and
•
product price, which we believe has been an important factor in
South Africa and may be elsewhere.
If we
fail to comply with good manufacturing practices, we may not be
able to sell our products.
To obtain the approval of the FDA and European regulatory
authorities to sell Hemopure, we must demonstrate to them that
we can manufacture Hemopure in compliance with applicable good
manufacturing practices, commonly known as GMPs. GMPs are
stringent requirements that apply to all aspects of the
manufacturing process. We are subject to inspections by the FDA
and European regulatory authorities at any time to determine
whether we are in compliance with GMP requirements. If we fail
to manufacture in compliance with GMPs, these regulatory
authorities may refuse to approve Hemopure or revoke approval of
Oxyglobin or may take other enforcement actions with respect to
Hemopure or Oxyglobin.
The
manufacturing process for Hemopure is complicated and
time-consuming, and we may experience problems that would limit
our ability to manufacture and sell Hemopure.
Our products are biologic drugs and require product
manufacturing steps that are more complicated, time consuming
and costly than those required for most chemical drugs. Minor
deviations in our manufacturing processes or other problems
could result in unacceptable changes in the products that result
in lot failures, increased production scrap, shipment delays,
regulatory problems, product recalls or product liability, all
of which could negatively affect our results of operations.
If we
were unable to use our manufacturing facilities in Massachusetts
or Pennsylvania, we would not be able to manufacture for an
extended period of time.
We manufacture at a single location in Massachusetts with raw
material sourcing and initial processing in Pennsylvania. Damage
to either of these manufacturing facilities due to fire,
contamination, natural disaster, power loss or other events
could cause us to cease manufacturing. For example, if our
Massachusetts manufacturing facility were destroyed, it would
take approximately two years or more to rebuild and qualify it.
In the reconstruction period, we would not be able to
manufacture product and thus would have no supply of Hemopure
for research and development, clinical trials or sales after we
used up all finished goods in our inventory. A new manufacturing
facility would take longer to construct.
If
Hemopure receives regulatory approval in a major market, we will
be required to expand our manufacturing capacity to develop our
business, which will require substantial third-party financing.
Failure to increase our manufacturing capacity and to lower our
manufacturing cost per unit may impair market acceptance of
Hemopure and prevent us from achieving
profitability.
If Hemopure is approved for indications with high demand in one
or more markets, we will need to construct new manufacturing
capacity to develop our business. The increase in our
manufacturing capacity is dependent upon our obtaining
substantial financing from third parties. Third parties can be
expected to be unwilling to commit to finance a new
manufacturing facility so long as we do not have regulatory
approval to market Hemopure in a major market. We cannot assure
that sufficient financing for new manufacturing capacity will be
available or, if available, will be on terms that are acceptable
to us. After the required significant financing was in place, it
would take at least 30 to 36 months from groundbreaking to
build a large Hemopure manufacturing facility and to qualify and
obtain facility approval from the FDA or European regulatory
authorities.
If Hemopure is approved for marketing in a major market and
receives market acceptance, we may experience difficulty
manufacturing enough of the product to meet demand. The
manufacturing processes we currently employ to produce small
quantities of material for research and development activities
and clinical trials may not be successfully scaled up for
production of commercial quantities at a reasonable cost or at
all. We will face risks in the
scale-up of
our processes in the construction of any new manufacturing
facility, and in turn could encounter delays, higher than usual
rejects, additional reviews and tests of units produced and
other costs attendant to an inability to manufacture saleable
product. Furthermore,
scale-up
might not succeed in lowering our product cost, which also could
negatively affect our results of operations. If we cannot
manufacture sufficient quantities of Hemopure, we may not be
able to build our business or operate profitably. In addition,
if we cannot fill orders for Hemopure, customers might turn to
alternative products and may choose not to use Hemopure even
after we have addressed any capacity shortage.
Our
lack of operating history makes evaluating our business
difficult.
Proceeds from the sales of equity securities, payments to fund
our research and development activities, licensing fees, and
interest income have provided almost all of our funding to date.
We have no operating history of selling Hemopure upon which to
base an evaluation of our business and prospects.
If we
are not able to protect our intellectual property, competition
could force us to lower our prices, which might reduce
profitability.
We believe that our patents, trademarks and other intellectual
property rights, including our proprietary knowledge, are
important to our success. Accordingly, the success of our
business will depend, in part, upon our ability to defend our
intellectual property against infringement by third parties. We
cannot guarantee that our intellectual property rights will
protect us adequately from competition from similar products.
Some of our important patents have relatively short remaining
terms. Nor can we guarantee that additional products or
processes we discover or seek to commercialize will receive
adequate intellectual property protection.
In addition, third parties may successfully challenge our
intellectual property. We have not filed patent applications in
every country. In certain countries, obtaining patents for our
products, processes and uses may be difficult or impossible.
Patents issued in regions other than the U.S. and Europe
may be harder to enforce than, and may not provide the same
protection as, patents obtained in the U.S. and Europe.
Failure
to avoid infringement of others’ intellectual property
rights could impair our ability to manufacture and market our
products.
We cannot guarantee that our products and manufacturing process
will be free of claims by third parties alleging that we have
infringed their intellectual property rights. Several third
parties hold patents with claims to compositions comprising
polymerized hemoglobin and their methods of manufacture and use.
One or more of these third parties may assert that our
activities infringe claims under an existing patent. Any such
claim could be expensive and time-consuming to defend, and an
adverse litigation result or a settlement of litigation could
require us to pay damages, obtain a license from the complaining
party or a third party, develop non-infringing alternatives
or cease using the challenged intellectual property. Any such
result could be expensive or result in a protracted plant
shutdown, in turn adversely affecting our ability to operate
profitably.
There can be no assurance that we would prevail in any
intellectual property infringement action, or be able to obtain
a license to any third-party intellectual property on
commercially reasonable terms, to successfully develop
non-infringing alternatives on a timely basis, or to license
alternative non-infringing intellectual property, if any exists,
on commercially reasonable terms. Any significant intellectual
property impediment to our ability to develop and commercialize
Hemopure would seriously harm our business and prospects.
Our
operating results will be adversely affected if we incur product
liability claims in excess of our insurance
coverage.
The testing and marketing of medical products, even after
regulatory approval, have an inherent risk of product liability.
We maintain limited product liability insurance coverage. Our
profitability would be adversely affected by a successful
product liability claim in excess of our insurance coverage. We
cannot guarantee that product liability insurance in adequate
coverage amounts will be available in the future or be available
on terms we could afford to pay.
Replacing
our sole- source suppliers for key materials could result in
unexpected delays and expenses.
We obtain some key materials, including membranes and chemicals,
and services from sole-source suppliers. All of these materials
are commercially available elsewhere. If such materials were no
longer available at a reasonable cost from our existing
suppliers, we would need to purchase substitute materials from
new suppliers. If we needed to locate a new supplier, the
substitute or replacement materials or facilities would need to
be tested for equivalency. Such equivalency tests could
significantly delay product development, or delay or limit
commercial sales of approved products and cause us to incur
additional expense.
We obtain bovine hemoglobin from one abattoir, from animals
raised in several states of the U.S. We cannot predict the
future effect, if any, on us of the spread of bovine spongiform
encephalopathy (“mad cow” disease) in the
U.S. Any quarantine affecting herds that supply us or a
shutdown of the abattoir that we use could have a material
adverse effect on us, as we would have to find, validate and
obtain regulatory approval of new sources of supply or new
facilities.
Changes
in the securities laws and regulations are likely to increase
our costs.
The Sarbanes-Oxley Act of 2002, which became law in July 2002,
has required changes in some of our corporate governance,
securities disclosure and compliance practices. In response to
the requirements of that Act, the SEC and the Nasdaq Stock
Market promulgated new rules and listing standards covering a
variety of subjects. Compliance with these new rules and listing
standards has increased our general and administrative costs,
and we expect to continue to experience increased costs. These
developments also could make it more difficult and more
expensive for us to obtain director and officer liability
insurance. Likewise, these developments may make it more
difficult for us to attract and retain qualified members of our
board of directors, particularly independent directors, or
qualified executive officers.
As directed by Section 404 of the Sarbanes-Oxley Act of
2002, the SEC adopted rules requiring public companies to
include a report of management on a company’s internal
controls over financial reporting in their annual reports on
Form 10-K
that contains an assessment by management of the effectiveness
of the company’s internal controls over financial
reporting. In addition, the independent registered public
accounting firm auditing a company’s financial statements
must attest to and report on the effectiveness of the
company’s internal controls over financial reporting. We
have determined that we are not an “accelerated filer”
and consequently Section 404 requirements did not apply to
us for our 2007 annual report on
Form 10-K.
Nevertheless, if our independent registered public accounting
firm does not provide us with an unqualified report as to the
effectiveness of our internal controls over financial reporting
for one or more future year-ends, investors could lose
confidence in the reliability of our financial statements, which
could result in a decrease in the value of our securities.
Provisions
of our restated certificate of incorporation and by-laws could
impair or delay stockholders’ ability to replace or remove
our management and could discourage takeover transactions that a
stockholder might consider to be in its best
interest.
Provisions of our restated certificate of incorporation and
by-laws, as well as our stockholder rights plan, could impede
attempts by stockholders to remove or replace our management or
could discourage others from initiating a potential merger,
takeover or other change of control transaction, including a
potential transaction at a premium over market price that a
stockholder might consider to be in its best interest. In
particular:
•
Our restated certificate of incorporation does not permit
stockholders to take action by written consent and provides for
a classified board of directors, and our by-laws provide that
stockholders who wish to bring business before an annual meeting
of stockholders or to nominate candidates for election of
directors at an annual meeting of stockholders must deliver
advance notice of their proposals to us before the meeting.
These provisions could make it more difficult for a party to
replace our board of directors by requiring two annual
stockholder meetings to replace a majority of the directors,
making it impossible to remove or elect directors by written
consent in lieu of a meeting and making it more difficult to
introduce business at meetings.
•
Our stockholder rights plan may have the effect of discouraging
any person or group that wishes to acquire more than 20% of our
Class A common stock from doing so without obtaining our
agreement to redeem the rights. If our agreement to redeem the
rights is not obtained, the acquiring person or group would
suffer substantial dilution. Consequently, the possible acquirer
would likely not complete a transaction that stockholders might
consider to be in their best interest.
Industry
Risks
Intense
competition could harm our financial performance.
The biotechnology and pharmaceutical industries are highly
competitive. There are a number of companies, universities and
research organizations actively engaged in research and
development of products that may be similar to, or alternatives
to, Hemopure for trauma or ischemia indications. We are aware
that one public company competitor, Northfield Laboratories
Inc., has completed a pivotal trial of a hemoglobin-based oxygen
carrier produced from human blood that has passed its expiration
date for human transfusion, and has stated its intention to file
a BLA in 2008. We are also aware that other companies are
conducting preclinical studies and clinical trials of
hemoglobin-based or perfluorocarbon oxygen carriers. The
products being developed by these companies are intended for use
in humans and as such could compete, if approved by regulatory
authorities, with Hemopure. We may also encounter competition in
ischemia indications from medical devices and drugs on the
market or currently under development.
Competition could diminish our ability to become profitable or
affect our profitability in the future. Our existing and
potential competitors:
•
are conducting clinical trials of their products;
•
have or may be able to access substantially greater resources
than we have and be better equipped to develop, manufacture and
market their products;
•
may have their products approved for marketing prior to
Hemopure; and
•
may develop superior technologies or products rendering our
technology and products non-competitive or obsolete.
Stringent,
ongoing government regulation and inspection of our facilities
could lead to delays in the manufacture, marketing and sale of
our products.
The FDA and foreign regulatory authorities continue to regulate
products even after they receive marketing authorization. If the
FDA or a foreign regulatory agency approves Hemopure, the
manufacture and marketing of Hemopure will be subject to ongoing
regulation, including compliance with current good manufacturing
practices,
adverse event reporting requirements and general prohibitions
against promoting products for unapproved or
“off-label” uses. We would also be subject to
inspection and market surveillance by the FDA and foreign
regulatory authorities for compliance with these and other
requirements. We are subject to such regulation, inspection and
surveillance in South Africa. Any enforcement action resulting
from failure, even by inadvertence, to comply with these
requirements could affect the manufacture and marketing of
Hemopure. In addition, the FDA or foreign regulatory authorities
could withdraw a previously approved product from the applicable
market(s) upon receipt of newly discovered information.
Furthermore, the FDA or foreign regulatory authorities could
require us to conduct additional, and potentially expensive,
studies in areas outside our approved indications. Also,
unanticipated changes in existing regulations or the adoption of
new regulations could affect and make more expensive the
continued manufacturing and marketing of our products.
Health
care reform and controls on health care spending may limit the
price we can charge for Hemopure and the amount we can
sell.
The federal government and private insurers have considered ways
to change, and have changed, the manner in which health care
services are provided in the U.S. Potential approaches and
changes in recent years include controls on health care spending
and the creation of large purchasing groups. In the future, it
is possible that the government may institute price controls and
limits on Medicare and Medicaid spending. These controls and
limits might affect the payments we collect from sales of our
products. European governments generally control expenditures on
medicines through price control and other restrictive practices.
Assuming we succeed in bringing Hemopure to market,
uncertainties regarding future health care reform and private
market practices would affect our ability to sell Hemopure in
large quantities at profitable pricing in the U.S. and
abroad.
Uncertainty
of third-party reimbursement could affect our
profitability.
Sales of medical products largely depend on the reimbursement of
patients’ medical expenses by governmental health care
programs and private health insurers. Even if Hemopure is
approved for marketing, there is no guarantee that governmental
health care programs or private health insurers would reimburse
for purchases of Hemopure, or reimburse a sufficient amount to
permit us to sell Hemopure at high enough prices to generate a
profit. Hemopure sales in South Africa have been adversely
affected by a lack of third-party reimbursement.
Investment
Risks
The
Nasdaq Capital Market may cease to list our Class A common
stock which may cause the value of an investment in our Company
to substantially decrease.
We may be unable to meet the listing requirements of the Nasdaq
Capital Market in the future. To maintain our listing, we are
required, among other things, to maintain a daily closing bid
price per share of $1.00. On December 14, 2007, we received
notice from the Nasdaq Stock Market that the closing bid price
of our Class A common stock had fallen below and remained
below $1.00 for 30 consecutive business days. As a result, we
are out of compliance with the $1.00 minimum bid price
requirement for continued inclusion of our Class A common
stock in the Nasdaq Capital Market. Under Nasdaq rules, we have
two periods of 180 days each to regain compliance by having
the bid price of our Class A common stock close at $1.00
per share or more for at least 10 consecutive business days. If
we do not regain compliance with the minimum bid price rule by
December 2008, Nasdaq will provide written notification that our
Class A common stock will be delisted.
Delisting would adversely affect the trading price and limit the
liquidity of our common stock and therefore could cause the
value of an investment in our Company to decrease.
As we
sell additional shares, our stock price may decline as a result
of the dilution which will occur to existing
stockholders.
Until we are profitable, we will need significant additional
funds to develop our business and sustain our operations. Any
additional sales of shares of our common stock are likely to
have a dilutive effect on some or all of our then existing
stockholders. Resales of newly issued shares in the open market
could also have the effect of
lowering our stock price, thereby increasing the number of
shares we may need to issue in the future to raise the same
dollar amount and consequently further diluting our outstanding
shares.
The perceived risk associated with the possible sale of a large
number of shares could cause some of our stockholders to sell
their stock, thus causing the price of our stock to decline. In
addition, actual or anticipated downward pressure on our stock
price due to actual or anticipated sales of stock could cause
some institutions or individuals to engage in short sales of our
common stock, which may itself cause the price of our stock to
decline.
If our stock price declines, we may be unable to raise
additional capital. A sustained inability to raise capital could
force us to go out of business. Significant declines in the
price of our common stock could also impair our ability to
attract and retain qualified employees, reduce the liquidity of
our common stock and result in the delisting of our common stock
from the Nasdaq Stock Market.
Shares
eligible for future sale may cause the market price for our
common stock to drop significantly, even if our business is
doing well.
We cannot predict the effect, if any, of future sales of our
common stock or the availability of shares for future sale will
have on the market price of our common stock from time to time.
Shares of our common stock issued in the future, including
shares issued upon exercise of outstanding options and warrants
may become available for resale in the public market from time
to time, and the market price of shares of our common stock
could drop significantly if the holders of these shares sell
them or are perceived by the market as intending to sell them.
Our
stock price has been and may continue to be highly volatile,
which may adversely affect holders of our stock and our ability
to raise capital.
The trading price of our common stock has been and is likely to
continue to be extremely volatile. During the period from
November 1, 2004 to October 31, 2007, the trading
price of our stock ranged from a low of $1.01 per share (on
October 31, 2007) to a high of $23.10 per share (on
January 4, 2005). Our stock price and trading volume could
be subject to wide fluctuations in response to a variety of
factors including, but not limited to, the following:
•
failure to identify and hire key personnel or the loss of key
personnel;
•
an inability to obtain or the perception that we will be unable
to obtain adequate financing to fund our operations;
•
FDA action or delays in FDA action on Hemopure or
competitors’ products;
•
publicity regarding actual, perceived or potential medical
issues relating to products under development by us or our
competitors;
•
actual or potential preclinical or clinical trial results
relating to products under development by us or our competitors;
•
delays in our testing and development schedules;
•
announcements of technological innovations or new products by
our competitors;
•
developments or disputes concerning patents or proprietary
rights;
•
regulatory developments in the U.S. and foreign countries;
•
economic and other factors, as well as period-to-period
fluctuations in our financial results;
•
market conditions for pharmaceutical and biotechnology
stocks; and
•
additional, future communications from the Nasdaq Stock Market
concerning delisting or potential delisting.
External factors may also adversely affect the market price for
our common stock. The price and liquidity of our common stock
may be significantly affected by the overall trading activity
and market factors affecting small capitalization biotechnology
stocks generally.
We have manufacturing facilities in Pennsylvania for the
collection and separation of blood and in Cambridge,
Massachusetts, where processing is completed. In connection with
our application for marketing approval for Oxyglobin, and again
following our 2002 plant expansion, the FDA inspected these
facilities for compliance with good manufacturing practices. The
Medicines Control Agency, on behalf of the European Medicines
Evaluation Agency, also inspected our facilities prior to
granting marketing approval for Oxyglobin.
We manufacture separation materials in a 10,000 square foot
plant in New Hampshire. The current annual lease payment for
this facility is $61,000. The lease expires on March 31,2010. We also lease 10,000 square feet of warehouse space
in New Hampshire. The current annual lease payment is $56,000.
The lease expires on May 31, 2010.
We lease office and research space in Massachusetts. The lease
covers 24,000 square feet, and its current annual lease
payment is $304,000. This lease expires on December 31,2012. We have an option to extend this lease for nine five-year
periods, or an additional 45 years.
We lease 33,000 square feet of manufacturing space in
Massachusetts under four leases. The current annual lease
payment for these facilities is $339,000. The leases expire on
November 30, 2010. We have an option to extend these leases
for three five-year periods, or an additional 15 years,
with an exclusive right to negotiate for an additional
25 years. We own 18,000 square feet of manufacturing
space in Pennsylvania.
Our current process is designed to be scalable, such that
additional capacity can be obtained by adding duplicate
equipment and additional utilities including power and water.
The Cambridge, Massachusetts manufacturing facilities have the
design capacity to produce approximately 75,000 Hemopure units
(250 ml/unit) or approximately 263,000 Oxyglobin units (125
ml/unit) or 500,000 of the smaller Oxyglobin bags (60 ml/unit).
This capacity can be used for any combination of Oxyglobin and
Hemopure units. This facility could produce up to an estimated
100,000 Hemopure units per year upon further validation. The
collection and separation processes at the Pennsylvania facility
and the separation materials manufacturing at the New Hampshire
plant have annual capacities sufficient to supply the Cambridge
facility at its maximum potential annual capacity. We have also
completed most of the engineering for anticipated future
construction of a new manufacturing plant designed to produce
500,000 Hemopure units per year.
Item 3.
Legal
Proceedings
Biopure, two former outside directors, its former chief
executive officer, former chief technology officer, former chief
financial officer and former senior vice president of regulatory
affairs were named as defendants in a number of purported class
action complaints, filed between December 30, 2003 and
January 28, 2004, in the United States District Court for
the District of Massachusetts (the “District Court”)
by alleged purchasers of the Company’s common stock. Those
complaints were consolidated in a single action, in regards to
Biopure Corporation Securities Litigation. The consolidated
matter has since been settled and the District Court entered
final judgment dismissing the claims with prejudice on
September 24, 2007. The settlement payment was made by
insurance.
The seven members of the Company’s Board of Directors
during the period March through December 2003 and certain
officers during that period were named as defendants in two
stockholder derivative actions filed on January 26, 2004
and January 29, 2004 in the District Court. A consolidated,
amended complaint was filed in regard to Biopure Corporation
Derivative Litigation. Biopure is named as a defendant, even
though in a derivative action any award is for the benefit of
the Company, not individual stockholders. The consolidated,
amended complaint alleges that the individual directors and
officers breached fiduciary duties in connection with
disclosures concerning regulatory and clinical events. The
complaint does not specify an amount of alleged damages. The
Company appointed two disinterested directors as a special
litigation committee to determine whether or not the Company
should pursue this action. The special litigation committee
conducted its investigation and determined the Company should
not pursue the action. The special litigation committee
accordingly has filed a motion to dismiss the action. No amounts
have been accrued to date with regard to this litigation and a
similar claim in the Trial Court of Middlesex County in
Massachusetts. The Company believes this case is without merit.
Submission
of Matters to a Vote of Security Holders
A special meeting of stockholders was held on October 1,2007. The purpose of the meeting was to consider a proposal to
approve a series of amendments to our restated certificate of
incorporation to effect a reverse split of the Company’s
class A common stock. The voting was as follows:
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Market Information. Our Class A Common
Stock is traded on The Nasdaq Capital Market under the trading
symbol “BPUR.” There is no established public trading
market for our Class B Common Stock.
The following table sets forth the high and low sales prices for
the Class A Common Stock for each of the quarters in the
two years ended October 31, 2007, as reported by The Nasdaq
Stock Market, adjusted for a one-for-five reverse stock split in
October 2007.
Holders. As of December 31, 2007, there
were 870 holders of record of the Class A Common Stock. We
issued all 117.7 shares of Class B Common Stock
outstanding to one holder. Transfers of Class B Common
Stock are restricted and, as of December 31, 2007, we are
not aware of any shares of Class B Common Stock having been
transferred by such holder to any other person.
Dividends and Repurchases. We did not pay
dividends on our Class A Common Stock during the two fiscal
years ended October 31, 2007 and do not plan to pay
dividends in the foreseeable future. The Class B Common
Stock is not entitled to dividends. We did not repurchase any of
our equity during the fourth quarter of fiscal 2007.
The graph below compares the performance of the Company’s
class A common stock (the single class of common stock of
the Company that has a public market) with the performance of
the CRSP Total Return Index for the Nasdaq Stock Market
(U.S. Companies) and the Nasdaq Pharmaceutical Stocks Index
from October 31, 2002, through the end of fiscal 2007. The
total stockholder return assumes that $100 was invested on
October 31, 2002 in the Company’s class A common
stock, the CRSP Total Return Index for the Nasdaq Stock Market
(U.S. Companies) and the Nasdaq Pharmaceutical Stocks
Index, and that all dividends were reinvested. Information used
in the graph was obtained from the Nasdaq Stock Market, a source
we believe to be reliable, but we are not responsible for errors
or omissions in such information.
Set forth below is selected financial data for the five years
ended October 31, 2007. The following table sets forth
selected financial data that is qualified in its entirety by and
should be read in conjunction with Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our financial
statements and notes thereto appearing elsewhere in this annual
report on
Form 10-K.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward
Looking Statements and Risk Factors
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 and with the information contained
elsewhere in this report under the captions “Cautionary
Statement Regarding Forward Looking Information” and
“Risk Factors.”
Overview
Since its founding in 1984, Biopure has been primarily a
research and development company focused on developing Hemopure,
the Company’s oxygen therapeutic for human use, and
obtaining regulatory approval in the United States and other
markets. The Company’s research and development expenses
have been devoted to basic research, product development,
process development, preclinical studies, clinical trials and
regulatory activity. In addition, the Company’s development
expenses in the past included the design, construction,
validation and maintenance of a large-scale pilot manufacturing
plant in Cambridge, Massachusetts.
A manufacturing facility is a necessary part of developing a
product like Hemopure. The FDA classifies Hemopure as a biologic
because it is derived from animal-source material. Unlike drugs
that are chemical compounds, biologics are defined by their
manufacturing process and composition. Under FDA regulations,
any change in the manufacturing process could be considered to
produce an altered, possibly different product. Therefore, it is
necessary to demonstrate manufacturing capability at greater
than laboratory scale for an application for regulatory approval
of a biologic to be accepted for review. This requirement has
resulted in high manufacturing research and development costs in
the development of our products relative to other types of drugs.
Prior to 1998, the Company only manufactured product for use in
preclinical and clinical trials, and production costs were
charged wholly to research and development. As an offshoot of
the research and development for Hemopure, Oxyglobin, a similar
product, gained marketing approval for veterinary use in the
U.S. in 1998 and in the European Union in 1999. Following
the U.S. approval, Oxyglobin was produced for sale in the
pilot manufacturing plant that was built and maintained
primarily for the development of Hemopure. Because of this
marketing approval, costs of production of Oxyglobin for sale
and an allocation of manufacturing overhead based on capacity
used for Oxyglobin are charged to inventory and to cost of
revenues. Since marketing approval of Hemopure for human use was
granted in South Africa in 2002, costs of production of Hemopure
for sale and an allocation of manufacturing overhead based on
capacity used for Hemopure have been charged to inventory and to
cost of revenues.
A substantial majority of our costs comprise research and
development and cost of revenues. The revenues from products we
now market defray some of the manufacturing costs we must incur
to keep our substantial plant operational as we manufacture
Hemopure for clinical trials and maintain readiness for greater
volume manufacturing. We also receive governmental
reimbursements of research and development costs for development
of Hemopure for use in trauma.
Our research and development activities in 2007 include the
clinical trials described under “Business”.
Critical
Accounting Policies
Our critical accounting policies are described in the Notes to
the accompanying consolidated financial statements. The
application of our critical accounting policies is particularly
important to the portrayal of our financial position and results
of operations. These critical accounting policies require us to
make subjective judgments in determining estimates about the
effect of matters that are inherently uncertain. The following
critical accounting policies meet these characteristics and are
considered most significant:
Inventories
Inventories are stated at the lower of cost (determined using
the
first-in,
first-out method) or market. Inventories consist of raw
material,
work-in-process
and Hemopure and Oxyglobin finished goods. Inventories
are reviewed periodically to identify expired units and units
with a remaining life too short to be commercially viable, based
on projected sales activity, or for use in the proposed RESUS
clinical trial. Inventories are also subject to internal quality
compliance investigations. Inventory that is not expected to be
utilized based on projected demand or fails quality assessment
is written off. The inventory of Hemopure finished goods
represents the units the Company expects to sell in South Africa
or use in preclinical and clinical studies where payment is
received for the trial material. The Company has been and
expects to continue to be reimbursed for the cost of units to be
used in a proposed trauma trial to be conducted by or on behalf
of the NMRC. Any units expected to be consumed by the Company in
its own preclinical or clinical trials are expensed to research
and development when manufactured.
Stock-based
Compensation
We adopted the provisions of Statement of Financial Accounting
Standards 123(R), “Share-Based Payment”
(“SFAS 123(R)”), beginning November 1, 2005,
using the modified prospective transition method.
SFAS 123(R) requires us to measure the cost of employee
services in exchange for an award of equity instruments based on
the fair value of the award on the date the award is made and to
recognize cost over the requisite service period. Under the
modified prospective transition method, financial statements for
periods prior to the date of adoption are not retrospectively
adjusted. However, compensation expense is recognized for
(a) all share-based payments granted after the effective
date under SFAS 123(R), and (b) all awards granted
under SFAS 123 to employees prior to the effective date
that remain unvested on the effective date. We recognize
compensation expense on fixed awards with pro rata vesting on a
straight-line basis over the vesting period.
Prior to November 1, 2005, we used the intrinsic value
method to account for stock-based employee compensation under
Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees.”
Consequently, we did not recognize compensation expense in
association with options granted at or above the market price of
our common stock at the date of grant.
As of October 31, 2007, there was $1.1 million of
unrecognized compensation expense, net of forfeitures, related
to non-vested market-based share awards, that is expected to be
recognized over a weighted average period of 2.2 years.
Refer to Note 2 to the consolidated financial statements
for further discussion and analysis of the impact of adoption in
our statement of operations.
Long-Lived
Assets
Statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (“SFAS 144”), requires that
long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Our investments in property and
equipment, such as construction in progress; real property
license rights related to the source, supply and initial
processing of our major raw material; and the asset related to
expenditures on engineering and plans for a large-scale
manufacturing facility we plan to build in South Carolina have
been the principal long-lived assets subject to such a review.
Pursuant to SFAS 144, during the fourth quarter of fiscal
2007, we assessed our long-lived assets for potential
impairment. Regarding the design and engineering asset related
to the planned South Carolina manufacturing facility, we have
experienced continued delays in obtaining financing for this
facility and in our plans to construct this facility. In
addition, we have experienced significant delays in our
activities, including clinical and U.S. regulatory delays,
toward marketing authorization for Hemopure in the United States
or another jurisdiction with a sizeable market. We have also
modified our clinical development strategy and are focusing
increasing efforts on the approval of Hemopure in European
countries. We are unable to reliably project the timing of a
need for a new plant given the continued delays, uncertainties
in drug development and uncertainties about our ability to gain
regulatory approval in a major market. Consequently, pursuant to
SFAS 144, we recorded a one time, non-cash impairment
charge of $11.3 million during the fourth quarter of fiscal
2007 to fully impair the design and engineering asset. However,
if Hemopure is approved for an indication with broad application
in a major market, we believe that at some point in the future
we would ultimately exceed our existing plant capacity and
require the construction of a facility using these designs.
We recognize revenue from sales of Hemopure and Oxyglobin upon
shipment, provided that there is evidence of a final
arrangement, there are no uncertainties surrounding acceptance,
title has passed, collectability is probable and the price is
fixed or determinable. Hemopure marketing in South Africa is
directed toward doctors in hospitals in both the private and
government sectors. We sell Oxyglobin directly to veterinarians
in the United States and to a distributor in the United Kingdom
for resale in the European Union. Collectability is reasonably
assured once pricing arrangements are established, as these
arrangements establish the distributor’s intent to pay. Our
customers do not have a right to return product. We monitor
creditworthiness on a regular basis and believe collectability
of product revenues is reasonably assured at the time of sale.
We recognize revenue from the U.S. military upon invoicing
for reimbursable expenses incurred in connection with developing
Hemopure for a trauma indication. Amounts received for future
inventory purchases, recorded as deferred revenue, will be
recognized as sales upon shipment in accordance with the
provisions discussed above.
Results
of Operations
As we generate net losses, the key drivers of the losses are
cost of revenues, research and development and other expenses
consisting of sales and marketing and general and
administrative. Inflation and changing prices have not had a
significant impact on our revenues or loss from operations in
the three years ended October 31, 2007. For fiscal 2007,
2006 and 2005, these items were as follows (in thousands):
2007
2006
2005
Percent of
Percent of
Percent of
Amount
Total Costs*
Amount
Total Costs
Amount
Total Costs
Revenues
Product Revenues
$
2,275
—
$
1,305
—
$
1,163
—
Research and Development Revenue
281
—
410
—
947
—
2,556
1,715
2,110
Cost of Revenues
Oxyglobin
2,939
10
%
2,674
9
%
2,784
9
%
Hemopure
8,715
32
%
9,320
33
%
10,523
34
%
Total Cost of Revenues
11,654
42
%
11,994
42
%
13,307
43
%
Research and Development
6,972
24
%
6,662
23
%
5,322
17
%
Impairment Charge — Engineering and Design Asset
11,277
N/A
—
—
Sales and Marketing
Oxyglobin
81
0
%
86
0
%
25
0
%
Hemopure
1,308
5
%
585
2
%
505
1
%
Total Sales and Marketing
1,389
5
%
671
2
%
530
1
%
General and Administrative
8,188
29
%
9,315
33
%
12,094
39
%
Total Costs
$
39,480
100
%
$
28,642
100
%
$
31,253
100
%
*
Other than a one-time, non-cash impairment charge.
Our revenues consisted of sales of Oxyglobin and Hemopure and
funds received from the U.S. government. Revenues from
sales of Oxyglobin increased $864,000 in fiscal 2007 compared to
fiscal 2006, due to an increase in the sales price of Oxyglobin
and to a change in arrangements between Biopure and its European
distributor. In 2006 we accounted for European sales on a
consignment basis. Now the distributor purchases the product
outright.
Revenues from sales of Hemopure were $143,000 in fiscal 2007
compared to $37,000 in fiscal 2006, due to our marketing efforts
and increasing use of the product.
During fiscal 2007 and 2006, we received $281,000 and $410,000,
respectively, from past congressional appropriations to
reimburse us for certain trauma development expenses. We have
recorded these funds as revenue in connection with research and
development activities. These payments vary relative to the
amount of reimbursable activity we are conducting.
Cost of revenues includes costs of both Oxyglobin and Hemopure.
Hemopure cost of revenues, which includes the allocation of
unabsorbed fixed manufacturing costs, was $290,000 less in
fiscal 2007 than in fiscal 2006, primarily because of higher
inventory write-offs in 2006 charged to cost of revenues,
partially offset by higher spending in fiscal 2007. Oxyglobin
cost of revenues increased in fiscal 2007 compared to the
corresponding period in fiscal 2006 primarily due to higher unit
sales in the United Kingdom.
Research and development expenses include preclinical studies,
clinical trials and clinical trial materials. In 2004 we began
to focus on developing Hemopure for a potential indication in
cardiovascular ischemia and on supporting the
U.S. Navy’s government-funded efforts to develop a
potential out-of-hospital trauma indication. Prior to that time,
our primary focus was on one major project — the final
phases of Hemopure development for its use in patients
undergoing surgery. During fiscal 2006, we applied in the U.K.
for regulatory approval of a proposed orthopedic surgical anemia
indication. A breakdown of our research and development expenses
by major activity is as follows (in thousands):
2007
2006
2005
Ischemia Program
$
2,132
$
1,582
$
1,897
Trauma Program
1,875
1,058
1,492
Ischemia
and Trauma Programs
The ischemia program is in early clinical trials. The NMRC is
seeking FDA authorization to conduct a Phase 2 trial in trauma
patients with our support, but its proposed application to begin
the trial is on clinical hold. Cumulative ischemia project
expenditures of $6.6 million as of October 31, 2007,
consist of the costs of preparing and carrying out pilot
clinical trials in Europe and South Africa. Cumulative trauma
expenditures of $5.4 million as of October 31, 2007,
consist of costs primarily associated with preclinical trials,
protocol and study design for the proposed NMRC sponsored
out-of-hospital trauma trial. Of these expenses,
$3.0 million has been reimbursed to date by payments
administered by the U.S. Army.
Additional expenses for either an ischemia indication or for a
trauma indication cannot be estimated with precision at this
time. The risks and uncertainties associated with the early
stage of planning and execution of the ischemia and trauma
clinical development programs include, among other things,
uncertainties about results that at any time could require us to
abandon or greatly modify either project. Accordingly, we cannot
estimate the period in which material net cash inflows for
either of these two projects might commence, if ever.
Expenses
The increase in research and development in fiscal 2007 as
compared to fiscal 2006 was primarily due to a $849,000 increase
in salaries expense and an increase in spending on trauma and
ischemia related preclinical studies. Partially offsetting these
increases was a reduction in expenses related to the filing of a
marketing application in the United Kingdom in fiscal 2006, for
which there were no comparable expenses in 2007. The $281,000 in
Army reimbursements recorded as revenue during fiscal 2007, as
explained above, related to research and development activities
and preclinical studies.
The impairment charge shown above represents a one-time,
non-cash charge, recorded during the fourth quarter of fiscal
2007, consisting of engineering and design of a planned large
scale manufacturing facility. The Company determined this asset
was impaired pursuant to SFAS 144, primarily due to
continued delays and uncertainties of future estimates, and
recorded the impairment charge accordingly. See Notes 1, 2
and 3 in the Notes to the Consolidated Financial Statements for
further discussion.
Hemopure and Oxyglobin related sales and marketing expenses
increased to $1.4 million in 2007 from $671,000 in 2006.
The increase was primarily due to market research and public
affairs activities in the United Kingdom. Expenses in South
Africa increased by $163,000 in fiscal 2007 compared to 2006
mostly due to a charge for product donated in South Africa to
promote adoption and use of Hemopure. We expect Oxyglobin sales
and marketing expenses to be consistent in fiscal 2008 with
those in fiscal 2007.
General and administrative expenses were $8.2 million in
fiscal 2007 compared to $9.3 million in fiscal 2006. This
decrease was primarily due to decreases of $504,000 in insurance
premiums, $384,000 in legal expenses and $190,000 in severance
expenses.
Our revenues consisted primarily of sales of Oxyglobin and funds
received from the U.S. Army. Revenues from sales of
Oxyglobin increased $108,000 in fiscal 2006 compared to fiscal
2005, mostly due to an increase in the sales price of Oxyglobin.
In fiscal 2006, we recorded the first sales of Hemopure,
representing the first sales ever of a hemoglobin-based oxygen
therapeutic for human use. Revenues from these sales totaled
$37,000 for the fiscal year. Biopure attributes the low level of
sales to the high cost of Hemopure compared with allogenic red
blood cells (RBCs), when available, the fact that allogenic RBCs
are considered safe in South Africa, and the lack of private
medical insurer or governmental reimbursement for the product.
We had anticipated low sales before we began to market, because
Hemopure marketing is limited to use in surgery.
During fiscal 2006 and 2005, we received $410,000 and $947,000,
respectively, from past congressional appropriations
administered by the U.S. Army to reimburse us for certain
trauma development expenses. We have recorded these funds as
revenue in connection with research and development activities
supporting the trauma program. The payments from the government
vary relative to the amount of reimbursable activity we are
conducting.
Cost of revenues includes costs of both Oxyglobin and Hemopure.
Hemopure cost of revenues, which includes the allocation of
unabsorbed fixed manufacturing costs, decreased in fiscal 2006
compared to fiscal 2005. Oxyglobin cost of revenues also
decreased in fiscal 2006 compared to the corresponding period in
fiscal 2005. These decreases for both Hemopure and Oxyglobin
cost of revenues were primarily due to an impairment charge, in
fiscal 2005, of $1.4 million. During the fourth fiscal
quarter of 2005, we revised the projected start date of the
U.S. Navy’s proposed RESUS clinical trial of Hemopure
due to the FDA’s clinical hold placed on this proposed
trial. This revision in turn delayed the expected need for
expanded production facilities. As a result, we determined that
impairment existed on certain specific manufacturing equipment
and recorded a one-time, non-cash write-down of
$1.4 million on this equipment. There was no comparable
impairment charge in fiscal 2006.
Research and development expenses include preclinical studies,
clinical trials and clinical trial materials. In 2004 we changed
our corporate strategy to focus on developing Hemopure for a
potential indication in cardiovascular ischemia and on
supporting the U.S. Navy’s government-funded efforts
to develop a potential out-of-hospital trauma indication. Prior
to that time, our primary focus was on one major
project — the final phases of Hemopure development for
its use in patients undergoing surgery. In addition, during
fiscal 2006, we applied in the U.K. for regulatory approval of a
proposed orthopedic surgical anemia indication. A breakdown of
our research and development expenses by major activity is as
follows (in thousands):
2006
2005
Ischemia Program
$
1,582
$
1,897
Trauma Program
1,058
1,492
Ischemia
and Trauma Programs
Both the ischemia and the trauma programs are in early stages
(i.e., safety clinical trials and preclinical animal studies)
although the NMRC is seeking FDA authorization to conduct a
Phase 2 trial in trauma patients. Regulatory agency requirements
for additional clinical trials and any further preclinical
studies that might be necessary for either an ischemia
indication or for use in trauma patients cannot be estimated at
this time. The risks and uncertainties associated with the early
stage of planning and execution of the ischemia and trauma
clinical
development programs include, among other things, uncertainties
about results that at any time could require us to abandon or
greatly modify either project. Accordingly, we cannot estimate
the period in which material net cash inflows for either of
these two projects might commence, if ever, and we do not expect
to obtain marketing approval of a potential ischemia indication
or trauma indication for several years.
Expenses
The increase in research and development in fiscal 2006 as
compared to fiscal 2005, as shown in the table above, was
primarily due to a $1.2 million increase in salaries
expense, expenses related to the filing of a marketing
application in July 2006 in the United Kingdom, for which there
were no comparable expenses in 2005, and $131,000 in stock-based
compensation expense recorded under SFAS 123(R). These
increases were partially offset by lower spending on trauma and
ischemia related preclinical studies. The $410,000 in
reimbursements recorded as revenue during fiscal 2006, as
explained above, related to research and development activities
and preclinical studies.
Hemopure and Oxyglobin related sales and marketing expenses
increased to $671,000 in 2006 from $530,000 in 2005. The
increase was primarily due to expenses for a sales agent for
Hemopure in South Africa, which were partially offset by lower
salary expenses. We did not have a sales agent in South Africa
during fiscal 2005. We agreed in late 2006 to an early
termination of the agreement with the sales agent in South
Africa.
General and administrative expenses were $9.3 million in
fiscal 2006 compared to $12.1 million in fiscal 2005. This
decrease was primarily due to decreases of $1.1 million in
severance expenses, $764,000 in outside services, $314,000 in
insurance premiums and $209,000 in audit and tax-related
expenses in fiscal 2006. In addition, in fiscal 2005, we
expensed $824,000, relating to a contract termination, and
$724,000 for restructuring costs associated with vacated office
space. General and administrative cost increases in 2006
comprise stock-based compensation expense, explained above, and
higher legal fees and expenses arising out of the pending
derivative litigation described in Note 13 to the
consolidated financial statements.
Liquidity
and Capital Resources
At October 31, 2007, we had $1.9 million in cash and
cash equivalents. Since October 31, 2007, we have raised
approximately $16.5 million, before expenses of
approximately $1.6 million, in additional financing (See
Note 14, to our consolidated financial statements). We
expect this funding, in addition to the cash and cash
equivalents at October 31, 2007, to be sufficient to fund
operations into July 2008. We expect to continue to explore
opportunities to raise capital, through sales of equity
securities and, if appropriate, to consider strategic
collaborations.
Cash used in operating activities in fiscal 2007, 2006 and 2005
was $20.8 million, $20.7 million and
$21.1 million, respectively. The use of cash in each year
was primarily attributable to our recurring net losses.
In fiscal 2007, financing activities provided us with
$16.4 million in cash, primarily from the sale of common
stock and warrants.
The following table summarizes our significant contractual
obligations at October 31, 2007:
Payments Due by Period
Less than
1 Year
1-3 Years
4-5 Years
Total
(In thousands)
Operating Leases
$
916
$
1,516
$
355
$
2,787
As explained above, in 2003 we entered into a CRADA with the
NMRC. As part of the CRADA the Navy paid approximately
$1.2 million for future inventory purchases, recorded in
the accompanying financial statements as current portion of
deferred revenue and deferred revenue, net of current portion.
If the Navy were to decide not to continue to pursue the RESUS
project described in the CRADA, we could be required to return
the $1.2 million.
As of October 31, 2007, we had net operating loss
carryforwards of approximately $353.9 million to offset
future federal and state taxable income through 2027. 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, 2007. Net operating
loss carryforwards and available tax credits are subject to
review by the Internal Revenue Service and may be limited in the
event of certain changes in the ownership interest of
significant stockholders.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 provides companies
with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities and to provide additional information that will help
investors and other financial statement users to easily
understand the effect of the company’s choice to use fair
value on its earnings. Additionally, SFAS No. 159
requires entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value
on the face of the balance sheet. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal
year beginning after November 15, 2007 (beginning with the
Company’s 2009 fiscal year). Early adoption is permitted as
of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that
fiscal year and also elects to apply the provisions of
SFAS No. 157. The Company is currently assessing the
impact of adopting SFAS No. 159, but does not believe
the adoption of this standard will have a material impact on the
Company’s results of operations or financial position.
In July 2006, the FASB issued FIN 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”).
This interpretation requires that the Company recognize in its
financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006 (beginning with the Company’s 2008
fiscal year), with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the
impact of adopting FIN 48 on its financial statements, but
does not believe the adoption of this standard will have a
material impact on its financial position or results of
operations.
In September 2006, the FASB issued FAS 157, “Fair
Value Measurements” (“SFAS 157”). This
standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. This statement is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, (beginning with the Company’s 2009
fiscal year) although earlier application is encouraged. The
Company is currently evaluating the impact of adopting
SFAS 157 on its financial statements, but does not believe
the adoption of this standard will have a significant impact on
the Company’s results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS 141(R)”). In SFAS 141(R), the FASB
retained the fundamental requirements of Statement No. 141
to account for all business combinations using the acquisition
method (formerly the purchase method) and for an acquiring
entity to be identified in all business combinations. However,
the new standard requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and
financial effect of the business combination. SFAS 141(R)
is effective for annual periods beginning on or after
December 15, 2008 (beginning with the Company’s 2010
fiscal year). We have not yet determined the impact, if any,
that SFAS 141(R) will have on our results of operations or
financial position.
Item 7A.
Quantitative
and Qualitative Disclosure About Market Risk
We currently do not have any foreign currency exchange risks,
with the exception of minimal exchange fluctuations associated
with expenses for clinical trial, regulatory and sales and
marketing activities outside of the United States and minimal
sales in South Africa. We sell Oxyglobin in Europe in
U.S. dollars. The customers bear the risk of foreign
currency exchange fluctuation. We sell Hemopure in South Africa
in local currency. Fluctuations in revenues in South Africa are
offset by fluctuations in our local expenses. Dramatic
fluctuations in exchange rates could result in either increases
or decreases in unit sales, as the effective unit price to the
customer would vary. We invest our cash and cash equivalents in
money market funds. These investments are subject to interest
rate risk. However, due to the nature of our short-term
investments, we believe that the interest rate risk exposure is
not material.
Financial Statements are submitted as a separate section of this
report commencing on
Page F-1.
The following is a summary of quarterly (unaudited) financial
results:
4Q 2007
3Q 2007
2Q 2007
1Q 2007
4Q 2006
3Q 2006
2Q 2006
1Q 2006
(In thousands, except per share data)
Statements of Operations Data:
Total revenues
$
793
$
550
$
619
$
594
$
431
$
396
$
411
$
477
Gross loss
(1,835
)
(2,539
)
(2,156
)
(2,568
)
(2,212
)
(2,543
)
(2,927
)
(2,597
)
Operating expenses:
Research and development
1,575
1,618
1,864
1,915
1,550
1,772
1,866
1,474
Impairment charge — Engineering and Design Asset
11,277
—
—
—
—
—
—
—
Sales and marketing
290
341
366
392
147
197
155
172
General and administration
1,823
2,107
2,027
2,231
2,489
2,239
2,287
2,300
Total operating expenses
14,965
4,066
4,257
4,538
4,186
4,208
4,308
3,946
Loss from operations
(16,800
)
(6,605
)
(6,413
)
(7,106
)
(6,398
)
(6,751
)
(7,235
)
(6,543
)
Other income, net
114
157
193
178
117
127
126
103
Net loss
$
(16,686
)
$
(6,448
)
$
(6,220
)
$
(6,928
)
$
(6,281
)
$
(6,624
)
$
(7,109
)
$
(6,440
)
Per share data:
Basic and diluted net loss per common share
$
(1.07
)
$
(0.41
)
$
(0.40
)
$
(0.54
)
$
(0.66
)
$
(0.80
)
$
(0.91
)
$
(1.11
)
Weighted-average shares used in computing basic net loss per
common share
15,593
15,591
15,562
12,955
9,511
8,323
7,915
5,798
Item 9.
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A.
Controls
and Procedures
a) Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our
principal executive officer and principal financial officer, the
effectiveness of our disclosure controls and procedures (as
defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the fiscal year
covered by this Annual Report on
Form 10-K.
Based upon that evaluation, our principal executive officer and
principal financial officer have concluded that as of the end of
such fiscal year, our disclosure controls and procedures are
effective and adequate. Our chief executive officer and
principal financial officer reached this conclusion
notwithstanding the material weakness in internal control over
financial reporting. We note that the interrelationship between
disclosure controls and internal control over financial
reporting is not yet entirely defined by law and interpretation.
If an internal control over financial reporting were determined
by appropriate authority to be part of disclosure controls, then
our chief executive officer and principal financial officer
would conclude that our disclosure controls and procedures were
not effective for the same reason described below under
“Material Weaknesses and Change in Internal Controls.”
Our principal executive officer and principal financial officer
believe that this material weakness is confined to the
impairment assessment of the engineering and design asset
described below and that our current disclosure controls and
procedures are otherwise adequate to ensure that information
required to be disclosed in the reports we file under the
Exchange Act is recorded, processed, summarized and reported on
a timely basis.
b) Material Weaknesses and Changes in Internal Controls
Management has identified a material weakness in our internal
control over financial reporting; namely, that we did not
maintain effective controls over the accuracy of our accounting
for the impairment of long-lived assets. Specifically, prior to
audit, the Company did not record an impairment charge on its
engineering and design asset associated with the planned
manufacturing facility in South Carolina. During the fourth
quarter of fiscal 2007, the Company experienced continued delays
in its plans to construct the facility, significant clinical
delays, continued US regulatory delays and a modification in
clinical development strategy. Generally accepted accounting
principles require an impairment loss to be recognized on this
asset. Due to the Company’s insufficient controls, this
adjustment was not identified by management and was raised
during the audit, in December 2007. The impairment loss was
recorded in the fourth quarter of fiscal 2007 and included in
the financial statements herein. The material weakness
identified did not result in the restatement of any previously
reported financial statements or any other related financial
disclosure.
c) Except for re-addressing our impairment analysis, as
described above, there were no changes in our internal control
over financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the fiscal year covered by this
Annual Report on
Form 10-K
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
d) The Company is not an “accelerated filer” for
fiscal year 2007, hence, the internal controls certification and
attestation requirements of Section 404 of the
Sarbanes-Oxley Act did not apply to the Company for the fiscal
year ended October 31, 2007.
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 Related Stockholder
Matters; Item 13 — Certain Relationships and
Related Transactions; and Item 14 — Principal
Accounting Fees and Services is incorporated into Part III
of this Annual Report on
Form 10-K
by reference to our Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on March 27, 2008, except
that the information required by Item 10 pertaining to our
executive officers is contained in Part I of this report.
(a) (1). The financial statements included in this report
are listed on
page F-1.
(a) (3). The exhibits are set forth in the exhibit index.
The management contracts, compensatory plans and arrangements
filed as exhibits are identified by the letter “M” in
the list of exhibits.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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.
We have audited the accompanying consolidated balance sheets of
Biopure Corporation as of October 31, 2007 and 2006, and
the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three
years in the period ended October 31, 2007. 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 the standards of the
Public Company Accounting Oversight Board (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. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and 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 31,2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended October 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company’s recurring losses from operations
and lack of sufficient funds to sustain its operations through
the end of fiscal 2008 raise substantial doubt about its ability
to continue as a going concern. Management’s plans as to
these matters also are described in Note 1. The 2007
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial
statements, effective November 1, 2005, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment.
Preferred stock, $0.01 par value, 30,000,000 shares
authorized, no shares outstanding
—
—
Common stock:
Class A, $0.01 par value, 200,000,000 shares
authorized, 15,593,587 and 9,873,025 shares issued and
outstanding at October 31, 2007 and 2006, respectively
156
99
Class B, $1.00 par value, 179 shares authorized,
117.7 shares issued and outstanding
Biopure Corporation (Biopure, or the Company) develops and
manufactures pharmaceuticals called oxygen therapeutics that are
intravenously administered to deliver oxygen to the body’s
tissues. Its products are Oxyglobin, for veterinary use, and
Hemopure, for human use.
The Company sells Oxyglobin in the United States and Europe for
the treatment of anemia in dogs and sells Hemopure in South
Africa for use in adult surgery patients who are acutely anemic
and for eliminating, delaying, or reducing allogenic red blood
cell transfusions in these patients.
The Company is pursuing an ischemia development program in
Europe and South Africa. The Company completed its first pilot
trial in coronary ischemia in Europe in 2005 and since that time
has undertaken three additional pilot trials: cardiac surgery,
wound healing and acute coronary ischemia.
Effective October 2, 2007, the Company’s outstanding
class A common shares, stock options and warrants reverse
split at a one-for-five ratio, with post split shares retaining
a par value of $0.01 per share. The Company had
77,967,938 shares of class A common stock outstanding
at the end of trading on October 1, 2007, which converted
into 15,193,587 shares and cash in lieu of fractional
shares. All references to shares, options and warrants, have
been adjusted to reflect the reverse split for all periods
presented.
In trauma, the Company is continuing, under an agreement with
the Naval Medical Research Center (NMRC), to develop Hemopure
for use in trauma patients in the out-of-hospital setting. In
June 2005, the NMRC submitted an Investigational New Drug
Application (IND) to the FDA for a clinical trial called RESUS
(Restore Effective Survival in Shock). This IND was placed on
clinical hold by the FDA in July 2005. The Navy has responded to
questions and revised the protocol, but the FDA has maintained
its clinical hold. Separately, a Phase 2 safety and feasibility
trial of Hemopure, in trauma patients in the hospital setting,
is ongoing in South Africa.
In 2006, the Company submitted a marketing authorization
application (MAA) to the United Kingdom’s Medicines and
Healthcare products Regulatory Agency (MHRA). The application
sought authorization to market Hemopure in the U.K. for the
treatment of acutely anemic adult orthopedic surgery patients
less than 80 years of age. In December 2006, the Company
received a provisional opinion letter from the MHRA containing
comments and questions pertaining to the application. The
Company responded in full to the MHRA letter in early November
2007, requesting marketing authorization for the treatment of
acutely anemic adult orthopedic surgery patients under
80 years of age when blood is not readily available or not
an option. The Company expects the MHRA’s decision during
the first half of 2008.
The Company is subject to a number of risks. Principal among
these are the risks associated with the uncertainties of
adequate financing to continue as a going concern, compliance
with FDA and other governmental regulations and approval
requirements, the outcome of preclinical studies and clinical
trials, sources of supply of materials, development by
competitors of new technological innovations, dependence on key
personnel and protection of proprietary technology.
The Company obtains some key materials, including purification
membranes and chemicals, from sole source suppliers. If such
materials were no longer available at a reasonable cost from its
existing suppliers, the Company would need to obtain supply
contracts with new suppliers for substitute materials. If the
Company needs to locate a new supplier, the substitute or
replacement materials will most likely need to be tested for
equivalency. Such evaluations could delay development of a
product, limit commercial sales of an FDA-approved product and
cause the Company to incur additional expense. In addition, the
time expended for such tests could delay the marketing or sale
of an FDA-approved product.
Statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (“SFAS 144”), requires that
long-lived assets be reviewed for impairment whenever events or
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Our investments in property and
equipment, such as construction in progress; real property
license rights related to the source, supply and initial
processing of our major raw material; and the asset related to
expenditures on engineering and design for a planned
manufacturing facility in South Carolina are the principal
long-lived assets subject to such a review.
During the fourth quarter of fiscal 2007, pursuant to
SFAS 144 we recorded an $11.3 million impairment
charge for our engineering and design asset relating to a
large-scale manufacturing plant. See Note 3 to these
Consolidated Financial Statements for further information.
Since October 31, 2007, the Company has raised
approximately $16.5 million, before offering expenses of
approximately $1.6 million, in additional financing
(Note 14). The Company expects this funding, in addition to
the cash and cash equivalents at October 31, 2007, to be
sufficient to fund operations into July 2008. The Company is
considering additional measures to reduce its cash burn and
increase revenue, but additional capital will still be required
to fund the Company’s operations until such time, if ever,
as the Company’s income can sustain operations. The Company
intends to seek additional capital through sales of equity
securities and, if appropriate, to consider strategic
collaborations for sharing development and commercialization
costs. However, there can be no assurance that adequate
additional financing will be available to the Company on terms
that it deems acceptable, if at all. Furthermore, the Company
may not continue to qualify for continued listing on the Nasdaq
Capital Market. If delisting occurs, the Company’s ability
to raise funds will be adversely affected. Therefore, there
exists substantial doubt about the Company’s ability to
continue as a going concern. No adjustments have been made to
the carrying value of the assets
and/or
liabilities in these consolidated financial statements despite
this uncertainty.
2.
Significant
Accounting Policies
Basis
of Presentation
The consolidated financial statements reflect the accounts of
the Company and its subsidiaries. All inter-company accounts and
transactions have been eliminated.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
Biopure Netherlands, BV, Biopure South Africa, Pty, Ltd.,
Reperfusion Systems Incorporated, DeNovo Technologies
Corporation and Biopure Overseas Holding Company and Neuroblok
Incorporated, a 60% owned subsidiary, which has no activity. All
inter-company accounts and transactions have been eliminated in
consolidation. The Company’s treatment of foreign
subsidiaries is consistent with the guidelines set forth in
SFAS 52 “Foreign Currency Translations.” The
financial statements of the Company’s foreign subsidiaries
are measured using the U.S. dollar as the functional
currency, with results of operations and cash flows translated
at average exchange rates during the period, and assets and
liabilities translated at end of period exchange rates.
Unrealized foreign currency transaction gains and (losses) are
included in consolidated balance sheet and have not been
material to date.
Significant
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make significant estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of expenses during the reporting periods. Significant estimates
and assumptions by management affect accrued expenses,
stock-based compensation, long-lived assets and inventory
valuation.
Although the Company regularly assesses these estimates, actual
results could differ materially from these estimates. Changes in
estimates are recorded in the period in which they occur. The
Company bases its estimates on historical experience and various
other assumptions that it believes to be reasonable under the
circumstances.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Cash
Equivalents
The Company considers highly liquid instruments with original
maturities of 90 days or less at the time of purchase to be
cash equivalents. Cash equivalents are carried at cost, which
approximate their fair market value. As of October 31, 2007
and 2006, cash equivalents principally consist of money market
funds.
Inventories
Inventories are stated at the lower of cost (determined using
the
first-in,
first-out method) or market. Inventories consist of raw
material,
work-in-process
and Hemopure and Oxyglobin finished goods. Inventories are
reviewed periodically to identify expired units and units with a
remaining life too short to be commercially viable based on
projected sales activity. Inventories are also subject to
internal quality compliance investigations. Inventory that is
not expected to be utilized based on projected demand or that
fails quality assessment is written off. The inventory of
Hemopure finished goods represents the units the Company expects
to sell in South Africa or use in preclinical and clinical
studies where payment is received for the trial material. Any
units expected to be consumed by the Company in its own
preclinical or clinical trials are expensed to research and
development when manufactured. If the Company continues to
experience extremely limited sales in South Africa or further
delays occur in the use of Hemopure by the NMRC in its proposed
RESUS trial, the Company expects to write off additional units
in the future.
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. Repairs and maintenance costs are expensed as incurred.
The estimated useful lives are as follows:
Major equipment
10-12 years
Equipment
5-7 years
Leasehold improvements
Shorter of useful life or life of the lease
Furniture and fixtures
5 years
Computer software and equipment
3 years
Other
Long-Lived Assets
Real property licenses, stated at amortized cost of $394,000 as
of October 31, 2007, are included in other non-current
assets. Amortization is calculated using the straight-line
method over the estimated useful life of the amortized assets,
which is 13 years. For the fiscal years ended
October 31, 2007, 2006 and 2005, amortization expense for
these licenses was $56,000 per year. The estimated aggregate
amortization expense for the next 5 fiscal years is $280,000.
The remainder of the balance of other non-current assets
includes credit assurance and security deposits for property the
Company leases.
Long-Lived
Assets
In accordance with Financial Accounting Standards Board (FASB)
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,”the Company evaluates
long-lived assets for impairment when changes in circumstances
indicate the carrying amount of the long-lived asset may not be
recoverable. During the fourth quarter of 2007, the Company
identified indicators of impairment and performed the required
test relating to the design and engineering asset associated
with the proposed large scale manufacturing plant in South
Carolina. See Note 3 for further discussion.
In fiscal 2005, the Company determined that impairment existed
on some manufacturing equipment located in its Cambridge,
Massachusetts facility. Accordingly, the Company recorded an
impairment charge. During the first fiscal quarter of 2007, the
Company determined that the plan of sale criteria in
SFAS No. 144 for the equipment had
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
been met. A third party is marketing the equipment on the
Company’s behalf and the Company expects the sale of this
asset to be completed within 3 months. The carrying value of
this asset, which was approximately $225,000 at October 31,2007, is included in other current assets in the accompanying
consolidated balance sheet.
Revenue
Recognition
The Company recognizes revenue from sales of Hemopure and
Oxyglobin in accordance with Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue Recognition,”
whereby sales are recorded upon shipment, provided that there is
evidence of a final arrangement, there are no uncertainties
surrounding acceptance, title has passed, collectibility is
probable and the price is fixed or determinable. Hemopure
marketing in South Africa is directed toward institutions. The
Company sells Oxyglobin directly to veterinarians in the United
States. The Company sells Oxyglobin to a distributor in the
United Kingdom for resale in the European Union. Collectibility
is reasonably assured once pricing arrangements are established,
as these agreements establish the distributor’s intent to
pay. The Company’s customers do not have a right to return
product. We monitor creditworthiness on a regular basis and
believe collectibility of product revenues is reasonably assured
at the time of sale. The Company recognizes expenses to be
reimbursed by the U.S. military as incurred and gross
versus net in accordance with Emerging Issues Task Force
(“EITF”) Issue
No. 99-19,
“Reporting Revenue as a Principal Versus Net as an
Agent.” Amounts received for future inventory purchases,
recorded as deferred revenue, will be recognized upon shipment.
Revenues from Hemopure sold for clinical use in South Africa are
recognized when sold, in accordance with SAB 104 described
above.
Shipping
and Handling Costs
Shipping and handling costs are recorded as cost of revenues and
are not material for fiscal years 2007, 2006 and 2005.
Research
and Development Costs
Research and development costs are expensed as incurred. These
costs include compensation and other internal and external costs
associated with preclinical studies, clinical trials, costs of
product used in trials and tests.
Stock-Based
Compensation
As of October 31, 2007, the Company had one share-based
compensation plan, the 2002 Biopure Corporation Omnibus
Securities and Incentive Plan (“the 2002 Plan”). The
Plan as amended, which is shareholder-approved, permits the
grant of share options to the Company’s employees,
consultants and directors for up to 943,328 shares of
common stock. Option awards are generally granted with an
exercise price equal to the market price of the Company’s
stock at the date of grant. Typically, granted options vest in
increments over four years and may be exercised within ten years
of the date of grant. Options to the board of directors vest
monthly. Shares issued upon exercise of options are generally
issued from new shares of the Company.
The Company adopted the provisions of Statement of Financial
Accounting Standards 123(R), “Share-Based Payment”
(SFAS 123(R)), beginning November 1, 2005, using the
modified prospective transition method. Under the modified
prospective transition method, financial statements for periods
prior to the adoption date are not retrospectively adjusted.
However, compensation expense is recognized, based on the
requirements of SFAS 123(R), for (a) all share-based
payments granted after the effective date and (b) all
awards granted to employees prior to the effective date that
remained unvested on the effective date.
Prior to adopting SFAS 123(R), the Company used the
intrinsic value method to account for stock-based compensation
under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees.” As a
result of the adoption of SFAS 123(R), the Company is
amortizing the unamortized stock-based compensation expense
related to unvested option grants issued prior to the adoption
of SFAS 123(R). Historically the fair value of
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
options granted was calculated using the Black-Scholes Option
pricing model. The Company has elected to continue to use this
model. SFAS 123(R) also requires companies to use an
estimated forfeiture rate when calculating the expense for the
period, while SFAS 123 permitted companies to record
forfeitures based on actual forfeitures, which was the
Company’s historical policy. The Company has applied an
estimated forfeiture rate to remaining unvested awards based on
historical experience in determining the expense recorded in the
Company’s consolidated statement of operations. This
estimate is evaluated quarterly and the forfeiture rate is
adjusted as necessary. Ultimately, the actual expense recognized
over the vesting period will only be for those shares that vest.
The Company has elected to recognize compensation cost for
awards with pro-rata vesting using the straight-line method.
Total compensation expense for all stock-based compensation
recorded under SFAS 123(R) for the fiscal years ended
October 31, 2007 and 2006 is as follows (in thousands):
2007
2006
Cost of revenues
$
124
$
152
Research and development
142
131
Selling and marketing
2
4
General and administrative
494
636
Total
$
762
$
923
The compensation expense increased both basic and diluted net
loss per share by $0.051 and $0.117 for the fiscal years ended
October 31, 2007 and 2006, respectively. No stock-based
compensation expense was capitalized as part of inventory during
the years ended October 31, 2007 and 2006. In accordance
with the modified-prospective transition method of
SFAS 123(R), results for prior periods have not been
restated. As of October 31, 2007, there was
$1.1 million of unrecognized compensation expense, net of
forfeitures, related to non-vested market-based share awards,
that is expected to be recognized over a weighted-average period
of 2.2 years.
The following table illustrates the effect on net loss and net
loss per share for the fiscal year ended October 31, 2005
if the Company had applied the fair value recognition provisions
of SFAS 123(R) to options granted under the plan (in
thousands, except per share data):
2005
Net loss as reported
$
(28,671
)
Add: Stock-based employee compensation cost included in the
determination of net loss as reported
—
Deduct: Total stock-based compensation expense determined under
the fair value method for all employee awards
(1,962
)
As adjusted net loss
$
(30,633
)
Basic and diluted net loss per share:
As reported
$
(6.40
)
As adjusted
$
(6.85
)
Weighted average fair value of options granted
$
5.00
The fair value of each stock option is estimated on the date of
grant using the Black-Scholes Option Pricing Model using the
assumptions noted in the following table. The risk-free interest
rate is based on a treasury instrument, the term of which is
consistent with the expected life of the stock options. Expected
volatility is based exclusively on historical volatility data of
the Company’s stock. The Company was unable to use
historical information to estimate the expected term due to a
lack of historical exercise activity and therefore used the
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
“simplified” method as prescribed by the Securities
and Exchange Commission Staff Accounting
Bulletin No. 107. The Company estimated the stock
option forfeitures based on historical experience.
The weighted average grant-date fair value of options granted
during fiscal 2007 was $1.93 per share.
A summary of option activity under the Plan as of
October 31, 2007 and changes during the twelve-month period
then ended is presented below (in thousands, except weighted
average data):
During fiscal years 2007 and 2006, there were 1,000 and 2,400
options exercised, respectively, with no intrinsic value. There
were no options exercised during the same periods in fiscal
2005. The total fair value of shares vested during fiscal years
2007, 2006 and 2005 were $711,000, $1.1 million and
$1.7 million, respectively.
Net
Loss Per Common Share
Basic net loss per common share is computed based on the
weighted-average number of common shares outstanding during the
period. Diluted net loss per common share is computed based upon
the weighted-average number of common shares outstanding during
the year, adjusted for the dilutive effect of the Company’s
common stock equivalents, including the shares issuable upon the
conversion of Class B Common Stock outstanding and the
exercise of common stock options and warrants determined based
upon average market price of the class A common stock for
the period. Basic and diluted net loss per common share is
computed the same for all periods presented, as the Company had
losses for all periods presented and, consequently, the effect
of the Class B Common Stock and common stock equivalents is
anti-dilutive.
Dilutive weighted average shares does not include 12,026,120,
5,483,634 and 1,360,789 common stock equivalents for the years
ended October 31, 2007, 2006 and 2005, respectively, as
their effects would be anti-dilutive.
Concentration
of Credit Risk and Significant Customers
SFAS No. 105, “Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk,” requires
disclosure of any significant off-balance-sheet risks and credit
risk concentrations. The Company has no significant
off-balance-sheet risk. Financial instruments,
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
which subject the Company to credit risk, principally consist of
cash, cash equivalents, accounts receivable and a note
receivable from one former officer. The Company maintains the
majority of its cash balances with high quality financial
institutions. Prior to August 2007 the Company accounted for
European sales on a consignment basis. Now the distributor
purchases the product outright. This distributor represented 0%,
82% and 86% of total Oxyglobin accounts receivable at
October 31, 2007, 2006 and 2005, respectively. The Company
derived Oxyglobin revenue, included in product revenue, from one
unrelated distributor in the United Kingdom in 2007, 2006 and
2005 individually accounting for a total of 29% or $614,000, 22%
or $278,000 and 24% or $277,000, respectively, of total
Oxyglobin revenues. All of the research and development revenue
recorded in fiscal years 2007, 2006 and 2005 was derived from
the U.S. Army for reimbursement of certain trauma
development expenses.
Fair
Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” requires disclosure of the fair
value of financial instruments. The Company has estimated the
fair value of financial instruments using available market
information and appropriate valuation methodologies. The
carrying value of cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term
nature of these financial instruments.
Comprehensive
Income (Loss)
Comprehensive income (loss) is defined as the change in net
assets of the Company during a period from transactions
generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments
by owners and distributions to owners. The Company had no
components of comprehensive loss other than its net loss for all
periods presented.
Segment
Information
SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information,” establishes standards
for reporting information regarding operating segments and for
related disclosures about products and services and geographical
areas.
Operating segments are identified as components of an enterprise
about which separate discrete financial information is available
for evaluation by the chief operating decision-maker, or
decision making group, in making decisions regarding resource
allocation and assessing performance. To date the Company has
viewed its operations and manages its business as principally
one operating segment, which is developing, manufacturing and
supplying a new class of pharmaceuticals, called oxygen
therapeutics, which are intravenously administered to deliver
oxygen to the body’s tissues. As of October 31, 2007,
virtually all of the Company’s assets are located in the
United States. For the fiscal year ended October 31, 2007,
customers in the United States and the Company’s
distributor in the United Kingdom accounted for 71% and 29% of
the Company’s Oxyglobin revenue recognized, respectively.
For the fiscal year ended October 31, 2006, customers in
the United States and the Company’s distributor in the
United Kingdom accounted for 78% and 22% of the Company’s
Oxyglobin revenue recognized, respectively. For the fiscal year
ended October 31, 2005, customers in the United States and
the Company’s distributor in the United Kingdom accounted
for 76% and 24% of the Company’s Oxyglobin revenue
recognized, respectively. The Company also markets Hemopure for
one indication in South Africa. Revenue to date has not been
significant.
Recently
Issued Accounting Standards
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 provides companies
with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities and to provide additional information that will help
investors and other financial statement users to easily
understand the effect of the company’s choice to use fair
value on its earnings. Additionally, SFAS No. 159
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
requires entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value
on the face of the balance sheet. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal
year beginning after November 15, 2007 (beginning with the
Company’s 2009 fiscal year). Early adoption is permitted as
of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that
fiscal year and also elects to apply the provisions of
SFAS No. 157. The Company is currently assessing the
impact of adopting SFAS No. 159, but does not believe
the adoption of this standard will have a material impact on the
Company’s results of operations or financial position.
In July 2006, the FASB issued FIN 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”).
This interpretation requires that the Company recognize in its
financial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006 (beginning with the Company’s 2008
fiscal year), with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the
impact of adopting FIN 48 on its financial statements, but
does not believe the adoption of this standard will have a
material impact on its financial position or results of
operations.
In September 2006, the FASB issued FAS 157, “Fair
Value Measurements” (“SFAS 157”). This
standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. This statement is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, (beginning with the Company’s 2009
fiscal year) . The Company is currently evaluating the impact of
adopting SFAS 157 on its financial statements, but does not
believe the adoption of this standard will have a significant
impact on the Company’s results of operations or financial
position.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS 141(R)”). In SFAS 141(R), the FASB
retained the fundamental requirements of Statement No. 141
to account for all business combinations using the acquisition
method (formerly the purchase method) and for an acquiring
entity to be identified in all business combinations. However,
the new standard requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and
financial effect of the business combination. SFAS 141(R)
is effective for annual periods beginning on or after
December 15, 2008 (beginning with the Company’s 2010
fiscal year). We have not yet determined the impact, if any,
that SFAS 141(R) will have on our results of operations or
financial position.
3.
Impairment
Charge
Pursuant to SFAS 144, during the fourth quarter of fiscal
2007, we assessed our long-lived assets for potential
impairment. Regarding the design and engineering asset related
to the planned South Carolina manufacturing facility, we have
experienced continued delays in obtaining financing for this
facility and in our plans to construct this facility. In
addition, we have experienced significant delays in our
activities, including clinical and U.S. regulatory delays,
toward marketing authorization for Hemopure in the United States
or another jurisdiction with a sizeable market. We have also
modified our clinical development strategy toward increasing
efforts on the approval of Hemopure in European countries. We
are unable to reliably project the timing of a need for a new
plant given the continued delays, uncertainties in drug
development and uncertainties about our ability to gain, or the
timing of our gaining, regulatory approval in a major market.
Consequently, pursuant to SFAS 144, the Company recorded a
one time, non-cash impairment charge of $11.3 million
during the fourth quarter of fiscal 2007 to fully impair the
engineering and design asset.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
4.
Transactions
with Related Parties
In August 1990, the Company made loans to certain directors and
officers to allow them to purchase Class A Common Stock.
All of the loans, with the exception below, have been paid or,
in one case, forgiven and charged as compensation.
The Company holds a note receivable from Carl Rausch, a former
officer. During fiscal 2007 the Company determined that
collecting payment on this note can not reasonably be assured
and that a reserve was appropriate. The Company charged general
and administrative expense by $235,000 and established a reserve
which is offsetting the note receivable within
stockholders’ equity in the accompanying consolidated
balance sheet. The Company is pursuing collection of this note.
The note continues to bear interest at the prime rate (7.50% at
October 31, 2007) plus 2% for late payment.
Mr. Rausch is no longer affiliated with the Company.
The inventory of Hemopure finished goods represents those units
the Company expects to sell in South Africa or use in
preclinical or clinical studies where payment is received for
the trial material . Each quarter the Company reviews the
inventory of Hemopure finished goods and, if necessary, writes
off any units beyond those forecast for these purposes,
resulting in a charge to operations through cost of revenues or
to research and development. Accordingly, in fiscal 2007 the
Company charged $236,000 to cost of revenues and $219,000 to
research and development. If the Company continues to experience
extremely limited sales in South Africa or further delays occur
in the use of Hemopure by the NMRC in its proposed RESUS trial,
the Company expects to write off additional units in the future.
6.
Investment
in Affiliate
In July 1994, the Company acquired a 50 percent 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 $304,000 through 2012. In the event EHSA became insolvent or
was unable to pay its obligations, the Company, as one of the
general partners, could be liable for all partnership
obligations to the extent partnership assets are not sufficient
to satisfy such obligations. EHSA’s liabilities as of
October 31, 2007 consist of a promissory note to a bank
with a principal balance of $1,000,000. The note accrues
interest at 6.5% and matures on August 31, 2015. As of
October 31, 2007, the maximum potential amount of future
payments under the note would be $1,460,000. The note is secured
by the office and research and development facility, which the
Company believes has fair value sufficient to satisfy the
promissory note balance. In October 2003, the FASB issued
Interpretation of FIN No. 46(R),
“Consolidation of Variable Interest Entities,”
which requires consolidation of variable interest entities
created before February 1, 2003 for financial statements
issued for the first reporting period ending after
December 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31,2003, regardless of when the variable interest entity was
established. The Company adopted FIN 46(R) in the second
quarter of fiscal 2004.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Consolidation was not required as a result of such adoption, and
as a result, the adoption has not had a material impact on the
Company’s overall financial position or results of
operations.
Accrued severance at October 31, 2006, included costs
relating to the resignation, in fiscal 2005, of the
Company’s Chief Technology Officer. At October 31,2006, an accrual for this individual was $568,000. During fiscal
2007, the Company paid $175,000 of this amount. Because the
Company was no longer obligated to pay the remaining $393,000
due to a breach of the employment agreement, it reversed this
amount in fiscal 2007 by crediting general and administrative
expense in the accompanying consolidated statement of operations.
8.
Restructuring
During the first quarter of fiscal 2005, the Company vacated
leased office space and sublet it for a period of
38 months. The Company accounted for the transaction in
accordance with FAS 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” These costs
were included in general and administrative expense in the
consolidated statement of operations during fiscal 2005 and the
remaining obligation is accrued in restructuring charges on the
consolidated balance sheet at October 31, 2007.
The following table displays the restructuring activity and
liability balances (in thousands):
On December 13, 2006, the Company sold
5,670,000 shares of its Class A Common Stock and
received proceeds of $18,144,000 before expenses of $1,757,315
and recorded an increase in stockholders’ equity of
$16,387,000. The Company also issued to the same investors
warrants to acquire 5,670,000 shares of its Class A
Common Stock at an exercise price of $4.00 per share. These
warrants vested immediately and expire five years from the date
of issuance. The Company also issued to the underwriters
warrants to acquire 600,000 shares of its Class A
Common Stock at an exercise price of $4.00. These warrants
became exercisable one year from their date of issuance and
expire on the fifth anniversary of their date of issuance. All
of the warrants issued in this financing
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
became callable by the Company after six months provided,
however, that the weighted average price of the Company’s
Class A common stock for ten consecutive days is over $6.00.
The Company accounts for warrants granted to unrelated parties
in accordance with
EITF 00-19:
“Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Company’s Own Stock”. In
accordance with the EITF, the Company classifies the fair value
of such warrants as a component of permanent equity within
additional paid-in capital. The fair value of the warrants has
been calculated on the date of grant using the Black-Scholes
Option pricing model with assumptions for risk-free interest
rate of 4.53%, no dividend yield, expected lives of 5 years
and a volatility of 85%. The proceeds of the equity fundraisings
assigned to the common stock and warrants were approximately
$9,200,000 and $7,200,000, respectively, based upon their
relative fair values, and are reflected in total within the
consolidated statements of stockholders’ equity.
During fiscal year 2007, 1,562 warrants were exercised at an
exercise price of $4.25 per share, for proceeds to the Company
of approximately $6,600.
The following table reflects warrants outstanding and
exercisable as of October 31, 2007:
Warrants Outstanding
Weighted
Average
Weighted-
Warrants Exercisable
Remaining
Average
Weighted-
Number
Contractual Life
Exercise
Number
Average
Exercise Price
Outstanding
(Yrs.)
Price
Exercisable
Price
$4.00-$4.25
7,940,018
3.9
$
4.05
7,340,018
$
4.05
$4.45-$4.92
1,715,986
3.8
4.46
1,715,986
4.46
$5.125-$21.39
1,504,684
2.6
7.91
1,504,684
7.91
$75.00-$118.80
92,372
0.4
98.11
92,372
98.11
11,253,060
10,653,060
Common
Stock
The holder of Class B Common Stock is not entitled to vote
or to 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 Company and is conditioned upon the Company achieving
U.S. FDA approval for Hemopure. 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 oxygen therapeutic product for humans. The
valuation is then divided by 454,517 shares, representing
the number of shares of class A common stock outstanding on
the date of the agreement, (adjusted for reverse splits) to
arrive at a fair value per share of Class A Common Stock.
The 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 the holder will receive, limited to a maximum of
42,404 shares.
Of the Company’s currently outstanding Class A Common
Stock, 32,112 shares are restricted from transfer by a
restriction that can only be removed upon payment to the
Company, in cash or Class A Common Stock, of $237.60 per
restricted share.
Dividends
At this time, the Company does not intend to pay dividends.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Contributed
Capital
The Company recorded as contributed capital the research and
development costs incurred by the holder of the Class B
Common Stock on behalf of the Company. Upon conversion of the
Class B Common Stock, the cumulative amount of this
contributed capital will be treated as consideration for the
Class A Common Stock issued in the conversion.
Stock
Options
The Company has options outstanding under its 2002 Omnibus
Securities and Incentive Plan (the 2002 Plan), under which key
employees, directors and consultants may be granted options to
purchase Class A Common Stock. The options generally become
exercisable over a four-year period and expire ten years from
date of grant.
The following table summarizes information about options
outstanding at October 31, 2007:
Options Outstanding
Weighted
Options Exercisable
Average
Weighted-
Weighted-
Remaining
Average
Average
Contractual Life
Exercise
Exercise
Exercise Price
Shares
(Yrs.)
Price
Shares
Price
$1.985-$4.60
303,603
9.3
$
2.93
38,095
$
4.06
$5.825-$11.10
291,692
7.6
6.18
172,732
6.24
$21.45-$53.625
69,943
6.6
32.86
57,443
33.01
$90.15-$104.40
3,999
5.4
93.64
3,999
93.64
$180.75-$223.80
18,863
3.6
204.86
18,863
204.86
$279.00-$360.00
28,118
2.2
351.10
28,118
351.10
$533.45-$783.00
12,865
1.3
579.91
12,865
579.91
729,083
7.8
36.43
332,115
74.37
In April 2002, the Company established the 2002 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.
Following several amendments, the latest of which was
April 6, 2005, the maximum number of shares reserved for
issuance under this plan is 943,328. At October 31, 2007,
there were 214,245 shares available for future grants under
the 2002 plan.
Reserved
Shares
At October 31, 2007, there were 12,240,354 shares of
Class A Common Stock reserved for issuance under options
and warrants and upon conversion of Class B Common Stock as
shown below:
Outstanding stock options
729,083
Stock options available for grant
214,245
Outstanding warrants
11,253,060
Shares reserved for issuance upon conversion of Class B
Common Stock
42,404
12,238,792
Rights
Agreement
Each holder of Class A Common Stock has 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 percent of the Company’s
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Class A Common Stock by any person or group, if the board
of directors does not redeem the rights. If the rights were not
redeemed, their exercise would cause substantial dilution to the
acquiring person or group.
10.
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 enrollment upon becoming employed and
for discretionary matching after one year of service. The
Company’s discretionary contribution vests after a period
of three years from the date of employment. In 2007, 2006 and
2005, the Company contributed $172,000, $135,000, and $147,000
respectively, to the plan.
11.
Income
Taxes
At October 31, 2007, the Company had available for the
reduction of future years’ federal taxable income and
income taxes, net operating loss carry forwards of approximately
$353,865,000 expiring from the year ended October 31, 2008
through 2027, along with federal and state research and
development and state investment tax credits of approximately
$7,765,000 expiring from the year ended October 31, 2008
through 2027. 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
carry forwards and other deferred tax assets. Accordingly, the
tax benefit of these items has been fully reserved. Net
operating loss carryforwards and available tax credits are
subject to review by the Internal Revenue Service and may be
limited in the event of certain changes in the ownership
interest of significant stockholders.
In the event of any tax benefit relating to the valuation
allowance of deferred tax assets, approximately $3,501,000 as of
October 31, 2007 would be reported in additional paid in
capital.
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, 2007 and 2006 were as follows:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In 2007, the valuation allowance increased by $11,805,000 due
primarily to the increase in net operating losses combined with
expired net operating losses. In 2006, the valuation allowance
increased by $6,333,000 due primarily to the increase in net
operating losses combined with expired net operating losses.
12.
Commitments
and Contingencies
The Company is party to an agreement with B. Braun Melsungen
A.G. (Braun) requiring that the Company pay Braun a royalty of
two percent of the Company’s revenues from human product
sales and license fees in a specified European region. Payments
must be made on a quarterly basis until such amounts aggregate
$7,500,000. No payments have been required or made as of
October 31, 2007.
The Company leases office, research and manufacturing space
under operating lease agreements that expire at various dates
through December 31, 2012. The Company has the option to
extend the terms of certain operating leases for additional
periods. Future minimum lease payments under these leases, which
include the facility subleased below, at October 31, 2007
are as follows:
Fiscal 2008
$
915,765
Fiscal 2009
807,610
Fiscal 2010
404,748
Fiscal 2011
304,064
Fiscal 2012
304,064
$
2,736,251
Rent expense was approximately $802,000, $796,000 and $715,000
in 2007, 2006 and 2005, respectively.
During fiscal 2005, the Company vacated office space and sublet
it. The minimum payments to be received in the future under the
non-cancelable sublease are as follows:
2008
$
107,359
$
107,359
In 2003 the Company entered into a cooperative research and
development agreement (CRADA) with the U.S. Naval medical
Research Center (NMRC). As part of the CRADA the NMRC paid
approximately $1.2 million for future inventory purchases,
recorded in the accompanying consolidated financial statements
as deferred revenue and deferred revenue, net of current
portion. If the NMRC were to decide not to continue to pursue
the RESUS project described in the CRADA, the Company could be
required to return the $1.2 million.
13.
Litigation
Biopure, two former outside directors, its former chief
executive officer, former chief technology officer, former chief
financial officer and former senior vice president of regulatory
affairs were named as defendants in a number of purported class
action complaints, filed between December 30, 2003 and
January 28, 2004, in the United States District Court for
the District of Massachusetts (the “District Court”)
by alleged purchasers of the Company’s common stock. Those
complaints were consolidated in a single action, in regards to
Biopure Corporation Securities Litigation. The consolidated
matter was settled and the District Court entered final judgment
dismissing the claims with prejudice on September 24, 2007.
The settlement payment was made by insurance.
The seven members of the Company’s Board of Directors
during the period March through December 2003 and certain
officers during that period were named as defendants in two
stockholder derivative actions filed on January 26, 2004
and January 29, 2004 in the District Court. A consolidated,
amended complaint was filed in regard to Biopure Corporation
Derivative Litigation. Biopure is named as a defendant, even
though in a derivative action any award is for the benefit of
the Company, not individual stockholders. The consolidated,
amended complaint
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
alleges that the individual directors and officers breached
fiduciary duties in connection with disclosures concerning
regulatory and clinical events. The complaint does not specify
an amount of alleged damages. The Company appointed two
disinterested directors as a special litigation committee to
determine whether or not the Company should pursue this action.
The special litigation committee conducted its investigation and
determined the Company should not pursue the action. The special
litigation committee accordingly has filed a motion to dismiss
the action. No amounts have been accrued to date with regard to
this litigation and a similar claim in the Trial Court of
Middlesex County in Massachusetts. The Company believes this
case is without merit.
14.
Subsequent
Event
On November 6, 2007, Biopure completed a public offering of
its common stock and warrants that raised $16.5 million,
for net proceeds to the Company of $14.9 million. The
Company sold 19,377,500 new shares of its common stock at $0.85
per share to institutional and individual investors and issued
these investors warrants to purchase 19,377,500 shares of
its common stock at an exercise price of $1.0625 per share.
These warrants have a five-year term and are callable by Biopure
after six months provided that the weighted average price of
Biopure’s common stock for ten consecutive days is over
$1.59. The Company also issued to the underwriters warrants to
acquire 842,500 shares of its Class A Common Stock at
an exercise price of $1.0625. These warrants become exercisable
one year from their date of issuance and expire on the fifth
anniversary of their date of issuance.
15.
Quarterly
Financial Information (Unaudited)
The following is a summary of quarterly financial results for
the fiscal years 2007 and 2006:
4Q 2007
3Q 2007
2Q 2007
1Q 2007
(In thousands, except per share data)
Statements of Operations Data:
Total revenues
$
793
$
550
$
619
$
594
Gross loss
(1,835
)
(2,539
)
(2,156
)
(2,568
)
Operating expenses:
Research and development
1,575
1,618
1,864
1,915
Impairment charge — Engineering and Design Asset
11,277
—
—
—
Sales and marketing
290
341
366
392
General and administration
1,823
2,107
2,027
2,231
Total operating expenses
14,965
4,066
4,257
4,538
Loss from operations
(16,800
)
(6,605
)
(6,413
)
(7,106
)
Other income, net
114
157
193
178
Net loss
$
(16,686
)
$
(6,448
)
$
(6,220
)
$
(6,928
)
Per share data:
Basic and diluted net loss per common share
$
(1.07
)
$
(0.41
)
$
(0.40
)
$
(0.54
)
Weighted-average shares used in computing basic net loss per
common share