Biopure develops, manufactures and markets oxygen therapeutics. Its products are Hemopure, for human use, and Oxyglobin, for veterinary use. Biopure is developing Hemopure as an alternative to red blood cell transfusions as well as for use in the treatment of other critical care conditions.

     In 2001, Biopure received approval to sell Hemopure for human use in South Africa and launched Oxyglobin in Europe. Also in 2001, Biopure announced that the primary safety and efficacy endpoints of its U.S. Phase III clinical trial of Hemopure were met. Biopure has selected a site, completed engineering work sufficient to support the start of construction and committed $10 million of equity financing for a manufacturing plant. The plant, to be located in South Carolina, will have a capacity of 500,000 Hemopure units and is estimated to cost $110-120 million.

     Oxygen is indispensable to the life of all human tissues. Hemoglobin, a protein normally contained within red blood cells, is the molecule responsible for carrying and releasing oxygen to the body’s tissues. Hemoglobin’s protein structure is similar in many different animal species, including humans. Under normal conditions, hemoglobin contained within red blood cells carries approximately 98% of the body’s oxygen and the remaining two percent is dissolved in the plasma, or fluid part of the blood.

     As the heart pumps blood, hemoglobin within the red blood cells takes up oxygen in the lungs and carries it to various parts of the body. Blood travels through progressively smaller blood vessels to the capillaries, some of which are so narrow that red blood cells can only pass through them in single file. Most of the oxygen release occurs in the capillaries. Blood then returns to the lungs to reload the red blood cells with oxygen. Adequate blood pressure and red blood cell counts are crucial to this process. Oxygen deprivation, even for several minutes, can result in cell damage, organ dysfunction and, if prolonged, death.

     The causes of inadequate tissue oxygenation generally can be classified into three categories:

• anemia — insufficient hemoglobin. Blood loss from injury or surgery or disorders that affect red blood cell production or maintenance, such as bone marrow disease, can cause anemia;
• ischemia — inadequate red blood cell flow for tissue oxygenation. Obstructed or constricted blood vessels can result in ischemia. Ischemia can lead to stroke, heart attack or other organ or tissue dysfunction; and
• cardiopulmonary failure — impaired function of the heart or lungs. The heart’s inability to pump sufficient quantities of blood to meet the needs of the tissues or the failure of the lungs to oxygenate blood adequately can cause 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. Health care professionals also may use medications that stimulate red blood cell production if anemia is anticipated, for example, as a result of planned surgery.

     Red blood cell transfusions have certain risks and limitations. As HIV, hepatitis and other diseases have infected the world’s blood supply, the need for a sterile blood product has become increasingly apparent. There is currently no 100% effective method for detecting blood-borne diseases or for sterilizing donated blood. As a result, the risk of disease transmission from donated blood is an ongoing concern to physicians and patients, although less so than in the past. Handling errors in typing and cross-matching blood, as well as the inadvertent introduction of pathogens, can also result in significant medical problems. Blood typing and handling requirements, particularly refrigeration, limit the feasibility of red blood cell transfusions in pre-hospital emergency treatment situations. Shortages of certain types of blood can occur due to seasonal factors or disasters. Donated red blood cells are available for use in transfusions for only 42 days after collection and this limitation affects the ability to stockpile red blood cell supplies. Although freezing can extend the life of red blood cells, the freezing and thawing processes require chemical treatment of the red blood cells and reduce the efficacy of those red blood cells. Finally, the longer red blood cells are stored, the longer it takes them to reach their maximum oxygen-releasing capacity and the more they break down, limiting their effectiveness in delivering oxygen. Red blood cells lose approximately 75% of their immediate oxygen-releasing ability after eight days of storage. Blood banks generally release the oldest stored blood first to prevent outdating after 42 days.

     Red blood cell transfusions generally are not effective for ischemic conditions caused by blockage. In such situations, an obstructed or constricted blood vessel that is too narrow to permit the normal passage of red blood cells can prevent oxygen from reaching the body’s tissues.

     Similarly, red blood cell transfusions are generally not effective in overcoming poor oxygenation due to impaired heart or lung function.

     Existing alternatives to red blood cell transfusions are limited. In trauma situations, victims may experience massive bleeding resulting in rapid loss of blood volume and oxygen-carrying capacity. In an effort to stabilize trauma patients, emergency caregivers typically administer commonly used intravenous fluids, such as Ringer’s lactate or saline. Ringer’s lactate consists of water and electrolytes and is generally administered to patients who have lost substantial amounts of bodily fluids as a result of bleeding, vomiting or diarrhea. Both Ringer’s lactate and saline restore blood volume, but do not carry oxygen.

     For anemia in non-acute situations, there are currently two biological products on the market. Both of these products are formulations of a protein called erythropoietin. Erythropoietin stimulates the body’s ability to produce its own red blood cells. This stimulation is called an erythropoietic effect. In a surgical setting, these products are administered in anticipation of blood loss during surgery, thereby potentially reducing the need for red blood cell transfusions. However, erythropoietin does not deliver oxygen to the body’s tissues and does not act as a blood volume expander. As a result, these products are not effective in treating acute blood loss and are generally not used in cases of unplanned surgeries or emergency need. In addition, the labels on these products caution against their use in cardiac surgery patients.

     Biopure has two proprietary oxygen therapeutic products that are identical except for their molecular size distributions. Biopure defines its products as therapeutics because they remediate oxygen deprived tissues. One administers these products intravenously. Biopure’s products consist of hemoglobin that has been extracted from bovine red blood cells, purified, chemically modified and cross-linked for stability. The resulting hemoglobin solutions do not contain red blood cells and are formulated in a balanced salt solution similar to Ringer’s lactate.

     The average Hemopure molecule is less than 1/1000th the size of a red blood cell. Once infused into a patient, the Hemopure molecules disperse throughout the entire plasma space, including the area between and around red blood cells, and are in continuous contact with the blood vessel wall where oxygen transport to tissues takes place.

     Hemopure, by filling plasma with hemoglobin molecules, immediately turns the plasma into an oxygen-delivering substance. Plasma containing Hemopure flows everywhere that blood ordinarily flows and can also bypass partial blockages or pass through constricted vessels that impede the normal passage of red blood cells.

     Furthermore, introducing Hemopure into the bloodstream enables red blood cells to release more oxygen to the tissues than they otherwise would. In addition to delivering oxygen to tissues, Hemopure also acts as a blood volume expander and may support the body’s ability to produce red blood cells.

     Hemopure molecules hold the same amount of oxygen as the hemoglobin molecules in red blood cells on a gram-for-gram basis. Hemopure molecules, however, are chemically modified to have less affinity for oxygen than red blood cells, enabling Hemopure to release oxygen to tissues more efficiently than red blood cells. Human hemoglobin, unlike bovine hemoglobin, depends on the action of 2,3 diphosphoglycerate, or 2,3 DPG, a substance found in high concentrations only within the red blood cell, for optimal offloading, or release, of oxygen to tissues. The 2,3 DPG breaks down rapidly in stored blood causing red blood cells to lose approximately 75% of their ability to immediately release oxygen after eight days of storage. The 2,3 DPG breakdown reduces the oxygen offloading efficiency of transfused red blood cells until its levels are restored. Transfused red blood cells can require hours to regain their oxygen offloading capability. Biopure’s bovine hemoglobin permits the efficient offloading of oxygen in the absence of 2,3 DPG, thereby allowing Hemopure to be at its optimal oxygen offloading effectiveness immediately upon infusion.

     Hemoglobin molecules in different species have demonstrated low antigenicity, which means that they do not readily elicit an immune or allergic response. Biopure has confirmed Hemopure’s low antigenicity, as indicated by the absence of certain effects, through in vitro and in vivo studies.

     The following chart lists Hemopure’s characteristics in comparison to transfused red blood cells:

Characteristic		Hemopure		Transfused Red Blood Cells
Onset of action		Immediate — not 2,3 DPG-dependent		Initially limited — 2,3 DPG-dependent
Oxygen affinity		More efficient oxygen release to tissues		Less efficient oxygen release to tissues
Oxygen transport		Red blood cells and plasma		Red blood cells only
Risk of disease transmission		Product purity maintained through a reproducible and controllable manufacturing process; no leukocyte, or white blood cell, exposure		Risk minimized by testing, donor selection and administration protocols and ongoing surveillance for emerging pathogens; leukocyte exposure
Storage		Room temperature; no loss of efficacy		Refrigeration required; loss of efficacy
Shelf life		36 months		42 days
Compatibility		Universal		Type-specific
Preparation		Ready-to-use		Requires typing and cross-matching
Viscosity		Low		High
Raw material source		Controlled		Not controlled
Duration of action		Maximum of 3 days		Estimated 60 to 90 days

     In addition to Hemopure’s use as an alternative to red blood cell transfusions in surgery, human clinical testing and preclinical studies suggest that Hemopure also could be a readily available therapeutic with a broad range of potential applications. These applications include the treatment of trauma, ischemic conditions, including stroke and heart attack, and malignant hypoxic tumors.

     Hemopure has a 36-month shelf life at room temperature, is universally compatible and can be stocked well in advance of anticipated use. Consequently, when blood is not available, Hemopure could be used to maintain a patient until the needed type and quantity of red blood cells arrive, until the patient can be transported to a hospital or until a patient’s body produces its own red blood cells. Hemopure thus could be an effective Oxygen Bridge™ to a red blood cell transfusion or to the body’s ability to regenerate its own fresh red blood cells. Hemopure may be particularly well suited for this Oxygen Bridge function because the duration of action of a single infusion is about two to three days with 50% of the Hemopure molecules retained in the circulatory system for 24 to 36 hours following administration. In clinical trial data, Biopure has observed that the redosing of Hemopure over several days can prolong Hemopure’s “Oxygen Bridge” effect.

     Transfused red blood cells, however, have some advantages when compared to Hemopure. Transfused red blood cells have a longer duration of action and can persist in the body for an estimated 60 to 90 days. Hemopure, on the other hand, depending on the amount infused, can last between one and three days and may require repeat administration. Biopure has also observed slight increases in blood pressure and abdominal discomfort in Hemopure-infused patients. An evaluation of all available clinical safety data is in progress. Fluctuations in a patient’s blood pressure can affect the manner in which health care professionals, who are accustomed to transfusing red blood cells, manage a patient’s care. Furthermore, Hemopure may elicit an immune response in some individuals, as do some other proteins. In addition, it is anticipated that the cost of Hemopure will be significantly greater to the patient than the cost of transfused red blood cells.

     Biopure intends to expand its leadership position in the development, manufacture and marketing of oxygen therapeutics through the following strategy:

• Develop and Commercialize Hemopure as an Alternative to Red Blood Cell Transfusions. Biopure’s advanced clinical trials have demonstrated Hemopure’s efficacy as an alternative to red blood cell transfusions in elective surgery. While Biopure does not anticipate that Hemopure will replace all red blood cell transfusions, Biopure expects that Hemopure’s use in surgery will demonstrate Hemopure to be a safe and effective oxygen therapeutic in a wide range of patients.
• Pursue Marketing Approvals. Biopure will seek to register its oxygen therapeutics internationally.
• Pursue Approvals of Hemopure for Additional Therapeutic Applications. Because of Hemopure’s special oxygen therapeutic characteristics, Biopure intends to develop Hemopure as a therapy for indications such as trauma, ischemic conditions, including stroke and heart attack, and as an adjunct to therapy for malignant hypoxic tumors.
• Increase Market Awareness for Hemopure. Biopure intends to increase market awareness for Hemopure by identifying the issues and patient management benefits necessary for widespread acceptance of oxygen therapeutics by the medical community.

     Biopure’s two products are oxygen therapeutics. Hemopure is its product for human use. Biopure expects to file a marketing application with the FDA in fiscal 2002 for the use of Hemopure as an alternative to red blood cell transfusions before, during or after elective surgery. The FDA and the European Medicines Evaluation Agency have approved the use of Oxyglobin, Biopure’s veterinary product, for the treatment of anemia in dogs, regardless of cause. Oxyglobin is marketed and sold to veterinary hospitals and to small animal veterinary practices in the United States and Europe. Biopure has tested Hemopure in clinical trials involving more than 1250 humans and has tested Hemopure and Oxyglobin in 150 completed preclinical studies involving animals from 10 species. On a “compassionate use” basis, Hemopure has been administered as an Oxygen Bridge to more than 30 patients with life threatening anemia when compatible red blood cells were unavailable or unacceptable. Commercial sales of Oxyglobin have resulted in thousands of administrations in animals.

     Biopure believes Hemopure can be developed for several indications. As described below, the first indication Biopure is seeking approval for is use as an alternative to red blood cell transfusions. Preclinical studies and observations from completed trials show that trauma, ischemic conditions, including stroke and heart attack, and malignant hypoxic tumors might be possible additional indications for clinical development.

     Hemopure would serve as an alternative to a red blood cell transfusion or as an Oxygen Bridge pending the acquisition or production by the body of suitable red blood cells. Biopure does not expect Hemopure to replace all red blood cell transfusions. However, Hemopure’s oxygen-carrying properties, storage and infusion advantages address many of the limitations associated with red blood cell transfusions.

     Biopure’s clinical trials have demonstrated Hemopure’s efficacy as an alternative to red blood cell transfusions in elective surgery patients as measured by the avoidance of red blood cell transfusions. In all of Biopure’s advanced clinical trials, Biopure evaluated Hemopure’s efficacy as an oxygen therapeutic by determining, within the context of a written set of guidelines known as a protocol, the percentage of patients given Hemopure who did not require a subsequent transfusion of red blood cells. In these trials, Hemopure was administered only to patients who needed a red blood cell transfusion. Trial design limited the amount of Hemopure that could be infused and the number of post-operative days during which it could be infused. Despite these trial limitations, Hemopure’s clinical trials that have been completed and analyzed demonstrate clinically significant elimination of red blood cell transfusions. Elimination was deemed to occur if the patient did not require a subsequent red blood cell transfusion. Elimination was deemed not to occur if the patient was administered the maximum number of Hemopure units permitted by the particular trial design and subsequently needed a red blood cell transfusion.

     The following chart summarizes the advanced clinical trials that Biopure has completed for Hemopure as an alternative to red blood cell transfusions. The column labeled “Results” lists efficacy, or elimination of red blood cell transfusion, results. Another endpoint of our pivotal Phase III trial is a safety profile in the Hemopure group that is no worse than the control group. We believe that we have met these endpoints. In our trials previous to the U.S. pivotal trial we met these endpoints, and we are in the process of submitting our final study report on the U.S. pivotal trial.

Type of Surgery		Development Status		Dosing: Grams Hemoglobin (Units Hemopure)		No. of Total Patients/No. of Patients Treated with Hemopure				Results
Elective orthopedic   surgery		U.S. pivotal Phase III trial		Up to 300 grams (10 units) over 6 days			688/350			59% elimination of red blood cell transfusions in the intent-to-treat population
Non-cardiac elective   surgery (1998)		Phase III trial completed in Europe and South Africa, the basis for filing in South Africa in July 1999		Up to 210 grams (7 units) over 6 days			160/83			43% elimination of red blood cell transfusions in the intent-to-treat population
Post cardio-   pulmonary bypass   surgery (1996)		Phase II trial completed in the U.S.; supportive trial for the South African July 1999 filing		Up to 120 grams (4 units) over 3 days, first dose administered post- surgery			98/50			34% elimination of red blood cell transfusions
Aortic aneurysm   reconstruction   surgery (1996)		Intraoperative Phase II trial completed in the U.S. and Europe; supportive trial for the South African July 1999 filing		Up to 150 grams (5 units) over 4 days; first dose administered during surgery, if required			72/48			27% elimination of red blood cell transfusions

     U.S. Pivotal Phase III Orthopedic Surgery Trial. Biopure began a pivotal Phase III trial in the United States in March 1999 in elective orthopedic surgery. Elective orthopedic surgery includes non-emergency surgery involving bones and joints, including repair of orthopedic fractures in stabilized patients. The primary efficacy objective of this trial was the avoidance of red blood cell transfusions for six weeks after orthopedic surgery. Biopure designed this randomized, red blood cell controlled, multi-center study to enroll a total of 640 patients in the United States, Europe, Canada and South Africa, of whom approximately one-half would be in the Hemopure treatment group and the other half would receive red blood cells. Final enrollment was 688 patients. Up to 300 grams of hemoglobin, or ten units of Hemopure, could be infused before, during or after surgery for a total of up to six treatment days. The efficacy endpoint of this trial was the elimination of red blood cell transfusions in at least 35% of the patients who received Hemopure. Another endpoint is a safety profile that is no worse than the control group.

     Non-U.S. Phase III Non-cardiac Surgery Trial. Biopure completed a Phase III trial in Europe and South Africa in 1998 in non-cardiac surgery. Non-cardiac surgery refers to surgery that does not involve the heart and can include surgery of the digestive or urinary tract as well as orthopedic surgery. The primary objective of this trial was the avoidance of red blood cell transfusions for 28 days after non-cardiac surgery. This randomized, red blood cell controlled, multi-center study enrolled 160 patients, 83 of whom were infused with Hemopure. Up to 210 grams of hemoglobin, or seven units of Hemopure, were permitted during a six-day treatment period. The trial resulted in the clinically significant elimination of red blood cell transfusions in 43% of the patients who received Hemopure in the intent-to-treat population.

     U.S. Phase II Post Cardiopulmonary Bypass Surgery Trial. Human testing was completed in 1997 in a double-blind, randomized, red blood cell controlled, multi-center study in post cardiopulmonary bypass surgery patients. During cardiopulmonary bypass surgery, patients are connected to a heart and lung machine that replaces functions of the heart and lungs during surgery. The primary objective of this trial was the avoidance of red blood cell transfusions for 28 days after surgery. The study treated 98 patients, 50 of whom were infused with Hemopure. Up to 120 grams of hemoglobin, or four units of Hemopure, were administered over a three-day treatment period following surgery. The trial resulted in the clinically significant elimination of red blood cell transfusions in 34% of the patients that received Hemopure. In this study, 100% of the patients who received Hemopure did not require any red blood cells during the day of surgery.

     Additionally, Biopure observed that the hematocrit, or packed red blood cell volume as a percentage of total blood volume, of the patients treated with Hemopure recovered to a degree that was indistinguishable from the red blood cell treated patients at both six and 28 days post-surgery. This observation supports the potential use of Hemopure as an erythropoietic support.

     U.S. Phase II Aortic Aneurysm Reconstruction Surgery Trial. In 1998, Biopure completed a randomized, red blood cell controlled, multi-center trial in abdominal aortic aneurysm reconstruction surgery. Aortic aneurysm reconstruction surgery involves repairing a damaged segment of the aorta, the body’s principal artery. This study treated 72 patients, 48 of whom were infused with Hemopure. The maximum dosage was 150 grams of hemoglobin, 30 grams more than the post cardiopulmonary bypass trial. Usually aortic aneurysm reconstruction surgery involves much more blood loss than post cardiopulmonary bypass surgery. In this trial, Hemopure was used during the surgery in contrast to the post cardiopulmonary bypass trial, where use began after surgery. The trial resulted in the clinically significant elimination of red blood cell transfusions in 27% of the patients that received Hemopure. The trial was reported in the Journal of Vascular Surgery, February 2000 issue.

     Biopure has observed a 100% elimination of red blood cell transfusions on the day of surgery in cardiac patients infused with Hemopure. As a result, Biopure believes that Hemopure could be infused at the site of an accident, potentially extending the time that a trauma patient could be supported awaiting definitive hospital care. Hemopure also acts as an expander of blood volume, a common therapy used to stabilize trauma patients. As part of our approach to trauma, Biopure is conducting a Phase II trial in non-cardiac surgery patients that allows enrollment of consenting, stable trauma patients. This 60-patient trial is being conducted at Brooke Army Medical Center and Wilford Hall Air Force Hospital. In this controlled and randomized study, investigators dose with Hemopure (or Ringer’s lactate, the control treatment) based on the estimated amount of blood the patient has lost. Endpoints include blood utilization and safety. There have been no deaths in either group in this study. In this trial, physicians are administering Hemopure to a maximum dose of 10 units or 300 grams of hemoglobin. Biopure expects this trial to provide information useful in designing a clinical development plan for trauma. Hemopure has been used on a “compassionate use” basis in trauma patients. The design of pivotal trauma trials will be complicated by heterogeneous patient populations and logistical issues. Biopure has convened a panel of experts to advise in the design of a trauma program.

     In addition, preclinical animal model studies performed in academic and military research laboratories have shown the benefit of using Hemopure in situations involving severe trauma, hemorrhagic shock, hemorrhagic shock with tissue injury and resuscitation from cardiac arrest resulting from severe hemorrhage.

     The ability of Hemopure molecules to circumvent partial occlusions could potentially benefit patients suffering from ischemic conditions by supplying oxygen to tissues that are receiving inadequate numbers of red blood cells. Inadequate tissue oxygenation due to partial vessel blockage or constriction can cause heart attack, angina and transient ischemic attack, which is a precursor to stroke. In these situations, treatment with red blood cell transfusions would not be effective because red blood cells are too large to navigate around blockages. Biopure has completed preclinical studies with results supporting these potential indications. One preclinical study demonstrated that infusing Hemopure before there is a blockage in a coronary artery leading to a heart attack can limit potential damage to the heart. Although Hemopure would not attack the root cause of the ischemia, such as a clot or plaque in the arteries, it could help to maintain oxygenation and thereby sustain tissue pending a correction of the blockage or could lessen the damage from ischemia if infused in time. In 1996, the American Heart Association reported that approximately 900,000 people in the United States each year experience heart attacks, of which approximately one quarter are fatal. In its 1999 Heart and Stroke Statistical Update, the American Heart Association reported that approximately 600,000 people suffer a new or recurrent stroke each year.

     An abstract published in the The Journal of Trauma in January 2000 and presented at the 30th Annual Scientific Meeting of the Western Trauma Association on March 1, 2000 described a preclinical study using a pre-hospital hemorrhagic shock model designed to model what happens to humans after an accident. The study demonstrates that small-volume resuscitation with Hemopure can restore and sustain brain oxygenation, blood pressure and cardiac output following severe hemorrhagic shock.

     Radiation therapy and many types of chemotherapy depend on the adequate oxygenation of tumors to kill cancer cells. Malignant cancer tumors, such as breast, prostate and other solid tumors, are dense tumors which often outgrow their blood supply, leaving much of the tumor without oxygen. Consequently, they resist chemotherapy and radiation treatment. Biopure, in collaboration with the Dana-Farber Cancer Institute in Boston, has developed a patented method for oxygenating hypoxic, or oxygen deficient, tumor cells that could potentially increase the tumor-killing effects of radiation and chemotherapy. Preclinical studies have shown the feasibility of this application. In 1999, Biopure initiated clinical development of this indication, specifically the treatment of glioblastoma. Enrollment in a Phase I clinical trial of patients diagnosed with glioblastoma began in 2000.

     After blood loss, health care professionals typically administer human serum albumin, or HSA, or other volume expanding fluids to restore blood volume. Adequate blood volume is necessary to maintain effective blood pressure and heart rate. HSA is a naturally occurring protein that is part of the plasma. Hemopure molecules are also proteins. Hemopure maintains the volume of blood in a manner similar to HSA. In many patients suffering from severe blood loss, Biopure believes that Hemopure would be preferable to currently available plasma expanding agents, which do not carry or offload oxygen.

     Acute normovolemic hemodilution, or ANH, is a technique that reduces the need for donated blood. ANH refers to a practice where the patient donates one to three units of blood immediately before surgery and is infused with a non-oxygen carrying plasma expander such as Ringer’s lactate. The patient is then transfused with his or her own blood during or after surgery. Biopure has administered Hemopure in three clinical safety trials involving humans undergoing ANH. As an oxygen carrier and a plasma-expanding agent, Hemopure could potentially temporarily replace the oxygen-carrying support and volume lost from donating blood. At present, ANH is not widely used in the United States but is more commonly used in Europe.

     In Biopure’s Phase II post-cardiopulmonary bypass clinical trial, which compared the post-operative use of Hemopure to donated red blood cells in cardiac surgery, the hematocrit, or packed red blood cell volume as a percentage of total blood volume, was similar for both the Hemopure-infused and the control patients on the sixth day following surgery. Both groups maintained this similarity when measured again at a follow-up visit 28 days after surgery, suggesting that Hemopure may support the regeneration of red blood cells. In addition, in one “compassionate use” case, a patient with a critically low hematocrit, who received Hemopure but not red blood cells, was stabilized for several days and then was able to restore her hematocrit. As such, Hemopure could potentially be used in conjunction with, or as an alternative to, erythropoietin, a hormone that enhances the production of red blood cells. A preclinical study supports the use of Hemopure as an erythropoietic agent. This study involved eight conscious sheep, all of which underwent an exchange transfusion involving the replacement of at least 95% of their blood with an early formulation of Hemopure. Even with critically low hematocrits, these animals achieved stable hemodynamics, demonstrated no clinical signs of distress and survived long term with a rapid resynthesis of their red blood cells.

     Oxyglobin is identical to Hemopure except for its molecular size distribution. The FDA Center for Veterinary Medicine approved Oxyglobin in 1998 and the European Medicines Evaluation Agency approved Oxyglobin in 1999, in both cases for the treatment of canine anemia, regardless of cause. Anemia in dogs often results from surgery, trauma, hemolysis, gastrointestinal blood loss, urinary blood loss, iron deficiency and rodenticide toxicity. Oxyglobin sales were $3.5 million in fiscal 2001, $3.1 million in fiscal 2000 and $2.7 million in fiscal 1999. From the date of U.S. approval through December 31, 2001, Biopure sold approximately 94,000 units of Oxyglobin.

     Biopure intends to limit sales until capacity increases. At that time, we believe it will be possible to increase the market for Oxyglobin by:

• further educating veterinarians;
• adding Japanese and other foreign approvals;
• adding repeat dosing;
• adding other applications;
• offering a smaller package size; and
• adding other species.

     Biopure uses proprietary and patented purification and polymerization processes in the manufacture of its oxygen therapeutic products. Biopure’s processes comply with current good manufacturing practices established by the FDA and comparable standards required in the European Union for veterinary products. Biopure’s scientific and engineering team has designed and built much of its large-scale critical equipment. A proprietary computer software system operates and monitors most aspects of this process. Biopure has produced both Hemopure and Oxyglobin since 1991.

     Biopure’s products consist of bovine hemoglobin that has been purified, chemically modified and cross-linked for stability. Controlled herds of U.S. cattle raised for meat provide the raw material used in Biopure’s products. Biopure monitors the source, health, location, feed consumption and quality of the cattle to be used as a raw material source, a safety standard that is not and cannot be established for donated human blood. Suppliers to Biopure contract to maintain traceable records on animal origin, health, feed and care to assure the use of known, healthy animals.

     At a high volume abattoir, Biopure collects bovine whole blood into individual presanitized containers and transports them to a separation facility. Following blood collection, the animals pass U.S. Department of Agriculture, or USDA, inspection for use as beef for human consumption. If an animal’s meat is not approved for human consumption, Biopure also rejects the corresponding container of whole blood. The USDA considers the United States to be free of pathogens associated with “mad cow disease.”

     Biopure’s processes remove bacterial and viral pathogens, such as those leading to hepatitis and AIDS. Biopure also believes that both its source material and manufacturing processes safeguard humans from potential risks of transmissible spongiform encephalopathies (TSE), one of a category of diseases that includes “mad cow disease.” Health and regulatory authorities have given guidance directed at three factors to control these diseases: source of animals, nature of tissue used and manufacturing process. Biopure complies with, and believes it exceeds, all current guidelines regarding such risks for human pharmaceutical products. Blood as a tissue generally has been found to have little or no potential for transmitting transmissible spongiform encephalopathies. Bovine red blood cells do not contain prions, the proteins necessary for transmissible spongiform encephalopathies. Furthermore, Biopure’s patented purification and manufacturing process has been tested to demonstrate that the potential risk of infectious disease transmission is insignificant. In fiscal 2001 the European Directorate for the Quality of Medicines (EDQM) granted a “Certification of Suitability of Monographs of the European Pharmacopoeia” for Oxyglobin. This certification is required for all 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 with regard to transmissible spongiform encephalopathy agents.

     A washing and a filtration process remove plasma proteins in the bovine blood. Washed cells are next placed in a centrifuge that separates the red blood cells from the rest of the blood. The hemoglobin is extracted from the red blood cells and is then diafiltered to remove red blood cell wall debris and other contaminants. The resulting material is a cell-free hemoglobin intermediate. A semi-continuous purification process involving a high performance liquid chromatography process purifies the hemoglobin intermediate. Next, the purified hemoglobin is polymerized, or linked, by the addition of a cross-linking agent. Polymerized and stabilized material is then fractionated and concentrated. The final product is filtered into sterilized batch holding tanks until sterile fill into bags.

     Biopure expects to market Hemopure to physician practices and hospitals initially for the reduction or elimination of red blood cell transfusions in patients undergoing elective surgery. Biopure recognizes that it is crucial to establish a core belief among opinion leaders that Hemopure fills an important medical need and that systematic development of opinion leader advocacy is necessary for capturing and maintaining a leadership position. Biopure expects to reach anesthesiologists, surgeons, oncologists, critical care and other physician-specialists through publications and educational forums, such as seminars and presentations at meetings of specialists. Biopure has engaged a distributor for sales in South Africa and has embarked on pre-launch activities, primarily educational forums.

     Biopure will explore various means of selling Hemopure elsewhere. Among other options, Biopure may seek to enter into licensing or co-marketing agreements for parts or all of the world in order to avail itself of the marketing expertise of one or more seasoned pharmaceutical companies. Alternatively, it could engage “contract” sales organizations from vendors, contract pharmaceutical companies that supply sales services or recruit and train its own marketing and sales force.

     Biopure estimates that there are at least 15,000 small animal veterinary practices in the United States and another 4,000 mixed animal practices treating small and large animals. Biopure believes that the average veterinary practice treats only a small percentage of canine anemia cases with a red blood cell transfusion. The remainder receive either cage rest or a minimally effective treatment such as fluid administration, iron supplements, nutritional supplements or inspired oxygen.

     Biopure sells Oxyglobin directly to veterinarians in the United States through veterinary product distributors — one national and seven regional. Orders are drop shipped by Biopure directly. In Europe, it sells to three brokers who buy product for resale to veterinarians.

     Marketing programs in both the United States and Europe have included advertising, direct mail, educational seminars, conference calls and attendance at trade shows. Biopure has established a core group of veterinary practices in the United States that use the product regularly. These veterinarians are effective advocates of the product when interacting with other veterinarians. Biopure sponsors evening seminars featuring these veterinarians. Most veterinarians who buy the product reserve its use for the most severe clinical situations.

     Hemopure will compete with traditional therapies and with other oxygen delivery pharmaceuticals. Comparisons with traditional therapies, including red blood cell transfusions, are described under “— Scientific Overview,” “— Biopure’s Oxygenating 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, consist of natural hemoglobin from an animal or genetically engineered source that has been modified to improve stability, efficacy and safety; and
• perfluorocarbon emulsions are chemicals administered intravenously. Perfluorocarbon emulsions are effective principally under conditions of high oxygen partial pressure to assist in oxygen delivery by forcing dissolved oxygen into the plasma space.

     Biopure believes that the competitive factors for its oxygen therapeutics will be efficacy, safety, ease of use and cost. Biopure believes that it has significant advantages as compared to its competitors’ pharmaceuticals including:

• patents covering its processes, its products and their uses;
• large molecule size resulting in longer duration of action than most other oxygen therapeutics under development;
• long-term room temperature stability;
• completed and operational large-scale manufacturing facility;
• safe, ample, controlled inexpensive source of raw material; and
• FDA and EMEA approvals of Oxyglobin and usage by veterinarians.

     Many of Biopure’s competitors and potential competitors have significantly greater financial and other resources to develop, manufacture and market their products. Existing competitors in the development of hemoglobin-based investigational products use outdated human red blood cells as their raw material. Biopure is aware of two human hemoglobin-based products currently in advanced clinical trials or with applications for approval pending. It is not aware of any competitor that has completed advanced clinical trials of an investigational product as a direct comparator to red blood cell transfusions in surgery. Biopure believes that its use of bovine red blood cells is an advantage over products made from outdated donated human red blood cells because of the availability, abundance, ability to control source, cost and relative safety of bovine red blood cells. However, the use of bovine derived blood products may encounter resistance from physicians and patients. Among other things, public perceptions about the risk of “mad cow disease” may affect market acceptance of Hemopure. Biopure also believes that competitors may find it difficult to make or offer a hemoglobin-based oxygen carrier product having the product characteristics of Hemopure without infringing on one or more Biopure patents. In addition, the relatively low viscosity of Hemopure is a potential advantage, particularly in large doses, in permitting perfusion at low blood pressure.

     Biopure is aware of one perfluorocarbon oxygen carrier in advanced clinical trials. This product is a chemical fluid infused into the body. This chemical attracts oxygen and takes it into the plasma. The patient needs an oxygen mask for this process because perfluorocarbons require high oxygen environments in order to be effective. The perfluorocarbon solution does not persist in the body, so repeat dosing is necessary. These limitations may reduce the number of potential applications for the product. As far as Biopure is aware, applications pursued for this product do not include any of the applications Biopure might pursue other than acute normovolemic hemodilution.

     Biopure knows of no companies developing oxygen products intended to compete with Oxyglobin in the veterinary market.

     Patents, trademarks, trade secrets, technological know-how and other proprietary rights are important to Biopure’s business. Biopure actively seeks patent protection both in the United States and abroad. Biopure filed its initial patent in 1986 in the United States. Four 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, Biopure has 20 U.S. patents granted and eight applications pending relating to its oxygen therapeutics. Biopure’s granted U.S. patents include:

• two patents covering an ultra-purification process for hemoglobin solutions, regardless of the source of hemoglobin, which expire in 2006 and 2014; two patents covering the ultra-pure oxygen therapeutic solutions produced by this process expiring in 2009; and one patent covering the chromatography purification of the hemoglobin solution, expiring in 2015.
• 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;
• three patents, two of which expire in 2015 and one of which expires in 2016, covering improvements in preservation of such hemoglobin solutions;
• two patents, which expire in 2015 and 2016, covering improved methods for separating polymerized from unpolymerized hemoglobin;
• one patent, which expires in 2015, covering methods of oxygenating tissue affected by inadequate red blood cell flow;
• one patent, which expires in 2016, covering the removal of pathogens, if present, from Biopure’s source material; and
• three patents, which expire in 2011, 2014 and 2015, covering methods for treating tumors; and
• one patent, which expires in 2010, covering a sample valve for sterile processing.

     Biopure also filed its original patent in Europe. Although granted, third parties subsequently opposed Biopure’s original European patent. As a result of the opposition proceeding, the patent was revoked. However, Biopure filed an appeal that reinstated the patent during the appeal and is awaiting a decision on the appeal. In the opposition process, Biopure narrowed its claims. Despite the narrowing, Biopure believes that these claims provide protection for Biopure’s existing process and products. Biopure further believes that a narrowed European patent should be sustained. During the opposition proceeding, some pre-existing patents and articles not presented to the United States Patent Office during the prosecution of patents already issued in the United States were presented to the European Patent Office by the opponents. These preexisting patents and articles are not expected to affect claims of Biopure patents in the rest of the world. Biopure also has other foreign patents and patent applications.

     Biopure believes that it is not economically practicable to determine in advance whether its products, product components, manufacturing processes or the uses infringe the patent rights of others. It is likely that, from time to time, Biopure will receive notices from others of claims or potential claims of intellectual property infringement or Biopure may be called upon to defend a customer, vendee or licensee against such third-party claims. Responding to these kinds of claims, regardless of merit, could consume valuable time, result in costly litigation or cause delays, all of which could harm Biopure’s business. Responding to these claims could also require Biopure to enter into royalty or licensing agreements with the third parties claiming infringement. Such royalty or licensing agreements, if available, may not be available on terms acceptable to Biopure.

     As of January 10, 2002, Biopure employed 211 persons. Of its total work force, 122 employees are engaged in manufacturing and related manufacturing support services, 36 are engaged in research and development activities, 11 are engaged in sales and marketing, primarily veterinary, and 42 are engaged in support and administrative activities. None of Biopure’s employees are covered by a collective bargaining agreement. Biopure believes its relations with its employees are good.

     Governmental authorities in the United States and other countries extensively regulate the testing, manufacturing, labeling, advertising, promotion, export and marketing, among other things, of Biopure’s oxygen therapeutic products. Any oxygen therapeutic product administered to human patients is regulated as a drug or a biologic drug and requires regulatory approval before it may be commercialized.

     In the United States, Hemopure is regulated as a human biologic. The FDA will require Biopure to file and obtain approval of a biologic license application covering both Hemopure and the facility in which it is manufactured.

     The steps required before approval of a biologic for marketing in the United States generally include:

• preclinical laboratory tests and animal tests;
• the submission to the FDA of an Investigational New Drug, or IND, application for human clinical testing, which must become effective before human clinical trials may lawfully commence;
• adequate and well-controlled human clinical trials to establish the safety and efficacy of the product;
• the submission to the FDA of a biologic license application;
• FDA review of the biologic license application; and
• satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with current good manufacturing practices, which includes elaborate testing, control, documentation and other quality assurance procedures.

     The testing and approval process requires substantial time, effort and financial resources. After approval is obtained, a supplemental approval is generally required for each proposed new indication, often accompanied by data similar to that submitted with the original biologic license application.

     Preclinical studies include laboratory evaluation of the product and animal studies to assess the safety and potential efficacy of the product. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of the IND. The IND automatically becomes effective 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 and the FDA must resolve any outstanding concerns before the trial can proceed. Once trials have commenced, the FDA may stop the trials, or particular types of trials, by imposing a clinical hold because of concerns about, for example, the safety of the product being tested or the adequacy of the trial design.

     Clinical trials involve the administration of investigational products to healthy volunteers or patients under the supervision of a qualified principal investigator consistent with an informed consent. An independent institutional review board, or IRB, or ethics committee must review and approve each clinical trial at each institution at which the study will be conducted. The IRB or ethics committee will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.

     Clinical trials typically are conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug into human subjects, the drug is usually tested for safety or adverse effects, dosage tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics. Phase II clinical trials usually involve studies in a limited patient population to evaluate the efficacy of the drug for specific, targeted indications, determine dosage tolerance and optimal dosage and identify possible adverse effects and safety risks. Phase III clinical trials generally further evaluate clinical efficacy and test further for safety within an expanded patient population and at multiple clinical sites. Phase IV clinical trials are conducted after approval to gain additional experience from the treatment of patients in the intended therapeutic indication. If the FDA approves a product, additional clinical trials may be necessary. A company may be able to use the data from these clinical trials to meet all or part of any Phase IV clinical trial requirement. These clinical trials are often referred to as Phase III/ IV post-approval clinical trials.

     Biopure believes that its completed U.S. pivotal Phase III clinical trial is consistent with the FDA’s most recent guidance on the design and efficacy and safety endpoints required for approval of products such as Hemopure. However, the FDA could change its view or require additional data or even further clinical trials prior to approval of Hemopure.

     The results of the preclinical studies and clinical trials, together with detailed information on the manufacture and composition of the product, are submitted to the FDA in the application requesting approval to market the product. Before approving a biologic 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 biologic license application if applicable regulatory criteria are not satisfied or may require additional testing or information, and/or require postmarketing testing and surveillance to monitor safety, purity or potency of a product. It may also limit the indicated uses for which an approval is given.

     New drugs for companion animals must receive New Animal Drug Application, or NADA, approval prior to marketing in the U.S. The requirements for approval are similar to those for new human drugs. Obtaining NADA approval often requires clinical field trials and the submission of an Investigational New Animal Drug Application, which for non-food animals becomes effective upon acceptance for filing.

     Any product approvals that are granted remain subject to continual FDA review, and newly discovered or developed safety or efficacy data may result in withdrawal of products from marketing. Moreover, if and when such approval is obtained, the manufacture and marketing of Biopure’s products remain subject to extensive regulatory requirements administered by the FDA and other regulatory bodies, including 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. Biopure is 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. Any such enforcement action could have a material adverse effect on Biopure. Unanticipated changes in existing regulations or the adoption of new requirements could also have a material adverse effect on Biopure.

     Biopure also is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and hazardous substance disposal.

     Biopure will be subject to a variety of regulations governing clinical trials and sales of its products outside the United States and is currently subject to requirements of law in South Africa. Biopure must obtain approval of its products by the comparable non-U.S. regulatory authorities prior to the commencement of product marketing in the country whether or not Biopure has obtained FDA approval. The approval process varies from country to country and the time needed to secure approval may be longer or shorter than that required for FDA approval. These applications require the completion of extensive preclinical and clinical studies and manufacturing and controls information.

     Biopure’s ability to successfully commercialize its human product will depend in significant part on the extent to which reimbursement of the cost of such product and related treatment will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available to enable Biopure to maintain price levels sufficient for realization of an appropriate return on its investment in product development. The public and the federal government have recently focused significant attention on reforming the health care system in the United States. A number of health care reform measures have been suggested, including price controls on 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.