says it has solved a 50-year puzzle to develop a human blood substitute, but safety issues may derail the biotech company just as it seeks approval from U.S. drug regulators.

Shares in the Cambridge, Mass., company are up 121% since April 6, the day that South Africa approved the use of Hemopure, its highly anticipated oxygen-carrying red blood cell substitute. The big run-up in the stock was helped along by a company announcement on May 8 that a late-stage test in the U.S. showed positive results. The data from that test will form the basis for an application to the

U.S. Food and Drug Administration

by the end of the year.

An effective and safe human blood substitute has been sought since after World War II. Investors have rushed into Biopure because it seems to be winning where many other companies have lost. Hemopure could eventually generate billions of dollars in sales if it gains approval in the U.S. and Europe.

But short-sellers have taken an unusually large 25% position in Biopure, betting on a big fall in the company's fortunes. Their ammunition: suspicions that Biopure executives are disclosing the best data from the Hemopure tests, but not releasing more damaging evidence. Specifically, the company is touting the efficacy of Hemopure, but has refused to release any information on the product's safety. Safety is the most critical determining factor in whether or not the product gets the green light from the FDA, which will require it to be as safe as whole blood. Biopure executives acknowledge that safety data are crucial, but the information is still being analyzed and will be released soon.

Several sources familiar with the late-stage Hemopure tests say that a significant number of patients receiving the blood substitute have experienced negative side effects, including, most alarmingly, temporary kidney failure.

And other red flags have popped up. The company's chief medical officer, Dr. William Hoffman, essentially the top researcher in charge of testing Hemopure, quit the company right before the late-stage test was finished, in a highly unusual move.

And last month, C. Everett Koop, the former Surgeon General and a Biopure director since 1990, sold nearly his entire stake in the company, or 143,000 shares. Koop sold his shares after Biopure received approval in South Africa and right before the U.S. test results were announced.

Doug Sayles, Biopure's spokesman, defends the company's disclosure of preliminary test results as "balanced and responsible." While the company has had some access to the safety data, he says it is unaware of any significant adverse side effects in Hemopure patients, including possible temporary kidney failure. Earlier studies didn't uncover any significant health risks in patients given Hemopure, he adds.

"It would be irresponsible of us to talk about

Hemopure's safety until all the data is analyzed and discussed with the FDA," says Sayles.

The departure of the chief medical officer and Koop's divestiture are irrelevant to Hemopure's prospects, he says.

So, what exactly is this Hemopure and how does it work? Carl Rausch, Biopure's CEO, calls Hemopure an "oxygen therapeutic" -- or oxygen drug -- rather than a blood substitute. Developed from cow's blood, Hemopure turns plasma into an oxygen-carrying substance, flowing everywhere blood normally flows. But unlike blood, Hemopure doesn't need to be refrigerated. And it can sit on a shelf for up to three years at full strength, while unfrozen blood lasts a little more than six weeks before losing its effectiveness.

Eager for a product that could save wounded soldiers, U.S. military scientists began unsuccessful efforts to develop a blood substitute after World War II. In the 1980s, the efforts moved to the private sector with little improvement in results. Several companies, including

Alliance Pharmaceutical



Northfield Laboratories





have all made some progress, but not enough to get a product close to FDA approval.

Then there's Biopure. The company already sells a blood substitute used by veterinarians in the U.S. and Europe. The humanized version of the product -- Hemopure -- was the first to complete a seemingly successful pivotal late-stage test in humans last August, which cleared the way for approval in South Africa. The company expects to file an application for approval in the U.S. by the end of the year.

But does Hemopure really work, and more importantly, is it safe enough for human use? So far, Biopure is giving investors only half the story -- the side that shows Hemopure works.

In a late-stage study of 693 patients undergoing elective surgery, Biopure says that 95% of patients receiving Hemopure avoided red blood cell transfusion for at least 24 hours, and more than 60% avoided blood throughout the six-week study period. At a minimum, Biopure was hoping that 35% of patients would avoid the need for blood during the test, a goal that was far surpassed.

Biopure issued a press release announcing the results on May 8, and CEO Rausch made an appearance on


to talk about Hemopure's rosy prospects. Sell-side analysts backed his optimism.

"Hemopure works," wrote

J.P. Morgan

analyst Frank Berger, in a research note the day after the preliminary results were released. Berger rates Biopure a buy and his firm is an underwriter for the company.

But what Rausch failed to mention on television, and what was only alluded to in Berger's research note, was the fact that Hemopure's safety relative to red blood cells is the most important factor in the product's FDA approval.

In its May 8 press release, Biopure does acknowledge that an analysis of that safety data -- being conducted by an independent committee -- will determine whether the late-stage test was a success. But this information was not mentioned until the middle of the release's fifth paragraph.

Biopure's Sayles defends his company's handling of the situation. "We've been receiving a lot of queries from investors about the progress of our testing. We had the option of telling them nothing or giving them an update based on the latest information we had.

"We chose to write a press release that made it clear the efficacy data was preliminary and that safety data was just as important, but that it was still be analyzed. We are not trying to pull the wool over anyone's eyes."

Sources familiar with the safety data say several problems have cropped up that might make it difficult for Hemopure to pass muster with the FDA. Most notably, some patients given Hemopure went into temporary kidney failure; others suffered from elevated blood pressure levels. These sources had access only to the raw safety data and have not seen the final analysis, so they are careful to say that the FDA could still deem Hemopure safe enough for approval. Two of's

sources are short Biopure; the third has no position in the company. All said virtually the same thing.

These same sources say that the adverse side effects were the main reason Dr. William Hoffman, Biopure's chief medical officer, quit the company in April 2000, as the study was nearing completion.

Hoffman took a job as the director of the cardiac surgical intensive care unit at

Massachusetts General Hospital

in Boston. Reached there, Hoffman would not comment on his departure from Biopure, saying only that he wanted to return to academic medicine.

Biopure's Sayles, again, says the company is unaware of any significant adverse side effects, and that the final safety judgment cannot be made until the independent analysis is complete. He also says Hoffman left the company because he found his dream job, and that his departure was unrelated to Hemopure and its testing program.

But the alleged side effects seen in Hemopure's late-stage tests were presaged in earlier tests. A February 2000 research paper published in the

Journal of Vascular Surgery

says that patients receiving low doses of Hemopure showed a 15% increase in blood pressure and a threefold increase in a measure of kidney malfunction. The complications, however, did not change the study's conclusion that Hemopure worked as a red blood cell substitute.

Again, it's important to remember that the FDA will be the final arbiter of Hemopure, and it's impossible to determine now what the agency will do once Biopure files for approval. The FDA's main concern about blood products is safety.

At an April 19 meeting of a blood safety committee of the

U.S. Department of Health and Human Services

, Dr. Jay Epstein, one of the FDA's top blood experts, was asked his opinion of blood substitutes, especially given the fact that Hemopure was approved for use in South Africa.

"I think that the relative risk and benefit of these products is, in fact, very different in different countries," said Epstein, whose comments were part of a meeting transcript available on the agency's Web site. "In the South African situation, where you have a very high rate of HIV, and you know, resource-stressed environment, there may be a willingness to consider products whose safety profile may not be optimal in the United States ... where blood products are, in fact, astoundingly safe."