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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2003

or

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 0-23678

BioSphere Medical, Inc.

(Exact Name of Registrant as Specified in Its Charter)

1050 Hingham St., Rockland, Massachusetts 02370

(Address of Principal Executive Offices) (Zip Code)

(781) 681-7900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

  None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $.01 par value

(Title of class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of voting common stock held by non-affiliates of the registrant was $61,468,000 based on the closing price of the shares as reported by the Nasdaq National Market on June 30, 2003.

The number of shares outstanding of the registrant’s common stock as of March 1, 2004 was 14,013,476.

Documents incorporated by reference:

Portions of the Registrant’s Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders of the Registrant are incorporated by reference into Part III.

PART I

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of BioSphere to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenues, expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product research, development and commercialization timelines and expectations regarding market acceptance and market penetration for our products; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are described in “Business—Factors that May Affect Future Results” and elsewhere in this annual report and that are otherwise described from time to time in our Securities and Exchange Commission reports filed after this report.

The forward-looking statements included in this annual report represent our estimates as of the date of this annual report. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this annual report.

Item 1.    BUSINESS

We are focused on applying our proprietary microsphere technology to medical applications using embolotherapy techniques. Our core technologies, consisting of patented bio-engineered polymers and manufacturing methods, are used to produce miniature spherical beads with uniquely beneficial properties for a variety of medical applications. Our principal focus is the treatment of symptomatic uterine fibroids using a procedure called uterine fibroid embolization, or UFE. Our products have already begun to gain acceptance in this rapidly emerging procedure, as well as in a number of other new and established medical treatments. Our strategy is twofold. First, we are seeking to grow the embolotherapy business worldwide, specifically the UFE procedure, by increasing awareness of the availability of this procedure. Second, we are seeking to maintain our current technology leadership by continuously introducing new products and product improvements, through both internally developed and externally acquired technologies, that improve and broaden the use of embolotherapy techniques.

Embolotherapy works by reducing blood flow to target areas of the body. The procedure is performed by injecting agents, usually particles, through a catheter and into the blood vessels that feed these target areas. By selectively blocking the target tissue’s blood supply, the deprived tissue will either be destroyed or become devitalized, resulting in therapeutic benefit. Our initial products, Embosphere^® Microspheres and EmboGold^® Microspheres, have a number of beneficial properties that we believe make them well suited for these procedures. Because of their uniform, spherical shape and soft, slippery surface, our particles are easy to inject through small catheters, resulting in a more even distribution within the vessel network. We provide these products in a variety of precise sizes, so they can be selected to target occlusion of specific sized vessels to produce predictable results.

In November 2002, we received 510(k) clearance from the Food and Drug Administration, or FDA, to market our Embosphere Microspheres for UFE. Significant third-party clinical data and publications support the safety and effectiveness of the UFE procedure. We believe that a growing part of the medical community perceives UFE to be a reasonable alternative for most patients who now undergo hysterectomy for treatment of their fibroids. For these reasons, we believe the number of UFE procedures will increase at an accelerating rate. We were the first company to gain regulatory clearance to market a product for UFE in the United States. During 2003, we have continued to focus on seeking to grow our Embosphere Microsphere business through our ASK4UFE^™ awareness and education program and through physician training. On a worldwide basis, we continue to develop our sales and marketing organization to maintain our leadership position.

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We also believe that significant growth opportunities exist in the use of other embolotherapy procedures, notably in the treatment of liver cancer. We are seeking to obtain CE mark approval in the European Union of our Hepasphere SAP Microspheres and our Hepasphere SAP Microspheres are currently in clinical evaluation in Japan. We continue to conduct and support research on the safety and effectiveness of our products in other indications. Specifically, we are currently engaged in preclinical research on the development of temporary or dissolving embolics and the use of our microsphere technology for the targeted delivery of radiation therapy. We have sought to develop new, improved technologies. For example, in 2002 we introduced our EmboCath^® Infusion Catheter and our Segway^® Guidewire, the first products in our microsphere delivery system product line.

We believe that our platform microsphere technologies also have several non-embolotherapy applications, such as tissue bulking, repair and regeneration. For example, we have explored the use of our microspheres in the treatment of stress urinary incontinence, gastroesophageal reflux disease, urinary reflux and certain dermal defects. Our efforts in these areas led to a number of patent applications related to these technologies. Although our current focus is on embolotherapy markets, we believe that these non-embolotherapy applications have the potential to deliver value through internal efforts or third party licensing, collaboration or similar opportunities.

BioSphere Medical, Inc. was originally incorporated in 1993 under the name BioSepra, Inc., as a chromatography media company. During 1999, we strategically refocused our business on the development and commercialization of our proprietary microspheres for medical applications. In May 1999, we sold substantially all of our assets relating to our former core business, chromatography, and changed our name to BioSphere Medical, Inc. Between February 1999 and November 2001, we acquired complete ownership interest in Biosphere Medical S.A., referred to as BMSA. BMSA retains the license to the embolotherapy device that is the main focus of our business.

As of December 31, 2003, Sepracor, Inc., a specialty pharmaceutical company, owned approximately 23% of the outstanding shares of our common stock.

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge under “Investor Relations” on our website at www.biospheremed.com as soon as reasonably practicable after we electronically file this material with, or furnish this material to, the U.S. Securities and Exchange Commission. Information contained on our website is not incorporated by reference into our annual report on Form 10-K.

BioSphere^®, Embosphere^®, EmboGold^®, EmboCath^®, Segway^®, Hepasphere SAP^™, TempRX^™, Radiosphere^™, and ASK4UFE^™ are trademarks of BioSphere Medical, Inc. Other trademarks appearing in this annual report are the property of their respective holders.

INDUSTRY OVERVIEW

Embolotherapy Markets

Embolotherapy has been in use for more than 20 years by interventional radiologists to mechanically block the flow of blood to treat certain peripheral tumors and arteriovenous malformations and to control blood loss. In the past decade, interventional radiologists around the world have adopted new embolotherapy procedures, including uterine fibroid embolization and the treatment of certain cancers, especially liver cancer. Moreover, we believe that an increasing number of affected people have taken proactive steps in seeking alternative treatments due to their desire for less invasive treatment options.

Uterine Fibroids

Uterine fibroids are non-cancerous tumors growing within or on the wall of the uterus. Their cause is unknown. Most patients with uterine fibroids do not initially have symptoms and remain untreated until the patient experiences abnormal bleeding, increased urinary frequency, pain, swelling or fertility difficulties.

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Until recently, women suffering from uterine fibroids have had few treatment options. These existing treatment options include the following:

Liver Cancer

Worldwide, liver cancer is the most prevalent form of malignancy. In the U.S., metastatic liver cancer usually arises from cancer in other sites in the body, especially from the colon. However, the rate of primary liver cancer, where the cancer originates in the liver, is expected to increase dramatically in the United States due to increased incidences of hepatitis C, a key risk factor for primary liver cancer.

Primary liver cancer is typically diagnosed at a state that is too advanced for surgical cure. For the 70 percent of patients in the U.S. that fall into this category, remaining treatment options are primarily designed to improve quality of life rather than cure the underlying disease. Many conventional forms of cancer therapy, such as systemic chemotherapy or external beam radiation, do not show significant effectiveness for most patients and, therefore, are rarely used alone.

Numerous studies and medical publications indicate that embolotherapy has been used for decades to treat liver cancer. For example, particle embolization is commonly used in Japan to manage liver cancer patients. In the United States, embolic particles are commonly injected with chemotherapeutic agents to control and limit distribution of the chemotherapy agents, thereby increasing the therapeutic exposure at the target area.

A number of other, less invasive technologies are either in use or in development to treat inoperable primary liver cancer. Selective tumor ablation, using needle-like devices containing thermal energy or chemicals that are placed directly through the skin and into the tumor, can be used. However, application of this technique is practically limited to those with adequate liver function and relatively small tumors.

Recently, a new, targeted approach to treating liver cancer, using radioactive particles, has become available. These particles, which are similar to our Embosphere Microspheres, are delivered in a targeted fashion, through catheters placed in the feeding vessels near the tumor site. We have been working on related technologies, which we believe will offer significant advantages over the first generation products currently available.

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Non-Embolotherapy Applications

Although our current focus is to develop our embolotherapy business, we believe there are numerous applications for our core technology in non-embolotherapy applications, particularly as bulking agents to replace or supplement tissue support. Bulking agents are materials, injected into body sites, used to provide extra physical support where normal anatomic support is not present. These applications include: stress urinary incontinence, gastro esophageal reflux disease, urinary reflux in infants and certain skin conditions.

We have developed a number of technologies related to non-embolotherapy applications that have resulted in numerous patent applications. Although we are currently focusing our resources and efforts on the embolotherapy business, we believe that this technology represents a valuable intellectual property asset for us.

OUR BUSINESS STRATEGY

Our goal is to maintain a global leadership position in embolotherapy. Elements of our strategy to accomplish this goal include:

PRODUCTS

Our innovative microsphere technology evolved out of approximately 15 years of research and development of polymer formulations used in the field of biological separations and drug purification. In 1999, we made a strategic decision to focus all of our resources on microsphere technologies for medical applications.

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The following table summarizes information about our principal products and products under research and development.

Embosphere Microspheres

Our products, Embosphere Microspheres and EmboGold Microspheres, are intended for use in embolotherapy to block or control the blood supply to certain tumors and other vascular malformations. In November 2002, following successful completion of our clinical studies, we received regulatory clearance in the United States from the FDA for use of our Embosphere Microspheres in treating uterine fibroids. In April 2000, we received 510(k) marketing clearance from the FDA of our Embosphere Microspheres for hypervascularized tumors and arteriovenous malformations.

We believe that UFE will become the principal application for our microsphere products. The majority of our revenues in the United States is currently derived from the sale of our microspheres for UFE. Uterine fibroid embolization is a minimally invasive procedure, performed by interventional radiologists, in which microspheres are injected through a small catheter into the blood vessels that supply the uterus. Blood flow guides these particles into the network of vessels that preferentially flow toward the fibroids, thereby preferentially blocking the blood supply to the fibroids, but not to the surrounding healthy tissue. The goal of the uterine fibroid embolization procedure is to eliminate the flow of blood to the uterine fibroids, thereby causing fibroid shrinkage and alleviating related symptoms, while preserving normal uterine and ovarian function.

We believe that embolotherapy is a significantly more attractive alternative for treatment of uterine fibroids, particularly when compared to the invasiveness of such surgical procedures as hysterectomy or myomectomy, or even when compared to hormone therapy and “watchful waiting.” Current therapies can have significant adverse side effects, including loss of fertility, lengthy recovery periods, high costs, discomfort and risk of recurrence of fibroids.

Although the effect of uterine fibroid embolization on continued fertility or the effect to fetal development has not been studied extensively, and our 510(k) clearance does not include women who intend future pregnancy, we believe that uterine fibroid embolization has the potential to preserve the fertility of at least some of the patients that would otherwise be lost through hysterectomy or may be compromised by the use of current

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therapies or technologies, and to reduce or eliminate the risk of recurrence of the uterine fibroid tumors and the complications associated with myomectomy. Most uterine fibroid embolization procedures can be performed in less than one hour, while the patient is sedated, but awake. The patient generally stays overnight in the hospital to manage any discomfort associated with the procedure and typically returns to everyday activities in several days. In contrast, hysterectomy patients undergo general anesthesia, stay in the hospital for four to five days and have a recovery period lasting up to six to eight weeks.

Our Embosphere Microspheres are also being used in other disease areas and procedures, including liver cancer, arteriovenous malformations, pre-operative embolization and trauma, although we are devoting substantially all of our internal efforts to marketing and selling this product for UFE.

Independent studies have indicated that Embosphere Microspheres have a variety of characteristics that may make them preferable to current alternative particles. These include:

Embosphere Microspheres are currently available in six sizes, from 40 to 1,200 microns. They are designed to precisely fit the blood vessels, resulting in targeted and controlled occlusion. They can be used with our accessory catheter products or with any other commercially available catheter and delivery systems.

EmboGold^® Microspheres

EmboGold Microspheres were launched in the United States in September 2001 after receiving FDA clearance for treatment of hypervascularized tumors and arteriovenous malformations. In March 2002, we received CE Mark approval in the European Union. This product enhancement adds color to the spheres for improved visibility during preparation and injection. We do not have FDA clearance to market our EmboGold Microspheres for use in the treatment of uterine fibroids, and have determined not to seek such approval at this time. We made this decision because of reports that a small number of patients treated with UFE using EmboGold Microspheres, which we believe constitute approximately 2% of the total number of patients receiving the procedure, reported a delayed onset of pain and/or rash.

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Hepasphere SAP^™ Microspheres

We are seeking to obtain CE Mark approval of our Hepasphere SAP Microspheres in the European Union and Hepasphere SAP Microspheres are currently in clinical evaluation in Japan. This product shares some features with our Embosphere Microspheres, which also are used for the treatment of liver cancer and, in addition, they expand in size. Like UFE, targeted liver embolotherapy is intended to starve the liver tumor without damaging the surrounding tissue or causing any adverse side effects on other parts of the body, such as those associated with chemotherapy and radiation. In September 1999, we obtained a worldwide exclusive license to Hepasphere SAP Microsphere from Dr. Shinichi Hori.

TempRx^™ Microspheres

We believe that a significant opportunity exists for temporary or resorbing embolic materials. Currently, embolic materials are frequently used to temporarily treat internal bleeding from trauma or specific disease, and we believe that this could be a suitable application for temporary embolics. We believe that there is also a growing interest to use temporary or dissolving embolics in many current embolization applications, including liver and fibroid embolization. We are currently conducting early stage pre-clinical research on our TempRx Microspheres as temporary embolics.

Radiosphere^™ Microspheres

We are currently conducting early stage pre-clinical research on our Radiosphere Microspheres, through which we are seeking to adapt our microsphere technology in order to create radioactive compounds for targeted delivery of radiation therapy. We believe that the targeting of radiation doses through the body’s blood vessels is a potentially superior method to external radiation treatment modalities because it offers a conceptually optimum way of uniformly dosing the tissue that is most actively proliferating while, at the same time, minimizing dosage to non-targeted areas. We also believe our technology will offer significant benefits to physicians and patients compared with first generation products recently introduced.

Delivery Systems

During 2002, we introduced our EmboCath Infusion Catheter and our Segway Guidewire, which are our first products in our delivery system line. We are seeking to further develop this pipeline with new delivery products and product enhancements.

In November 2001, we received FDA clearance to market our EmboCath Infusion Catheter. The EmboCath Infusion Catheter is a microcatheter that is designed to be used to inject embolic material in the pelvic and abdominal region and has properties that we believe optimize the unique design of our hydrophilic and compressible microspheres, including the largest inside diameter available on the market in this size range, a specially designed hub to enable easy transfer of embolic agents from the syringe through the catheter, a hydrophilic coating and variable stiffness shaft to enable responsive yet supple handling.

In 2002, we introduced our Segway Guidewire, designed specifically for use with our EmboCath Infusion Catheter. The unique, proprietary design offers advanced features developed for use in cardiology applications. Guidewires are used in most intravascular catheter procedures to establish a support structure to aid placement of the catheter.

Other Non-Strategic Products

In addition to our Embosphere Microspheres products, we sell barium delivery kits and other ancillary products in the European Union. Barium is purchased from Guerbet Medical and resold for use in gastrointestinal medical testing. We sell other ancillary devices as medical products for hospital and physician use. While we generated a significant portion of our revenues in 2003 and 2002 from these non-strategic products, we do not expect these products to be a significant component of our future sales.

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MARKETING AND SALES

We currently market our embolotherapy and delivery systems products through direct sales efforts in the United States and through a combination of direct sales, distributors, field representatives and direct marketing support in the European Union, Canada, the Middle East, Africa, the Far East, South America and other parts of the world.

As part of our sales and marketing efforts, we plan to attend major medical conventions throughout the world pertaining to our targeted markets and to invest in market development, including physician training and patient outreach. We are working closely with major academic centers to serve as centers for excellence for physician training, product evaluation and ongoing research. Many members of our medical advisory board are associated with these major academic centers.

RESEARCH AND DEVELOPMENT

Our research and development group is focusing on developing our product technology in three areas:

Our core technologies include microsphere technologies, organic and inorganic polymer and surface chemistries for microsphere design and development, and expertise and know-how in microsphere manufacturing.

During the fiscal years ended December 31, 2003, 2002, and 2001, research and development expenses were $2.58 million, $3.97 million and $4.76 million, respectively.

COMPETITION

The primary competitive embolotherapy product has been polyvinyl alcohol, or PVA, a product introduced into the market more than 20 years ago. We encounter, and expect to continue to encounter, competition in the sale of our current and future embolotherapy products. Our principal competitors in the field of embolotherapy are Biocompatibles, Ltd., Boston Scientific Corporation, Cook Incorporated and Cordis Corporation (a Johnson & Johnson company), as well as companies selling or developing non-embolotherapy solutions for the disease states targeted by us. These competitors have, and our future competitors are likely to have, greater financial, operational, sales and marketing resources and more experience in research and development than we have. We compete primarily on the basis of product performance, ease of use, degree of targeted embolization control, and quality of patient outcome.

GOVERNMENT REGULATION

FDA Regulation. The FDA, and other federal, state, local, and foreign authorities, regulates our products and manufacturing activities. Pursuant to the Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, the FDA regulates the development, clinical testing, manufacture, packaging, labeling, storage, distribution and promotion of medical devices. Before a new device can be introduced into the market, generally, the manufacturer must obtain marketing clearance through a 510(k) notification or approval through a premarket approval application. We generally will be required to obtain 510(k) clearance or premarket approval prior to commercial distribution of future products or additional applications of current products.

Changes in Approved Devices. Device manufacturers must obtain new FDA 510(k) clearance when there is a major change or modification in the intended use of a legally marketed device or a change or modification,

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including product enhancements, to a legally marketed device that could significantly affect its safety or effectiveness. For devices marketed pursuant to 510(k) determinations of substantial equivalence, we must obtain FDA clearance of a new 510(k) notification prior to marketing the modified device.

Good Manufacturing Practices and Reporting. The Federal Food, Drug, and Cosmetic Act requires us to comply with Good Manufacturing Practices or Quality Systems regulations. We must comply with various quality control requirements pertaining to all aspects of our product design and manufacturing process, including requirements for packaging, labeling and record keeping, including complaint files. The FDA enforces these requirements through periodic inspections of medical device manufacturing facilities. In addition, the medical device reporting regulation obligates us to inform the FDA whenever information reasonably suggests that one of our devices may have caused or contributed to death or serious injury, or when one of our devices malfunctions, if the device would be likely to cause or contribute to a death or a serious injury in the event the malfunction recurred. We believe we, and all of our contract manufacturers, are in compliance with applicable Good Manufacturing Practices and Quality Systems regulations.

Labeling and Advertising. Labeling and promotional activities are also subject to scrutiny by the FDA. Among other things, labeling is violative of the law if it is false or misleading in any respect or it fails to contain adequate directions for use. Moreover, claims that are outside the labeling either approved or cleared by the FDA may violate the Federal Food, Drug, and Cosmetic Act.

Our product promotion is also subject to regulation by the Federal Trade Commission under the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce, as well as unfair or deceptive practices such as the dissemination of any false advertisement pertaining to medical devices.

Import Requirements. To import a device, the importer must file an entry notice and bond with the U.S. Customs Department pending an FDA decision on the product’s admissibility. All devices are subject to FDA examination before release from Customs. Any article that appears to be in violation of the Federal Food, Drug, and Cosmetic Act may be refused admission and a notice of detention and hearing may be issued.

Export Requirements. Products for export from Europe and from the United States are subject to foreign countries’ import requirements and the FDA’s or European regulating bodies’ exporting requirements. In addition to the import requirements of foreign countries, we must also comply with the United States laws governing the export of products regulated by the FDA. However, foreign countries often require, among other things, an FDA certificate for products for export. To obtain this certificate, the device manufacturer must certify to the FDA that the product has been granted clearance or approval in the United States and that the manufacturing facilities are in compliance with Good Manufacturing Practices regulations at the time of the last FDA inspection.

Fines and Penalties for Noncompliance. Failure to comply with applicable FDA regulatory requirements could result in, among other things, premarket clearance or approval withdrawal, injunctions, product withdrawals, voluntary or mandatory patient/physician notifications, recalls, warning letters, product seizures, civil penalties, fines and criminal prosecutions. Federal Trade Commission enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, rescission of contracts and such other relief as may be deemed necessary.

Medical device laws are also in effect in many countries outside of the United States. These range from comprehensive device approval requirements for some or all of our medical device products to simpler requests for product data or certification. The number and scope of these requirements are increasing. Sales of medical devices in the European Union are subject to the European Medical Device Directive. This directive contains requirements for quality system and product performance guidelines with which all manufacturers must comply. These guidelines contain quality system guidelines and preproduction product design verification that closely

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resemble current FDA guidelines. In 1997, we obtained ISO 9002 international quality systems registration, a certification showing that our procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. Our compliance with this registration has been confirmed since 1997 in semi-annual surveillance audits.

Failure to comply with applicable federal, state and foreign medical device laws and regulations would likely have a material adverse effect on our business. In addition, federal, state and foreign regulations regarding the manufacture and sale of medical devices are subject to future changes.

We are subject to various federal, state, local and foreign laws and regulations relating to the protection of the environment, as well as health and safety. In the course of our business, we are involved in the handling, storage and disposal of certain chemicals. The laws and regulations applicable to our operations include provisions that regulate the discharge of materials into the environment. Usually these environmental laws and regulations impose “strict liability,” rendering a person liable without regard to negligence or fault on the part of such person. Such environmental laws and regulations may expose us to liability for the conduct of, or conditions caused by, others, or for acts that were in compliance with all applicable laws at the time the acts were performed. We do not believe that we have been required to expend material amounts in connection with our efforts to comply with environmental requirements or that compliance with such requirements will have a material adverse effect upon our capital expenditures, results of operations or competitive position. Failure to comply with applicable environmental and related laws could have a material adverse effect on our business. In addition, because the requirements imposed by such laws and regulations are frequently changed, we are unable to predict the cost of compliance with such requirements in the future, or the effect of such laws on our capital expenditures, results of operations or competitive position.

PROPRIETARY TECHNOLOGY AND PATENT RIGHTS

We seek to establish and protect our proprietary technologies and products through a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality provisions in our contracts. We have implemented a patent strategy designed to maximize our intellectual property rights. We are pursuing patent coverage in the United States and foreign countries to protect the technology, inventions and improvements that we consider critical to the development of our products and business.

In January 1998, we entered into an agreement with L’Assistance Publique-Hopitaux De Paris, referred to as AP-HP, pursuant to which AP-HP has granted us the exclusive right to use two jointly-owned patents relating to microspheres. We are required to pay to AP-HP a royalty on the commercial sale of any products that incorporate technology covered by the patents. We may only sublicense these exclusive rights under the agreement with the prior written consent of AP-HP, which consent cannot be unreasonably withheld. The rights granted under the contract are for an initial period, which ends on September 16, 2009, and are renewable by mutual agreement between the parties. The agreement can be terminated on three months’ notice by either party if the other party does not perform one or more of its obligations under the agreement and fails to cure its nonperformance during the notice period. These jointly-owned patents will expire in 2014.

In addition, as part of the sale of our former core business to Invitrogen, Inc., formerly known as Life Technologies, in May 1999, we entered into a cross-license agreement with Invitrogen. Under that agreement, Invitrogen has granted to us an exclusive, worldwide, perpetual, royalty-free license to its technology and patents relating to our core field of development, including any improvement to that technology made prior to May 2004.

Under the agreement, we also granted to Invitrogen an exclusive, worldwide, perpetual, royalty-free license to any improvements to the technology they have licensed to us, which are useful in Invitrogen’s fields of development. Either party can terminate the agreement, and all licenses granted thereunder, on sixty days’ notice in the event of a breach of the agreement by the other party.

In 1999, we entered into an agreement with Dr. Shinichi Hori, pursuant to which we have an exclusive royalty-bearing license to Japanese patent rights for our Hepasphere SAP Microsphere product. These patent

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rights expire in 2012. There are no United States or other international filings corresponding to this patent application. We intend to file patent applications directed to improvement of this inventor’s technology. However, present applications may not issue as patents, and these patents, if issued, may not provide us with sufficient protection against competitors. Further, we may be required to obtain additional licenses concerning the Japanese patent application and any licenses, if obtained, may not be on terms that are acceptable to us.

In 2003, we received a United States patent that is directed to methods and kits for dermal augmentation and tissue bulking using microspheres, which expires in 2019. Another U.S. patent application was allowed in 2003 and issued in early 2004, directed to a method of embolization using polyvinyl alcohol microspheres, which expires in 2019.

In 2002, we received a United States patent that is directed to the treatment of urinary incontinence using microparticles, which expires in 2019. A related patent application was also awarded to us in 2002, directed to the use of microspheres in dermal augmentation, which expires in 2020.

We have numerous US patent applications currently pending. Almost all of these applications have corresponding European applications pending. The subjects of the patents include new material for embolization, new uses of our material outside of embolization and new methods of using our material for embolization and other applications.

Our success depends to a significant degree upon our ability to develop proprietary products and technologies and to obtain patent coverage for these products and technologies. We intend to continue to file patent applications covering any newly developed products and technologies. However, as discussed above, there can be no guarantee that any of our pending or future filed applications will be issued as patents. There can be no guarantee that the United States Patent and Trademark Office or some third party will not initiate an interference proceeding involving any of our pending applications or issued patents. Finally, there can be no guarantee that our issued patents or future issued patents, if any, will provide adequate protection from competition, as further discussed below.

Patents provide some degree of protection for our proprietary technology. However, the pursuit and assertion of patent rights, particularly in areas like medical device development, involve complex legal and factual determinations and, therefore, are characterized by significant uncertainty. In addition, the laws governing patent issuance and the scope of patent coverage continue to evolve, particularly in life sciences. Moreover, the patent rights we possess or are pursuing generally cover our technologies to varying degrees. As a result, we cannot ensure that patents will issue from any of our patent applications or from applications licensed to us, or that any of our issued patents will offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or rendered unenforceable so that our patent rights may not create an effective competitive barrier. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent, as do the laws of the United States. There can be no assurance that any patents issued to us will provide a legal basis for establishing an exclusive market for our products or provide us with any competitive advantages, or that the patents of others will not have an adverse effect on our ability to do business or to continue to use our technologies freely. In view of these factors, the value of our intellectual property position is uncertain.

We may be subject to third parties filing claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert such claims against us or our licensees or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against such claims, regardless of their merit or whether they are resolved in favor of or against us, our licensees or our licensors, we may face costly litigation and diversion of management’s attention and resources. As a result of such disputes, we may have to develop, at a substantial cost, non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business or financial condition.

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We also rely in part on trade secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees also sign agreements requiring that they assign to us their interests in inventions and original expressions and any corresponding patents and copyrights arising from their work for us. However, it is possible that these agreements may be breached, invalidated or rendered unenforceable, and, if so, our trade secrets could be disclosed to others, including our competitors, and there may not be an adequate corrective remedy available. Despite the measures we have taken to protect our intellectual property, parties to our agreements may breach the confidentiality provisions in our contracts or infringe or misappropriate our patents, copyrights, trademarks, trade secrets and other proprietary rights. In addition, third parties may independently discover or invent competitive technologies, or reverse engineer our trade secrets or other technology. Therefore, the measures we are taking to protect our proprietary technology may not be adequate.

EMPLOYEES

As of December 31, 2003, we employed 74 persons. Of these employees, 10 are primarily engaged in research, development and clinical activities, 21 are engaged in manufacturing, 31 are engaged in sales and marketing, and the remainder are engaged in finance and administration. Of these 74 persons, 40 are located in the United States and 34 are located in France.

Our employees in the United States are not covered by a collective bargaining agreement. In Europe, our employees are covered by the provisions of an agreement setting forth national guidelines and standards for labor relations within our industry. We consider our relations with our employees to be good.

FACTORS THAT MAY AFFECT FUTURE RESULTS

You should carefully consider the following risk factors, in addition to other information included in this annual report, in evaluating BioSphere and our business. If any of the following risks occur, our business, financial condition and operating results could be materially adversely affected.

RISK RELATING TO OUR FUTURE PROFITABILITY

Because We Have a History of Losses and Our Future Profitability is Uncertain, Our Common Stock is a Speculative Investment.

We have incurred operating losses since our inception and, as of December 31, 2003, had an accumulated deficit of approximately $68.59 million. We expect to spend substantial funds to continue research and product testing, to establish sales, marketing, quality control, regulatory, manufacturing and administrative capabilities and for other general corporate purposes. We expect to continue to incur operating losses until at least the fourth quarter of 2004, as we expand our commercialization efforts. If we are unable to maintain expected cost and expense levels and/or increase sales, then we may extend operating losses beyond the fourth quarter of 2004.

We may never become profitable. If we do become profitable, we may not remain profitable on a continuing basis. Our failure to become and remain profitable would depress the market price of our common stock and impair our ability to raise capital and expand, diversify or continue our operations.

RISKS RELATING TO OUR INDUSTRY, BUSINESS AND STRATEGY

If We Do Not Achieve Widespread Market Acceptance of the UFE Procedure, Our Business Prospects Will Be Seriously Harmed.

Our microspheres are based on new technologies and therapeutic approaches. In the United States, we began selling our microspheres product in the first half of 2000. In November 2002, we received FDA clearance to market our Embosphere Microspheres in the United States for specific use in the embolization of uterine fibroids.

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To date we have not achieved widespread market acceptance of the UFE procedure. Our success will depend upon the medical community’s, patients’ and third-party payers’ continued acceptance of the UFE procedure as medically therapeutic and cost-effective. Our future success will also depend upon obstetrics and gynecology physicians referring patients to interventional radiologists to receive UFE using our Embosphere Microspheres in lieu of, or in addition to, receiving other forms of treatment that the obstetrics and gynecology physicians can otherwise provide directly.

Negative publicity associated with any adverse medical effects attributed to embolization treatments generally, or our products specifically, may create the market perception that our products are unsafe. For example, patients commonly experience a day or two of post-procedure abdominal pain or cramping. Other infrequently occurring complications may include allergic reactions, rashes, early onset of menopause, infertility and infection that may, in some cases, require a hysterectomy. We are also aware of reports that a small number of the patients treated with UFE using EmboGold Microspheres, which we believe constitute approximately 2% of the total number of patients receiving the procedure, reported a delayed onset of pain and/or rash.

Our microspheres are designed to remain in the body permanently. As a result, there is some risk that some or all of the microspheres used in a medical procedure may travel in the blood system beyond the intended surgical site and occlude, or block, other blood vessels, resulting in the potential for significant adverse health effects on the patient or, in a worst case, even death. Moreover, to use our microspheres correctly for a particular medical procedure, trained physicians must select and use the proper size and quantity. A physician’s selection and use of the wrong size or quantity of our microspheres could potentially have significant adverse health effects on the patient, including death. It will be necessary for us to spend significant amounts of money and allocate management resources to educate physicians about the selection and use of the proper size and quantity of microspheres in patient therapy. In addition, there is only limited data concerning the long-term health effects on persons receiving embolotherapy using our microspheres. The effect of uterine fibroid embolization on continued fertility or the effect to fetal development has not been studied extensively, and our 510(k) clearance does not include women who intend future pregnancy.

If we are not able to successfully educate physicians to properly use our product, or if the market determines or concludes that any of our products are not safe or effective for any reason, we may be exposed to product liability claims, product recalls, fines or other penalties or enforcement actions by regulatory agencies and associated adverse publicity. In addition, we have provided to our customers a satisfaction guarantee that requires us to accept the return of any inventory and credit the entire amount of the original order if a properly trained customer is not satisfied with the performance of either our microspheres or our EmboCath Catheter products. If we experience adverse publicity or are subject to product liability claims, excessive guarantee claims, recalls, fines and the like, we will be unable to achieve widespread market acceptance of our microsphere products and achieve profitability.

If We Do Not Successfully Market and Promote Our Embosphere Microspheres for Use in Uterine Fibroid Embolization, Our Product Revenues Will Not Increase.

In the first quarter of 2003, we launched our ASK4UFE campaign to increase awareness among patients, referring physicians, interventional radiologists and third party payers of UFE as an alternative fibroid treatment to surgery. To date, we believe that a very small segment of the population is familiar with the treatment option. We believe the majority of our revenues in the United States for the years ended December 31, 2003 and 2002 was derived from the sale of Embosphere Microspheres and EmboGold Microspheres, for use in UFE. Although we believe that EmboGold Microspheres accounted for a significant portion of revenues, we currently do not intend to seek 510(k) clearance for use of EmboGold Microspheres in UFE. Because we do not intend to seek 510(k) clearance of EmboGold Microspheres, we believe that our future product revenues are substantially dependent on our ability to market Embosphere Microspheres for the treatment of UFE, and if we are not successful in marketing Embosphere Microspheres for UFE, our product revenues profitability and success will be adversely affected. If we cease to market EmboGold Microspheres for any reason, we could incur substantial costs to write off and replace existing inventory.

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If We Experience Delays, Difficulties or Unanticipated Costs in Establishing the Sales, Distribution and Marketing Capabilities Necessary to Successfully Commercialize Our Products, We Will Have Difficulty Maintaining and Increasing Our Sales.

We are continuing to develop sales, distribution and marketing capabilities in the United States, the European Union, the Far East and in South America. We recently began an aggressive marketing strategy to promote UFE awareness and the benefits of our product for the treatment of uterine fibroids. It will be expensive and time-consuming for us to develop a global marketing and sales force. Moreover, we may choose, or find it necessary, to enter into strategic collaborations to sell, market and distribute our products. We may not be able to provide adequate incentive to our sales force or to establish and maintain favorable distribution and marketing collaborations with other companies to promote our products. In addition, any third party with whom we have established a marketing and distribution relationship may not devote sufficient time to the marketing and sales of our products thereby exposing us to potential expenses in exiting such distribution agreements. We and any of our third-party collaborators must also market our products in compliance with federal, state and local laws relating to the providing of incentives and inducements. Violation of these laws can result in substantial penalties. If we are unable to successfully motivate and expand our marketing and sales force and further develop our sales and marketing capabilities, or if our distributors fail to promote our products, we will have difficulty maintaining and increasing our sales.

We May Be Required to Expend Significant Resources for Research, Development, Testing and Regulatory Approval of Our Products Under Development, and These Products May Not Be Developed Successfully.

We are developing and commercializing products for medical applications using embolotherapy techniques. Our next-generation embolotherapy product candidates are still in the early stages of research and development. These products, if successfully developed, may not provide greater benefits than current treatments or products, or alternative treatments or products under development. All of our products under development will require significant additional research, development, pre-clinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not:

If We Do Not Develop and Introduce New Products, We May Not Achieve Revenue Opportunities.

We derived approximately 16% of our revenues for the year ended December 31, 2003, and 14% of our revenues for the year ended December 31, 2002, from the sale of non-strategic medical device products that we do not expect to constitute a significant portion of our revenues on an ongoing basis. In addition, we believe that a significant portion of our revenues for the years ended December 31, 2003 and 2002 was derived from the sale of EmboGold Microspheres for UFE, an indication for which we do not have, and do not presently intend to seek clearance from the FDA to market directly for UFE. Accordingly, we need to develop and introduce new applications for our embolotherapy technology and pursue opportunities for microsphere technology in other medical applications. Our nearest term product candidate opportunities are our Hepasphere SAP Microspheres, which are currently in clinical evaluation in Japan, and our TempRx Microspheres and Radiosphere Microspheres product candidates. If we are not successful in developing these or other new applications and products, we may not achieve revenue opportunities.

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If We Are Unable to Obtain Adequate Product Liability Insurance, then We May Have to Pay Significant Monetary Damages in a Successful Product Liability Claim Against Us.

The development and sale of medical devices entails an inherent risk of product liability. For example, if we are not able to successfully educate physicians to properly use our products, or if the market determines or concludes that any of our products are not safe or effective for any reason, we may be exposed to product liability claims. Product liability insurance is generally expensive for medical device companies such as ours. Although we maintain limited product liability insurance coverage for our products, it is possible that we will not be able to obtain further product liability insurance on acceptable terms, if at all. Our existing insurance and any additional insurance we may subsequently obtain may not provide us with adequate coverage against all potential claims. If we are exposed to product liability claims for which we have insufficient insurance, we may be required to pay significant damages, which would prevent or delay our ability to commercialize our products and could harm our business and results of operations.

If We Are Not Able to Compete Effectively, We May Experience Decreased Demand for Our Products, Which May Result in Price Reductions.

We have many competitors in the United States and abroad, including medical device, biotechnology and other alternative therapeutic companies, universities and other private and public research institutions. We have experienced increased competition since receiving FDA clearance for use of our Embosphere Microspheres for UFE. Our success depends upon our ability to develop and maintain a competitive position in the embolotherapy market. Our key medical device competitors are Biocompatibles, Ltd., Boston Scientific Corporation, Cook Incorporated and Cordis Corporation, a Johnson & Johnson company. These and many of our other competitors have greater capabilities, experience and financial resources than we do. As a result, they may develop products quicker or at less cost, that compete with our microsphere products. For example, in the fourth quarter of 2002, some of our competitors provided free or reduced price samples of competitive product. The availability of these free or reduced priced samples adversely affected our products revenues in the fourth quarter of 2002 and the year ended December 31, 2003. Currently, the primary products with which our microspheres compete for some of our applications are polyvinyl alcohol, polymerizing gels and coils. In addition, our competitors may develop technologies that render our products obsolete or otherwise noncompetitive.

We may not be able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our market and continue to commercially develop our business. Moreover, we may not be able to compete effectively, and competitive pressures may result in less demand for our products and impair our ability to become profitable.

If We Fail to Maintain, Or in Some Instances Obtain, an Adequate Level of Reimbursement for Our Products by Third-Party Payers, There May Be No Commercially Viable Markets for Our Products.

The availability and levels of reimbursement by governmental and other third-party payers affects the market for any medical device. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount. Some insurance companies do not fully reimburse for embolization procedures. These third-party payers continually attempt to contain or reduce the costs of healthcare by challenging the prices that companies such as ours charge for medical products. In some foreign countries, particularly the countries of the European Union where our microsphere products are currently marketed and sold, the pricing of medical devices is subject to governmental control, and the prices charged for our products have in some instances been reduced as a result of these controls. Additionally, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system. Further proposals are likely. These proposals, if adopted, could result in less revenues per procedure for us, and could affect our ability to market our products profitably.

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If We Do Not Retain Our Senior Management, Other Key Employees, Scientific Collaborators and Advisors, We May Not Be Able to Successfully Implement Our Business Strategy.

The loss of key members of our management team could harm us. We also depend on our scientific collaborators and advisors, all of whom have other commitments that may limit their availability to us. Our success is substantially dependent on the ability, experience and performance of these members of our senior management and other key employees, scientific collaborators and advisors. Because of their ability and experience, if we lose one or more of these individuals, we may not be able to successfully implement our business strategy.

If We Do Not Attract and Retain Skilled Personnel, We Will Not Be Able to Expand Our Business.

Our future success will depend in large part upon our ability to attract and retain highly skilled scientific, operational, managerial and marketing personnel, particularly as we expand our activities in product development, the regulatory approval process and sales and manufacturing. We face significant competition for these types of persons from other companies, research and academic institutions, government entities and other organizations. Consequently, if we are unable to attract and retain skilled personnel, we will not be able to expand our business.

If We Make Any Acquisitions, We Will Incur a Variety of Costs and May Never Successfully Integrate the Acquired Business into Ours.

We may attempt to acquire businesses, technologies, services or products that we believe are a strategic complement to our business model. We may encounter operating difficulties and expenditures relating to integrating an acquired business, technology, service or product. These acquisitions may also absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. We may also make dilutive issuances of equity securities, incur debt or experience a decrease in the cash available for our operations, or incur contingent liabilities in connection with any future acquisitions.

Because Sepracor Inc. Owns a Significant Amount of Our Common Stock, It May Be Able to Exert Control Over Us.

As of December 31, 2003, Sepracor Inc. owned approximately 23% of our outstanding common stock and currently two of our directors are executive officers of Sepracor. Accordingly, Sepracor may have significant influence over corporate actions requiring stockholder approval, such as the election of director’s, amendment of our charter documents and the approval of merger or significant asset sale transactions.

This ownership concentration could cause the market price of our common stock to decline. In addition, conflicts of interest between Sepracor and us may arise, including with respect to competitive business activities and control of our management and our affairs.

Our Subsidiary’s Litigation with Terumo Could Be Expensive and Time Consuming and Any Adverse Decision by a Court Could Require the Payment of Money to Terumo.

On January 27, 2003, our French subsidiary, BioSphere Medical, S.A., received notice from Terumo Europe, N.V. that Terumo initiated legal proceedings in the Commercial Court of Pontoise, France alleging that it suffered damages from a purported termination of the distribution contract by BioSphere Medical, S.A. BioSphere Medical, S.A. and Terumo Europe entered into a distribution agreement in January 2002 pursuant to which Terumo Europe became the exclusive distributor of EmboSphere Microsphere and EmboGold Microsphere products in certain countries of Europe.

We can provide no assurance as to the outcome of Terumo’s complaint. Our subsidiary may incur substantial expenses in defending against Terumo’s claims and, even if our subsidiary prevails, this claim could divert our attention. Moreover, an adverse court decision could require us and our subsidiary to incur significant costs.

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If the Estimates We Make, and the Assumptions on Which We Rely, in Preparing Our Financial Statements Prove Inaccurate, Our Actual Results May Vary from Those Reflected in Our Projections and Accruals.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be no assurance, however, that our estimates, or the assumptions underlying them, will be correct. This, in turn, could adversely affect our stock price.

RISKS RELATING TO REGULATORY MATTERS

If We Do Not Obtain and Maintain the Regulatory Approvals Required to Market and Sell Our Products, Then Our Business May Be Unsuccessful and the Market Price of Our Stock May Decline.

We are subject to regulation by government agencies in the United States and abroad with respect to the manufacture, packaging, labeling, advertising, promotion, distribution and sale of our products. For example, our products are subject to approval or clearance by the FDA prior to marketing in the United States for commercial use. Similar regulations exist in most major foreign markets, including the European Union and Asia. The process of obtaining necessary regulatory approvals and clearances will be time-consuming and expensive for us. If we do not receive required regulatory approval or clearance to market our products, or if any approvals we have received are revoked or terminated, we may not be able to develop and commercialize our products and become profitable, and the value of our common stock may decline.

If the FDA Or Other Regulatory Agencies Place Restrictions On, Or Impose Additional Approval Requirements with Respect to Products We Are Then Marketing, We May Incur Substantial Additional Costs and Experience Delays Or Difficulties in Continuing to Market and Sell These Products.

Even if the FDA grants us clearance with respect to marketing any product it may place substantial restrictions on the indications for which we may market the product, which could result in lower revenues. The marketing claims we are permitted to make in labeling or advertising regarding our microspheres are limited to those specified in any FDA clearance or approval. For example, because our EmboGold Microspheres are not cleared for use in UFE, we may not promote them for this use.

We may in the future make modifications to our microspheres or their labeling which we determine do not necessitate the filing of a new 510(k) notification. However, if the FDA does not agree with our determination, it will require us to make additional 510(k) filings for the modification, and we may be prohibited from marketing the modified product until we obtain FDA clearance. Similarly, if we obtain premarket approval, we may not be able to make product or labeling changes until we get FDA clearance.

Further, the FDA has classified our embolotherapy device into Class III, which means that even though we have obtained clearance under Section 510(k) to market the device for certain indications, the FDA could in the future promulgate a regulation requiring premarket approval of the device under Section 515 of the Federal Food, Drug, and Cosmetic Act to allow it to remain on the market. We may experience difficulty in providing the FDA with sufficient data for premarket approval in a timely fashion, if at all. In addition, the FDA may require us to conduct a postmarket surveillance study that would require us to track specific elements of patient experience with our microspheres product after we have begun marketing it. If such a study revealed previously unknown adverse events or an unexpectedly high rate of adverse events, the FDA could place further restrictions on our marketing of the device, or rescind our clearance or approval.

Our products will be subject to continuing FDA requirements relating to quality control, quality assurance, and maintenance of records, documentation, manufacturing, labeling and promotion of medical devices. We are

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also required to submit medical device reports to the FDA to report device-related deaths or serious injuries, as well as malfunctions, the recurrence of which would be likely to cause or contribute to a death or serious injury. These reports are publicly available.

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