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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

Form 10-Q

For the quarterly period ended September 30, 2009

or

For the Transition Period from           to

Commission File Number: 001-34473

Talecris Biotherapeutics Holdings Corp.

(Exact name of registrant as specified in its charter)

P.O. Box 110526

4101 Research Commons

79 T.W. Alexander Drive

Research Triangle Park, North Carolina 27709

(Address of principal executive offices, including Zip Code)

(919) 316-6300

(Registrants telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*   Yes x No o

*The registrant has not yet been phased into the interactive data requirements.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 119,781,056 shares of Common Stock, $0.01 par value, as of October 31, 2009

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Talecris Biotherapeutics Holdings Corp.

Form 10-Q

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Talecris Biotherapeutics Holdings Corp.

Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

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Talecris Biotherapeutics Holdings Corp.

Consolidated Income Statements

(in thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Talecris Biotherapeutics Holdings Corp.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Talecris Biotherapeutics Holdings Corp.

Notes to Unaudited Consolidated Financial Statements

1.                   Description of Business

We are a biopharmaceutical company that researches, develops, manufactures, markets, and sells protein-based therapies that extend and enhance the lives of individuals who suffer from life-threatening diseases. Our products are derived from human plasma, the liquid component of blood, which is sourced from our plasma collection centers or purchased from third parties, located in the United States. Plasma contains many therapeutic proteins, which we extract through a process known as fractionation at our Clayton, North Carolina and/or Melville, New York facilities. The fractionated intermediates are then purified, formulated into final bulk, and aseptically filled into vials for distribution.

The majority of our sales are concentrated in two key therapeutic areas of the plasma business: Immunology/Neurology, through our intravenous immune globulin (IGIV) product for the treatment of primary immune deficiency and autoimmune diseases, as well as chronic inflammatory demyelinating polyneuropathy (CIDP), and Pulmonology, through our alpha-1 proteinase inhibitor (A1PI) product for the treatment of alpha-1 antitrypsin deficiency-related emphysema. These therapeutic areas are served by our branded products, Gamunex brand IGIV and Prolastin brand A1PI, respectively. Sales of Gamunex and Prolastin together comprised 72.8% and 73.9% of our net revenue for the three months ended September 30, 2009 and 2008, respectively, and 74.3% and 72.7% of our net revenue for the nine months ended September 30, 2009 and 2008, respectively.  We also have a line of hyperimmune therapies that provides treatment for tetanus, rabies, hepatitis B, and Rh factor control during pregnancy and at birth. In addition, we provide plasma-derived therapies for critical care, including the treatment of hemophilia, an anti-coagulation factor (Thrombate III antithrombin III), as well as albumin to expand blood volume. Although we sell our products worldwide, the majority of our sales are concentrated in the United States and Canada.

On October 6, 2009, we completed our initial public offering (IPO), which resulted in net primary proceeds to us of $519.7 million.  We used the net primary proceeds to us to repay $389.8 million and $129.9 million of principal under our First and Second Lien Term Loans, respectively.

On October 15, 2009, we entered into an amendment of certain provisions of our Revolving Credit Facility.  Further, on October 21, 2009, we completed the issuance of $600.0 million, 7.75% Unsecured Senior Notes, due 2016 (7.75% Notes) at a price of 99.321% of par in a private placement to certain qualified institutional buyers. We used the net proceeds to us of $583.9 million to repay principal and interest under our First and Second Lien Term Loans of $295.5 million and $204.1 million, respectively, which were subsequently terminated, $55.6 million to repay principal under our Revolving Credit Facility, as amended, and $28.7 million to settle and terminate certain interest rate swap contracts with a notional amount of $390.0 million.

Additional information regarding our IPO and refinancing transactions is included in Note 15, “Subsequent Events.”

2.                   Summary of Significant Accounting Policies

Throughout the unaudited interim consolidated financial statements, references to “Talecris Biotherapeutics Holdings Corp.,” “Talecris,” “the Company,” “we,” “us,” and “our” are references to Talecris Biotherapeutics Holdings Corp. and its wholly-owned subsidiaries.

All tabular disclosures of dollar amounts are presented in thousands. All share and per share amounts are presented at their actual amounts.

A seven-for-one share dividend on our common stock was paid on September 10, 2009.  All share and per-share amounts have been retroactively adjusted for all periods presented to reflect the share dividend.

Interim Financial Statements

We have prepared the accompanying unaudited interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (SEC).  The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008, which are included in our prospectus filed pursuant to Rule 424(b) under the Securities and Exchange Act, as amended (Securities Act), with the SEC on October 1, 2009 (our prospectus).  In our opinion, the accompanying unaudited interim

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consolidated financial statements have been prepared on the same basis as our annual audited consolidated financial statements and contain all material adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly our financial condition, results of operations, and cash flows for the periods presented. The consolidated balance sheet that we have presented as of December 31, 2008 has been derived from the audited consolidated financial statements on that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Significant Accounting Policies

A detailed description of our significant accounting policies is presented in our annual audited consolidated financial statements and footnotes included in our prospectus. Our significant accounting policies, estimates, and assumptions have not changed materially since that date.

Recent Accounting Pronouncements Applicable to our Company

In October 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance regarding multiple-deliverable revenue arrangements.  The new guidance addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the guidance retrospectively for all prior periods. We do not anticipate that the adoption of this guidance will have a material impact on our consolidated financial statements or related disclosures.

In August 2009, the FASB released new accounting guidance concerning measuring liabilities at fair value.  The new guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain valuation techniques.  Additionally, it clarifies that a reporting entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability.  This new guidance is effective for the first reporting period after its issuance, however earlier application is permitted.  We do not anticipate that the adoption of this guidance will have a material impact on our consolidated financial statements or related disclosures.

Effective July 1, 2009, the FASB Accounting Standards Codification (ASC) became the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States.  The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the SEC.  Our accounting policies were not affected by the conversion to ASC.

On January 30, 2009, the SEC released the final rules requiring all registered companies to use eXtensible Business Reporting Language (XBRL) when submitting financial statements to the SEC.  The new rules initially will require interactive data reporting only by domestic and foreign large accelerated filers that prepare their financial statements in accordance with U.S. GAAP and have a worldwide public common equity float above $5.0 billion for their first quarterly period ending after June 15, 2009 and all reporting periods thereafter.  We expect to be required to file using XBRL beginning with our quarterly reporting period ending March 31, 2011.

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS).  IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board.  Under the proposed roadmap, we may be required in fiscal 2015 to prepare financial statements in accordance with IFRS.  However, the SEC announced it will make a determination in 2011 regarding the mandatory adoption of IFRS.  We are currently assessing the impact that this potential change would have on our consolidated financial statements, and will continue to monitor the development of the potential implementation of IFRS.

3.                   Definitive Merger Agreement with CSL Limited (CSL)

On August 12, 2008, we entered into a definitive merger agreement with CSL, under which CSL agreed to acquire us for cash consideration of $3.1 billion, less net debt, as defined.  The closing of the transaction was subject to the receipt of certain regulatory approvals as well as other customary conditions.  The U.S. Federal Trade Commission challenged the merger and the merger parties

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agreed to terminate the definitive merger agreement on June 8, 2009.  CSL paid us a merger termination fee of $75.0 million, which is included in other non-operating income in our consolidated income statement for the nine months ended September 30, 2009.  The Federal Trade Commission’s complaints were subsequently dismissed.

In consideration of the definitive merger agreement with CSL, our board of directors approved a retention program in August 2008 for an amount up to $20.0 million, of which approximately $13.5 million has been specifically allocated to certain employees as of September 30, 2009, as adjusted for forfeitures.  We classify the cost of this retention program consistent with each recipient’s salary.  We recorded retention expense of $1.4 million and $7.5 million, excluding fringe benefit, during the three and nine months ended September 30, 2009, respectively.  During the three months ended September 30, 2008, we recorded retention expense of $1.6 million, excluding fringe benefit.  At September 30, 2009, the remaining unrecognized expense related to this retention program totaled $0.9 million, which we will recognize through December 2009.  During the second quarter of 2009, we made the first two payments under this retention program totaling $6.8 million and the remaining balance will be paid in December 2009, adjusted for forfeitures.

4.                   Business Acquisitions

Pursuant to the terms of our June 9, 2007 Plasma Supply Agreement, as amended, with International BioResources, L.L.C. and affiliated entities (IBR), we acquired ten licensed plasma collection centers from IBR during the nine months ended September 30, 2009 to further support our plasma supply vertical integration efforts.  The plasma collection centers’ results of operations have been included in our consolidated financial statements from their respective date of acquisition.

The following table summarizes our purchase accounting for the plasma collection centers acquired during 2009:

In the table above, the purchase price consists of various loans and advances made to IBR under the terms of the June 9, 2007 Purchase and Sale of Assets Agreement.  The purchase price also includes performance incentive payments made to IBR for achieving milestones related to the timing of plasma collection center openings and licensure.  Further, the purchase price includes the allocable portion of contingent consideration due to IBR under our November 18, 2006 Asset Purchase Agreement, which was accelerated in June 2007, in connection with the June 9, 2007 Purchase and Sale of Assets Agreement.

We have no further financing commitments to IBR under the terms of our June 9, 2007 agreement.  We purchased the two centers remaining under this agreement in October 2009.

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5.                   Inventories and Cost of Goods Sold

Inventories consisted of the following:

Our raw material inventories include unlicensed plasma and related testing costs of $5.4 million and $8.2 million at September 30, 2009 and December 31, 2008, respectively, which we believe are realizable.

Unabsorbed Talecris Plasma Resources, Inc. (TPR) Infrastructure and Start-Up Costs

Our cost of goods sold reflects $8.7 million and $25.7 million for the three months ended September 30, 2009 and 2008, respectively, and $34.1 million and $77.7 million for the nine months ended September 30, 2009 and 2008, respectively, related to unabsorbed TPR infrastructure and start-up costs associated with the development of our plasma collection center platform.  Until our plasma collection centers reach normal operating capacity, we charge unabsorbed overhead costs directly to cost of goods sold.

Plasma Center cGMP Issue

During the nine months ended September 30, 2008, we incurred charges to cost of goods sold of $23.3 million due to deviations from our standard operating procedures and cGMP at one of our plasma collection centers.  Our preliminary investigations concluded that the deviations from our standard operating procedures and current Good Manufacturing Practices (cGMP) resulted in impairments to the related raw material and work-in-process inventories as we concluded there was no probable future economic benefit related to the impacted inventories.  Subsequently, due to further investigations and new facts and circumstances, we determined that certain impacted materials were saleable.  We record recoveries directly to cost of goods sold after the impacted material is converted into final products and sold to third parties.  For the three and nine months ended September 30, 2009, we recorded recoveries of $0.4 million and $1.1 million, respectively, and for the three and nine months ended September 30, 2008, we recorded recoveries of $11.4 million and $14.1 million, respectively.  We do not expect to recognize significant further recoveries of the impacted inventories.

6.                   Long-Term Debt and Capital Lease Obligations

Long-Term Debt and Capital Lease Obligations

We were obligated under the following debt instruments:

Our First and Second Lien Term Loans, which were repaid in full and terminated on October 21, 2009, contained default provisions, imposed restrictions on annual capital expenditures, and contained financial covenants, which required us to maintain a maximum leverage ratio, which decreased over the term and a minimum interest coverage ratio, which increased over the term.  For the three months ended September 30, 2009, our leverage and interest coverage ratio requirements under our First Lien Term Loan, calculated based upon our trailing twelve months’ results, were 4.49 to 1.00 and 2.02 to 1.00, respectively.  For the three months ended September 30, 2009, our leverage and interest coverage ratio requirements under our Second Lien Term Loan were 5.59 to 1.00 and 1.63 to 1.00, respectively, calculated on the same basis as our First Lien Term Loan.  We were in compliance with these requirements at September 30, 2009.  At September 30, 2009, our Revolving Credit Facility contained default provisions, imposed restrictions on annual capital expenditures, and contained a financial covenant which required us to maintain a minimum collateral availability of $32.5 million.

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On October 6, 2009, we completed our IPO, which resulted in net primary proceeds to us of $519.7 million.  We used the net primary proceeds to us to repay $389.8 million and $129.9 million of principal under our First and Second Lien Term Loans, respectively.

On October 15, 2009, we entered into an amendment of certain provisions of our Revolving Credit Facility.  Further, on October 21, 2009, we completed the issuance of our 7.75% Notes in a private placement to certain qualified institutional buyers.   We used the net proceeds to us of $583.9 million to repay principal and interest under our First and Second Lien Term Loans of $295.5 million and $204.1 million, respectively, which were subsequently terminated, $55.6 million to repay principal under our Revolving Credit Facility, as amended, and $28.7 million to settle and terminate certain interest rate swap contracts with a notional amount of $390.0 million.  As a result of the prepayment and termination of the First and Second Lien Term Loans, we will write off the remaining unamortized debt issuance costs associated with these loans, totaling $12.1 million, within other non-operating expense, net, during the fourth quarter of 2009.

Additional information regarding our IPO and refinancing transactions is included in Note 15, “Subsequent Events.”

Interest Rate Swaps and Caps

At September 30, 2009, our derivative financial instruments consisted of four variable-to-fixed interest rate swap contracts ($440.0 million notional amount) and two interest rate cap contracts ($175.0 million notional amount).  Under the terms of the interest rate swap contracts, we make interest payments on the underlying debt based on LIBOR and receive/pay interest based on the spread between LIBOR and fixed interest rates ranging from 5.16% to 5.19% on various notional amounts over various swap terms through February 13, 2013.  Our interest rate caps at 6.00% effectively place an upper limit on the floating interest rate for a portion of our long-term debt portfolio.  The interest rate caps mature on February 14, 2010.  The counterparty to our interest rate swaps and caps is Morgan Stanley Capital Services, Inc.

Our interest rate swaps and caps are designated as cash flow hedges, and as a result, the effective portion of the net gain or loss on the derivative financial instruments is reported as a component of other comprehensive income (loss) and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings.

We used $28.7 million of the net proceeds to us from our issuance of the 7.75% Notes on October 21, 2009 to settle and terminate certain interest rate swap contracts with a notional amount of $390.0 million.  We will record a loss on the extinguishment of these interest rate swap contracts of approximately $25.0 million within other non-operating expenses, net, during the fourth quarter of 2009.  In addition, we will settle and terminate the remaining interest rate swap contract with a notional amount of $50 million during the 2009 fourth quarter, which will result in a loss on extinguishment of approximately $5.8 million. The total losses of approximately $30.8 million related to the extinguishment of our interest rate swap contracts had previously been reflected as a component of other comprehensive (loss) income and therefore the recognition of these losses in our consolidated income statement during the fourth quarter of 2009 will have a negligible impact on our stockholders’ equity.  At September 30, 2009, the recorded amount of our derivative financial instruments was $29.3 million, of which $27.9 million was recorded within other long-term liabilities and $1.4 million was recorded within accrued expenses and other liabilities on our consolidated balance sheet.  Additional information regarding the settlement and termination of certain of our interest rate swap contracts is included in Note 15, “Subsequent Events.”

Fair Value Hierarchy

Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1- Quoted market prices in active markets for identical assets or liabilities.

Level 2- Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3- Unobservable inputs that are significant to the valuation methodology reflecting the reporting entity’s own assumptions or external inputs from inactive markets.

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At September 30, 2009, we calculated the fair value of our derivative financial instruments using Level 2 inputs, which included forward LIBOR curves and credit default swap data.  At September 30, 2009, we calculated the fair value of vested common stock with an embedded put/call feature using level 2 inputs, which consisted of a signed underwriters’ agreement to purchase shares of our common stock at $19.00 per share.  At September 30, 2009, we had no financial assets or liabilities for which fair value was determined using Level 1 or Level 3 inputs.

7.                   Comprehensive Income

The following table illustrates the components of our comprehensive income:

8.                   Income Taxes

Our income tax expense was $14.1 million and $12.1 million for the three months ended September 30, 2009 and 2008, respectively, resulting in effective income tax rates of 28.3% and 37.1%, respectively.  Our income tax expense was $74.9 million and $25.3 million for the nine months ended September 30, 2009 and 2008, respectively, resulting in effective income tax rates of 32.9% and 39.0%, respectively.

For the three and nine months ended September 30, 2009, our effective income tax rates were lower than the U.S. statutory Federal income tax rate, primarily due to credits for Federal Research and Experimentation and Orphan Drug clinical testing expenditures and the deduction of previously capitalized transaction costs related to our terminated merger agreement with CSL.

For the three and nine months ended September 30, 2008, our effective income tax rate was higher than the U.S. statutory Federal income tax rate, primarily due to state tax expense, net of Federal benefit.  In addition, during April 2008, 862,432 shares of restricted stock issued to employees and directors vested.  As a result of a decline in the fair value of our common stock price, we recognized a tax deduction on the vesting date, which was less than the previously deferred taxes, resulting in higher tax expense during the nine months ended September 30, 2008.

At September 30, 2009, our total gross unrecognized tax benefits were approximately $12.6 million, of which approximately $9.2 million would reduce our effective income tax rate if recognized.

We have not provided for U.S. Federal income and foreign withholding taxes on our non-U.S. subsidiaries’ cumulative undistributed earnings of approximately $10.7 million as of September 30, 2009. Such earnings are intended to be reinvested outside of the United States indefinitely.  It is not practical to estimate the amount of tax that might be payable if some or all of such earnings were to be remitted, and foreign tax credits would be available to reduce or eliminate the resulting U.S. income tax liability.

The Internal Revenue Service (IRS) recently completed the fieldwork related to the audit of our 2005, 2006, and 2007 consolidated Federal income tax returns.  The audit will likely be finalized following review by the Joint Committee on Taxation.  We do not believe that the outcome of this examination will have a material adverse impact on our consolidated financial statements or results of operations.

9.                   Related Party Transactions

We consider Cerberus and Ampersand to be related parties during the periods presented.  We are a majority-owned subsidiary of Talecris Holdings, LLC, which held approximately 97.1% of our outstanding common stock at September 30, 2009.  Talecris Holdings, LLC is owned by (i) Cerberus-Plasma Holdings LLC, the managing member of which is Cerberus Partners, L.P., and (ii) limited partnerships affiliated with Ampersand Ventures. Substantially all rights of management and control of Talecris Holdings, LLC

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are held by Cerberus-Plasma Holdings LLC.  As of October 31, 2009, Talecris Holdings, LLC held approximately 51.1% of our outstanding common stock.

During the periods presented, we had a Management Agreement, as amended, with Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures.  Under the terms of this agreement, we were charged a management fee equal to 0.5% of net sales for advisory services related to a number of topics including strategy, acquisitions, financing, and operational matters.  We also have a Master Consulting and Advisory Services Agreement with an affiliate of Cerberus to provide certain advisory services to us outside of the scope of the Management Agreement, as amended.  The Management Agreement, as amended, was terminated as of September 30, 2009 in connection with our IPO.

We have an equity investment in Centric Health Resources, Inc. (Centric); therefore, we consider Centric to be a related party during the periods presented.  Centric provides services in the management of our Prolastin Direct and Gamunex Direct programs.  In this capacity, Centric provides warehousing, order fulfillment, distribution, home infusion, and customer relationship services for us primarily related to our U.S. sales of Prolastin.  We provide Centric with a fee for each unit of product provided to patients which escalates with volume.

The following tables summarize our related party transactions for three and nine months ended September 30, 2009 and 2008 and our related party accounts payable balances at September 30, 2009 and December 31, 2008:

10.            Commitments and Contingencies

We have disclosed information regarding our commitments and contingencies in the footnotes to our consolidated financial statements, which are included in our prospectus.  There have been no material changes to our commitments and contingencies since the date of our prospectus, except as indicated below.

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Leases

We lease office buildings, plasma collection centers, refrigerated storage, furniture, machinery, computer equipment, and miscellaneous equipment under leasing arrangements.  The majority of our leases are operating leases.  In addition to rent, certain of our leases require us to pay directly for taxes, insurance, maintenance, and other operating expenses.  Future minimum lease payments required under our capital leases and under our non-cancellable operating leases as of September 30, 2009 are as follows:

In the preceding table, the future minimum annual rentals payable under non-cancellable leases denominated in foreign currencies have been calculated based upon the September 30, 2009 foreign currency exchange rates.

Foreign Corrupt Practices Act

We are conducting an internal investigation into potential violations of the Foreign Corrupt Practices Act (FCPA) that we became aware of during the conduct of an unrelated review. The FCPA investigation is being conducted by outside counsel under the direction of a special committee of our board of directors. The investigation primarily involves sales to certain Eastern European and Middle Eastern countries. Our net revenue in 2008 and for the nine months ended September 30, 2009 in such countries represented approximately 2.3% and 3.3% of our net revenue during such periods. Our investigation will also review our business practices in other countries.

In July 2009, we voluntarily contacted the U.S. Department of Justice (DOJ) to advise them of the investigation and to offer our cooperation in any investigation that they want to conduct or they want us to conduct. The DOJ has not indicated what action it may take, if any, against us or any individual, or the extent to which it may conduct its own investigation. The DOJ or other federal agencies may seek to impose sanctions on us that may include, among other things, injunctive relief, disgorgement, fines, penalties, appointment of a monitor, appointment of new control staff, or enhancement of existing compliance and training programs. Other countries in which we do business may initiate their own investigations and impose similar penalties. As a result of this investigation, we have suspended shipments to some of these countries while we put additional safeguards in place. We have also terminated several consultants and suspended relations with other distributors and consultants in countries under investigation while we gather further facts and implement safeguards. We expect these actions will result in a short term decline in revenue from these countries. To the extent that we conclude, or the DOJ concludes, that we cannot implement adequate safeguards or otherwise need to change our business practices, distributors, or consultants in affected countries or other countries, this may result in a permanent loss of business. These sanctions or the loss of business could have a material adverse effect on us or our results of operations. Based on the information obtained to date, we have not determined that any potential liability that may result is probable or can be reasonably estimated. Therefore, we have not made any accrual in our consolidated financial statements as of September 30, 2009.

As of October 31, 2009, we have approximately $2.6 million of accounts receivable, net, outstanding with customers related to this matter.  If we determine that we may be unable to collect some, or all, of these receivables, we would record a provision for doubtful accounts receivable within SG&A in the period in which we determine that collection was unlikely or that the amounts that may be collected would be less than the amounts due.

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11.            Equity Transactions

A seven-for-one share dividend on our common stock was paid on September 10, 2009.  All share and per-share amounts have been retroactively adjusted for all periods presented to reflect the share dividend.

On September 30, 2009, 1,000,000 shares of our series A preferred stock and 192,310 shares of our series B preferred stock were converted into an aggregate of 85,846,320 shares of our common stock in connection with our IPO.  In addition, on September 30, 2009, 2,381,548 shares of our common stock were issued to settle $45.3 million of accrued dividends upon the conversion of our series A and B preferred stock.

During the nine months ended September 30, 2008, we repurchased 2,146,232 shares of our common stock from IBR for $35.4 million at a put value of $15.61 per share plus accrued charges.

During the second quarter of 2008, our board of directors approved the retirement of 2,212,640 shares of our common stock held in treasury, and approved that shares of our common stock repurchased in the future would be immediately retired by the Company.

On October 6, 2009, we completed our IPO of 56,000,000 shares of our common stock, par value $0.01 per share.  Additional information regarding our IPO is included in Note 15, “Subsequent Events.”

12.            Share-Based Compensation

In connection with our IPO, we ceased further grants under the 2005 Stock Option and Incentive Plan and the 2006 Restricted Stock Plan. The Talecris Biotherapeutics Holdings Corp. 2009 Long-Term Incentive Plan (2009 Plan), which was adopted by our board of directors on August 7, 2009, became effective in connection with our IPO.  The 2009 Plan provides for the grant of awards in the form of incentive stock options, nonqualified stock options, share appreciation rights, restricted stock, restricted stock units (RSU’s), unrestricted shares of common stock, deferred share units, and performance awards.  Our employees, directors, and consultants are eligible to receive awards under the 2009 Plan.  The maximum number of shares that we may issue for all awards under the 2009 Plan is 7,200,000.

We value share-based compensation at the grant date using a fair value model and recognize this value as expense over the employees’ requisite service period, typically the period over which the share-based compensation vests.  We classify share-based compensation costs consistent with each grantee’s salary.  We record corporate income tax benefits realized upon exercise or vesting of an award in excess of that previously recognized in earnings as additional paid-in capital.

The following is a summary of equity awards granted on the dates presented:

We determined the fair value per common share contemporaneously with each equity award.

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Share-based compensation expense for the three months ended September 30, 2009 and 2008 was as follows:

Share-based compensation expense for the nine months ended September 30, 2009 and 2008 was as follows:

Stock Options

The following is a summary of stock option activity for the nine months ended September 30, 2009:

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The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our IPO price per common share of $19.00 at September 30, 2009 and the weighted average exercise price, multiplied by the number of options) that the option holders would have received if all option holders exercised their options on September 30, 2009, excluding the impact of income taxes.  We do not record the aggregate intrinsic value for financial accounting purposes and the value changes based upon changes in the fair value of our common stock.

In connection with our IPO, we granted 597,713 stock options with an exercise price per share equal to our IPO price per share of $19.00.  These stock options will vest one-third on each of April 1 of 2011, 2012, and 2013, subject to the option holder being employed on the vesting date.  The fair value of each option was determined to be $9.57; resulting in aggregate future expense of approximately $5.2 million, which we expect to recognize ratably through April of 2013.  At September 30, 2009, the remaining total estimated unrecognized compensation cost related to unvested stock options, including the IPO awards, was approximately $15.0 million, which we expect to recognize over a weighted average period of approximately 2.2 years.  The amount of share-based compensation expense that we will ultimately be required to record could change in the future as a result of additional grants, changes in the fair value of shares for performance-based options, differences between our anticipated forfeiture rate and the actual forfeiture rate, the probability of achieving targets established for performance share vesting, and other actions by our board of directors or its compensation committee.

We estimated the fair value of stock options at their grant date using the Black-Scholes option pricing model.  This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants.  If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different.  The following weighted-average assumptions were used to estimate the fair value of stock options granted during the nine months ended September 30, 2009 and 2008:

We generally apply a 3% forfeiture rate to the options granted over the term of the award, representing our estimate of those awards not expected to vest due to attrition.

We entered into an amended and restated employment agreement with our Chairman and Chief Executive Officer which included accelerating the vesting of options to purchase 1,008,000 shares of our common stock at an exercise price of $21.25 per common share to August 19, 2009.  The acceleration of these options resulted in the recognition of a non-cash charge of $11.8 million of compensation expense during the three months ended September 30, 2009.  Options to purchase these shares were previously scheduled to vest in April of 2010 (504,000 options) and April of 2011 (504,000 options).

Restricted Stock

The following is a summary of share activity for the nine months ended September 30, 2009:

At September 30, 2009, the remaining estimated unrecognized compensation cost related to our restricted stock was approximately $9.7 million, which we expect to recognize over a weighted average period of approximately 0.6 years.

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During the nine months ended September 30, 2009, we repurchased 248,512 shares of our common stock from employees for $4.1 million to settle their withholding tax obligations upon vesting of restricted stock.  During the nine months ended September 30, 2008, we repurchased 67,336 shares of our common stock from employees for $0.7 million to settle their withholding tax obligations upon vesting of restricted stock.

In the event of a participant’s termination of continuous service due to death or disability, the participant (or designated beneficiary or estate) had the right to sell, or “put,” shares of our common stock back to us at fair market value.  In addition, we had the right to repurchase, or “call,” our common stock upon a participant’s termination of continuous services, as defined.  As a result, we had recorded the fair value of vested common stock with an embedded put/call feature outside of permanent equity on our consolidated balance sheets at September 30, 2009 and December 31, 2008.  Both our redemption rights and the participants’ put rights were terminated in connection with the closing of our IPO.  As a result, we reclassified the fair value of vested common stock to permanent equity in the fourth quarter of 2009.

Restricted Stock Units

We granted 483,100 RSU’s in connection with our IPO.  These RSU’s will vest one-third on each of April 1 of 2011, 2012, and 2013, subject to the award holder being employed on the vesting date.  The aggregate grant date fair value of the RSU’s was $8.4 million, which we expect to recognize ratably through April of 2013.

13.            Segment Reporting

We operate our plasma-derived protein therapeutics business as a single reportable business segment since all operating activities are directed from our North Carolina headquarters and all of our products are derived from a single source and result from a common manufacturing process. All products are manufactured from a single raw material source, human plasma, and are processed in whole, or in part, at our principal manufacturing facilities located in Clayton, North Carolina. Our Melville, New York, facility primarily supplies intermediate plasma fractions to our Clayton facilities. Gamunex brand IGIV and Prolastin brand A1PI constitute the majority of our net revenue. Although we sell our products worldwide, the majority of our net revenue was concentrated in the United States and Canada for the periods presented.

In the following table, we have presented our net revenue by significant category. Our Immunology/Neurology product category includes products that are used to provide antibodies to patients who have a genetic or acquired inability to produce these antibodies, as well as a treatment for CIDP, and also products that provide antibodies to counter specific antigens such as rabies. Our Pulmonology product category is currently comprised of our Prolastin brand A1PI product, which is used to treat patients with a genetic alpha-1 antitrypsin deficiency. Our Critical Care product category includes products that are used to supplement, restore, or maintain normal plasma parameters such as volume or coagulation values.  Other product revenue consists of sales of PPF powder and sales of intermediate products, such as cryoprecipitate.  Other non-product revenue primarily consists of royalties under collaborative agreements.