Talecris Biotherapeutics Holdings Corp. - FORM 10-Q

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EX-31.2 - EX-31.2 - Talecris Biotherapeutics Holdings Corp.	a10-17610_1ex31d2.htm
EX-31.1 - EX-31.1 - Talecris Biotherapeutics Holdings Corp.	a10-17610_1ex31d1.htm
EX-32.1 - EX-32.1 - Talecris Biotherapeutics Holdings Corp.	a10-17610_1ex32d1.htm
EX-32.2 - EX-32.2 - Talecris Biotherapeutics Holdings Corp.	a10-17610_1ex32d2.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

o 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: 001-34473

Talecris Biotherapeutics Holdings Corp.

(Exact name of registrant as specified in its charter)

Delaware		20-2533768
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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 x No o

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 o 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):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o

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. 125,324,916 shares of Common Stock, $0.01 par value, as of October 21, 2010

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Talecris Biotherapeutics Holdings Corp.

Form 10-Q

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		Page

Part I- Financial Information

Item 1.	Unaudited Interim Consolidated Financial Statements:	1

	Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	1

	Consolidated Income Statements for the Three and Nine Months Ended September 30, 2010 and 2009	2

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	48

Part II- Other Information
Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	50

Item 6.	Exhibits	54

	Signatures	55

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Talecris Biotherapeutics Holdings Corp.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

	September 30,			December 31,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	150,530		$	65,239
Accounts receivable, net of allowances of $2,613 and $3,461, respectively	170,872			136,978
Inventories	672,728			644,054
Deferred income taxes	88,076			88,652
Prepaid expenses and other	31,969			31,466
Total current assets	1,114,175			966,389

Property, plant, and equipment, net	331,490			267,199
Investment in affiliate	2,534			1,935
Intangible assets	10,880			10,880
Goodwill	172,860			172,860
Deferred income taxes	—			5,848
Other	16,804			19,894
Total assets	$	1,648,743		$	1,445,005

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	39,715		$	71,046
Accrued expenses and other liabilities	198,572			170,533
Current portion of capital lease obligations	832			740
Total current liabilities	239,119			242,319

Long-term debt and capital lease obligations	605,383			605,267
Deferred income taxes	19,552			—
Other	15,348			15,265
Total liabilities	879,402			862,851

Commitments and contingencies

Stockholders’ equity:
Common stock, $0.01 par value; 400,000,000 shares authorized; 124,915,474 and 122,173,274 shares issued and outstanding, respectively	1,246			1,212
Additional paid-in capital	805,473			767,032
Accumulated deficit	(37,432		)	(186,446		)
Accumulated other comprehensive income, net of tax	54			356
Total stockholders’ equity	769,341			582,154
Total liabilities and stockholders’ equity	$	1,648,743		$	1,445,005

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

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Talecris Biotherapeutics Holdings Corp.

Consolidated Income Statements

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net revenue:
Product	$	400,561		$	387,898		$	1,172,278		$	1,122,877
Other	6,440			7,833			18,510			20,219
Total	407,001			395,731			1,190,788			1,143,096
Cost of goods sold	229,908			230,666			670,476			663,875

Gross profit	177,093			165,065			520,312			479,221

Operating expenses:
Selling, general, and administrative	61,383			79,488			205,007			213,913
Research and development	18,673			16,167			50,832			51,728
Total	80,056			95,655			255,839			265,641

Income from operations	97,037			69,410			264,473			213,580

Other non-operating (expense) income:
Interest expense, net	(11,529		)	(19,587		)	(34,915		)	(61,445		)
Merger termination fee	—			—			—			75,000
Equity in earnings of affiliate	273			112			599			296
Total	(11,256		)	(19,475		)	(34,316		)	13,851

Income before income taxes	85,781			49,935			230,157			227,431

Provision for income taxes	(29,729		)	(14,125		)	(81,143		)	(74,914		)

Net income	56,052			35,810			149,014			152,517

Less dividends to preferred stockholders	—			(4,012		)	—			(11,744		)
Net income available to common stockholders	$	56,052		$	31,798		$	149,014		$	140,773

Net income per common share:

Basic	$	0.45		$	12.01		$	1.21		$	76.21

Diluted	$	0.43		$	0.38		$	1.16		$	1.62

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

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Talecris Biotherapeutics Holdings Corp.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2010			2009
Cash flows from operating activities:	$	149,014		$	152,517
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	26,482			21,403
Amortization of deferred loan fees and debt discount	3,163			2,823
Share-based compensation expense	14,203			39,625
Change in allowance for doubtful receivables	2,629			3,203
Amortization of deferred compensation	1,911			4,407
Equity in earnings of affiliate	(599		)	(296		)
Asset impairment	563			1,010
Decrease in deferred tax assets	25,976			8,409
Excess tax benefits from share-based payment arrangements	(10,836		)	(1,437		)
Other	478			710
Changes in assets and liabilities, excluding the effects of business acquisitions:
Accounts receivable	(36,515		)	(17,289		)
Inventories	(30,018		)	(52,112		)
Prepaid expenses and other assets	(1,723		)	16,775
Accounts payable	(31,331		)	4,825
Accrued expenses and other liabilities	30,600			15,827
Interest payable	8,523			(1,676		)
Net cash provided by operating activities	152,520			198,724

Cash flows from investing activities:
Purchases of property, plant, and equipment	(91,691		)	(36,291		)
Business acquisitions, net of cash acquired	—			(27,113		)
Other	507			634
Net cash used in investing activities	(91,184		)	(62,770		)

Cash flows from financing activities:
Borrowings under Revolving Credit Facility	645			1,090,222
Repayments of borrowings under Revolving Credit Facility	(645		)	(1,202,319		)
Repayments of borrowings under term loan	—			(5,250		)
Financing transaction costs	(394		)	—
Repayments of capital lease obligations	(553		)	(407		)
Proceeds from exercises of stock options	19,251			—
Repurchases of common stock from employees	(4,917		)	(4,132		)
Excess tax benefits from share-based payment arrangements	10,836			1,437
Net cash provided by (used in) financing activities	24,223			(120,449		)
Effect of exchange rate changes on cash and cash equivalents	(268		)	465
Net increase in cash and cash equivalents	85,291			15,970
Cash and cash equivalents at beginning of period	65,239			16,979
Cash and cash equivalents at end of period	$	150,530		$	32,949

The accompanying notes are an integral part of these unaudited interim 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 chronic and acute, often life-threatening, conditions, such as primary immune deficiencies, chronic inflammatory demyelinating polyneuropathy (CIDP), alpha-1 antitrypsin deficiency-related emphysema, bleeding disorders, infectious diseases, and severe trauma. Our primary products have orphan drug designation to serve populations with rare, chronic 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 with plasma collection centers located in the United States. Plasma contains many therapeutic proteins, which we extract through the process of fractionation at our Clayton, North Carolina and Melville, New York facilities. The fractionated intermediates are then purified, formulated into final bulk, and aseptically filled into final containers for sale. We also sell the fractionated intermediate products.

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, such as 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, Immune Globulin Intravenous (Human), 10% Caprylate/Chromatography Purified (Gamunex, Gamunex IGIV) and Prolastin Alpha-1 Proteinase Inhibitor (Human) (Prolastin, Prolastin A1PI, Prolastin-C A1PI). In March 2010, we launched Prolastin-C A1PI, our next generation A1PI product, in the United States. During the third quarter of 2010, we completed the conversion of our existing U.S. Prolastin patients to Prolastin-C A1PI. During the third quarter of 2010, we launched Prolastin-C A1PI in Canada and anticipate full conversion of our existing Canadian Prolastin A1PI patients to Prolastin-C A1PI in the 2010 fourth quarter. Sales of Gamunex and Prolastin/Prolastin-C A1PI together comprised 75.2% and 72.8% of our net revenue for the three months ended September 30, 2010 and 2009, respectively, and 75.7% and 74.3% of our net revenue for the nine months ended September 30, 2010 and 2009, respectively. We also have a line of hyperimmune therapies that provides treatment for tetanus, rabies, hepatitis A, hepatitis B, and Rh factor control during pregnancy and at birth. In addition, we provide plasma-derived therapies for critical care/hemostasis, including the treatment of hemophilia, an anti-coagulation factor (Thrombate 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.

We are headquartered in Research Triangle Park, North Carolina and our primary manufacturing facilities are a short distance away in Clayton, North Carolina. Our Clayton site is one of the world’s largest plasma protein processing facilities whose operations include fractionation, purification, filling, and finishing. We have an integrated plasma collection center platform, which as of September 30, 2010, consisted of 69 operating centers, of which 66 were FDA licensed and 3 were unlicensed. Subsequent to September 30, 2010, we received FDA licensure for one of the unlicensed plasma collection centers. In addition to our U.S. operations, we have operations located in Germany and Canada, as well as a team dedicated to the development of our international markets.

On October 6, 2009, we completed our initial public offering (IPO), which resulted in net primary proceeds to us of $519.7 million. In addition, during October 2009, we amended our Revolving Credit Facility and completed the issuance of $600.0 million, 7.75% Unsecured Senior Notes, due November 15, 2016, at a price of 99.321% of par, in a private placement to certain qualified institutional buyers. The issuance of the notes resulted in net proceeds to us of $583.9 million. As discussed in Note 9, the notes were subsequently exchanged for notes registered under the Securities Act of 1933, as amended. Proceeds from these transactions were used to repay and terminate our then existing First and Second Lien Term Loans, settle and terminate certain interest rate swap contracts, and repay amounts outstanding under our Revolving Credit Facility. Additional information regarding our IPO and refinancing transactions is included in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on February 23, 2010 (2009 Form 10-K).

As discussed in Note 3, we entered into a definitive merger agreement with Grifols S.A. and Grifols, Inc. (Grifols) on June 6, 2010.

2. Summary of Significant Accounting Policies

Throughout the unaudited interim consolidated financial statements, references to “Talecris Biotherapeutics Holdings Corp.,”

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“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 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 SEC. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our 2009 Form 10-K. In our opinion, the accompanying unaudited interim 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, 2009 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 the footnotes to our annual audited consolidated financial statements included in our 2009 Form 10-K. Our significant accounting policies, estimates, and assumptions have not changed materially since December 31, 2009.

Recent Accounting Pronouncements

There were no accounting pronouncements during the nine months ended September 30, 2010 that are expected to have a material impact on our consolidated financial statements or related disclosures.

3. Definitive Merger Agreement with Grifols S.A. and Grifols, Inc. (Grifols)

We entered into a definitive merger agreement with Grifols on June 6, 2010. Under the terms of the agreement, Grifols will acquire, through merger transactions, all of the common stock of Talecris for a combination of $19.00 in cash and 0.641 of a newly-issued non-voting Grifols’ (Class B) ordinary share for each outstanding Talecris share (the merger consideration). Under the terms of the agreement, completion of the transaction is subject to obtaining certain regulatory approvals, shareholder approvals, as well as other customary conditions. The 0.641 exchange ratio is generally fixed but is subject to adjustment to a lower exchange ratio to the extent that application of 0.641 exchange ratio would result in Grifols issuing in excess of 86.5 million Grifols non-voting shares in the transaction. The Grifols non-voting shares will be listed on NASDAQ in the form of American Depositary Shares and the Madrid, Barcelona, Bilbao and Valencia stock exchanges and quoted on the Automated Quotation System of the Spanish Stock Exchanges. Grifols non-voting shares will carry the same economic rights as Grifols ordinary shares. Additionally, Talecris share-based compensation, whether vested or unvested, generally will be converted into the right to receive or acquire the merger consideration, or, in the case of employee stock options, the right to acquire the merger consideration, as described in the merger agreement in lieu of Talecris common stock. The merger agreement provides that if the merger agreement is terminated under specified circumstances Grifols will be required to pay Talecris a termination fee of either $100 million or $375 million, depending on the specified circumstances. If the merger agreement is terminated under other specified circumstances, Talecris will be required to pay Grifols a termination fee of $100 million. Generally, except as noted above, all fees and expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring those expenses. We have incurred and will continue to incur significant costs related to investment banking, legal, and accounting activities, as well as retention expenses, related to this merger transaction. The leading shareholders of Grifols have entered into an agreement with us, subject to conditions, to vote their Grifols shares in favor of the transaction and, separately, an affiliate of Cerberus Capital Management, L.P., which owns approximately 49% of the outstanding Talecris common stock, has entered into an agreement with Grifols, subject to conditions, to vote its Talecris shares in favor of the transaction.

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Under the terms of the definitive merger agreement with Grifols, we are permitted to offer retention amounts up to a total of $15.0 million to employees. As of September 30, 2010, we have offered retention amounts totaling approximately $10.3 million to employees, of which $2.9 million was paid during the three months ended September 30, 2010 and the remaining amounts are expected to be paid in 2011, subject to the terms of the retention agreements. We incurred retention expenses, including fringe benefits, of $3.7 million during the three and nine months ended September 30, 2010. The remaining retention amounts will likely be recognized ratably through the second quarter of 2011.

We have entered into agreements with investment bankers related to our definitive merger agreement with Grifols. We incurred fees totaling $2.5 million under these agreements during the nine months ended September 30, 2010. We are obligated to pay additional fees totaling $21.3 million upon successful closing of the merger transaction. During the three and nine months ended September 30, 2010, we also incurred legal, accounting, and other fees of $5.7 million and $11.6 million, respectively, associated with the definitive merger agreement.

4. Terminated Definitive Merger Agreement with CSL Limited (CSL)

We entered into a definitive merger agreement with CSL on August 12, 2008, which was subject to the receipt of certain regulatory approvals as well as other customary conditions. The U.S. Federal Trade Commission filed an administrative complaint before the Commission challenging the merger and a complaint in Federal district court seeking to enjoin the merger during the administrative process. On June 8, 2009, the merger parties agreed to terminate the definitive merger agreement, and as a result, CSL paid us a merger termination fee of $75.0 million during the 2009 second quarter. The U.S. Federal Trade Commission’s complaints were subsequently dismissed. We incurred retention expenses, including fringe benefits, of $1.6 million and $8.3 million for the three and nine months ended September 30, 2009, respectively, and legal costs associated with the regulatory review process of $6.0 million during the nine months ended September 30, 2009. No amounts were incurred during 2010. All retention amounts were paid during 2009.

5. Inventories and Cost of Goods Sold

Inventories consisted of the following:

	September 30,		December 31,
	2010		2009
Raw material	$	168,343	$	171,866
Work-in-process	347,550		312,178
Finished goods	156,835		160,010
Total inventories	$	672,728	$	644,054

Our raw material inventories include unlicensed plasma and related testing costs of $5.4 million and $7.6 million at September 30, 2010 and December 31, 2009, respectively, which we believe are realizable.

6. Comprehensive Income

The following table includes the components of our comprehensive income:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010			2009
Net income	$	56,052	$	35,810	$	149,014		$	152,517
Foreign currency translation adjustments	1,237		376		(302		)	466
Net unrealized gain on derivative financial instruments, net of tax	—		9		—			5,097
Total comprehensive income	$	57,289	$	36,195	$	148,712		$	158,080

During the fourth quarter of 2009, we settled and terminated our interest rate swap contracts as discussed further in our 2009 Form 10-K.

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7. Income Taxes

Our income tax provision was $29.7 million and $14.1 million for the three months ended September 30, 2010 and 2009, respectively, resulting in effective income tax rates of 34.7% and 28.3%, respectively. Our income tax provision was $81.1 million and $74.9 million for the nine months ended September 30, 2010 and 2009, respectively, resulting in effective income tax rates of 35.3% and 32.9%, respectively.

For the nine months ended September 30, 2010, our effective income tax rate is higher than the U.S. statutory federal income tax rate, primarily due to the requirement to capitalize transaction costs related to our definitive merger agreement with Grifols and the effects of state taxes. These items were partially offset by the increased deduction allowed with respect to domestic production activities and tax credits for orphan drug clinical testing expenditures. The difference in the effective income tax rates for the three months and nine months ended September 30, 2010 is attributable to a benefit recognized in the third quarter from higher orphan drug tax credits and domestic production activity deductions reported on the 2009 Federal tax return that exceeded levels estimated in the 2009 financial statements.

For the three and nine months ended September 30, 2009, our effective income tax rate is 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. For the nine months ended September 30, 2009, our effective income tax rate was also impacted by the deduction of previously capitalized transaction costs related to our terminated merger agreement with CSL. These factors offset the effects of state taxes.

Following the completion of field work by the Internal Revenue Service examination team (IRS Exam) in connection with the audit of our 2005, 2006, and 2007 Federal income tax returns, the audit file was sent to the Joint Committee on Taxation (JCT) in accordance with requirements that the JCT review any refunds in excess of $2 million. The refund was attributable to additional tax credits for research and experimental expenditures and orphan drug expenditures claimed during the course of the audit. The JCT subsequently returned the audit file to the IRS Exam for additional fact finding. In lieu of engaging with the company in fact-finding efforts, IRS Exam issued a new audit report disallowing the tax credits for research and experimental expenditures and orphan drug clinical testing expenditures and issued a 30 Day Letter indicating that IRS Exam and the company could not reach agreement on the issue. The company has filed a timely protest to the adjustments proposed by IRS Exam and expects to favorably resolve this matter at the IRS Appeals level. We do not believe the outcome of this matter will have a material adverse impact on our consolidated financial condition or results of operation. It is reasonably possible that, within the next twelve months, we will resolve this matter with the IRS and JCT, which may increase or decrease the unrecognized tax benefits for all open tax years. The favorable resolution of this matter would increase earnings by approximately $4.7 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

8. Related Party Transactions

Until January 21, 2010, a majority of our outstanding common stock was owned by Talecris Holdings, LLC. 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 are held by Cerberus-Plasma Holdings LLC. As of September 30, 2010, Talecris Holdings, LLC owned approximately 49% of our outstanding common stock. We had a management agreement with Cerberus-Plasma Holdings, LLC and an affiliate of Ampersand Ventures, which was terminated as of September 30, 2009 in connection with our IPO. We have a Master Consulting and Advisory Services Agreement with an affiliate of Cerberus to provide certain advisory services to us, for which we incurred no significant costs for the periods presented.

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 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/Prolastin-C A1PI. Centric maintains inventory on our behalf which it utilizes to fill customer orders. Centric also provides services to us in collecting accounts receivable for sales made under the Prolastin and Gamunex Direct programs. We provide Centric with a fee for each unit of product provided to patients which escalates with volume.

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The following table summarizes our related party expenses for the periods presented:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Centric (product distribution and other services)	$	5,957	$	5,128	$	11,076	$	15,076
Cerberus/Ampersand (management fees)	$	—	$	1,958	$	—	$	5,715

The following table summarizes our related party accounts payable balances:

	September 30,		December 31,
	2010		2009
Centric (product distribution and other services)	$	6,447	$	5,537

9. 7.75% Notes Exchange

On July 19, 2010, we exchanged all of our then outstanding 7.75% Senior Notes due 2016 for 7.75% Senior Notes due 2016 that have been registered under the Securities Act of 1933, as amended (Exchange Notes). The exchange offer was made pursuant to the registration rights agreement that we entered into with the initial purchasers in connection with the issuance of the previously outstanding notes. The Exchange Notes are substantially identical to the previously outstanding notes, except that the transfer restrictions, registration rights, and additional interest provisions relating to the previously outstanding notes will not apply to the Exchange Notes. This exchange did not impact our capitalization. Unless stated otherwise in the context of discussion, we use the term “7.75% Notes” to describe our previously outstanding notes and the Exchange Notes.

10. Commitments and Contingencies

We have disclosed information regarding our commercial commitments in our 2009 Form 10-K. The following summarizes our significant changes in material commitments and contingencies as of September 30, 2010.

Capital Commitments

As discussed in our 2009 Form 10-K, we have embarked on a substantial capital plan to address our manufacturing capacity constraints. As of September 30, 2010, we have commitments and open purchase orders for capital spending under this capital program of approximately $222 million.

Litigation

We are involved in various legal and regulatory proceedings that arise in the ordinary course of business. We record accruals for such contingencies to the extent that we conclude that their occurrence is both probable and estimable. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. We have estimated the likelihood of settlement, unfavorable outcomes, and the amounts of such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of litigation is unpredictable and actual results could be materially different from our estimates. We record anticipated recoveries under applicable insurance contracts when we are assured of recovery.

Grifols Transaction

Four purported class action lawsuits have been filed by our stockholders challenging the proposed Grifols transaction. Two of the lawsuits were filed in the Court of Chancery of the State of Delaware and have been consolidated under the caption: In re Talecris Biotherapeutics Holdings Shareholder Litigation, Consol. C.A. No. 5614-VCL. The other two lawsuits were filed in the Superior Court of the State of North Carolina and are captioned Rubin v. Charpie, et al., No. 10 CV 004507 (North Carolina Superior Court, Durham County), and Kovary v. Talecris Biotherapeutics Holdings Corp., et al., No. 10 CV 011638 (North Carolina Superior Court, Wake County). The lawsuits name as defendants Talecris, the members of our board of directors, Grifols, S.A. and its subsidiary, Grifols, Inc., and, in the Delaware consolidated action, Talecris Holdings LLC and Stream Merger Sub, Inc, a wholly owned subsidiary of

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Talecris. The two North Carolina actions have been stayed.

All of the lawsuits allege that the individual defendants (and, in the consolidated Delaware action, Talecris Holdings LLC) breached their fiduciary duties to our stockholders in connection with the proposed transaction with Grifols, and that Grifols (and, in one of the North Carolina cases, Talecris, and in the Delaware action, Grifols, Inc.) aided and abetted those breaches. The Delaware complaint alleges, among other things, that the consideration offered to our stockholders pursuant to the proposed transaction is inadequate; that our board of directors failed to take steps to maximize stockholder value; that our IPO and debt refinancing in 2009 were intended to facilitate a sale of Talecris; that Cerberus and Talecris Holdings LLC arranged the proposed merger for the benefit of affiliates of Cerberus Associates, LLC, without regard to the interests of other stockholders; that the voting agreements impermissibly lock up the transaction; that the merger agreement contains terms, including a termination fee, that favor Grifols and deter alternative bids; and that the preliminary Form F-4 filed on August 10, 2010 contains material misstatements and/or omissions, including with respect to the availability of appraisal rights in the merger; the purpose and effects of the Virginia reincorporation merger; the antitrust risks of the proposed transaction; the financial advisors’ analyses regarding the Grifols’ non-voting stock to be issued in connection with the transaction; and the fees to be paid to Morgan Stanley by us and Grifols in connection with the proposed transaction. The Delaware complaint also alleges that our stockholders are entitled to appraisal rights in connection with the transaction pursuant to Section 262 of the Delaware General Corporation Law, and that the transaction violates the Delaware General Corporation Law by failing to provide such rights. The Delaware action seeks equitable and injunctive relief, including a determination that the stockholders have appraisal rights in connection with the merger, and damages. Plaintiffs have filed a motion for a preliminary injunction, which has been scheduled to be heard on November 8, 2010.

We believe that these lawsuits are without merit and intend to defend them vigorously.

National Genetics Institute/Baxter Healthcare Corporation Litigation

In May 2008, Baxter Healthcare Corporation (Baxter) and National Genetics Institute (NGI), a wholly-owned subsidiary of Laboratory Corporation of America, filed a complaint in the U.S. District Court for the Eastern District of North Carolina, alleging that we infringed U.S. Patent Nos. 5,780,222, 6,063,563, and 6,566,052. The patents deal primarily with a method of screening large numbers of biological samples utilizing various pooling and matrix array strategies, and the complaint alleges that the patents are owned by Baxter and exclusively licensed to NGI. In November 2008, we filed our answer to their complaint, asserting anti-trust and other counterclaims, and filed a request for re-examination of the patents with the Patent and Trademark Office (PTO), which was subsequently granted. We filed a motion to stay litigation pending the PTO proceedings. This case was settled effective October 1, 2010, with us receiving a paid-up license to the technology subject to the disputed patents and the parties dismissing their claims and counterclaims.

Plasma Centers of America, LLC and G&M Crandall Limited Family Partnership

We had a three year Amended and Restated Plasma Sale/Purchase Agreement with Plasma Centers of America, LLC (PCA) under which we were required to purchase annual minimum quantities of plasma from plasma collection centers approved by us, including the prepayment of 90% for unlicensed plasma. We were also committed to finance the development of up to eight plasma collection centers, which were to be used to source plasma for us. Under the terms of the agreement, we had the obligation to purchase such centers under certain conditions for a sum determined by a formula set forth in the agreement. We provided $3.2 million in financing, including accrued interest, related to the development of such centers, and we advanced payment of $1.0 million for unlicensed plasma. We recorded a provision within SG&A during 2008 related to these advances.

In August 2008, we notified PCA that they were in breach of the Amended and Restated Plasma Sale/Purchase Agreement. We terminated the agreement in September 2008. In November 2008, TPR filed suit in federal court in Raleigh, North Carolina against the G&M Crandall Limited Family Partnership and its individual partners as guarantors of obligations of PCA. We were served in January 2009 in a parallel state action by PCA, alleging breach of contract by TPR. Motions to summary judgment by both parties have been denied. The two cases are proceeding in parallel, with trial in the state action set for November 2010.

Foreign Corrupt Practices Act Investigation

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 initially focused on sales to certain Eastern European and Middle Eastern countries, primarily Belarus, Russia and Iran, but we are also reviewing sales practices in Brazil, China, Georgia, Turkey and other countries as deemed appropriate.

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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. In some cases, safeguards involved terminating consultants and suspending relations with or terminating distributors in countries under investigation as circumstances warranted. These actions unfavorably affected revenue from these countries in 2009 and have an ongoing unfavorable impact on revenue in 2010. We have resumed sales in countries where we have appropriate safeguards in place and are reallocating product to other countries as necessary. 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 from those countries. 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 unaudited interim consolidated financial statements as of September 30, 2010.

Compliance with Pharmaceutical Pricing Agreement under the Public Health Service Program

In November 2009, we received a letter from the United States Attorney’s Office for the Eastern District of Pennsylvania (USAO). The USAO requested a meeting to review our compliance with the terms of the Pharmaceutical Pricing Agreement (PPA) under the Public Health Service program. Specifically, the USAO asked for information related to the sale of our IGIV product, Gamunex, under that program. In order to have federal financial participation apply to their products under the Medicaid program and to obtain Medicare Part B coverage, manufacturers are required to enter into a PPA. The PPA obligates manufacturers to charge covered entities the Public Health Service price for drugs intended for outpatient use. The Public Health Service price is based on the Medicaid rebate amount. We believe that we have complied with the terms of the PPA and federal law. If the USAO determines that our practices are inconsistent with the terms of the PPA, the USAO has stated that it may file a civil action against us under the Anti-fraud Injunction Act and seek a court order directing the company to comply with the PPA or, potentially, proceed under some other legal theory. We could also be subject to fines, damages, penalties, appointment of a monitor, or enhancement of existing compliance and training programs as a result of government action. We are cooperating with the investigation and intend to respond to information requests from the USAO. 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 unaudited interim consolidated financial statements as of September 30, 2010.

11. Share-Based Compensation

We have long-term incentive plans, which provide 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 share units (PSU’s), to eligible employees, directors, and consultants.

Share-based compensation expense for the three and nine months ended September 30, 2010 and 2009 was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
SG&A	$	2,530	$	17,929	$	10,480	$	34,379
R&D	181		513		896		1,692
Cost of goods sold	908		1,012		2,827		3,554
Total expense	$	3,619	$	19,454	$	14,203	$	39,625

Capitalized in inventory	$	483	$	868	$	1,928	$	2,874

Amounts capitalized in inventory are recognized in cost of goods sold in our consolidated income statement primarily within twelve months.

The following table summarizes the estimated remaining unrecognized compensation cost related to our share-based

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compensation program as of September 30, 2010 and the weighted average period over which the non-cash compensation cost is expected to be recognized:

			Weighted-
	Unrecognized		Average
	Compensation		Period
	Cost		(Years)
Stock options	$	4,523	2.35
Restricted share awards	2,163		0.50
RSU’s	7,298		2.41
PSU’s	3,894		2.50
Total	$	17,878

In addition to the unrecognized compensation cost included in the table above, at September 30, 2010, $1.9 million of compensation cost was included in inventory on our unaudited interim consolidated balance sheet, which we expect to be recognized as non-cash compensation expense in our consolidated income statement primarily within the next twelve months. 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 awards, differences between our anticipated forfeiture rate and the actual forfeiture rate, the probability of achieving targets established for performance award vesting, and other actions by our board of directors or its compensation committee.

Stock Options

The following is a summary of stock option activity for the nine months ended September 30, 2010:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual	Aggregate
			Exercise		Term	Intrinsic
	Shares		Price		(Years)	Value
Outstanding at December 31, 2009	12,129,438		$	8.40
Granted	73,593		$	20.39
Forfeited	(18,805	)	$	19.00
Exercised	(2,989,023	)	$	6.44
Outstanding at September 30, 2010	9,195,203		$	9.11	6.0	$	126,587

Exercisable at September 30, 2010	8,542,702		$	8.35	5.1	$	124,157

Vested and expected to vest at September 30, 2010	9,142,593		$	9.00	6.0	$	126,862

The aggregate intrinsic value in the table above represents the difference between the $22.88 closing price of our common stock as reported by The NASDAQ Global Select Market on September 30, 2010 and the weighted average exercise price, multiplied by the number of options outstanding or exercisable. The total cash proceeds to us from stock option exercises during the nine months ended September 30, 2010 were $19.3 million for shares with an estimated intrinsic value of $68.4 million. 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.

The following weighted-average assumptions were used to estimate the fair value of stock options granted:

	Nine Months Ended
	September 30,
	2010		2009
Risk-free interest rate	2.66	%	2.66	%
Expected term (years)	5.66		5.96
Expected volatility	50	%	50	%
Expected dividend yield	0	%	0	%

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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.

Restricted Stock

The following is a summary of restricted stock activity for the nine months ended September 30, 2010:

			Weighted
			Average
			Grant Date
	Shares		Fair Value
Unvested shares outstanding at December 31, 2009	913,856		$	15.27
Vested	(727,256	)	$	13.74
Unvested shares outstanding at September 30, 2010	186,600		$	21.25

During the nine months ended September 30, 2010, we repurchased 246,823 shares of our common stock from employees for $4.9 million to settle their withholding tax obligations upon vesting of 727,256 shares of restricted stock. 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 771,744 shares of restricted stock. The total fair value of the restricted stock that vested during the nine months ended September 30, 2010 and 2009 was $14.5 million and $12.8 million, respectively.

Restricted Stock Units (RSU’s)

The following is a summary of RSU activity for the nine months ended September 30, 2010:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual	Aggregate
			Grant Date		Term	Intrinsic
	Shares		Fair Value		(Years)	value
Outstanding at December 31, 2009	480,024		$	19.00
Granted	36,015		$	20.40
Forfeited	(23,703	)	$	19.00
Outstanding at September 30, 2010	492,336		$	19.10	2.4	$	11,265

Performance Share Units (PSU’s)

The following is a summary of performance share unit activity for the nine months ended September 30, 2010:

			Weighted
			Average
			Grant Date
	Shares		Fair Value
Unvested PSU’s outstanding at December 31, 2009	—		—
Granted	261,327		$	21.51
Forfeited	(1,627	)	$	21.51
Unvested PSU’s outstanding at September 30, 2010	259,700		$	21.51

PSU’s are awards that vest based on the achievement of pre-established objective performance goals, which are generally financial in nature. For performance awards, the compensation committee establishes a performance period and the performance targets for each performance measure that must be achieved at the end of the performance period for awards to vest. The number of shares issued upon the vesting of the performance awards varies based on actual performance in a year relative to a defined minimum and maximum financial target for that year. The PSU’s granted on March 8, 2010 will vest annually over a three-year performance period with the potential for 0% to 125% payout, based on the achievement of annual earnings per share targets that were established at the time of grant.

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Income Taxes

In connection with stock option exercises and restricted stock vesting, we recognized net tax benefits of $12.4 million and

$4.7 million for the nine months ended September 30, 2010 and 2009, respectively. We record income tax benefits realized upon exercise or vesting of an award in excess of that previously recognized in earnings as additional paid-in-capital. We recognized excess tax benefits related to share-based compensation of $10.8 million and $1.4 million for the nine months ended September 30, 2010 and 2009, respectively.

12. 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 and Prolastin/Prolastin-C 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 product category. Our Immunology/Neurology product category includes the 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 comprised of our Prolastin/Prolastin-C A1PI product, which is used to treat patients with a genetic alpha-1 antitrypsin deficiency. Our Critical Care/Hemostasis product category includes products that are used to supplement, restore, or maintain normal plasma parameters such as volume or coagulation values. Other product net revenue primarily consists of sales of PPF powder and intermediate products, such as cryoprecipitate. Other net revenue consists of royalties and licensing fees, milestones, and revenues related to contracted services performed for third parties at our Melville, New York facility.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Product net revenue:
Immunology/ Neurology	$	246,393	$	237,395	$	718,101	$	700,938
Pulmonology	89,980		80,813		258,149		230,193
Critical Care/ Hemostasis	44,100		42,434		130,818		119,168
Other	20,088		27,256		65,210		72,578
Total product net revenue	400,561		387,898		1,172,278		1,122,877
Other revenue	6,440		7,833		18,510		20,219
Total net revenue	$	407,001	$	395,731	$	1,190,788	$	1,143,096

In the following table, we have presented our net revenue by geographic region. Net revenue for each region is based on the geographic location of the customer.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
United States	$	285,912	$	267,411	$	822,808	$	764,500
Canada	47,729		58,227		144,266		162,092
Europe	50,430		45,956		145,077		132,617
Other	22,930		24,137		78,637		83,887
Total net revenue	$	407,001	$	395,731	$	1,190,788	$	1,143,096

We did not maintain significant long-lived assets outside of the United States at September 30, 2010 and December 31, 2009.

13. Earnings per Share

The following table illustrates the calculation of our basic earnings per common share outstanding:

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.	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010		2009			2010		2009
Net income	$	56,052	$	35,810		$	149,014	$	152,517
Less:
Series A convertible preferred stock undeclared dividends	—		(3,280		)	—		(9,602		)
Series B convertible preferred stock undeclared dividends	—		(732		)	—		(2,142		)
Net income available to common stockholders	$	56,052	$	31,798		$	149,014	$	140,773

Weighted average common shares outstanding	123,668,072		2,647,178			122,669,724		1,847,235

Basic net income per common share	$	0.45	$	12.01		$	1.21	$	76.21

The following table illustrates the calculation of our diluted earnings per common share outstanding:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Net income	$	56,052	$	35,810	$	149,014	$	152,517

Weighted average common shares outstanding	123,668,072		2,647,178		122,669,724		1,847,235
Plus incremental shares from assumed conversions:
Series A preferred stock	—		71,217,391		—		71,736,264
Series B preferred stock	—		13,695,817		—		13,795,601
Stock options and restricted shares	5,266,418		6,350,815		5,844,003		6,540,453
Dilutive potential common shares	128,934,490		93,911,201		128,513,727		93,919,553

Diluted net income per common share	$	0.43	$	0.38	$	1.16	$	1.62

Options at the weighted average exercise prices indicated below were outstanding but excluded from the computation of diluted earnings per common share because their exercise prices and assumed tax benefits upon exercise were greater than the average market price for the common shares during the periods presented, so including those options would be anti-dilutive.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Stock options	602,768		2,053,889		640,636		2,039,807
Weighted average exercise price	$	19.10	$	21.17	$	19.11	$	21.20

14. Fair Value of Financial Instruments

At December 31, 2009, we had two interest rate cap contracts with a notional principal amount of $175.0 million outstanding for which the cap rate of 6.00% was significantly higher than prevailing market interest rates; therefore, the fair market value was zero. The interest rate caps matured during February 2010.

At September 30, 2010 and December 31, 2009, the estimated fair value of our 7.75% Notes was $657.8 million and $607.9 million, respectively. We calculated the fair value by reference to open bid/ask quotations of our 7.75% Notes at each balance sheet date. We had no amounts outstanding under our variable rate Revolving Credit Facility at September 30, 2010 and December 31, 2009. At September 30, 2010 and December 31, 2009, we have notes receivable outstanding, which bear interest at market rates, and consequently, the recorded amounts approximate fair value. The recorded amounts of all other financial instruments, which consists of cash and cash equivalents, accounts receivable, net, accounts payable, accrued expenses and other liabilities, approximate fair value due to the short duration of the instruments.

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15. Condensed Consolidating Financial Information

In October 2009, we completed the issuance of our 7.75% Notes. The 7.75% Notes are guaranteed on a senior unsecured basis by our existing and future domestic subsidiaries. The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Each of the subsidiary guarantors are 100% owned, directly or indirectly, by us, and all guarantees are full and unconditional and joint and several. Our investments in our consolidated subsidiaries are presented under the equity method of accounting. No significant administrative costs are borne by the Parent. Our unaudited condensed consolidating financial statements are presented below:

Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Balance Sheets

September 30, 2010

	Parent/		Guarantor			Non-Guarantor			Consolidating
	Issuer		Subsidiaries			Subsidiaries			Adjustments			Consolidated
Assets:
Current assets:
Cash	$	—	$	143,327		$	7,203		$	—		$	150,530
Accounts receivable, net	—		287,799			38,502			(155,429		)	170,872
Inventories	—		626,319			46,409			—			672,728
Other	—		119,158			887			—			120,045
Total current assets	—		1,176,603			93,001			(155,429		)	1,114,175
Property, plant, and equipment, net	—		330,355			1,135			—			331,490
Intangible assets	—		10,880			—			—			10,880
Goodwill	—		172,860			—			—			172,860
Investment in Subsidiaries	809,729		(33,839		)	—			(775,890		)	—
Advances and notes between Parent and Subsidiaries	1,400,295		826,572			—			(2,226,867		)	—
Other	—		19,029			309			—			19,338
Total assets	$	2,210,024	$	2,502,460		$	94,445		$	(3,158,186	)	$	1,648,743

Liabilities and Stockholders’ Equity (Deficit):
Current liabilities:
Accounts payable	$	—	$	75,963		$	119,181		$	(155,429	)	$	39,715
Accrued expenses and other liabilities	17,634		172,558			8,380			—			198,572
Current portion of capital lease obligations	—		832			—			—			832
Total current liabilities	17,634		249,353			127,561			(155,429		)	239,119
Long-term debt and capital lease obligations	596,477		8,906			—			—			605,383
Advances and notes between Parent and Subsidiaries	826,572		1,400,295			—			— (2,226,867		)	—
Other	—		34,177			723			—			34,900
Total liabilities	1,440,683		1,692,731			128,284			(2,382,296		)	879,402
Stockholders’ equity (deficit)	769,341		809,729			(33,839		)	(775,890		)	769,341
Total liabilities and stockholders’ equity (deficit)	$	2,210,024	$	2,502,460		$	94,445		$	(3,158,186	)	$	1,648,743

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Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Balance Sheets

December 31, 2009

	Parent/		Guarantor			Non-Guarantor			Consolidating
	Issuer		Subsidiaries			Subsidiaries			Adjustments			Consolidated
Assets:
Current assets:
Cash	$	—	$	58,320		$	6,919		$	—		$	65,239
Accounts receivable, net	—		222,007			64,454			(149,483		)	136,978
Inventories	—		605,324			38,730			—			644,054
Other	—		117,670			2,448			—			120,118
Total current assets	—		1,003,321			112,551			(149,483		)	966,389
Property, plant, and equipment, net	—		266,067			1,132			—			267,199
Intangible assets	—		10,880			—			—			10,880
Goodwill	—		172,860			—			—			172,860
Investment in Subsidiaries	680,459		(27,925		)	—			(652,534		)	—
Advances and notes between Parent and Subsidiaries	1,346,520		862,406			—			(2,208,926		)	—
Other	—		27,054			623			—			27,677
Total assets	$	2,026,979	$	2,314,663		$	114,306		$	(3,010,943	)	$	1,445,005

Liabilities and Stockholders’ Equity (Deficit):
Current liabilities:
Accounts payable	$	—	$	103,460		$	117,069		$	(149,483	)	$	71,046
Accrued expenses and other liabilities	—		160,047			10,486			—			170,533
Current portion of capital lease obligations	—		740			—			—			740
Total current liabilities	—		264,247			127,555			(149,483		)	242,319
Long-term debt and capital lease obligations	596,046		9,221			—			—			605,267
Advances and notes between Parent and Subsidiaries	848,779		1,346,515			13,632			(2,208,926		)	—
Other	—		14,221			1,044			—			15,265
Total liabilities	1,444,825		1,634,204			142,231			(2,358,409		)	862,851
Stockholders’ equity (deficit)	582,154		680,459			(27,925		)	(652,534		)	582,154
Total liabilities and stockholders’ equity (deficit)	$	2,026,979	$	2,314,663		$	114,306		$	(3,010,943	)	$	1,445,005

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Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Income Statements

Three Months Ended September 30, 2010

	Parent/		Guarantor			Non-Guarantor			Consolidating
	Issuer		Subsidiaries			Subsidiaries			Adjustments			Consolidated
Net revenue	$	—	$	367,358		$	39,643		$	—		$	407,001
Cost of goods sold	—		196,723			33,185			—			229,908
Gross profit	—		170,635			6,458			—			177,093
Operating expenses	—		69,924			10,132			—			80,056
Income from operations	—		100,711			(3,674		)	—			97,037
Equity in earnings (losses) of Subsidiaries	56,052		(3,667		)	—			(52,385		)	—
Other non-operating (expense) income, net	—		(11,263		)	7			—			(11,256		)
Income (loss) before income taxes	56,052		85,781			(3,667		)	(52,385		)	85,781
Provision for income taxes	—		(29,729		)	—			—			(29,729		)
Net income (loss)	$	56,052	$	56,052		$	(3,667	)	$	(52,385	)	$	56,052

Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Income Statements

Three Months Ended September 30, 2009

	Parent/			Guarantor			Non-Guarantor			Consolidating
	Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Net revenue	$	—		$	361,028		$	34,703		$	—		$	395,731
Cost of goods sold	—			203,424			27,242			—			230,666
Gross profit	—			157,604			7,461			—			165,065
Operating expenses	1,958			85,494			8,203			—			95,655
Income (loss) from operations	(1,958		)	72,110			(742		)	—			69,410
Equity in earnings (losses) of Subsidiaries	37,083			(635		)	—			(36,448		)	—
Other non-operating (expense) income, net	—			(19,476		)	1			—			(19,475		)
Income (loss) before income taxes	35,125			51,999			(741		)	(36,448		)	49,935
Benefit (provision) for income taxes	685			(14,916		)	106			—			(14,125		)
Net income (loss)	$	35,810		$	37,083		$	(635	)	$	(36,448	)	$	35,810

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Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Income Statements

Nine Months Ended September 30, 2010

	Parent/		Guarantor			Non-Guarantor			Consolidating
	Issuer		Subsidiaries			Subsidiaries			Adjustments			Consolidated
Net revenue	$	—	$	1,071,760		$	119,028		$	—		$	1,190,788
Cost of goods sold	—		574,513			95,963			—			670,476
Gross profit	—		497,247			23,065			—			520,312
Operating expenses	—		227,156			28,683			—			255,839
Income from operations	—		270,091			(5,618		)	—			264,473
Equity in earnings (losses) of Subsidiaries	149,014		(5,613		)	—			(143,401		)	—
Other non-operating (expense) income, net	—		(34,329		)	13			—			(34,316		)
Income (loss) before income taxes	149,014		230,149			(5,605		)	(143,401		)	230,157
Provision for income taxes	—		(81,135		)	(8		)	—			(81,143		)
Net income (loss)	$	149,014	$	149,014		$	(5,613	)	$	(143,401	)	$	149,014

Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Income Statements

Nine Months Ended September 30, 2009

	Parent/			Guarantor			Non-Guarantor			Consolidating
	Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Net revenue	$	—		$	1,043,111		$	99,985		$	—		$	1,143,096
Cost of goods sold	—			585,046			78,829			—			663,875
Gross profit	—			458,065			21,156			—			479,221
Operating expenses	5,715			234,861			25,065			—			265,641
Income (loss) from operations	(5,715		)	223,204			(3,909		)	—			213,580
Equity in earnings (losses) of Subsidiaries	107,482			(3,659		)	—			(103,823		)	—
Other non-operating (expense) income, net	75,000			(61,167		)	18			—			13,851
Income (loss) before income taxes	176,767			158,378			(3,891		)	(103,823		)	227,431
(Provision) benefit for income taxes	(24,250		)	(50,896		)	232			—			(74,914		)
Net income (loss)	$	152,517		$	107,482		$	(3,659	)	$	(103,823	)	$	152,517

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Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2010

	Parent/			Guarantor			Non-Guarantor			Consolidating
	Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net income (loss)	$	149,014		$	149,014		$	(5,613	)	$	(143,401	)	$	149,014
Undistributed equity in (earnings) losses of Subsidiaries	(149,014		)	5,613			—			143,401			—
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities	—			(36,329		)	20,096			19,739			3,506
Net cash provided by operating activities	—			118,298			14,483			19,739			152,520

Cash flows from investing activities:
Purchases of property, plant, and equipment	—			(91,392		)	(299		)	—			(91,691		)
Net advances and notes between Parent and Subsidiaries	(25,170		)	—			—			25,170			—
Other	—			14,139			(13,632		)	—			507
Net cash (used in) provided by investing activities	(25,170		)	(77,253		)	(13,931		)	25,170			(91,184		)

Cash flows from financing activities:
Net advances and notes between Parent and Subsidiaries	—			44,909			—			(44,909		)	—
Other	25,170			(947		)	—			—			24,223
Net cash provided by (used in) financing activities	25,170			43,962			—			(44,909		)	24,223
Effect of exchange rate changes on cash and cash equivalents	—			—			(268		)	—			(268		)
Net increase in cash and cash equivalents	—			85,007			284			—			85,291
Cash and cash equivalents at beginning of period	—			58,320			6,919			—			65,239
Cash and cash equivalents at end of period	$	—		$	143,327		$	7,203		$	—		$	150,530

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Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2009

	Parent/			Guarantor			Non-Guarantor			Consolidating
	Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net income (loss)	$	152,517		$	107,482		$	(3,659	)	$	(103,823	)	$	152,517
Undistributed equity in (earnings) losses of Subsidiaries	(107,482		)	3,659			—			103,823			—
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities	(29		)	36,002			(3,266		)	13,500			46,207
Net cash provided by (used in) operating activities	45,006			147,143			(6,925		)	13,500			198,724

Cash flows from investing activities:
Purchases of property, plant, and equipment	—			(36,171		)	(120		)	—			(36,291		)
Business acquisitions, net of cash acquired	—			(25,510		)	—			—			(25,510		)
Net advances and notes between Parent and Subsidiaries	(42,311		)	—			—			42,311			—
Other	—			(7,961		)	6,992			—			(969		)
Net cash (used in) provided by investing activities	(42,311		)	(69,642		)	6,872			42,311			(62,770		)

Cash flows from financing activities:
Net repayments of borrowings	—			(117,347		)	—			—			(117,347		)
Net advances and notes between Parent and Subsidiaries	—			55,811			—			(55,811		)	—
Other	(2,695		)	(407		)	—			—			(3,102		)
Net cash used in financing activities	(2,695		)	(61,943		)	—			(55,811		)	(120,449		)
Effect of exchange rate changes on cash and cash equivalents	—			—			465			—			465
Net increase in cash and cash equivalents	—			15,558			412			—			15,970
Cash and cash equivalents at beginning of period	—			10,727			6,252			—			16,979
Cash and cash equivalents at end of period	$	—		$	26,285		$	6,664		$	—		$	32,949

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (Quarterly Report) contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report, regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terms such as “may,” “will,” “would,” “expects,” “intends,” “believes,” “anticipates,” “plans,” “predicts,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” or the negative of such terms or other variations on such terms or comparable terminology. The forward-looking statements that we make are based upon assumptions about many important risk factors, many of which are beyond our control. Among the factors that could cause actual results to differ materially are the following:

· the impact of the announcement of our definitive merger agreement with Grifols and the potential impact of completion, termination, or delay of the proposed merger with Grifols, including but not limited to, disruptions from the pending transaction, transaction costs, and the outcome of litigation and regulatory proceedings to which we may be a party;

· the unprecedented volatility in the global economy and fluctuations in financial markets;

· changes in economic conditions, political tensions, trade protection measures, licensing requirements, and tax matters in the countries in which we conduct business;

· the impact of competitive products and pricing and competitive actions by competitors;

· fluctuations in the balance between supply and demand with respect to the market for plasma-derived products;

· recently enacted and additional proposed U.S. healthcare legislation, regulatory action or legal proceedings affecting, among other things, the U.S. healthcare system, pharmaceutical pricing and reimbursement, including Medicaid, Medicare and the Public Health Service Program and additional legislation and regulatory action now under consideration;

· legislation or regulations in markets outside of the U.S. affecting product pricing, reimbursement, access, or distribution channels;

· our ability to procure adequate quantities of plasma and other materials which are acceptable for use in our manufacturing processes from our own plasma collection centers or from third-party vendors at competitive costs;

· our ability to maintain compliance with government regulations and licenses, including those related to plasma collection, production, and marketing;

· our ability to identify growth opportunities for existing products and our ability to identify and develop new product candidates through our research and development activities;

· the timing of, and our ability to, obtain and/or maintain regulatory approvals for new product candidates, the rate and degree of market acceptance, and the clinical utility of our products;

· unexpected shut-downs of our manufacturing and storage facilities or delays in opening new planned facilities;

· our and our suppliers’ ability to adhere to cGMP;

· our ability to manufacture at appropriate scale to meet the market’s demand for our products;

· our ability to resume or replace sales to countries affected by our Foreign Corrupt Practices Act investigation;

· availability and cost of financing opportunities;

· the impact of geographic and product mix on our sales and gross profit;

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· interest rate fluctuations impacting outstanding borrowings under our Revolving Credit Facility and foreign currency exchange rate fluctuations in the international markets in which we operate;

· the impact of our substantial capital plan over the next five years; and

· other factors identified elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on February 23, 2010 (2009 Form 10-K).

No assurances can be provided as to any future financial results. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make. Unless legally required, we do not undertake to update or revise any forward-looking statements, even if events make it clear that any projected results, expressed or implied, will not be realized.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. You are encouraged to read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim consolidated financial statements and related footnotes included elsewhere in this Quarterly Report. In addition, you are encouraged to refer to a discussion of risk factors included elsewhere in this Quarterly Report, as well as in our 2009 Form 10-K, that could cause actual results to differ materially from those described or implied by the forward-looking statements contained in the following discussion and analysis. You are also encouraged to refer to our 2009 Form 10-K, which includes additional information regarding our business and industry. See “Special Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report.

All tabular disclosures of dollar amounts, except earnings per common share amounts, are presented in thousands. Percentages and amounts presented herein may not calculate or sum precisely due to rounding.

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 to reflect the share dividend.

BUSINESS OVERVIEW

The majority of our sales are concentrated in the therapeutic areas of Immunology/Neurology and Pulmonology. Our largest product, representing 53.1% and 54.0% of our net revenue for the three and nine months ended September 30, 2010, Gamunex, Immune Globulin Intravenous (Human), 10% Caprylate/Chromatography Purified (Gamunex, Gamunex IGIV), provides a treatment for primary immune deficiency and autoimmune diseases, such as CIDP. Our second largest product, representing 22.1% and 21.7% of our net revenue for the three and nine months ended September 30, 2010, Prolastin Alpha-1 Proteinase Inhibitor (Human) (Prolastin, Prolastin A1PI, Prolastin-C A1PI), provides a treatment for alpha-1 antitrypsin deficiency-related emphysema. During the third quarter of 2010, we completed the conversion of our existing U.S. Prolastin patients to Prolastin-C A1PI, our next generation A1PI product. During the third quarter of 2010, we launched Prolastin-C A1PI in Canada and anticipate full conversion of our existing Canadian Prolastin A1PI patients to Prolastin-C A1PI in the 2010 fourth quarter.

U.S. IGIV distribution increased between 6% and 8% during the nine months ended September 30, 2010. This growth represents a recovery in demand in the second and third quarters of 2010 after a slight decline in growth in the first quarter of 2010. Despite solid demand growth for IGIV, there has been increased scrutiny and price sensitivity in the hospital segment. In addition, the increase in the number of hospitals qualifying for the 340B discounts has effectively reduced demand from GPO’s who are not permitted to service this discounted channel, which among other factors, has led us to accept reduced volume tiers under certain of our GPO contracts. We have seen solid demand growth for Gamunex with most customer segments. We believe that U.S. and international IGIV demand will grow approximately 6% to 8% over the long-term, which is consistent with demand growth during the nine months ended September 30, 2010. However, IGIV demand can vary significantly on a quarter-to-quarter basis.

Our ability to expand our international business has been hampered by the effects of our internal Foreign Corrupt Practices Act (FCPA) investigation and increased price sensitivities of our customers, which has resulted in pricing pressures for plasma-derived products. Our business with Iran, one of our major international customers, has been in decline, which is likely to continue. Our profitability has and may continue to be negatively impacted by unfavorable euro/U.S. dollar exchange rates. We have experienced, and expect to continue to experience, annual volume declines in Canada due to Canadian Blood Services (CBS) objective to have multiple sources of supply, which has impacted and will continue to impact our overall IGIV growth. CBS may further reduce volumes to contract minimums and Hema Quebec may adopt a similar strategy.

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We anticipate that we will operate near to or at our fractionation capacity over the next few years depending upon the demand for our products, the availability of source plasma and the impact of variability in yield, among other factors. We plan to utilize most of our available fractionation capacity in the near term, which may result in increased inventory levels in order to attempt to maintain pace with projected future growth in product demand. In response to our capacity constraints, we have embarked on a substantial capital plan, which we anticipate to be in the range of $800 million to $850 million on a cumulative basis over the five year period beginning in 2010. The increase in our capital plan over the next five years from our prior estimates results primarily due to an increase in the anticipated cost for our new fractionation facility which we estimate to be $340 million plus an additional $40 million in capitalized interest. Our estimated cost related to the construction of our new purification facility for Plasmin is $120 million with additional expenditures planned for Koate modernization and albumin purification expansion. The successful execution of our capital plan, which is discussed further in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our 2009 Form 10-K, will be necessary to support our projected future volume growth, particularly with the anticipation that we will reach our fractionation capacity in the near term, launch new product introductions and complete strategic initiatives.

Our integrated plasma collection center platform, Talecris Plasma Resources, Inc. (TPR), consisted of 69 operating centers, of which 66 were FDA licensed and 3 were unlicensed as of September 30, 2010 and provided approximately 73.9% and 69.4% of our plasma during the three and nine months ended September 30, 2010. We will need to significantly increase plasma collections generated from TPR in the near term to offset the expected decrease in plasma supplied by third parties and planned increases in our fractionation to meet anticipated demand. To meet our plasma requirements, we may increase donor fees, increase marketing expense, and expand plasma collection center days and hours of operation, among other initiatives, which may limit our ability to reduce our cost per liter of plasma. Consequently, we expect to continue to produce plasma at a cost per liter which we believe is significantly higher than our competitors. Subsequent to September 30, 2010, we received FDA licensure for one of the unlicensed plasma collection centers.

Our historical comparisons illustrate the substantial reduction in both the collection cost per liter and the amount of excess period costs charged directly to cost of goods sold as a result of the maturation of our plasma collection center platform. Decreasing collection costs and the reduction of excess period costs, combined with leveraging our manufacturing facilities as a result of higher volumes, have contributed to improving our gross margins. Our cost of goods sold reflects $1.5 million and $8.7 million for the three months ended September 30, 2010 and 2009, respectively, and $5.2 million and $34.1 million for the nine months ended September 30, 2010 and 2009, respectively, related to excess period costs associated with TPR. We believe that we have substantially eliminated unabsorbed TPR infrastructure and start-up costs. Consequently, future margin improvements will need to be derived from increases in product pricing and volumes, product mix, improvements in the cost per liter of plasma, manufacturing efficiencies, yield improvements or some combination thereof. We believe that the current environment does not favor near-term price increases and we have limited opportunities to enhance product mix. We have recently experienced and expect to continue to experience higher cost of goods sold due to yield variability, less efficient utilization of each incremental liter of plasma fractionated as we increase Gamunex production, and higher non-capitalizable costs associated with our capital projects, particularly the construction of our new fractionation facility.

The combination of the factors mentioned above, particularly the lower near-term demand growth, competitive pressures, slower than planned reductions in our cost per liter of plasma, yield variability as well inefficient plasma utilization, among other factors, will likely result in lower gross margins in future periods.

2010 HIGHLIGHTS

Our 2010 financial and business highlights are included below.

2010 Financial Highlights

· Total net revenue increased $11.3 million to $407.0 million for the three months ended September 30, 2010 as compared to $395.7 million for the three months ended September 30, 2009. Total net revenue increased $47.7 million to $1,190.8 million for the nine months ended September 30, 2010 as compared to $1,143.1 million for the nine months ended September 30, 2009.

· Gross margin was 43.5% and 41.7% for the three months ended September 30, 2010 and 2009, respectively, and 43.7% and 41.9% for the nine months ended September 30, 2010 and 2009, respectively.

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· Operating margin improved 630 basis points to 23.8% for the three months ended September 30, 2010 as compared to 17.5% for the three months ended September 30, 2009. Operating margin improved 350 basis points to 22.2% for the nine months ended September 30, 2010 as compared to 18.7% for the nine months ended September 30, 2009.

· Net income was $56.1 million and $149.0 million for the three and nine months ended September 30, 2010, respectively, as compared to $35.8 million and $152.5 million for the three and nine months ended September 30, 2009, respectively. Diluted earnings per common share were $0.43 and $0.38 for the three months ended September 30, 2010 and 2009, respectively, and $1.16 and $1.62 for the nine months ended September 30, 2010 and 2009, respectively. Our results for the nine months ended September 30, 2009 include the impact of the CSL Limited (CSL) merger termination fee of $75.0 million (approximately $48.8 million after tax) and our results for the three and nine months ended September 30, 2009 include transaction-related costs associated with the terminated CSL merger agreement. Our 2010 results include transaction-related costs associated with our definitive merger agreement with Grifols. We believe a meaningful comparison of our results for the periods presented is enhanced by a quantified presentation of the impact of the CSL merger termination fee and merger-related expenses and the Grifols merger-related expenses. The impacts of these items on our net income and diluted earnings per share are illustrated in the table below.

In addition, our 2010 diluted earnings per share amounts reflect a significant increase in the number of weighted average common shares used in our computation of diluted earnings per share as discussed below and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability.”

The adjusted net income and diluted earnings per share amounts in the table below are non-GAAP financial measures and should not be considered a substitute for any performance measure determined in accordance with U.S. GAAP. Additional information regarding the use of non-GAAP financial measures and their limitations is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Description of Adjustments and Reconciliation of U.S. GAAP to Non-GAAP Financial Measures

										Diluted Earnings
	Pre-Tax			Income Tax						Per Common
	Amount			Effect			Net Income			Share
Three Months Ended September 30, 2010
U.S. GAAP	$	85,781		$	(29,729	)	$	56,052		$	0.43
Grifols merger-related expenses	9,485			(3,680		)	5,805			0.05
Excluding merger-related items	$	95,266		$	(33,409	)	$	61,857		$	0.48

Three Months Ended September 30, 2009
U.S. GAAP	$	49,935		$	(14,125	)	$	35,810		$	0.38
CSL merger-related expenses	1,528			(593		)	935			0.01
Excluding merger-related items	$	51,463		$	(14,718	)	$	36,745		$	0.39

As adjusted for pro forma weighted average number of shares (1)										$	0.29

Nine Months Ended September 30, 2010
U.S. GAAP	$	230,157		$	(81,143	)	$	149,014		$	1.16
Grifols merger-related expenses	17,908			(6,948		)	10,960			0.08
Excluding merger-related items	$	248,065		$	(88,091	)	$	159,974		$	1.24

Nine Months Ended September 30, 2009
U.S. GAAP	$	227,431		$	(74,914	)	$	152,517		$	1.62
CSL merger termination fee	(75,000		)	26,250			(48,750		)	(0.52		)
CSL merger-related expenses	14,282			(5,541		)	8,741			0.10
Excluding merger-related items	$	166,713		$	(54,205	)	$	112,508		$	1.20

As adjusted for pro forma weighted average number of shares (1)										$	0.90

(1) As discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability,” we believe the comparability of our diluted earnings per share between the periods

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presented is enhanced by the use of an adjusted share base to reflect the impact for the issuance of common shares to convert our Series A and B preferred stock, settle accrued dividends on the preferred stock, and complete our IPO as if these events occurred at the beginning of 2009.

· Operating cash flows were $152.5 million and $198.7 million for the nine months ended September 30, 2010 and 2009, respectively. Capital expenditures were $91.7 million and $36.3 million for the nine months ended September 30, 2010 and 2009, respectively. Operating cash flows for the 2009 period included the impact of the CSL merger termination fee.

2010 Third Quarter and Subsequent Business Highlights

· On October 13, 2010, we received approval from the FDA for Gamunex® -C (Immune Globulin Injection [Human], 10% Caprylate/Chromatography Purified) for subcutaneous administration in the treatment of primary immunodeficiency (PI). Gamunex-C is the first and only immune globulin to provide both the intravenous route of administration and a new subcutaneous route of administration. The intravenous delivery mode is approved to treat PI, chronic inflammatory demyelinating polyneuropathy (CIDP), and idiopathic thrombocytopenic purpura (ITP). The subcutaneous mode is approved to treat only PI.

· In September 2010, we launched our next generation A1PI product, Prolastin-C, in Canada. We anticipate full conversion of existing Canadian Prolastin A1PI patients to Prolastin-C A1PI during the 2010 fourth quarter.

· During the third quarter of 2010, TPR received FDA licensure for two additional plasma collection centers. Subsequent to September 30, 2010, TPR received FDA licensure for one additional center. Of our 69 operating plasma collection centers, 67 have been licensed by the FDA.

HEALTHCARE REFORM

In March 2010, healthcare reform legislation was enacted in the U.S. This legislation contains several provisions that impact our business.

Although many provisions of the new legislation do not take effect immediately, several provisions became effective during 2010. These include (1) an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% of the Average Manufacturer Price (AMP) on our branded prescription drugs, with a limitation of this increase on clotting factors to 17.1% of AMP; (2) the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries; and (3) the expansion of the 340B Public Health Services drug pricing program, which provides hospital outpatient drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers. We do not believe that these new provisions will have a material impact on our 2010 financial results.

Beginning in 2011, the new law requires that drug manufacturers provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (commonly called the “donut hole”). Also, beginning in 2011, we will be assessed our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare, Medicaid and VA and PHS discount programs) made during the previous year. The aggregated industry wide fee is expected to range from $2.5 billion to $4.1 billion annually between 2011 and 2018 and remain at $2.8 billion in 2019 and subsequent years.

Beginning in 2012, the new law may require us to issue Internal Revenue Service Forms 1099 to plasma donors whose remuneration exceeds six hundred dollars. The cost of implementing this requirement, as well as its potential impact on plasma donations, are unknown at this time.

Presently, uncertainty exists as many of the specific determinations will be developed as regulatory bodies interpret the law and enact new regulations. For example, determinations as to how the Medicare Part D coverage gap will operate and how the annual fee on branded prescription drugs will be calculated and allocated remain to be clarified. As noted above, these programs will become effective in 2011.

CUSTOMER CONCENTRATION

Our accounts receivable, net, includes amounts due from pharmaceutical wholesalers and distributors, buying groups,

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hospitals, physicians’ offices, patients, and others. Our concentrations with customers that represented more than 10% of our accounts receivable, net were:

· At September 30, 2010: Amerisource Bergen- 13.3%; FFF Enterprise, Inc.- 12.2%

· At December 31, 2009: FFF Enterprise, Inc.- 14.6%

The following table summarizes our concentrations with customers that represented more than 10% of our total net revenue:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
FFF Enterprise Inc.	12.4	%	13.8	%	14.0	%	14.1	%
Amerisource Bergen	15.6	%	12.1	%	13.9	%	12.8	%

In the event that any of these customers were to suffer an adverse downturn in their business or a downturn in their supply needs, our business could be materially adversely affected.

BASIS OF PRESENTATION

Our consolidated financial statements include the accounts of Talecris Biotherapeutics Holdings Corp. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation. The effects of business acquisitions have been included in our consolidated financial statements from their respective date of acquisition.

The comparability of our financial results is impacted by significant events and transactions during the periods presented as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures of contingent assets and liabilities. A detailed description of our significant accounting policies is included in the footnotes to our audited consolidated financial statements included in our 2009 Form 10-K.

There have been no significant changes in our application of our critical accounting policies and estimates during the nine months ended September 30, 2010 as compared to the prior year. We periodically review our critical accounting policies and estimates with the audit committee of our board of directors.

Gross-to-Net Revenue Adjustments

The following table summarizes our gross-to-net revenue adjustments expressed in dollars and percentages:

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	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Gross product revenue	$	422,357		$	412,006		$	1,238,352		$	1,188,010
Chargebacks	(7,596		)	(7,809		)	(21,910		)	(18,488		)
Cash discounts	(5,194		)	(5,013		)	(15,162		)	(14,113		)
Rebates and other	(9,006		)	(11,286		)	(29,002		)	(32,532		)
Product net revenue	$	400,561		$	387,898		$	1,172,278		$	1,122,877

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Gross product revenue	100.0	%	100.0	%	100.0	%	100.0	%
Chargebacks	(1.8	)%	(1.9	)%	(1.8	)%	(1.6	)%
Cash discounts	(1.2	)%	(1.2	)%	(1.2	)%	(1.2	)%
Rebates and other	(2.1	)%	(2.7	)%	(2.3	)%	(2.7	)%
Product net revenue	94.9	%	94.2	%	94.7	%	94.5	%

The following table provides a summary of activity with respect to our allowances:

				Cash			Rebates and
	Chargebacks			Discounts			Other			Total
Balance at December 31, 2009	$	4,262		$	1,274		$	26,427		$	31,963
Provision	21,910			15,162			28,643			65,715
Credits issued	(22,270		)	(14,542		)	(29,002		)	(65,814		)
Balance at September 30, 2010	$	3,902		$	1,894		$	26,068		$	31,864

As discussed elsewhere in this Quarterly Report, the recently enacted healthcare reform legislation increased the size of Medicaid rebates paid by drug manufacturers from 15.1% to 23.1% of the AMP, with a limitation of this increase on clotting factors to 17.1% of the AMP. The increase in the provisions for chargebacks during the nine months ended September 30, 2010 as compared to the same prior year period was largely due to increased sales related to government contracts. Rebates and other was also impacted by the reduction of channel inventories during the three and nine months ended September 30, 2010.

MATTERS AFFECTING COMPARABILITY

We believe that the comparability of our financial results between the periods presented is significantly impacted by the following items:

Definitive Merger Agreement with Grifols

We have entered into agreements with investment bankers related to our definitive merger agreement with Grifols. We incurred fees totaling $2.5 million under these agreements during 2010 and are obligated to pay additional fees totaling $21.3 million upon successful closing of the merger transaction. During the three and nine months ended September 30, 2010, we also incurred legal, accounting, and other fees of $5.7 million and $11.6 million, respectively, associated with the definitive merger agreement.

Under the terms of the definitive merger agreement with Grifols, we are permitted to offer retention amounts up to a total of $15.0 million to employees. As of September 30, 2010, we have offered retention amounts totaling approximately $10.3 million to employees, of which $2.9 million was paid during the three months ended September 30, 2010 and the remaining amounts are expected to be paid in 2011, subject to the terms of the retention agreements. We incurred retention expenses, including fringe benefits, of $3.7 million during the three months ended September 30, 2010. The remaining retention amounts will likely be recognized ratably through the second quarter of 2011.

Financial Impact of IPO and Refinancing Transactions

As discussed in our 2009 Form 10-K, we completed our IPO and refinancing transactions during the fourth quarter of 2009, which has resulted in lower average borrowings during the three and nine months ended September 30, 2010 as compared to the three and nine months ended September 30, 2009, and correspondingly lower interest expense during the 2010 periods. For the three months ended September 30, 2010 and 2009, our interest expense was $12.0 million and $19.0 million, respectively, and for the nine months ended September 30, 2010 and 2009, our interest expense was $35.9 million and $59.5 million, respectively.

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Comparability of Outstanding Common Shares and Pro Forma Diluted Earnings Per Common Share

As discussed in our 2009 Form 10-K, we completed our IPO and refinancing transactions during the fourth quarter of 2009. Our IPO consisted of 56,000,000 shares of our common stock of which 28,947,368 shares were newly issued and sold by us and 27,052,632 shares were sold by the selling stockholder, Talecris Holdings, LLC. We used the net primary proceeds to us of $519.7 million to repay amounts outstanding under our then existing First and Second Lien Term Loans. In connection with our IPO, we also converted 1,000,000 shares of our Series A preferred stock and 192,310 shares of our Series B preferred stock into 85,846,320 shares of our common stock and issued 2,381,548 shares of our common stock to settle $45.3 million of accrued dividends upon the conversion of our Series A and B preferred stock. The issuance of new common shares has resulted in a significant increase in the number of common shares used in our computation of diluted earnings per common share. The application of the net primary proceeds to us from our IPO to repay our then existing indebtedness has resulted in a significant reduction in interest expense during the three and nine months ended September 30, 2010 as compared to the prior year periods.

We believe that the comparability of our financial results for the periods presented is enhanced by the following pro forma presentation of our diluted earnings per common share. In the tables below, the pro forma diluted earnings per common share computations for the three and nine months ended September 30, 2009 reflect an adjustment to net income for reduced interest expense as if the net primary proceeds to us from our IPO of $519.7 million had been applied to repay our debt at the beginning of 2009, net of interest rate differences from our 7.75% Notes issuance. The pro forma adjustment to the denominator reflects the impacts for the issuance of common shares to convert preferred stock, settle accrued dividends on the preferred stock, and complete the IPO as if these events occurred at the beginning of 2009.

	Three Months Ended September 30,
	2010		2009		2009
	Actual		Actual		Pro forma

Net income	$	56,052	$	35,810	$	35,810
Interest expense reduction due to debt repayment	—		—		1,966
Numerator	$	56,052	$	35,810	$	37,776

Weighted average common shares outstanding	123,668,072		2,647,178		2,647,178
Adjustments:
Stock options and restricted shares	5,266,418		6,350,815		6,350,815
Series A preferred stock	—		71,217,391		71,217,391
Series B preferred stock	—		13,695,817		13,695,817
Shares issued for preferred stock dividend	—		—		2,355,662
Newly issued shares for IPO	—		—		28,947,368
Dilutive potential common shares	128,934,490		93,911,201		125,214,231

Diluted net income per common share	$	0.43	$	0.38	$	0.30

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	Nine Months Ended September 30,
	2010		2009		2009
	Actual		Actual		Pro forma

Net income	$	149,014	$	152,517	$	152,517
Interest expense reduction due to debt repayment	—		—		5,833
Numerator	$	149,014	$	152,517	$	158,350

Weighted average common shares outstanding	122,669,724		1,847,235		1,847,235
Adjustments:
Stock options and restricted shares	5,844,003		6,540,453		6,540,453
Series A preferred stock	—		71,736,264		71,736,264
Series B preferred stock	—		13,795,601		13,795,601
Shares issued for preferred stock dividend	—		—		2,372,824
Newly issued shares for IPO	—		—		28,947,368
Dilutive potential common shares	128,513,727		93,919,553		125,239,745

Diluted net income per common share	$	1.16	$	1.62	$	1.26

Definitive Merger Agreement with CSL

We entered into a definitive merger agreement with CSL on August 12, 2008, which was subject to the receipt of certain regulatory approvals as well as other customary conditions. The U.S. Federal Trade Commission filed an administrative complaint before the Commission challenging the merger and a complaint in Federal district court seeking to enjoin the merger during the administrative process. On June 8, 2009, the merger parties agreed to terminate the definitive merger agreement, and as a result, CSL paid us a merger termination fee of $75.0 million during the 2009 second quarter. The U.S. Federal Trade Commission’s complaints were subsequently dismissed. We incurred retention expense, including fringe benefits, of $1.6 million and $8.3 million for the three and nine months ended September 30, 2009, respectively, and legal costs associated with the regulatory review process of $6.0 million during the nine months ended September 30, 2009. All retention amounts were paid during 2009.

Unabsorbed TPR Infrastructure and Start-Up Costs

Our cost of goods sold includes $1.5 million and $8.7 million for the three months ended September 30, 2010 and 2009, respectively, and $5.2 million and $34.1 million for the nine months ended September 30, 2010 and 2009, respectively, related to unabsorbed TPR infrastructure and start-up costs associated with the development of our plasma collection center platform. The reduction in unabsorbed TPR infrastructure and start-up costs resulted primarily from the maturation of our plasma collection center platform. We believe we have substantially eliminated unabsorbed TPR infrastructure and start-up costs and as a result, we expect that the TPR excess period costs will continue to decline in 2010 as compared to prior periods.

Share-Based Compensation Awards

We have long-term incentive plans, which provide for the grant of awards in the form of incentive stock options, non-qualified stock options, share appreciation rights, restricted stock, restricted stock units (RSU’s), unrestricted shares of common stock, deferred share units, and performance share units (PSU’s), to eligible employees, directors, and consultants.

Share-based compensation expense for the three and nine months ended September 30, 2010 and 2009 was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
SG&A	$	2,530	$	17,929	$	10,480	$	34,379
R&D	181		513		896		1,692
Cost of goods sold	908		1,012		2,827		3,554
Total expense	$	3,619	$	19,454	$	14,203	$	39,625

Capitalized in inventory	$	483	$	868	$	1,928	$	2,874

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The decrease in share-based compensation expense during 2010 was primarily driven by the final vesting of awards under the 2005 Stock Option and Incentive Plan on April 1, 2010 and the majority of the awards under our 2006 Restricted Stock Plan on March 31, 2010. In addition, a combination of an adjustment during the 2010 first quarter as a result of actual award forfeitures being higher than initially estimated as well as the acceleration of certain option awards to our Chairman and Chief Executive Officer during the 2009 third quarter further impacted the comparability of share-based compensation expense between the 2010 and 2009 periods.

The following table summarizes the remaining unrecognized compensation cost related to our share-based compensation program as of September 30, 2010 and the weighted-average period over which the non-cash compensation cost is expected to be recognized:

			Weighted-
	Unrecognized		Average
	Compensation		Period
	Cost		(Years)
Stock options	$	4,523	2.35
Restricted share awards	2,163		0.50
RSU’s	7,298		2.41
PSU’s	3,894		2.50
Total	$	17,878

RESULTS OF OPERATIONS

We have included information regarding our results of operations in the following table. The subsequent discussion provides an analysis of our results of operations for the three and nine months ended September 30, 2010 as compared to the three and nine months ended September 30, 2009.

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	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net revenue:
Product	$	400,561		$	387,898		$	1,172,278		$	1,122,877
Other	6,440			7,833			18,510			20,219
Total	407,001			395,731			1,190,788			1,143,096
Cost of goods sold	229,908			230,666			670,476			663,875

Gross profit	177,093			165,065			520,312			479,221

Operating expenses:
SG&A	61,383			79,488			205,007			213,913
R&D	18,673			16,167			50,832			51,728
Total	80,056			95,655			255,839			265,641

Income from operations	97,037			69,410			264,473			213,580

Other non-operating (expense) income:
Interest expense, net	(11,529		)	(19,587		)	(34,915		)	(61,445		)
Merger termination fee	—			—			—			75,000
Equity in earnings of affiliate	273			112			599			296
Total	(11,256		)	(19,475		)	(34,316		)	13,851

Income before income taxes	85,781			49,935			230,157			227,431

Provision for income taxes	(29,729		)	(14,125		)	(81,143		)	(74,914		)

Net income	$	56,052		$	35,810		$	149,014		$	152,517

Earnings per common share:
Basic	$	0.45		$	12.01		$	1.21		$	76.21
Diluted	$	0.43		$	0.38		$	1.16		$	1.62

Financial measures:
Gross margin	43.5		%	41.7		%	43.7		%	41.9		%
Operating margin	23.8		%	17.5		%	22.2		%	18.7		%
Effective income tax rate	34.7		%	28.3		%	35.3		%	32.9		%

Three Months Ended September 30, 2010 as Compared to Three Months Ended September 30, 2009

The following discussion and analysis contains information regarding our results of operations for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009:

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	Three Months Ended
	September 30,						Change
	2010			2009			$			%
Net revenue:
Product	$	400,561		$	387,898		$	12,663		3.3	%
Other	6,440			7,833			(1,393		)	(17.8	)%
Total	407,001			395,731			11,270			2.8	%
Cost of goods sold	229,908			230,666			758			0.3	%

Gross profit	177,093			165,065			12,028			7.3	%
Operating expenses:
SG&A	61,383			79,488			18,105			22.8	%
R&D	18,673			16,167			(2,506		)	(15.5	)%
Total	80,056			95,655			15,599			16.3	%

Income from operations	97,037			69,410			27,627			39.8	%
Other non-operating (expense) income:
Interest expense, net	(11,529		)	(19,587		)	8,058			41.1	%
Equity in earnings of affiliate	273			112			161			143.8	%
Total	(11,256		)	(19,475		)	8,219			42.2	%

Income before income taxes	85,781			49,935			35,846			71.8	%
Provision for income taxes	(29,729		)	(14,125		)	(15,604		)	(110.5	)%

Net income	$	56,052		$	35,810		$	20,242		56.5	%

Earnings per common share:
Basic	$	0.45		$	12.01		$	(11.56	)	(96.3	)%
Diluted	$	0.43		$	0.38		$	0.05		13.2	%

Financial measures:
Gross profit margin	43.5		%	41.7		%
Operating margin	23.8		%	17.5		%
Effective income tax rate	34.7		%	28.3		%

Net Revenue

The following table contains information regarding our net revenue:

	Three Months Ended
	September 30,				Change
	2010		2009		$			%
Product net revenue:
Gamunex IGIV	$	215,974	$	207,179	$	8,795		4.2	%
Prolastin A1PI	89,980		80,813		9,167			11.3	%
Fraction V (Albumin and Plasmanate)	17,822		22,846		(5,024		)	(22.0	)%
Factor VIII (Koate DVI)	16,488		11,288		5,200			46.1	%
Hyperimmunes	24,793		24,103		690			2.9	%
Other	35,504		41,669		(6,165		)	(14.8	)%
Total product net revenue	400,561		387,898		12,663			3.3	%
Other net revenue	6,440		7,833		(1,393		)	(17.8	)%
Total net revenue	$	407,001	$	395,731	$	11,270		2.8	%

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	Three Months Ended
	September 30,				Change
	2010		2009		$			%
U.S. product net revenue:
Gamunex IGIV	$	164,968	$	151,066	$	13,902		9.2	%
Prolastin A1PI	60,478		52,632		7,846			14.9	%
Factor V (Albumin and Plasmanate)	12,390		11,231		1,159			10.3	%
Factor VIII (Koate DVI)	4,418		3,414		1,004			29.4	%
Hyperimmunes	21,561		23,020		(1,459		)	(6.3	)%
Other product net revenue	16,126		18,707		(2,581		)	(13.8	)%
Total U.S. product net revenue	$	279,941	$	260,070	$	19,871		7.6	%

International product net revenue:
Gamunex IGIV	$	51,006	$	56,113	$	(5,107	)	(9.1	)%
Prolastin A1PI	29,502		28,181		1,321			4.7	%
Factor V (Albumin and Plasmanate)	5,432		11,615		(6,183		)	(53.2	)%
Factor VIII (Koate DVI)	12,070		7,874		4,196			53.3	%
Hyperimmunes	3,232		1,083		2,149			198.4	%
Other product net revenue	19,378		22,962		(3,584		)	(15.6	)%
Total international product net revenue	$	120,620	$	127,828	$	(7,208	)	(5.6	)%

Our product net revenue was $400.6 million and $387.9 million for the three months ended September 30, 2010 and 2009, respectively, representing an increase of $12.7 million, or 3.3%. The increase consisted of higher volumes of $13.1 million, partially offset by lower pricing of $0.4 million driven by the effects of unfavorable foreign exchange of $4.0 million.

The $8.8 million increase in our Gamunex net revenue was driven by higher volumes of $9.2 million. We experienced higher Gamunex volumes of $21.3 million in the U.S., Europe, and other international regions which were partially offset by lower volumes of $12.1 million in Canada. Our 2010 Canadian Gamunex volumes were negatively impacted by lower commercial sales to CBS as discussed below. We experienced competitive pressures in Europe during 2009, which negatively impacted our Gamunex volumes during the prior year period. U.S. and Canadian Gamunex pricing was higher by $2.6 million during the 2010 period as compared to the prior year period. The benefit of the higher pricing in the U.S. and Canada was offset by lower pricing of $3.0 million in Europe and other international regions resulting from country mix as well as competitive pressures, including unfavorable foreign exchange of $1.0 million. As indicated elsewhere in this Quarterly Report, the recently enacted healthcare reform legislation increased the size of the Medicaid rebates paid by drug manufacturers from 15.1% to 23.1% of the AMP. We have also experienced higher Medicaid utilization and GPO administrative fees during 2010. Although we have experienced a favorable pricing environment in prior periods largely as a result of supply constraints, we expect product pricing to be relatively flat given the current balance of supply and demand.

The $9.2 million increase in our Prolastin net revenue consisted of higher volumes of $7.9 million and improved pricing of $1.3 million, including the effects of unfavorable foreign exchange of $2.9 million. The increase in volumes was driven primarily by higher volumes of $7.7 million in Europe and the U.S. where we experienced net patient gains during 2010. Prolastin volumes are largely a function of our ability to identify and enroll new patients as compared to the number of patients lost due to attrition and competition. Our ability to grow our European volumes will also depend on our ability to obtain appropriate reimbursement on a country by country basis. The increase in pricing was driven by higher pricing of $4.6 million in the U.S. as a result of a price increase implemented during the 2010 third quarter. The benefit of the favorable pricing in the U.S. was partially offset by lower pricing in Europe primarily due to unfavorable foreign exchange.

Effective August 1, 2010, legislation was enacted in Germany to increase rebates paid by drug manufacturers from 6% to 16% in retail pharmacies, which impacts our Gamunex business. In addition, effective August 1, 2010, a price freeze on the basis of August 2009 prices became effective through 2013 for all products we sell in Germany.

Our Fraction V product category consists of albumin and Plasmanate, with albumin representing the majority of sales in the category. The $5.0 million decrease in our Fraction V net revenue consisted of lower volumes of $4.3 million and lower pricing of $0.7 million. We experienced lower Fraction V volumes of $6.8 million in other international regions due to opportunistic sales during 2009, which did not recur during 2010, partially offset by higher volumes of $2.5 million in the U.S., Canada, and Europe as a result of supply availability

The $5.2 million increase in Factor VIII (Koate DVI) net revenue was primarily driven by higher volumes of $6.0 million in

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other international regions due to supply availability and opportunistic sales, partially offset by lower pricing of $1.8 million in other international regions.

Our other product net revenue consists primarily of revenue related to our contract manufacturing agreements for IGIV and Fraction V with the two Canadian blood system operators, CBS and Hema Quebec, intermediate products, Thrombate III (human), and contracted PPF powder. The $6.2 million decrease in other product net revenue was driven by lower PPF powder sales of $4.1 million and lower intermediate product sales of $2.9 million, partially offset by higher Thrombate III sales of $1.5 million. Sales of our contracted PPF powder are expected to decline in accordance with the related agreement and intermediate product revenues are opportunistic and may be lower in subsequent periods.

Our ability to expand our international business has been hampered by the effects of our internal FCPA investigation and increased price sensitivities of our customers which has resulted in pricing pressures for plasma-derived products. Our business with Iran, one of our major international customers, has been in decline which is likely to continue. Our profitability has been, and may continue to, be negatively impacted by unfavorable euro/dollar exchange rates. We have experienced, and expect to continue to experience, annual volume declines in Canada due to CBS’ objective to have multiple sources of supply, which has impacted and will continue to impact our overall IGIV growth. CBS may further reduce volumes to contract minimums and Hema Quebec may adopt a similar strategy. The combination of these factors, among others, may reduce our near term global IGIV growth, relative to our prior expectations.

We are the primary supplier of Canadian IGIV under our five year contracts with CBS and Hema Quebec, which became effective April 1, 2008. These five year contracts provide for escalated pricing, based on inflation, for contract fractionation services and our commercial products, including Gamunex, Plasbumin, and certain hyperimmune products, effective April 1 of each year throughout the term of the agreements. We have experienced, and expect to continue to experience, annual volume declines in Canada as discussed above.

In the current IGIV market with reduced demand growth, we still anticipate that we will operate near to or at our fractionation capacity over the next few years depending upon the demand for our products, the availability of source plasma and the impact of variability in yield, among other factors. We plan to utilize most of our available fractionation capacity in the near term, which may result in increased inventory levels in order to maintain pace with projected future growth in product demand.

Cost of Goods Sold and Gross Profit

Our gross profit was $177.1 million and $165.1 million for the three months ended September 30, 2010 and 2009, respectively, representing gross margin of 43.5% and 41.7%, respectively. In general, our gross margin and cost of goods sold are impacted by the volume and pricing of our finished products, our raw material costs, production mix, yield, and cycle times, as well as our production capacities and normal production shut-downs, and the timing and amount of release of finished product.

Our cost of goods sold was $229.9 million, or 56.5% of net revenue, for the three months ended September 30, 2010, as compared to $230.7 million, or 58.3% of net revenue, for the three months ended September 30, 2009. Our cost of goods sold benefited from lower TPR unabsorbed infrastructure and start-up costs of $7.2 million during the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. Our cost of goods sold also benefited from lower costs of production of $9.5 million during the 2010 period primarily driven by production mix associated with the conversion to our next generation A1PI product, Prolastin-C A1PI, as well as source mix, and lower project spending of $0.9 million as compared to the 2009 period. During the 2010 and 2009 periods, our non-capitalizable project spending was $8.2 million and $9.1 million, respectively. We experienced higher costs of $6.5 million associated with increased volumes during the three months ended September 30, 2010 as compared to the same prior year period. Our cost of goods sold was negatively impacted by $17.5 million of inventory impairments during the three months ended September 30, 2010, an increase of $10.3 million compared to the same prior year period, primarily driven by higher provisions for work-in-process inventories.

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The largest component of our cost of goods sold is the cost of source plasma, which represented greater than 50% of our cost of goods sold for the periods presented. The overall cost of source plasma is impacted by the collection cost per liter, including donor fees, labor, soft goods, facility costs, testing, unabsorbed TPR infrastructure and start-up costs, the cost of plasma purchased from third parties, and variability in protein yields, among other factors. Our internal cost per liter of plasma, including unabsorbed TPR infrastructure and start-up costs, decreased 5.0% for the three months ended September 30, 2010, as compared to the same prior year period, primarily driven by lower unabsorbed TPR infrastructure and start-up costs and higher TPR plasma collections. Our acquisition cost per liter of third party plasma decreased 1.0% during the three months ended September 30, 2010 as compared to the same prior year period. Due to our long manufacturing cycle times, which range from 100 days to in excess of 400 days, the cost of plasma is not expensed through cost of goods sold until a significant period of time subsequent to its acquisition.

We believe that we have substantially eliminated unabsorbed TPR infrastructure and start-up costs. Consequently, future margin improvements will need to be derived from increases in product pricing and volumes, product mix, improvements in the cost per liter of plasma, manufacturing efficiencies, yield improvements or some combination thereof. We believe that the current environment does not favor near-term price increases and we have limited opportunities to enhance product mix. We have recently experienced and expect to continue to experience higher cost of goods sold due to yield variability, less efficient utilization of each incremental liter of plasma fractionated as we increase Gamunex production, and non-capitalizable costs associated with our capital projects, particularly the construction of our new fractionation facility.

The combination of the factors mentioned above, particularly the lower near-term demand growth, competitive pressures, slower than planned reductions in our cost per liter of plasma, and yield variability as well as inefficient plasma utilization, among other factors, will likely result in lower gross margins in future periods.

Operating Expenses

Our SG&A was $61.4 million and $79.5 million for the three months ended September 30, 2010 and 2009, respectively, a decrease of $18.1 million, or 22.8%. The decrease in SG&A was driven by lower share-based compensation expense of $15.4 million as discussed previously, the absence of retention expense of $1.0 million related to our terminated merger agreement with CSL, lower donations of $2.3 million, lower legal expenses of $2.7 million related to our internal FCPA investigation, and the absence of $2.0 million of management fees to Talecris Holdings LLC as a result of the termination of the management agreement at the time of our initial public offering. During the three months ended September 30, 2010, our SG&A included $7.4 million of favorable foreign exchange as compared to favorable foreign exchange of $3.1 million during the three months ended September 30, 2009. These items were partially offset by higher sales and marketing expenses of $5.3 million during the 2010 period as a result of our sales force expansion, marketing of our CIDP indication, Prolastin patient identification efforts, launch of Prolastin-C A1PI, as well as support for other products. In addition, within SG&A, we incurred transaction related expenses of $5.7 million and retention expenses within SG&A of $2.8 million related to our definitive merger agreement with Grifols.

SG&A in future periods will be impacted by additional Grifols merger related transaction expenses such as legal and accounting costs as well as retention expenses as discussed further in the section titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability,” included elsewhere in this Quarterly Report.

Our R&D was $18.7 million and $16.2 million for the three months ended September 30, 2010 and 2009, respectively. As a percentage of net revenue, R&D was 4.6% and 4.1% for the three months ended September 30, 2010 and 2009, respectively. R&D expenses are influenced by the timing of in-process projects and the nature and extent of expenses associated with these projects. Additional information regarding our research and development projects is included in our 2009 Form 10-K. There have been no significant changes to our new product candidates or life-cycle management projects since December 31, 2009, except that we have decided not to initiate an aerosol trial with plasma-derived Prolastin A1PI. We may resume development in the future of an aerosol formulation of A1PI if warranted with recombinant A1PI. The increase in R&D period over period was primarily driven by Plasmin aPAO Phase II start-up costs. We anticipate that R&D will increase in subsequent periods primarily as a result of increased Plasmin clinical trials related to aPAO and ischemic stroke.

Our operating margin improved 630 basis points to 23.8% for the three months ended September 30, 2010 as compared to 17.5% for the three months ended September 30, 2009.

Total Other Non-Operating Expense, net

The primary component of our other non-operating expense, net, is interest expense, which amounted to $12.0 million and

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$19.0 million for the three months ended September 30, 2010 and 2009, respectively. Our weighted average interest rates on our outstanding debt, excluding amortization of deferred debt issuance costs and debt discount, were 7.7% and 5.1% for the three months ended September 30, 2010 and 2009, respectively. The reduction in interest expense was driven by lower weighted average debt levels during the 2010 period. During the three months ended September 30, 2010 and 2009, we capitalized interest costs related to the construction of plant and equipment of $1.4 million and $0.6 million, respectively.

Provision for Income Taxes

For the three months ended September 30, 2010, our effective income tax rate is lower than the U.S. statutory Federal income tax rate of 35% primarily due to a deduction for domestic production activities which, pursuant to the Internal Revenue Code, increased to 9% of qualified production activities income for taxable years beginning in 2010 from 6% in 2009, and to tax credits for orphan drug clinical testing expenditures. The effective income tax rate for the three months ended September 30, 2010 also benefited from the recognition in the third quarter of higher orphan drug tax credits and domestic production activity deductions reported on the 2009 Federal tax return than estimated in the 2009 financial statements. These reductions are principally offset by state income tax expense.

For the three months ended September 30, 2009, our effective income tax rate is 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. These factors offset the effects of state taxes.

Following the completion of field work by the Internal Revenue Service examination team (IRS Exam) in connection with the audit of our 2005, 2006, and 2007 Federal income tax returns, the audit file was sent to the Joint Committee on Taxation (JCT) in accordance with requirements that the JCT review any refunds in excess of $2 million. The refund was attributable to additional tax credits for research and experimental expenditures and orphan drug expenditures claimed during the course of the audit. The JCT subsequently returned the audit file to the IRS Exam for additional fact finding. In lieu of engaging with the company in fact-finding efforts, IRS Exam issued a new audit report disallowing the tax credits for research and experimental expenditures and orphan drug clinical testing expenditures and issued a 30 Day Letter indicating that IRS Exam and the company could not reach agreement on the issue. The company has filed a timely protest to the adjustments proposed by IRS Exam and expects to favorably resolve this matter at the IRS Appeals level. We do not believe the outcome of this matter will have a material adverse impact on our consolidated financial condition or results of operations. It is reasonably possible that, within the next twelve months, we will resolve this matter with the IRS and JCT, which may increase or decrease the unrecognized tax benefits for all open tax years. The favorable resolution of this matter would increase earnings by approximately $4.7 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

Net Income

Our net income was $56.1 million and $35.8 million for the three months ended September 30, 2010 and 2009, respectively. The significant factors and events contributing to the change in our net income are discussed above.

Nine Months Ended September 30, 2010 as Compared to Nine Months Ended September 30, 2009

The following discussion and analysis contains information regarding our results of operations for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009:

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	Nine Months Ended
	September 30,						Change
	2010			2009			$			%
Net revenue:
Product	$	1,172,278		$	1,122,877		$	49,401		4.4	%
Other	18,510			20,219			(1,709		)	(8.5	)%
Total	1,190,788			1,143,096			47,692			4.2	%
Cost of goods sold	670,476			663,875			(6,601		)	(1.0	)%
Gross profit	520,312			479,221			41,091			8.6	%
Operating expenses:
SG&A	205,007			213,913			8,906			4.2	%
R&D	50,832			51,728			896			1.7	%
Total	255,839			265,641			9,802			3.7	%
Income from operations	264,473			213,580			50,893			23.8	%
Other non-operating (expense) income:
Interest expense, net	(34,915		)	(61,445		)	26,530			43.2	%
Merger termination fee	—			75,000			(75,000		)	100.0	%
Equity in earnings of affiliate	599			296			303			102.4	%
Total	(34,316		)	13,851			(48,167		)	347.8	%
Income before income taxes	230,157			227,431			2,726			1.2	%
Provision for income taxes	(81,143		)	(74,914		)	(6,229		)	(8.3	)%
Net income	$	149,014		$	152,517		$	(3,503	)	(2.3	)%

Earnings per common share:
Basic	$	1.21		$	76.21		$	(75.00	)	(98.4	)%
Diluted	$	1.16		$	1.62		$	(0.46	)	(28.4	)%

Financial measures:
Gross profit margin	43.7		%	41.9		%
Operating margin	22.2		%	18.7		%
Effective income tax rate	35.3		%	32.9		%

Net Revenue

The following table contains information regarding our net revenue:

	Nine Months Ended
	September 30,				Change
	2010		2009		$			%
Product net revenue:
Gamunex IGIV	$	642,693	$	618,637	$	24,056		3.9	%
Prolastin A1PI	258,149		230,193		27,956			12.1	%
Fraction V (Albumin and Plasmanate)	62,175		61,275		900			1.5	%
Factor VIII (Koate DVI)	40,304		31,465		8,839			28.1	%
Hyperimmunes	58,592		61,705		(3,113		)	(5.0	)%
Other	110,365		119,602		(9,237		)	(7.7	)%
Total product net revenue	1,172,278		1,122,877		49,401			4.4	%
Other net revenue	18,510		20,219		(1,709		)	(8.5	)%
Total net revenue	$	1,190,788	$	1,143,096	$	47,692		4.2	%

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	Nine Months Ended
	September 30,				Change
	2010		2009		$			%
U.S. product net revenue:
Gamunex IGIV	$	489,800	$	450,786	$	39,014		8.7	%
Prolastin A1PI	168,747		151,559		17,188			11.3	%
Factor V (Albumin and Plasmanate)	39,445		32,547		6,898			21.2	%
Factor VIII (Koate DVI)	12,629		9,072		3,557			39.2	%
Hyperimmunes	45,588		51,720		(6,132		)	(11.9	)%
Other product net revenue	49,531		50,237		(706		)	(1.4	)%
Total U.S. product net revenue	$	805,740	$	745,921	$	59,819		8.0	%

International product net revenue
Gamunex IGIV	$	152,893	$	167,851	$	(14,958	)	(8.9	)%
Prolastin A1PI	89,402		78,634		10,768			13.7	%
Factor V (Albumin and Plasmanate)	22,730		28,728		(5,998		)	(20.9	)%
Factor VIII (Koate DVI)	27,675		22,393		5,282			23.6	%
Hyperimmunes	13,004		9,985		3,019			30.2	%
Other product net revenue	60,834		69,365		(8,531		)	(12.3	)%
Total international product net revenue	$	366,538	$	376,956	$	(10,418	)	(2.8	)%

Our product net revenue was $1,172.3 million and $1,122.9 million for the nine months ended September 30, 2010 and 2009, respectively, representing an increase of $49.4 million, or 4.4%. The increase consisted of higher volumes of $41.8 million and improved pricing of $7.6 million, including the effects of unfavorable foreign exchange of $3.6 million.

The $24.1 million increase in our Gamunex net revenue consisted of higher volumes of $27.4 million, partially offset by lower pricing of $3.3 million, including the effects of unfavorable foreign exchange of $1.0 million. We experienced higher Gamunex volumes of $51.6 million in the U.S. and Europe, which were partially offset by lower volumes of $24.2 million in Canada and other international regions. We experienced competitive pressures in Europe during 2009, which negatively impacted our Gamunex volumes during the prior year period. Our 2010 Canadian volumes were negatively impacted by lower commercial sales to CBS as a result of their multi-source strategy as discussed above. Our 2010 Gamunex volumes in other international regions were negatively impacted by competitive pressures, our ongoing internal investigation related to potential FCPA violations and tensions with Iran, which are discussed elsewhere in this Quarterly Report. We experienced lower pricing of $7.4 million in Europe and other international regions resulting from country mix as well as competitive pressures, partially offset by higher pricing of $4.1 million in the U.S. and Canada. Europe pricing included the effects of unfavorable foreign exchange of $1.0 million. Canadian pricing benefited from the annual price escalation, effective April 1, associated with our commercial contracts with CBS and Hema Quebec. As indicated elsewhere in this Quarterly Report, the recently enacted healthcare reform legislation increased the size of the Medicaid rebates paid by drug manufacturers from 15.1% to 23.1% of the AMP. We have also experienced higher Medicaid utilization and GPO administrative fees during 2010. Although we have experienced a favorable pricing environment in prior periods largely as a result of supply constraints, we expect pricing to be relatively flat given the current balance of supply and demand.

The $28.0 million increase in our Prolastin net revenue consisted of higher volumes of $19.3 million and improved pricing of $8.7 million, including $2.7 million of unfavorable foreign exchange. The increase in volumes was driven by higher volumes of $18.7 million in Europe and the U.S., where we experienced net patient gains during 2010. The increase in pricing was driven by higher pricing of $12.8 million in the U.S. and Canada, partially offset by lower pricing in Europe as a result of the effects of unfavorable foreign exchange. Our U.S. pricing was favorably impacted by price increases implemented in both the third quarter of 2010 and 2009. Our 2009 Canadian pricing was impacted by a negative pricing adjustment of $2.3 million during the 2009 first quarter related to a pricing dispute. Prolastin volumes are largely a function of our ability to identify and enroll new patients as compared to the number of patients lost due to attrition and competition. Our ability to grow our European volumes will also depend on our ability to obtain appropriate reimbursement on a country-by-country basis.

Our Fraction V product category consists of albumin and Plasmanate, with albumin representing the majority of sales in the category. The $0.9 million increase in Fraction V net revenues was driven by higher revenues of $10.1 million in the U.S., Canada, and Europe, partially offset by lower revenues of $9.2 million in other international regions. The reduction in revenues in other international regions resulted from opportunistic sales during 2009, which did not recur during 2010.

The $8.8 million increase in Factor VIII (Koate DVI) net revenue was driven by higher volumes of $12.3 million in the U.S. and other international regions as a result of supply availability and opportunistic sales. The benefit of the higher volumes was

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partially offset by lower pricing of $3.5 million, primarily due to country mix in other international regions. The $3.1 million decrease in hyperimmune revenue was driven by lower volumes of $10.3 million in the U.S. due to a customer systems issue, partially offset by higher U.S. pricing of $4.2 million and increased sales of $3.0 million in Canada and other international regions.

Our other product net revenue consists primarily of revenue related to our contract manufacturing agreements for IGIV and Fraction V with the two Canadian blood system operators, CBS and Hema Quebec, intermediate products, Thrombate III (human), and contracted PPF powder. The $9.2 million decrease in our other product net revenue was primarily driven by lower contract manufacturing IGIV and Fraction V volumes of $5.9 million due to CBS’ multi-source strategy as well as lower intermediate product sales of $2.8 million and lower PPF powder sales of $4.6 million, partially offset by higher Thrombate III sales of $3.5 million. Sales of our contracted PPF powder are expected to continue to decline in accordance with the related agreement and intermediate product revenues are opportunistic and may be lower in subsequent periods.

Additional information regarding our revenue expectations for the remainder of 2010 is included in our quarter over quarter discussion and analysis and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview,” included elsewhere in this Quarterly Report.

Cost of Goods Sold and Gross Profit

Our gross profit was $520.3 million and $479.2 million for the nine months ended September 30, 2010 and 2009, respectively, representing gross margin of 43.7% and 41.9%, respectively. In general, our gross margin and cost of goods sold are impacted by the volume and pricing of our finished products, our raw material costs, production mix, yield, and cycle times, as well as our production capacities and normal production shut-downs, and the timing and amount of release of finished product.

Our cost of goods sold was $670.5 million, or 56.3% of net revenue, for the nine months ended September 30, 2010, as compared to $663.9 million, or 58.1% of net revenue, for the nine months ended September 30, 2009. Our cost of goods sold benefited from lower TPR unabsorbed infrastructure and start-up costs of $28.9 million during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. Our cost of goods sold also benefited from lower costs of production of $18.0 million during the 2010 period primarily driven by production mix associated with the conversion to our next generation A1PI product, Prolastin-C A1PI, as well as source mix. Our cost of goods sold was negatively impacted by $40.4 million of inventory impairments during the nine months ended September 30, 2010, an increase of $17.1 million compared to the same prior year period, primarily driven by higher provisions for work in process inventories. Project spending during the nine months ended September 30, 2010 was $31.2 million as compared to $22.2 million during the same prior year period, driven by spending related to our new fractionation facility, Koate reengineering, and Thrombate III projects. We experienced higher costs of $27.4 million associated with increased volumes during the nine months ended September 30, 2010 as compared to the same prior year period.

The largest component of our cost of goods sold is the cost of source plasma, which represented greater than 50% of our cost of goods sold for the periods presented. The overall cost of source plasma is impacted by the collection cost per liter, including donor fees, labor, soft goods, facility costs, testing, unabsorbed TPR infrastructure and start-up costs, the cost of plasma purchased from third parties, and variability in protein yields, among other factors. Our internal cost per liter of plasma, including unabsorbed TPR infrastructure and start-up costs decreased 4.1% for the nine months ended September 30, 2010 as compared to the same prior year period, primarily driven by lower unabsorbed TPR infrastructure and start-up costs and higher TPR plasma collections. Our acquisition cost per liter of third party plasma decreased 1.3% during the nine months ended September 30, 2010 as compared to the same prior year period. Due to our long manufacturing cycle times, which range from 100 days to in excess of 400 days, the cost of plasma is not expensed through cost of goods sold until a significant period of time subsequent to its acquisition.

Additional information regarding our gross margin expectations for the remainder of 2010 is included in our quarter over quarter discussion and analysis and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview,” included elsewhere in this Quarterly Report.

Operating Expenses

Our SG&A was $205.0 million and $213.9 million for the nine months ended September 30, 2010 and 2009, respectively, a decrease of $8.9 million, or 4.2%. The decrease in SG&A was driven by lower share-based compensation expense of $23.9 million as discussed previously, the absence of $11.0 million of legal and retention expenses related to our terminated merger agreement with CSL, lower donations of $8.2 million, lower legal expenses of $2.5 million related to our internal FCPA investigation, and the absence of $5.7 million of management fees to Talecris Holdings LLC as a result of the termination of the management agreement at the time of our initial public offering. These items were partially offset by higher sales and marketing expenses of $16.0 million during the

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2010 period as a result of our sales force expansion, marketing of our CIDP indication, Prolastin patient identification efforts, launch of Prolastin-C A1PI, as well as support for other products. In addition, we incurred transaction related expenses of $14.1 million and retention expenses within SG&A of $2.8 million related to our definitive merger agreement with Grifols. During the nine months ended September 30, 2010, our SG&A included $2.9 million of unfavorable foreign exchange as compared to favorable foreign exchange of $3.3 million during the same prior year period. As compared to the nine months ended September 30, 2009, our 2010 SG&A also reflects incremental new public company expenses.

Our R&D was $50.8 million and $51.7 million for the nine months ended September 30, 2010 and 2009, respectively. As a percentage of net revenue, R&D was 4.3% and 4.5% for the nine months ended September 30, 2010 and 2009, respectively. R&D expenses are influenced by the timing of in-process projects and the nature and extent of expenses associated with these projects. Additional information regarding our research and development projects is included in our 2009 Form 10-K. There have been no significant changes to our new product candidates or life-cycle management projects since December 31, 2009, except that we have decided not to initiate an aerosol trial with plasma-derived Prolastin A1PI. We may resume development in the future of an aerosol formulation of A1PI if warranted with recombinant A1PI. We anticipate that R&D will increase in subsequent periods primarily as a result of increased Plasmin clinical trials related to aPAO and ischemic stroke.

Our operating margin increased 350 basis points to 22.2% for the nine months ended September 30, 2010 as compared to 18.7% for the nine months ended September 30, 2009.

Total Other Non-Operating (Expense) Income, net

The primary recurring component of our other non-operating (expense) income, net, is interest expense, which amounted to $35.9 million and $59.5 million for the nine months ended September 30, 2010 and 2009, respectively. The reduction in interest expense was driven by lower weighted average debt levels during the 2010 period. Our weighted average interest rates on our outstanding debt, excluding amortization of deferred debt issuance costs and debt discount, were 7.8% and 5.4% for the nine months ended September 30, 2010 and 2009, respectively. During the nine months ended September 30, 2010 and 2009, we capitalized interest costs related to the construction of plant and equipment of $3.7 million and $1.4 million, respectively.

Our total other non-operating income, net, for the nine months ended September 30, 2009 includes the CSL merger termination fee of $75.0 million as discussed previously.

Provision for Income Taxes

Our income tax provision was $81.1 million and $74.9 million for the nine months ended September 30, 2010 and 2009, respectively, resulting in effective income tax rates of 35.3% and 32.9%, respectively.

For the nine months ended September 30, 2010, our effective income tax rate is higher than the U.S. statutory Federal income tax rate, primarily due to the requirement for income tax purposes to capitalize transaction costs related to our definitive merger agreement with Grifols and the effects of state taxes. These items were partially offset by the increased deduction allowed with respect to domestic production activities and tax credits for orphan drug clinical testing expenditures and a benefit recognized in the third quarter from higher orphan drug tax credits and domestic production activity deductions reported on the 2009 Federal tax return than estimated in the 2009 financial statements.

For the nine months ended September 30, 2009, our effective income tax rate is 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. These factors offset the effects of state taxes.

Net Income

Our net income was $149.0 million and $152.5 million (including the CSL merger termination fee, net of tax, of $48.8 million) for the nine months ended September 30, 2010 and 2009, respectively. The significant factors and events contributing to the

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change in our net income are discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Analysis

The following table and subsequent discussion and analysis contain information regarding our cash flows for the nine months ended September 30, 2010 and 2009:

	Nine Months Ended
	September 30,
	2010			2009
Operating activities:
Net income	$	149,014		$	152,517
Non-cash items	63,970			79,857
Changes in operating assets and liabilities, excluding the effects of business acquisitions	(60,464		)	(33,650		)
Net cash provided by operating activities	$	152,520		$	198,724

Investing activities:
Purchases of property, plant, and equipment	$	(91,691	)	$	(36,291	)
Business acquisitions, net of cash acquired	—			(27,113		)
Other	507			634
Net cash used in investing activities	$	(91,184	)	$	(62,770	)

Financing activities:
Repayments under Revolving Credit Facility, net	$	—		$	(112,097	)
Repayments of borrowings under term loan	—			(5,250		)
Repayments of capital lease obligations	(553		)	(407		)
Financing transaction costs	(394		)	—
Proceeds from exercises of stock options	19,251			—
Excess tax benefits from share-based payment arrangements	10,836			1,437
Repurchases of common stock from employees	(4,917		)	(4,132		)
Net cash provided by (used in) financing activities	$	24,223		$	(120,449	)

At September 30, 2010, our cash and cash equivalents totaled $150.5 million. We use our available cash balances to repay amounts outstanding under our Revolving Credit Facility. We deposit any excess cash amounts into an overnight investment account. At September 30, 2010, we had unused available borrowing capacity of $322.6 million under our Revolving Credit Facility.

We have financed our operations through a combination of equity funding and debt financing, and through internally generated funds. We expect our cash flows from operations combined with our cash balances and availability of our Revolving Credit Facility to provide sufficient liquidity to fund our current obligations, projected working capital requirements, and capital expenditures for at least the next twelve months.

Cash Flows from Operating Activities

We generated net cash flows from operating activities of $152.5 million for the nine months ended September 30, 2010 as compared to $198.7 million for the nine months ended September 30, 2009. Our net income was $149.0 million and $152.5 million for the nine months ended September 30, 2010 and 2009, respectively. The net cash generated from our operating activities during the nine months ended September 30, 2009 includes the $75.0 million (approximately $48.8 million after tax) payment we received from CSL as a result of the termination of the definitive merger agreement.

Our non-cash operating items were $64.0 million and $79.9 million for the nine months ended September 30, 2010 and 2009, respectively. The following significant non-cash items impacted the comparability of the net cash provided by our operating activities during the periods presented.

· Our depreciation and amortization expense for the nine months ended September 30, 2010 and 2009 was $26.5 million and $21.4 million, respectively. The increase in depreciation and amortization expense reflects our cumulative capital investments, primarily related to our manufacturing facilities and TPR.

· Our share-based compensation expense for the nine months ended September 30, 2010 and 2009 was $14.2 million and

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$39.6 million, respectively. The decrease in share-based compensation expense during 2010 was primarily driven by the final vesting of awards under the 2005 Stock Option and Incentive Plan on April 1, 2010 and the majority of the awards under the 2006 Restricted Stock Plan on March 31, 2010. In addition, a combination of an adjustment during the 2010 first quarter as a result of actual award forfeitures being higher than initially estimated as well as the acceleration of certain option awards to our Chairman and Chief Executive Officer during the 2009 third quarter further impacted the comparability of share-based compensation expense between the two periods.

· Amortization of deferred compensation related to special recognition bonus awards was $1.9 million and $4.4 million for the nine months ended September 30, 2010 and 2009, respectively. We made the final special recognition bonus award payments during March 2010.

· During the nine months ended September 30, 2010 and 2009, our deferred income taxes decreased $26.0 million and $8.4 million, respectively. During the nine months ended September 30, 2010 and 2009, we recognized excess tax benefits related to share-based compensation of $10.8 million and $1.4 million, respectively. The decrease in the deferred tax asset during the 2010 period is primarily driven by the effects of stock option exercises.

The changes in our operating assets and liabilities, net of effects from business acquisitions, were driven by the following items:

· Our accounts receivable, net, increased $36.5 million and $17.3 million during the nine months ended September 30, 2010 and 2009, respectively. Accounts receivable, net, balances are influenced by the timing of net revenue and customer collections. Our days sales outstanding (DSO) were 38 days at both September 30, 2010 and 2009, primarily driven by an increase in international accounts receivable and timing of payments. Our international sales terms generally range from 30 to 150 days due to industry and national practices outside of the U.S., which can impact our DSO results. We calculate DSO as our period end accounts receivable, net, divided by our prior three months’ net sales, multiplied by 90 days. Our calculation of DSO may not be consistent with similar calculations performed by other companies.

· Our inventories increased $30.0 million and $52.1 million during the nine months ended September 30, 2010 and 2009, respectively. Our inventories fluctuate based upon our plasma collections, production mix and cycle times, production capacities, normal production shut-downs, finished product releases, targeted safety stock levels, and demand for our products. Our biological manufacturing processes result in relatively long inventory cycle times ranging from 100 days to in excess of 400 days for some specialty plasma in addition to a required 60 day pre-production holding period for plasma. Consequently, we have significant investment in raw material and work-in-process inventories for extended periods.

· Our prepaid expenses and other assets (increased) decreased $(1.7) million and $16.8 million during the nine months ended September 30, 2010 and 2009, respectively. The decrease for the nine months ended September 30, 2009 was primarily driven by a decrease in prepaid income taxes of $8.2 million and prepaid plasma of $10.6 million. The decrease in prepaid plasma resulted from the reclassification of prepaid plasma to raw material inventories as a result of plasma deliveries from International BioResources, L.L.C. and affiliated entities (IBR) upon plasma collection center licensure, for which we subsequently acquired the plasma collection centers.

· Our operating liabilities increased $7.8 million and $19.0 million during the nine months ended September 30, 2010 and 2009, respectively. Our liabilities fluctuate as a result of the varying due dates of accounts payable, accrued expenses, and other obligations. The increase for the nine months ended September 30, 2010 was primarily driven by higher accrued goods and services of $23.3 million primarily as a result of transaction costs related to our definitive merger agreement with Grifols and higher interest payable obligations of $8.6 million associated with our 7.75% Notes due to the timing of contractual payments, among other items. These items were partially offset by lower accounts payable obligations of $31.3 million due to our cash management strategy and lower accrued payroll, bonuses, and employee benefits of $7.3 million primarily due to the payment of accrued 2009 corporate performance bonuses and the final special recognition bonus payment in March 2010. The increase for the nine months ended September 30, 2009 was primarily driven by higher accounts payable obligations of $4.8 million due to our cash management strategies, higher Medicaid, commercial rebates, and chargebacks of $10.7 million, and higher taxes payable of $7.9 million. These items were partially offset by a reduction in the recorded amount of our interest rate swaps and caps of $9.3 million.

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Cash Flows from Investing Activities

Our capital expenditures were $91.7 million and $36.3 million for the nine months ended September 30, 2010 and 2009, respectively. Our capital expenditures reflect investments in our facilities to support a platform for future growth and efficiency improvements, including compliance enhancements, general infrastructure upgrades, capacity expansions, and new facilities. Our capital expenditures also reflect investments in our TPR infrastructure to support our plasma collection efforts. The increase in our capital spending reflects higher spending related to reliability/compliance initiatives, as well as our initial investments in our new fractionation strategic program, partially offset by lower TPR spending. Information regarding our strategic capital programs is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our 2009 Form 10-K. We expect that our capital spending over the next five years, beginning in 2010, to be in the range of $800 million to $850 million on a cumulative basis, an increase of $50 million as compared to the range of $750 million to $800 million disclosed in our 2009 Form 10-K.

Our cash flows used in investing activities for the nine months ended September 30, 2009 also include various other cash outflows for the development of our plasma collection center platform, including the purchase price of ten plasma collection centers acquired from IBR and loans and other advances made to third-party plasma suppliers, net of repayments, for the development of plasma collection centers for which we had the option to purchase under certain conditions. The IBR center acquisition program was completed in December 2009.

Cash Flows from Financing Activities

During the nine months ended September 30, 2010, we received proceeds of $19.3 million from the exercise of 2,989,023 stock options. In addition, we repurchased 246,823 shares of our common stock from employees for $4.9 million to settle their withholding tax obligations upon vesting of restricted stock. During the nine months ended September 30, 2010, we recognized excess tax benefits related to share-based compensation of $10.8 million.

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. In addition, we recognized excess tax benefits related to share-based compensation of $1.4 million. During the nine months ended September 30, 2009, we made contractual principal payments of $5.3 million under our First Lien Term Loan, which was repaid and terminated during the fourth quarter of 2009 with the proceeds from our IPO and refinancing transactions.

Outstanding amounts under our Revolving Credit Facility fluctuate based upon our business needs.

Credit Ratings

There were no changes to our credit ratings during the nine months ended September 30, 2010. Our credit ratings as of September 30, 2010 were as follows:

		Standard &
	Moody’s	Poor’s
7.75% Notes	B1	BB
Corporate Family Rating	Ba3	BB

Factors that can affect our credit ratings include changes in our operating performance, financial position, business strategy, and the overall economic environment for the plasma-derived products business. If a downgrade of our credit ratings were to occur, it could adversely impact, among other things, our future borrowing costs and access to capital markets.

Off Balance Sheet Arrangements

As of September 30, 2010, we do not have any off-balance sheet arrangements that are material or reasonably likely to be material to our consolidated financial position or results of operations.

Related Party Transactions

We consider Cerberus, Ampersand, and Centric to be related parties during certain periods presented. Additional information regarding transactions with our related parties is included in Note 8, “Related Party Transactions,” included elsewhere in this Quarterly Report.

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NON-GAAP FINANCIAL MEASURES

We believe that a meaningful analysis of our operating performance is enhanced by the use of EBITDA, adjusted EBITDA, as defined in our Revolving Credit Facility, and Consolidated Cash Flow, as defined in our 7.75% Notes.

Both adjusted EBITDA and Consolidated Cash Flow are financial measures that are not defined by U.S. GAAP. A non-GAAP financial measure is a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in a comparable measure calculated and presented in accordance with U.S. GAAP in the statement of operations, such as net income, or the statement of cash flows, such as operating cash flow, or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measures so calculated and presented. The non-GAAP financial measures that we use should not be considered a substitute for any performance measure determined in accordance with U.S. GAAP. We do not rely solely on these non-GAAP financial measures and also consider our U.S. GAAP results. Because the non-GAAP financial measures that we use are not calculated in the same manner by all companies, they may not be comparable to similarly titled measures used by other companies. To properly and prudently evaluate our business, we encourage you to also review our U.S. GAAP unaudited interim consolidated financial statements included elsewhere in this Quarterly Report, and not to rely on any single financial measure to evaluate our business. These non-GAAP financial measures have material limitations as analytical tools and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Additional information regarding our use of non-GAAP financial measures is included in our 2009 Form 10-K.

In addition to the adjustments we make in computing adjusted EBITDA and Consolidated Cash Flow, we also consider the impact of other items when evaluating our operating performance. Certain of these items, which impact the comparability of our financial results are included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability.”

In the following table, we have presented a reconciliation of adjusted EBITDA and Consolidated Cash Flow to the most comparable U.S. GAAP measure, net income:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net income	$	56,052		$	35,810		$	149,014		$	152,517
Interest expense, net (a)	11,529			19,587			34,915			61,445
Income tax provision (b)	29,729			14,125			81,143			74,914
Depreciation and amortization (c)	9,631			7,482			26,482			21,403
EBITDA	106,941			77,004			291,554			310,279
Management fees (d)	—			1,958			—			5,715
Non-cash share-based compensation expense (e)	3,619			19,454			14,203			39,625
Special recognition bonus expense (f)	203			1,489			2,019			4,852
Equity in earnings of affiliate (g)	(273		)	(112		)	(599		)	(296		)
Merger-related expenses (h)	9,485			1,573			17,908			8,310
Other (i)	883			1,126			1,106			1,903
Adjusted EBITDA/Consolidated Cash Flow as defined (j)	$	120,858		$	102,492		$	326,191		$	370,388

(a) Represents interest expense associated with our debt structure. During the nine months ended September 30, 2010, our debt structure consisted of our $600.0 million 7.75% Notes and $325.0 million Revolving Credit Facility. During the nine months ended September 30, 2009, our debt structure consisted of facilities totaling $1.355 billion, including our $700.0 million First Lien Term Loan, $330.0 million Second Lien Term Loan, and $325.0 million Revolving Credit Facility, as well as our interest rate cap and swap contracts.

(b) Represents our income tax provision as presented in our unaudited interim consolidated income statements.

(d) Represents the advisory fees paid to Talecris Holdings, LLC, under the management agreement. This agreement was terminated

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in connection with our IPO.

(e) Represents our non-cash share-based compensation expense associated with stock options, restricted stock, RSU’s, and PSU’s.

(f) Represents compensation expense associated with special recognition bonus awards granted to certain of our employees and senior executives to reward their past performance. We made the final payments under the special recognition bonus awards during March 2010. We do not anticipate granting similar awards in the future.

(g) Represents non-operating income associated with our investment in Centric, which we believe are not part of our core operations.

(h) Represents merger-related retention expenses associated with our terminated merger agreement with CSL for the 2009 periods and merger-related expenses associated with our definitive merger agreement with Grifols, including investment banker, legal, accounting, and other costs, as well as retention expenses, for the 2010 periods.

(i) For the three months ended September 30, 2010, the amount includes losses on disposals of equipment of $0.6 million and long-lived asset impairment charges of $0.3 million. For the nine months ended September 30, 2010, the amount includes losses on disposals of equipment of $0.6 million and long-lived asset impairment charges of $0.6 million, partially offset by inventory recoveries of $0.1 million. For the three months ended September 30, 2009, the amount includes long-lived asset impairment charges of $0.6 million and $0.9 million of non-capitalizable IPO costs, partially offset by inventory recoveries of $0.4 million. For the nine months ended September 30, 2009, the amount includes losses on disposals of equipment of $0.9 million, long-lived asset impairment charges of $1.0 million, and $1.1 million of non-capitalizable IPO costs, partially offset by inventory recoveries of $1.1 million.

(j) The computation of Consolidated Cash Flow is not applicable prior to the issuance of the 7.75% Notes on October 21, 2009. Our adjusted EBITDA for the nine months ended September 30, 2009 includes a $75.0 million termination fee received from CSL as a result of the termination of the definitive merger agreement. In addition, we incurred legal and other costs associated with the regulatory review process of our terminated merger agreement with CSL of $6.0 million during the nine months ended September 30, 2009. The termination fee and these expenses were not permitted as adjustments to our adjusted EBITDA as defined in our then existing Revolving Credit Facility or First and Second Lien Term Loans.

In addition to the non-GAAP financial measures of adjusted EBITDA and Consolidated Cash Flow presented above, we have also presented a quantification of the impact to our financial results for the CSL merger termination fee and the CSL and Grifols merger-related expenses in the fourth bullet point of the “2010 Financial Highlights” section presented above. We believe we have further enhanced the comparability of our financial results between the periods presented by using an adjusted share base in the computation of diluted earnings per share for the three and nine months ended September 30, 2009, reflecting the impact for the issuance of common shares to convert our Series A and B preferred stock, settle accrued dividends on the preferred stock, and complete our IPO as if these events occurred at the beginning of 2009.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We operate on a global basis and are exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates, foreign exchange, and commodity prices. The overall objective of our financial risk management program has historically been to minimize the impact of these risks through operational means and by using various financial instruments. These practices may change as economic conditions change. At September 30, 2010, we were not a party to any derivative financial instruments.

Interest Rate Risk

At September 30, 2010, our long-term debt consisted of our 7.75% Notes ($600.0 million outstanding), which bears a fixed interest rate, and our $325.0 million Revolving Credit Facility, which bears interest at a rate based upon either ABR or LIBOR, at our option, plus applicable margins based upon borrowing availability. Our exposure to adverse movements in ABR or LIBOR during 2010 has not been significant as a result of minimal average borrowings outstanding under the Revolving Credit Facility during the period. Assuming a fully drawn Revolving Credit Facility and a 100 basis point increase in applicable interest rates, our interest expense, net, would increase by $3.25 million on an annual basis.

At September 30, 2010, we had cash and cash equivalents of $150.5 million. We use our available cash balances to repay amounts outstanding under our Revolving Credit Facility. We deposit any excess amounts into an overnight investment account, which earns minimal interest. Because our cash and cash equivalents are short-term in duration, we believe that our exposure to interest rate risk is not significant and a 100 basis point movement in market interest rates would not have a significant impact on the carrying value of our cash and cash equivalents. We actively monitor changes in interest rates.

Foreign Currency Risk

We operate internationally and enter into transactions denominated in foreign currencies. As such, our financial position, results of operations, cash flows, and competitive position are subject to the variability that arises from exchange rate movements in relation to the U.S. dollar. Our foreign currency exposures are primarily limited to the impact that fluctuations in the euro and the Canadian dollar have on our net revenue and the remeasurement of our euro-denominated accounts receivable.

Approximately 29.8% and 30.9% of our net revenue for the three and nine months ended September 30, 2010 was generated outside of the United States. Foreign currency exchange rate fluctuations in relation to the U.S. dollar unfavorably impacted our product net revenue by $4.0 million, or 1.0%, for the three months ended September 30, 2010, and unfavorably impacted our product net revenue by $3.6 million, or 0.3%, for nine months ended September 30, 2010. In addition, we incurred transaction gains (losses), net, of $7.4 million and $(2.9) million during the three and nine months ended September 30, 2010, respectively, primarily related to the remeasurement of euro-denominated accounts receivable, which we recorded within SG&A in our unaudited consolidated income statement.

For the purpose of specific risk analysis, we used a sensitivity analysis to measure the potential impact to our unaudited consolidated income statement for a hypothetical 10% strengthening of the U.S. dollar compared with the euro and Canadian dollar for the three and nine months ended September 30, 2010. Assuming a 10% strengthening of the U.S. dollar, our product net revenue would have been negatively impacted by approximately $4.2 million and $12.5 million for the three and nine months ended September 30, 2010, respectively. At September 30, 2010, we had approximately €45.1 million in receivables. An adverse movement in the value of the euro in relation to the U.S. dollar could have a significant impact on our profitability. We have not hedged our exposure to changes in foreign currency exchange rates. Consequently, we could incur unanticipated gains and losses as a result of changes in foreign currency exchange rates.

Commodity Risk

Plasma is the key raw material used in the production of our products, which we obtain from our plasma collection centers, as well as third party plasma suppliers. As of September 30, 2010, our plasma collection center platform consisted of 69 operating centers, of which 66 were FDA licensed and 3 were unlicensed. These licensed centers collected approximately 73.9% and 69.4% of our plasma during the three and nine months ended September 30, 2010. Subsequent to September 30, 2010, we received FDA

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licensure for one of the unlicensed plasma collection centers.

For purposes of specific risk analysis, we used a sensitivity analysis to measure the potential impact to our unaudited consolidated income statements for a hypothetical 10% increase in the cost of plasma used to produce the products sold during the three and nine months ended September 30, 2010. Assuming this 10% increase in the cost of plasma, our cost of goods sold would have increased by $13.2 million and $40.9 million for the three and nine months ended September 30, 2010, respectively, and our gross margin would have been negatively impacted by 325 basis points and 344 basis points for the three and nine months ended September 30, 2010, respectively. This sensitivity analysis assumes that we would not be able to pass the hypothetical cost increase to our customers in the form of pricing increases. This sensitivity analysis does not consider the fixed pricing of plasma purchased from our third-party plasma suppliers.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods as specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2010, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Grifols Transaction

Four purported class action lawsuits have been filed by our stockholders challenging the proposed Grifols transaction. Two of the lawsuits were filed in the Court of Chancery of the State of Delaware and have been consolidated under the caption In re Talecris Biotherapeutics Holdings Shareholder Litigation, Consol. C.A. No. 5614-VCL. The other two lawsuits were filed in the Superior Court of the State of North Carolina and are captioned Rubin v. Charpie, et al., No. 10 CV 004507 (North Carolina Superior Court, Durham County), and Kovary v. Talecris Biotherapeutics Holdings Corp., et al., No. 10 CV 011638 (North Carolina Superior Court, Wake County). The lawsuits name as defendants Talecris, the members of our board of directors, Grifols, S.A. and its subsidiary, Grifols, Inc., and, in the Delaware consolidated action, Talecris Holdings LLC and Stream Merger Sub, Inc, a wholly owned subsidiary of Talecris. The two North Carolina actions have been stayed.

We believe that these lawsuits are without merit and intend to defend them vigorously.

National Genetics Institute/Baxter Healthcare Corporation Litigation

Plasma Centers of America, LLC and G&M Crandall Limited Family Partnership

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January 2009 in a parallel state action by PCA, alleging breach of contract by TPR. Motions to summary judgment by both parties have been denied. The two cases are proceeding in parallel, with trial in the state set for November 2010.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2009 Form 10-K, except as noted below.

Risks Related to Proposed Merger

Our proposed merger with Grifols may adversely affect our operations and financial performance.

The announcement of our proposed merger with Grifols may result in the loss of key employees, suppliers, and customers. The demand on management’s time and our resources relating to regulatory approvals and integration planning may interfere with management’s day—to-day oversight of operations. As a result, our operations and financial performance could be adversely affected while we prepare for the merger or in future periods should the merger not occur.

Lawsuits have been filed against us and certain of our officers and directors challenging the merger, and any adverse judgment for monetary damages could have a material adverse effect on the combined company’s operations after the transaction.

Four purported class action lawsuits have been filed by our stockholders challenging the proposed Grifols transaction. Two of the lawsuits were filed in the Court of Chancery of the State of Delaware and have been consolidated under the caption In re Talecris Biotherapeutics Holdings Shareholder Litigation, Consol. C.A. No. 5614-VCL. The other two lawsuits were filed in the Superior Court of the State of North Carolina and are captioned Rubin v. Charpie, et al., No. 10 CV 004507 (North Carolina Superior Court, Durham County), and Kovary v. Talecris Biotherapeutics Holdings Corp., et al., No. 10 CV 011638 (North Carolina Superior Court, Wake County). The lawsuits name as defendants Talecris, the members of our board of directors, Grifols, S.A. and its subsidiary, Grifols, Inc., and, in the Delaware consolidated action, Talecris Holdings LLC and Stream Merger Sub, Inc, a wholly owned subsidiary of Talecris. The two North Carolina actions have been stayed.

One of the conditions to the completion of the transaction is that no temporary restraining order, or preliminary or permanent injunction, or other judgment or order issued by a court or other governmental entity that prohibits or prevents the completion of the Talecris-Grifols merger shall be in effect. A preliminary injunction could delay or jeopardize the completion of the transaction, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the transaction. An adverse judgment for monetary damages could have a material adverse effect on the operations of the combined company after the transaction.

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Risks Related to Healthcare Reform and Reimbursement

We could be adversely affected if the implementation of recently passed healthcare reform legislation or additional legislation under consideration substantially changes the market for medical care or healthcare coverage in the United States.

Substantial changes could be made to the current system for paying for healthcare in the U.S., including changes made in order to extend medical benefits to those who currently lack insurance coverage. Approximately 47 million Americans currently lack health insurance of any kind. Extending coverage to such a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payors and government programs (Medicare, Medicaid and State Children’s Health Insurance Program), creation of state-based healthcare insurance exchanges, as well as other changes. Restructuring the coverage of medical care in the U.S. could impact the reimbursement for prescribed drugs and biopharmaceuticals, such as those produced and marketed by us. If reimbursement for these products is substantially reduced in the future, or rebate obligations associated with them are substantially increased (discussed in more detail below), our business could be materially impacted. Beginning in 2012, the new law may require us to issue Internal Revenue Service Forms 1099 to plasma donors whose remuneration exceeds six hundred dollars. The cost of implementing this requirement, as well as its potential impact on plasma donations, is unknown at this time.

Extending medical benefits to those who currently lack coverage will likely result in substantial cost to the federal government, which may force significant changes to the U.S. healthcare system. Much of the funding for expanded healthcare coverage will be sought through cost savings. While some of these savings may come from realizing greater efficiencies in delivering care, improving the effectiveness of preventive care and enhancing the overall quality of care, much of the cost savings may come from reducing the cost of care. Cost of care could be reduced by reducing the level of reimbursement for medical services or products (including those biopharmaceutical products produced and marketed by us), or by restricting coverage (and, thereby, utilization) of medical services or products. In either case, a reduction in the utilization of, or reimbursement for, our products could have a materially adverse impact on our financial performance.

All of the changes discussed above, and others, passed in this legislation are subject to rule-making and implementation timelines that extend for several years. This uncertainty limits our ability to forecast changes that may occur in the future and to manage our business accordingly.

We could be adversely affected if government or private third-party payors decrease or otherwise limit the amount, price, scope or other eligibility requirements for reimbursement for the purchasers of our products.

We have experienced and expect to continue to experience pricing pressures on our current products and pipeline products from initiatives aimed at reducing healthcare costs by governmental and private third-party payors, the increasing influence of managed care organizations, and regulatory proposals, both in the United States and in foreign markets. Recently enacted healthcare reform in the United States is likely to increase the pressure. This pressure may include the effect of such healthcare reform changes as the introduction of a biosimilar pathway (which will permit companies to obtain FDA approval of generic versions of existing biologics based upon lesser showings of safety and efficacy than is required for the pioneer biologic), the redefinition of the term “single source” product, which plays a key role in determining reimbursements under the Medicare Part B program, and changes to the 340B Public Health Service (PHS) drug pricing program imposing a “must sell” obligation on manufacturers so that they must offer for sale their products to eligible entities at legally-mandated discount prices. Additional legislative changes to current pricing rules are possible. We cannot predict which additional changes, if any, will eventually be adopted, or their impact on us. Certain changes could have a materially adverse impact on our financial performance.

If payors reduce the amount of reimbursement for a product, it may cause groups or individuals dispensing the product to discontinue administration of the product, to administer lower doses, to substitute lower cost products or to seek additional price related concessions. These actions could have a negative effect on our financial results, particularly in cases where we have a product that commands a premium price in the marketplace, or where changes in reimbursement induce a shift in the site of treatment. For example, beginning in 2005, the Medicare drug reimbursement methodology for physician and hospital outpatient payment schedules changed to Average Sales Price (ASP) +6%. This payment was based on a volume-weighted average of all brands under a common billing code. Medicare payments to physicians between the fourth quarter of 2004 and the first quarter of 2005 dropped 14% for both the powder and liquid forms of IGIV. Medicare payments to hospitals fell 45% for powder IGIV and 30% for liquid IGIV between the fourth quarter of 2005 and the first quarter of 2006. The Medicare reimbursement changes resulted in the shift of a significant number of Medicare IGIV patients to hospitals from physicians’ offices beginning in 2005 as many physicians could no longer recover their costs of obtaining and administering IGIV in their offices and clinics. After 2006, some hospitals reportedly began to refuse providing IGIV to Medicare patients due to reimbursement rates that were below their acquisition costs. While subsequent changes have improved some of these Medicare reimbursement issues, on January 1, 2008, the Centers for Medicare & Medicaid Services (CMS)

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reduced the reimbursement for separately covered drugs and biologicals, including IGIV, in the hospital outpatient setting from ASP +6% to ASP +5% using 2006 Medicare claims data as a reference for this reduction. In addition, CMS reduced a hospital add-on payment from $75 to $38 per infusion. Beginning January 1, 2009, CMS further reduced the hospital outpatient reimbursement for separately covered outpatient drugs, including IGIV, to ASP +4%, and eliminated the add-on payment.

Physicians frequently prescribe legally available therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. These unapproved, or “off-label,” uses are common across medical specialties, and physicians may believe such off-label uses constitute the preferred treatment or treatment of last resort for many patients in varied circumstances. We believe that a significant portion of our IGIV volume may be used to fill physician prescriptions for indications not approved by the FDA or similar regulatory authorities. If reimbursement for off-label uses of our products, including IGIV, is reduced or eliminated by Medicare or other third-party payors, including those in the United States or the European Union, we could be adversely affected.

For example, CMS could initiate an administrative procedure known as a National Coverage Determination (NCD) by which the agency determines which uses of a therapeutic product would be reimbursable under Medicare and which uses would not. This determination process can be lengthy, thereby creating a long period during which the future reimbursement for a particular product may be uncertain. High levels of spending on IGIV products, along with increases in IGIV prices, increased IGIV utilization and the high proportion of off-label uses, may increase the risk of regulation of IGIV reimbursement by CMS. On the state level, similar limits could be proposed for therapeutic products covered under Medicaid. Moreover, the Deficit Reduction Act of 2005 incentivizes states to take innovative steps to control healthcare costs, which could include attempts to negotiate limits to, or reductions of, drug prices.

Health care reform established and provided significant funding for the federal government to coordinate and fund Comparative Effectiveness Research (CER). While the stated intent of CER is to develop information to guide providers to the most efficacious therapies, outcomes of CER could influence the reimbursement or coverage for therapies that are determined to be less cost-effective than others. Should any of our products be determined to be less cost-effective than alternative therapies, the levels of reimbursement for these products, or the willingness to reimburse at all, could be impacted, which could materially impact our financial results.

For many payors, including private health insurers and self-insured health plans, as well as Medicare Part D plans and some state Medicaid programs, outpatient pharmaceuticals are often reimbursed based upon a discount calculated off of a pricing benchmark called “Average Wholesale Price,” which is referred to as AWP. AWP is a list price calculated and published by private third-party publishers (such as First DataBank, Thomson Reuters (Red Book) and Wolters Kluwer (Medi-Span)). AWP does not reflect actual transactions in the distribution chain (e.g., the publishers do not base the figure on actual transaction prices, including any prompt pay or other discounts, rebates or price reductions). Often, publishers calculate AWP based upon a standard markup of, for example, 20% over another list price which is reported by drug manufacturers to the publishers. This list price is called “Wholesale Acquisition Cost,” which is referred to as WAC. WAC is generally understood in the industry to be the list price drug manufacturers have for their drug wholesaler customers and, like AWP, is not calculated based on actual transaction prices, including any prompt pay or other discounts, rebates or price reductions. We do not publish an AWP for any of our products, reporting WAC for our products instead. We may be at a competitive disadvantage where providers are reimbursed on an AWP basis and competitors’ products are reimbursed based on a higher AWP than the corresponding AWP for our product.

The use of AWP and WAC as pricing benchmarks has been subject to legal challenge by both government officials and private citizens, often based on claims that the benchmarks were used in a misleading manner, thus defrauding consumers and third-party payors. It is possible that we, as a reporter of WAC, could be challenged on this basis. Additionally, the settlement of class action litigation against First DataBank and others has resulted in the downward revision of certain reported AWP listings (to a level of 20% over WAC). Issues regarding AWP have contributed to suggestions to eliminate its use as a drug pricing benchmark.

Talecris could be adversely affected by other provisions of recently passed United States healthcare reform legislation.

In the United States, Talecris’ products are reimbursed or purchased under several government programs, including, Medicaid, Medicare Parts B and D, the 340B/PHS program, and pursuant to contracts with the Department of Veterans Affairs. In order for a drug manufacturer’s products to be reimbursed by federal funding under Medicaid, the manufacturer must enter into a Medicaid drug rebate agreement with the Secretary of the United States Department of Health and Human Services, and pay certain rebates to the states based on utilization data provided by each state to the manufacturer and to the Centers for Medicare & Medicaid Services, which is referred to as CMS, and pricing data provided by the manufacturer to the federal government. The states have been required to share this savings with the federal government. The rebate amount for most branded drugs was previously equal to a minimum of 15.1% of the Average Manufacturer Price, which is referred to as AMP, or AMP less Best Price, which is referred to as AMP less BP, whichever is greater. The recently enacted healthcare reform legislation generally increases the size of the Medicaid rebates paid by drug manufacturers for single source and innovator multiple source (brand name) drugs from a minimum of 15.1% to 23.1% of the AMP, subject to certain exceptions, for example, for certain clotting factors the increase is limited to a minimum of

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17.1% of the AMP. For non-innovator multiple source (generic) drugs, the rebate percentage is increased from a minimum of 11% of AMP to 13% of AMP. The legislation also extends the rebate obligation to prescription drugs covered by Medicaid managed care organizations. The increase in required rebates, which became effective January 1, 2010, may adversely affect financial performance.

Medicare Part D is a partial, voluntary prescription drug benefit created by the United States federal government primarily for persons 65 years old and over. The Part D drug program is administered through private insurers that contract with CMS. To obtain payments under this program, each of Talecris is required to negotiate prices with private insurers operating pursuant to federal program guidance. These prices may be lower than might otherwise be obtained. In addition, beginning in 2011, the recently enacted healthcare reform legislation generally requires drug manufacturers to provide 50% savings for brand name drugs and biologics provided to Medicare Part D beneficiaries who are in the “donut hole” (or a gap in Medicare Part D coverage for beneficiaries who have expended certain amounts for drugs). The rebate requirement could adversely affect financial performance, particularly if contracts with Part D plans cannot be favorably renegotiated.

The availability of federal funds to pay for Talecris’ products under the United States Medicaid and Medicare Part B programs requires that Talecris extend discounts under the 340B/PHS program. The 340B/PHS program extends discounts to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of certain low income individuals. The PHS price (or “ceiling price”) cannot exceed the AMP (as reported to CMS under the Medicaid drug rebate program) less the Medicaid unit rebate amount. Talecris has entered into a Pharmaceutical Pricing Agreement with the government in which the companies have agreed to participate in the 340B/PHS program by charging eligible entities no more than the PHS ceiling price for drugs intended for outpatient use. Recently enacted healthcare reform legislation imposes a “must sell” obligation on manufacturers so that they must offer for sale their products to eligible entities at legally-mandated discount prices, and expands the number of qualified 340B entities eligible to purchase products for outpatient use. Additional legislation or regulation could require Talecris to allocate even more of their respective products for sale under the 340B/PHS program in order to maintain the availability of federal funds to pay for their respective products under Medicaid and Medicare Part B coverage, which could have a material negative impact on Talecris’ sales and margin given the significant price discount for 340B/PHS products as compared to their commercial prices.

The recently enacted United States healthcare reform legislation imposes a fee on manufacturers of branded drugs and biologics based on their sales to United States government health programs. The fee will first be imposed for 2011 sales. The aggregate fee imposed on all covered entities is $2.5 billion for 2011, $2.8 billion for 2012, $2.8 billion for 2013, $3 billion for 2014, $3 billion for 2015, $3 billion for 2016, $4 billion for 2017, $4.1 billion for 2018 and $2.8 billion for 2019 and following years. The aggregate fee will be allocated among applicable manufacturers and importers based on their relative sales to government health programs, with the caveat that entities with lower sales will have their sales counted at less than 100% in allocating responsibility for the fee. This new fee will increase costs for Talecris. It is not clear that Talecris will be able to pass this increased cost on to its customers.

Risks Related to Our Business

Our ability to export products to Iran requires annual export licenses and the use of intermediate or advisory banks.

In 2009, we had sales of $22.2 million, or approximately 1.4% of our net revenue, to customers located in Iran pursuant to an export license which must be renewed annually. Although the Office of Foreign Asset Control (OFAC) renewed our license to supply humanitarian products, tensions with Iran continue to impede our ability to conduct business in Iran. Our revenues related to our business in Iran have declined in 2010 compared to 2009 and are likely to continue to decline in the future.

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ITEM 6. EXHIBITS

Exhibit Number		Exhibit Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* This certification shall not be deemed filed for purposes of Section 18 of the Exchange Act, or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as may be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Research Triangle Park, State of North Carolina, on October 28, 2010.

	Talecris Biotherapeutics Holdings Corp.


	By:	/S/ Lawrence D. Stern

	Lawrence D. Stern
	Chairman and Chief Executive Officer


	By:	/S/ John M. Hanson

	John M. Hanson
	Executive Vice President and Chief Financial Officer

Attached files

Talecris Biotherapeutics Holdings Corp. Reports

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