Table ofContents

 

 

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**Form 10-K**

 

**(Mark One)**

** **
| **x** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

** **

**For the fiscal year ended December 31, 2009**

** **

**or**

** **
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**For thetransition period from           to            **

 

**Commissionfile number: 001-34473**

** **

**TALECRISBIOTHERAPEUTICS HOLDINGS CORP.**

(Exact name of registrant asspecified in its charter)

** **

| **Delaware**                                                    | ** ** | **20-2533768**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer Identification No.) |

 

**P.O. Box 110526**

**4101 Research Commons**

**79 T.W. Alexander Drive**

**Research Triangle Park,North Carolina 27709**

(Address of principalexecutive offices, including Zip Code)

 

**(919) 316-6300**

(Registrant’s telephone number, including area code)

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title of  each class**      | ** ** | **Name of  each exchange on which  registered** |
|-------------------------------|------------|-------------------------------------------------|
| Common Stock, $0.01 par value |       | The NASDAQ Global Select Market                 |

 

Securities registeredpursuant to section 12(g) of the Act: **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o  No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files)  Yes o  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. 

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non- accelerated filer x  |   | Smaller reporting company o |

 

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

 

Theregistrant commenced the initial public offering of its common stock on September 30,2009.  Accordingly, there was no publicmarket for the registrant’s common stock as of June 30, 2009, the lastbusiness day of the registrant’s most recently completed second fiscal quarter.

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date. 122,552,847 shares of Common Stock, $0.01 par value, as of February 10,2010.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **

Portionsof the Talecris Biotherapeutics Holdings Corp. Definitive Proxy Statement tothe 2010 Annual Meeting of Stockholders to be filed with the Securities andExchange Commission within 120 days after the close of the registrant’s fiscalyear are incorporated by reference in Part III to the extent described therein.

 

 

 

----

Table ofContents

 

**Talecris Biotherapeutics Holdings Corp.**

**2009 Annual Report on Form 10-K**

**Table of Contents**

** **
| ** **                                             | ** ** | ** **                                                                                                         | ** ** | **Page** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Special  Note Regarding Forward-Looking Statements** | ** ** | 1                                                                                                                  |
| **Part I**                                        |       |                                                                                                               |       |     |
| Item 1.                                                |       | Business                                                                                                           |       | 2        |
| Item 1A.                                               |       | Risk Factors                                                                                                       |       | 32       |
| Item 1B.                                               |       | Unresolved  Staff Comments                                                                                         |       | 58       |
| Item 2.                                                |       | Properties                                                                                                         |       | 58       |
| Item 3.                                                |       | Legal Proceedings                                                                                                  |       | 59       |
| Item 4.                                                |       | Submission  of Matters to a Vote of Security Holders                                                               |       | 59       |
|                                                   |       |                                                                                                               |       |     |
| **Part II**                                       |       |                                                                                                               |       |     |
| Item 5.                                                |       | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |       | 61       |
| Item 6.                                                |       | Selected Financial  Data                                                                                           |       | 65       |
| Item 7.                                                |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       | 67       |
| Item 7A.                                               |       | Quantitative  and Qualitative Disclosures About Market Risk                                                        |       | 107      |
| Item 8.                                                |       | Financial  Statements and Supplementary Data                                                                       |       | 109      |
| Item 9.                                                |       | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                              |       | 154      |
| Item 9A.                                               |       | Controls and  Procedures                                                                                           |       | 154      |
| Item 9B.                                               |       | Other Information                                                                                                  |       | 154      |
|                                                   |       |                                                                                                               |       |     |
| **Part III**                                      |       |                                                                                                               |       |     |
| Item 10.                                               |       | Directors, Executive Officers and  Corporate Governance                                                            |       | 155      |
| Item 11.                                               |       | Executive  Compensation                                                                                            |       | 157      |
| Item 12.                                               |       | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                    |       | 157      |
| Item 13.                                               |       | Certain Relationships and Related  Transactions, and Director Independence                                         |       | 157      |
| Item 14.                                               |       | Principal Accounting Fees and Services                                                                             |       | 157      |
|                                                   |       |                                                                                                               |       |     |
| **Part IV**                                       |       |                                                                                                               |       |     |
| Item 15.                                               |       | Exhibits, Financial Statement Schedule                                                                             |       | 158      |
|                                                   |       | Signatures                                                                                                         |       | 162      |

 

i

----

Table ofContents

 

**Special Note RegardingForward-Looking Statements**

 

ThisAnnual Report on Form 10-K (Annual Report) contains forward-lookingstatements that involve substantial risks and uncertainties. All statements,other than statements of historical facts, included in this Annual Report,regarding our strategy, future operations, future financial position, futurerevenue, projected costs, prospects, plans and objectives of management areforward-looking statements. Forward-looking statements may be identified by theuse 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 orother variations on such terms or comparable terminology. The forward-lookingstatements that we make are based upon assumptions about many important riskfactors, many of which are beyond our control. Among the factors that couldcause actual results to differ materially are the following:

 

·                  possible U.S.legislation, regulatory action or legal proceedings affecting, among otherthings, the U.S. healthcare system, pharmaceutical pricing and reimbursement,including Medicaid, Medicare and the Public Health Service Program;

 

·                  our ability toprocure adequate quantities of plasma and other materials which are acceptablefor use in our manufacturing processes from our own plasma collection centersor from third-party vendors;

 

·                  our ability tomaintain compliance with government regulations and licenses, including thoserelated to plasma collection, production, and marketing;

 

·                  our ability toidentify growth opportunities for existing products and our ability to identifyand 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 productcandidates, the rate and degree of market acceptance, and the clinical utilityof our products;

 

·                  unexpectedshut-downs of our manufacturing and storage facilities or delays in opening newplanned facilities;

 

·                  our and oursuppliers’ ability to adhere to cGMP;

 

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

 

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

 

·                  our ability toresume or replace sales to countries affected by our Foreign Corrupt PracticesAct investigation;

 

·                  availabilityand cost of financing opportunities;

 

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

 

·                  the impact ofcompetitive products and pricing;

 

·                  fluctuations inthe balance between supply and demand with respect to the market forplasma-derived products;

 

·                  interest ratefluctuations impacting our Revolving Credit Facility and foreign currencyexchange rate fluctuations in the international markets in which we operate;

 

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

 

·                  other factorsidentified elsewhere in this Annual Report.

 

Noassurances can be provided as to any future financial results. Ourforward-looking statements do not reflect the potential impact of any futureacquisitions, mergers, dispositions, joint ventures, or investments we maymake. Unless legally required, we do not undertake to update or revise anyforward-looking statements, even if events make it clear that any projectedresults, expressed or implied, will not be realized.

 

1

----

Table ofContents

 

**PART I**

 

*Unless otherwise stated or the context otherwise requires, referencesin this Annual Report to “Talecris,” “we,” “us,” “our” and similar references referto Talecris Biotherapeutics Holdings Corp. and its wholly-owned subsidiaries.*

 

**ITEM 1.  BUSINESS**

 

**Overview**

 

Weare a biopharmaceutical company that is one of the largest producers andmarketers of plasma-derived protein therapies in the world.  We develop, produce, market, and distributetherapies that extend and enhance the lives of people suffering from chronicand acute, often life-threatening, conditions, such as chronic inflammatorydemyelinating polyneuropathy (CIDP), primary immune deficiencies (PI), alpha-1antitrypsin deficiency, bleeding disorders, infectious diseases and severetrauma.  Our products are derived fromhuman plasma, the liquid component of blood, which is sourced from our plasmacollection centers or purchased from third parties, located in the UnitedStates.  Plasma contains many therapeuticproteins which we extract through a process known as fractionation at ourClayton, North Carolina and/or Melville, New York facilities.  The fractionated intermediates are thenpurified, formulated into a final bulk, and aseptically filled into finalcontainers for distribution.  We alsosell fractionated intermediate materials. Our manufacturing facilities currently have the capacity to fractionateapproximately 4.2 million liters of human plasma per year.  Purification, filling and finishingcapacities are dependent on fraction mix.

 

Ourlargest product, Gamunex, Immune Globulin Intravenous (Human), 10%Caprylate/Chromatography Purified, is one of the leading products in theintravenous immune globulin (IGIV) segment, with a reputation as a premiumproduct. Gamunex is the only IGIV approved for the treatment of CIDP, aneurological indication, in the U.S., Canada and 17 European countries. TheGamunex IGIV share of sales was 25% in the U.S. in 2009 and 16% globally in2007 based on MRB data. Our second largest product, Prolastin Alpha-1Proteinase Inhibitor (Human) had a 67% share of sales in the United States in2008 and a 76% share of sales worldwide in 2007 and has a high degree of brandrecognition within the alpha-1 proteinase inhibitor, or A1PI, category. Inaddition to Gamunex and Prolastin, which together represented 74.7% of our netrevenue in 2009, we also produce and sell albumin, Koate DVI Factor VIII,hyperimmunes, Thrombate III, PPF powder and other products. Our products areprimarily prescribed by specialty physicians, including neurologists,immunologists, pulmonologists, and hematologists. Our six key productscategories and their indications are given in the table below:

 
| **Category and Talecris  Key Products**                                                                                                    | ** **                                                                  | **Talecris Indications**                                                                                  | ** **            | **Talecris  Share of  Sales**         | ** **               | **Talecris Net  Revenue  2009 (in millions)** |
|--------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|-----------------------|---------------------------------------|--------------------------|-----------------------------------------------|
| **IGIV***Gamunex IGIV*                                                                                                                     | * *                                                                    | *U.S., Canada and EU—PI,ITP, CIDP.*                                                                  |                  | 25%—U.S.(1)                      |                     | $599.8—U.S.                              |
| * *                                                                                                                                   | *Canada and EU—Post Bone Marrow Transplant, Pediatric HIV  Infection.* |                                                                                                      | 16%—Worldwide(2) |                                  | $826.4(3)—Worldwide |
| ** **                                                                                                                                 | * *                                                                    | *EU only—Kawasaki Disease, Guillain Barre Syndrome, Chronic  Lymphocytic Leukemia, Multiple Myeloma* |                  |                                  |                     |                                          |
| **A1PI***Prolastin A1PI*                                                                                                                   | * *                                                                    | *A1PI Deficiency related emphysema*                                                                       |                  | 67%—U.S.(4)                 |                     | $206.1—U.S.                              |
| * *                                                                                                                                   | * *                                                                    |                                                                                                      | 76%—Worldwide(2) |                                  | $319.1—Worldwide    |
| **Fraction V (Albumin and PPF)***Plasbumin-5 (Human) 5% USP Plasbumin-20 (Human) 25%  USP Plasmanate, Plasma Protein Fraction 5% USP* | * *                                                                    | *Plasma expanders, severe trauma, acute liver and kidney  failures*                                       |                  | 9%—U.S.(4)

7%—Worldwide(2) |                     | $44.8—U.S.

$84.8(3)—Worldwide      |
| **Factor VIII***Koate DVI*                                                                                                                 | * *                                                                    | *Hemophilia A*                                                                                            |                  | 4%—U.S.(4)

3%—Worldwide(2) |                     | $13.6—U.S.

$46.5—Worldwide         |

 

2

----

Table of Contents

 
| **Antithrombin III***Thrombate III*                                  | * * | *Heriditary antithrombin III deficiency*                      |   | 100%—U.S.(4) 

5%—Worldwide(2) |   | $24.2—U.S.

$24.2—Worldwide |
|----------------------------------------------------------------------|----------|---------------------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------|
| **Hyperimmunes***GamaStan, HyperHepB, HyperRho, HyperRab,  HyperTet* | * * | *Hepatitis A, Hepatitis B, Rabies, RH Sensitization, Tetanus* |   | 22%—U.S.(4)

10%—Worldwide(2)       |   | $59.5—U.S.

$74.2—Worldwide |

 

----

(1)                                  For the 2009 calendar year,according to MRB 2009 estimate (MRB IVIG 2015: A Forecast of the PolyvalentIntravenous Immune Globulin (IVIG) Market in the United Sates in 2015, October 2009).

(2)                                  For the 2007 calendar year,according to MRB. Includes IGIV contract fractionation revenues.

(3)                                  Excludes contractfractionation revenues from the Canadian blood system operators.

(4)                                  For the 2008 calendar year,according to MRB.

 

Weestablished our leading industry positions through a history of innovationincluding developing the first ready-to-use 10% liquid IGIV product in NorthAmerica, the only IGIV product approved for use in neurology in North America,and the first A1PI product globally. Our primary products have orphan drugdesignation to serve populations with rare, chronic diseases. We continue todevelop products to address unmet medical needs and, as of December 31,2009, employ approximately 300 scientists and support staff to develop newproducts, expand the uses of our existing products, and enhance our processtechnologies. We focus our research and development efforts in three key areas:continued enhancement of our process technologies, including pathogen safety,life cycle management for our existing products, including new indications, anddiscovery of new products. Our research and development expenditures amountedto $71.2 million for the year ended December 31, 2009.

 

Ourbusiness is supported by an integrated infrastructure including, as of December 31,2009, 69 plasma collection centers (64 FDA licensed, 5 unlicensed), two ownedand operated manufacturing facilities (including our primary manufacturingfacility in Clayton, North Carolina, which is one of the world’s largestintegrated fractionation and purification facilities), a distribution networkand sales and marketing organizations in the U.S., Canada, Germany, and otherinternational regions.  Our heritage ofpatient care innovations in therapeutic proteins dates back to CutterLaboratories, which began to produce plasma-derived products in the early1940s, and its successor companies, including Miles Inc., BayerCorporation and Bayer Healthcare LLC. Our long experience as a producer andmarketer of plasma-derived protein therapies has enabled us to forge strongties with members of the medical community, patient advocacy groups and ourdistributors.

 

**Competitive Strengths**

 

Webelieve that the following strengths position us to compete effectively in theplasma products industry:

 

·                  *PremiumGlobal Liquid 10% IGIV Product*.  Our product, Gamunex IGIV, which was launchedin North America in 2003 as a premium ready-to-use liquid IGIV product, is oneof the leading products in the IGIV segment with a 25% share of U.S. sales in2009 according to the MRB 2009 estimate. We believe Gamunex IGIV is consideredto be the industry benchmark due to a comprehensive set of differentiatedproduct characteristics that have positioned it as the premium product in itscategory since its launch.  As a measureof our focus on continued enhancement of product safety, the manufacturingprocess for our IGIV therapy incorporates prion removal, which is described inthe FDA approved labeling for Gamunex. We also use a patented caprylate processthat preserves more of the fragile IgG proteins compared to prior generationIGIV products made with a harsher solvent/detergent purification process.Gamunex IGIV is the only IGIV approved for CIDP in the U.S., Canada and 17European countries. Our CIDP indication approval makes Gamunex the only IGIVapproved for use in a neurological indication in North America. According to anindependent survey by Harris Interactive, CIDP is the largest IGIV segment inthe U.S., representing 29% of total unit volume. As the only FDA approved IGIVfor CIDP, we believe we doubled our licensed market access to 61% of total U.S.IGIV unit volume. Further, the FDA granted Gamunex IGIV orphan drug status,which provides marketing exclusivity for the CIDP indication in the U.S. throughSeptember 2015.

 

·                  *LeadingProducer of A1PI with Strong Brand Recognition*.  We are the world’s largest producer of A1PI,which is used for the treatment of A1PI deficiency-related emphysema. In 2008,Prolastin A1PI had a 67% share of sales in the United States and an over 90%share of sales in the European Union (EU) where it is licensed in15 countries and competes with another licensed A1PI product only inSpain. We are also the only licensed A1PI product in Canada. While othermanufacturers began selling A1PI products in the United States and Spainbeginning in 2003, we continue to benefit

 

3

----

Table ofContents

 

fromhaving been the first provider in this product class and from our strongrelationships with the primary patient advocacy groups. We believe Prolastin isdifferentiated in the United States by its unique direct-to-patientdistribution and service model, Prolastin Direct, which provides easy enrollment,home infusion, access to insurance experts and patient-centered healthmanagement. Prolastin Direct health management provides better patient outcomesby reducing the frequency of respiratory exacerbations. Furthermore, ProlastinDirect results in high medication compliance, with over 94% of prescribed dosesbeing administered annually and high patient loyalty, with an annual retentionrate of over 96%. Based upon our internal estimates, we believe thatapproximately 30% of the global patient population for A1PI products resides inEuropean countries where Prolastin is now licensed. We are developingadditional product enhancements, including inhaled and recombinant versions ofour A1PI product. We received FDA approval for our next generation A1PIproduct, Prolastin-C A1PI in October 2009. A post-approval clinical trialwas required as a condition for approval. We submitted a supplemental New DrugSubmission (sNDS) to Health Canada for the approval of Prolastin-C A1PI in March 2009and Prolastin-C A1PI was approved for use in Canada in February 2010.Presently, additional clinical trials are being required by Europeanauthorities as a precursor to Prolastin-C A1PI approval in Europe. We arecurrently in the process of launching Prolastin-C A1PI in the U.S. and Canada.Prolastin-C A1PI has improved yields and higher concentration. As a result,infusion time for patients will be significantly reduced.

 

·                  *VerticallyIntegrated Global Platform*.  We have an integrated platform that allows usto appropriately control our plasma supply and production process.

 

·                  *TPRPlasma Platform*:  Until 2006,we purchased all of our plasma, which is our primary raw material, from thirdparties. Since then, we have successfully designed and executed our verticalplasma supply integration strategy and, as of December 31, 2009, weoperated 69 plasma collection centers (64 FDA licensed, 5 unlicensed) withapproximately 2,400 employees. Over the past two years, we have aggressivelyexpanded our plasma supply through these collection centers under ourwholly-owned subsidiary, Talecris Plasma Resources, Inc. (TPR). This givesus access to future supply of plasma that we believe will meet product demandand enable us to increase gross margin as we lower our collection cost per liter.These centers collectively represent substantially all of our currently plannedcollection center network for the next three years. We expect that thisnetwork, once it matures, will provide in excess of 90% of our current plasmarequirements. Additionally, in August 2008 we entered into a five-yearplasma supply agreement with CSL Plasma Inc., which has declining annualminimum volume commitments with the ability to request higher volumes annually,and provides flexibility as we increase internal production.

 

·                  *IntegratedFacilities*:  OurClayton, North Carolina site is one of the world’s largest integrated proteinmanufacturing sites, including fractionation, purification and aseptic fillingand finishing of plasma-derived proteins. Together with our facility inMelville, New York, we have a combined fractionation capacity of approximately4.2 million liters of plasma per year. We processed approximately 3.6million liters of plasma during 2009, which represented a utilization rate ofapproximately 85% of our fractionation capacity. Our facilities at Clayton havebenefited from roughly $630 million of capital investment since 1995,including compliance enhancements, general site infrastructure upgrades,capacity expansions, and new facilities, such as our chromatographicpurification facilities and our high-capacity sterile filling facility. We haveembarked on a capital expenditure plan which we currently estimate will be inthe range of $750 million to $800 million through 2014, which includes the expansionof our fractionation capacity 43% to 6.0 million liters in order to allow us tokeep pace with the expected demand growth for plasma-derived products and toprovide a balance with our Gamunex purification capacities.

 

·                  *Leaderand Innovator in the Global Plasma Products Industry*.  We are one of the largest producers andmarketers of plasma-derived protein therapies in the world. We have asuccessful history of product innovation and commercialization, and we possessspecific expertise and core competencies in the development, purification,large-scale manufacture and sale of protein therapeutics. Our longstandinginfrastructure, processes and expertise have enabled us to develop a stable ofgrowing marketed products and create a robust pipeline of potential newproducts and lifecycle management opportunities for our existing products.

 

·                  *Processand Product Innovation:* We are the developer of the firstready-to-use 10% liquid IGIV product in North America and the first A1PIproduct in the world. We have applied new developments in protein purification,including caprylate and chromatography technologies, and are now producing andselling a third generation IGIV product.

 

·                  *R&DPipeline:* Our current research and development consists of arange of programs that aim to develop new products, obtain new therapeuticindications for existing products, enhance product delivery, improveconcentrations and safety, and increase product yields. Our Phase I candidate,Plasmin, represents an 

 

4

----

Table ofContents

 

opportunityto expand into a new segment addressing the dissolution of blood clotsincluding acute peripheral arterial occlusion (aPAO) and ischemic stroke. Wehave also successfully completed pivotal clinical trials and submittedregulatory filings for licensure of Gamunex for subcutaneous administration forthe treatment of PI. Prolastin-C A1PI was recently approved by the FDA andHealth Canada.

 

·                  *FavorableDistribution Arrangements*.  Weenjoy favorable distribution arrangements, particularly in North America forour IGIV products. Our size, history and reputation in the industry haveenabled us to establish direct and indirect channels for the distribution ofour products, and have provided us with experience in appropriately addressingour key regulators, doctors, patient advocacy groups and plasma protein policymakers.

 

·                  In the U.S., wehave three specialty sales teams (Immunology/Neurology, Pulmonary andHematology/Specialty) that have a combination of extensive commercial andhealthcare-related experience calling on a variety of touch points includingphysicians, pharmacists, and homecare companies. Our specialty sales teamseducate physicians and other healthcare providers on the benefits of ourplasma-derived therapies. Our Immunology/Neurology team focuses on promotingGamunex as the only IGIV product approved for a neurological indication in theU.S. Our Pulmonary team focuses on the identification of A1PI patients anddriving brand choice for Prolastin. Our Hematology/Specialty team promotesKoate, Thrombate III, and our portfolio of hyperimmune products.

 

·                  We are theprimary supplier of plasma-derived products to the Canadian blood system underour contracts with the two national Canadian blood system operators, CanadianBlood Services and Hema Quebec. We were awarded five year contracts whichbecame effective April 1, 2008. Under these contracts, we currentlyfractionate 70% of Canadian plasma and we expect to supply the majority of theCanadian requirements for IGIV during the terms of the contracts. The contractsmay be extended for two one-year terms upon agreement of the parties. The totalpurchase commitment by Canadian Blood Services and Hema Quebec under thesecontracts was approximately $139 million and $71 million,respectively, in 2009 and will be $122 million and $62 million, respectively,in 2010, subject to annual volume and price adjustments. Canadian BloodServices has elected to pursue a dual-source strategy and although we willcontinue to be the primary supplier, we incorporate likely annual volumedeclines because of their strategy.  HemaQuebec has a sole source strategy for fractionation of their plasma and weexpect our IGIV share to remain relatively constant through the duration of thecontract. We expect to offset the overall volume decline in Canada withincreased sales in Europe as well as in other international markets. Wetransport plasma from Canadian Blood Services and Hema Quebec collectioncenters to our manufacturing facility in Clayton, North Carolina forfractionation, and return the finished product, along with commercial product,for sale to Canadian Blood Services and Hema Quebec. Pricing for our productsand services was set at the beginning of the contract period, subject toadjustment for inflation. The contracts are terminable upon the occurrence ofcertain events, including a third party obtaining Canadian regulatory approvalto introduce a significantly superior product or fractionation service. Thesefive-year contracts are currently the largest government contracts for IGIVunits globally.

 

·                  We haverationalized our distribution network and simultaneously entered into long-termdistribution agreements with major hospital group purchasing organizations, orGPOs, home care and specialty pharmacy providers and distributors which webelieve grant us favorable committed volume and payment terms, includingliquidated damages if they fail to purchase the agreed volume of products. Wehave contractual commitments from our customers for a majority of our NorthAmerican IGIV volume over the next three years. We have made appropriatecommitments to the Public Health Service and Federal Supply Schedule programsas part of our distribution system.

 

·                  *Experienced,Proven Management Team*.  Ourbusiness is led by an experienced management team, with our executive officerspossessing an average of nearly 11 years of experience in theplasma/protein therapeutics business and an average of over 15 years ofexperience in healthcare-related businesses. We have the complex technicalknowledge required in the protein therapeutic products industry, provencompetency in commercializing protein therapeutic products and the expertise tomanage an operationally complex business efficiently.

 

**Business Strategy**

 

Ourgoal is to be the recognized global leader in developing and delivering premiumprotein therapies to extend and enhance the lives of individuals suffering fromchronic, acute and life-threatening conditions. The key elements of ourstrategy for achieving this goal are as follows:

 

5

----

Table ofContents

 

·                  *AchieveCost Efficiencies in Our Plasma Collection Platform.*  In 2006, we made the strategic decision tovertically integrate our plasma supply chain in order to enhance thepredictability, sustainability and profitability of our plasma supply. Ourrapid vertical integration of our plasma supply was accomplished through thedevelopment of an extensive infrastructure to manage the multiple work streamsnecessary to accomplish the development of our current plasma collectionplatform. The infrastructure necessary to integrate the centers we acquiredfrom IBR in November 2006 and to open new centers which formed oursixty-nine center system included third party consultants as well as additionalmanagement. Given that it generally takes three to four years to mature aplasma center, many of our centers are immature. We have eliminated the thirdparty consultants used to develop the platform and reduced the managementnecessary to drive the platform development resulting in a significantreduction in cost. Additionally, as we increase the utilization of theplatform, we achieve economies of scale that result in lower cost per liter.These factors will lead to improving cost per liter of plasma collected and theelimination of unabsorbed TPR infrastructure and start-up costs chargeddirectly to cost of goods sold. Consequently, we expect that the improvement inour plasma collection costs will provide a near-term gross margin improvementopportunity.

 

·                  *ImproveOperating Leverage through Increased Recovery of Plasma Proteins.*  We seek to improve our profitability bycapitalizing on the operating leverage in our business model. A significantportion of our cost structure, other than raw materials, is relatively fixedand therefore incremental volume contributes significant additional profit. Ourcapital expenditure plan is designed, in part, to facilitate the production ofan increasing volume of existing and new products from each liter of plasma. Wecurrently have purification capacity constraints related to the production ofalbumin and Koate, our plasma-derived Factor VIII product. We also expect to beless efficient in the utilization of each incremental liter of plasmafractionated as we increase Gamunex production, which will result in grossmargin erosion. Additionally, we anticipate that we will reach ourfractionation capacity in the near future. Consequently, we have embarked on acapital expenditure plan which we currently estimate will be in the range of$750 million to $800 million through 2014. Key elements of this plan include anew fractionation facility currently estimated to range from $280 million to$300 million, based on conceptual engineering, to expand our fractionationcapacity from 4.2 million liters to 6.0 million liters. This 43% capacity expansionwill allow us to keep pace with expected demand growth for plasma-derivedproducts and will provide a balance with our Gamunex purification capacity. Wealso plan to expand albumin and Koate purification capacities. We are targeting2015 for commercial production from our new fractionation facility, withadditional albumin and Koate purification capacities available in the next fiveto six years. This capacity expansion will allow us to improve the utilizationof the proteins in each liter of plasma which should result in additional grossmargin improvement opportunities once completed.

 

·                  *EnhanceGrowth through New Plasma-Derived and Recombinant Proteins. *We continue to pursue growththrough our internal development capabilities and in-licensing of newtechnologies and products.  Increases in our research and developmentspending will be driven by our emphasis on new plasma-derived molecules as wellas the development of our recombinant capabilities in addition to our lifecycle management activities, particularly as they relate to A1PI. We believethat our plasma-derived and recombinant Plasmin therapies hold particularpromise. Plasmin is a natural protein that dissolves blood clots for which weare pursuing two versions.  We are developing a plasma-derived molecule,which is in a Phase I clinical trial for aPAO and a commercial process toproduce a recombinant form to treat ischemic stroke. Additionally, we aredeveloping recombinant versions of Factor VIII and A1PI through the use ofhuman cell lines. If successful, the development of these therapies couldsignificantly improve our revenue and profitability. In addition, our externalbusiness development will focus on proteins where we have synergies or corecompetencies in research, manufacturing and/or marketing.

 

·                  *BroadenGeographic Reach.*  During 2009,approximately 80% of our net revenue was generated in North America, whereasNorth America represented only approximately 40% of global plasma product salesin 2007, according to MRB.  Although ourbusiness is concentrated in North America, we see significant opportunities tobroaden our geographic reach in Europe as well as the rest of the world.  In terms of A1PI, there are a number ofEuropean countries with registries of identified A1PI patients whose healthcaresystems currently do not provide for reimbursement for the use of A1PI therapy.We hope to obtain reimbursement for these patients as we engage with therespective governmental healthcare organizations, patient advocacy groups andsupporting physicians and scientists. We also believe that the approval for theCIDP indication in 17 European countries will facilitate Gamunex marketexpansion. Additionally, we believe that the demand for plasma-derivedtherapies, particularly IGIV, Factor VIII and albumin are increasinginternationally with improving socio-economic conditions and medical educationregarding the benefits of plasma-derived therapies.  Until our facilities are expanded asdescribed above, significant growth in our international distribution will belimited and our focus will be on developing channels and relationships.

 

Executingthe above elements of our strategy should enable the profitable growth of ourbusiness.  We plan to achieve furthercost efficiencies in our plasma collection platform through increasedutilization and economies of scale which will lead to a lower cost per liter ofplasma. We expect to increase our operating leverage through capacity expansionand recovering more proteins per liter.  

 

6

----

Table ofContents

 

Ourgeographic expansion will continue.  Wewill continue to invest in new plasma-derived and recombinant proteins.  Lastly, we believe we are well positioned tobenefit from the favorable industry dynamics.

 

**Products**

 

Themajority of our sales are concentrated in the therapeutic areas of:Immunology/Neurology, primarily through our intravenous immune globulin (IGIV)product for the treatment of primary immune deficiency, CIDP, and Pulmonology,through our alpha-1 proteinase inhibitor (A1PI) product for the treatment ofalpha-1 antitrypsin deficiency-related emphysema.   These therapeutic areas are served by our brandedproducts, Gamunex brand IGIV (Gamunex or Gamunex IGIV), Prolastin brand A1PI(Prolastin or Prolastin A1PI) and our recently approved next generation A1PIproduct, Prolastin-C.  We also have aline of hyperimmune therapies that provide treatment for tetanus, rabies,hepatitis B, hepatitis A and Rh factor control during pregnancy and atbirth.  In addition, we provideplasma-derived therapies for critical care, including the treatment ofhemophilia, an anti-coagulation factor, as well as albumin to expand bloodvolume.  Although we sell our productsworldwide, the majority of our sales were concentrated in the United States andCanada for the periods presented.  Ourproducts are primarily prescribed by specialty physicians, includingneurologists, immunologists, pulmonologists, and hematologists.  Our six largest product categories, theirindications, and net revenues are included in the following table:

 
| ** **                          | ** ** | ** **                                                                                                                                                                                                     | ** ** | **Net Revenue (in millions)********Years Ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Category and Key Products**       | ** ** | **Our Indications**                                                                                                                                                                                            | ** ** | **2007**                                                           | ** ** | **2008** | ** ** | **2009** | ** ** |
| **IGIV**(1)                         |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |   |   |   |
| Gamunex IGIV                        |       | U.S.,  Canada, and EU-PI, ITP, CIDP. Canada and EU-Post Bone Marrow Transplant,  Pediatric HIV Infection. EU only - Kawasaki Disease, Guillain Barre Syndrome,  Chronic Lymphocytic Leukemia, Multiple Myeloma |       | $                                                                  | 646.8      |   | $ | 677.7 |   | $ | 826.4 |   |
|                                |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| **A1PI**                            |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |   |   |   |
| Prolastin A1PI                      |       | A1PI  Deficiency related emphysema                                                                                                                                                                             |       | $                                                                  | 276.5      |   | $ | 316.5 |   | $ | 319.1 |   |
|                                |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| **Fraction V (Albumin and PPF)**(1) |       |                                                                                                                                                                                                           |       | $                                                                  | 68.8       |   | $ | 61.1 |   | $ | 84.8 |   |
| Plasbumin-5                         |       | Plasma  expanders, severe trauma, acute liver and kidney failures                                                                                                                                              |       |                                                               |       |   |   |   |   |   |   |   |
|                                |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |
| (Human) 5% USP                      |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| Plasbumin-20                        |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| (Human) 25% USP                     |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| Plasmanate                          |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| Plasma Protein Fraction 5% USP      |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
|                                |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| **Factor VIII**Koate DVI            |       | Hemophilia  A                                                                                                                                                                                                  |       | $                                                                  | 33.7       |   | $ | 40.2 |   | $ | 46.5 |   |
|                                |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| **Antithrombin III**Thrombate III   |       | Hereditary  antithrombin III deficiency                                                                                                                                                                        |       | $                                                                  | 15.8       |   | $ | 21.3 |   | $ | 24.2 |   |
|                                |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| **Hyperimmunes**                    |       | Hepatitis  A, Hepatitis B, Rabies, RH Sensitization, Tetanus                                                                                                                                                   |       | $                                                                  | 68.8       |   | $ | 78.2 |   | $ | 74.2 |   |
| GamaStan                            |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |   |   |   |
| HyperHepB                           |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| HyperRho                            |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| HyperRab                            |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |
| HyperTet                            |       |                                                                                                                                                                                                           |       |                                                               |       |   |   |   |   |

 

----

(1)          Excludes contract fractionation revenues from the Canadian blood systemoperators.

 

7

----

Tableof Contents

 

Wehave a strong product portfolio with over ten licensed products focused on whatwe believe to be under diagnosed, underdeveloped markets. Our sales are driven primarilyby Gamunex and Prolastin products, which collectively accounted forapproximately 74.7% of our net revenue for the year ended December 31,2009.  The following is a discussion ofour key products or product classes:

 

***IGIV—Gamunex***

 

IGIV products areantibody-rich plasma therapies that have long been used in the treatment ofimmune related disorders such as primary immune deficiencies and certainautoimmune disorders, such as CIDP. For many indications, IGIV is thought toact as an immune modulator; however, in most cases formal regulatory approvalshave not been obtained. We believe that the overall unit demand for IGIV isstill significantly underdeveloped, due to under-diagnosis of conditionsamenable to IGIV therapy, physician under-dosing for current indications andunderutilization for many indications where it has demonstrated efficacy. Webelieve demand for IGIV products will generally increase as a result of newEuropean Agency for the Evaluation of Medicinal Products (EMEA) and FDA approvedindications, physician education on diagnosis and treatment options anddevelopment of consensus guidelines (to ensure appropriate therapeutic use andoptimal dosing).

 

In 2003, we becamethe first producer to commercialize a high concentration 10% caprylate/chromatographypurified liquid version of IGIV. The majority of competing IGIV products at thetime and until recently were either lyophilized (freeze dried) powders thatrequire time-consuming reconstitution or lower concentrated liquids, some ofwhich contain high levels of sugars and salt that pose increased risk ofadverse events particularly in patients with cardiovascular risk factors and/orrenal insufficiency. Gamunex IGIV provides a combination of characteristicsthat are important to physicians, nurses and patients. It is a ready-to-use 10%liquid, which simplifies infusions by eliminating the need for time-consumingreconstitution processes necessary with lyophilized products. As an example ofour continued enhancement of product safety, the manufacturing process for ourIGIV therapy incorporates prion removal, which is described in the FDA-approvedlabeling for Gamunex. We use a patented caprylate purification process in theproduction of Gamunex IGIV, which results in higher yields of the fragile IgGproteins, compared to harsher purification processes. The caprylate processmaintains the integrity of the IgG protein by allowing it to remain in solutionduring processing, maximizing biologic integrity and purity. We believe it isthis comprehensive set of features, together with our history as the firstproducer of a ready-to-use liquid IGIV product in North America and ourreputation for quality and innovation, that has resulted in a high level ofbrand recognition among prescribing physicians and the patient community andhas contributed to our holding a leading position in sales of IGIV since themid-1990s, currently with Gamunex IGIV and previously with its predecessor,Gamimune IGIV. Gamunex has the most approved indications of any liquid IGIVcurrently marketed in the U.S. Further, the FDA granted Gamunex IGIV orphandrug status, which provides marketing exclusivity for the CIDP indication inthe U.S. until September 2015. According to an independent study by HarrisInteractive, CIDP is the largest therapeutic use of IGIV volume, representing29% of the total U.S. IGIV unit volume. We believe Gamunex’s indication forCIDP doubles our market access for licensed indications to 61% of total U.S.IGIV unit volume in the U.S. In 2009, we submitted a sBLA with the FDA and a sNDSwith Health Canada for subcutaneous route of administration for Gamunex IGIVfor the treatment of PI.

 

The approvedindications for Gamunex IGIV in the U.S., Canada and 17 countries in theEuropean Union are Primary Immunodeficiency (PI), Idiopathic ThrombocytopenicPurpura (ITP), and Chronic Inflammatory Demyelinating Polyneuropathy (CIDP).Gamunex IGIV is also approved in the European Union and Canada for post bonemarrow transplant and pediatric HIV infection. Gamunex IGIV is also approved inthe European Union for Kawasaki Disease, Guillain Barre Syndrome, ChronicLymphocytic Leukemia and Multiple Myeloma.

 

On November 14,2008 Talecris Biotherapeutics GmbH, our German subsidiary, filed atype II variation to support the inclusion of the neurological indication Chronic Inflammatory DemyelinatingPolyneuropathy (CIDP) for Gamunex 10% (tradename in Greece : Gaminex10%). The type II variation procedure for the inclusion of CIDP wasperformed within a European Mutual Recognition Procedure, with the EuropeanMember State Germany as Reference Member State and the Paul-Ehrlich Instituteas Reference Competent Authority. The procedure included the following EuropeanMember States as Concerned Member States: Austria, Belgium, Cyprus, CzechRepublic, Denmark, Finland, Greece, Hungary, Ireland, Luxembourg, Poland,Portugal, Sweden, Netherlands and the United Kingdom.

 

On June 12,2009, the Paul-Ehrlich Institute approved the inclusion of CIDP as a newindication for Gamunex/Gaminex 10% for Germany. According to European Unionregulations this approval has been mutually agreed upon by all of the ConcernedMember States in this variation-procedure. As a result, we now have theapproval to promote the CIDP indication in 17 European countries(including a National License in Switzerland). The approval of CIDP is a keystep in our plan to launch Gamunex in selected countries over the next severalyears and grow our overall European business significantly.

 

In 2009, weexperienced a significant increase in demand for Gamunex, driven primarily bysupply availability, growth in our GPO and Specialty Pharmacy/Homecare segmentsin the U.S., and geographic expansion.  As a result of the success of ourplasma collection platform, as well as our plasma supply contract with CSL, webegan to alleviate our plasma supply constraints in the second 

 

8

----

Table of Contents

 

half of 2008, bringingsignificant additional IGIV volumes to the market, to meet the pent up demandfor Gamunex.  We believe that this pent up demand has largely beensatisfied, and consequently, we would not expect to experience the same highlevel of accelerated IGIV volume growth that we experienced in second half of2008 and full year 2009, which will affect our comparative growth in sales andmargins in future periods.  We expect that our volume growth rate willmoderate substantially and effectively grow with market at a long-term compoundannual rate of approximately 6% to 8%, matching our Gamunex and fractionationcapacities.  The supply of IGIV inventory increased throughout thedistribution channel as supply became available from the previous low levels.

 

For the yearsended December 31, 2009 and 2008, Gamunex IGIV net revenues were$826.4 million and $677.7 million, respectively, excluding contractfractionation revenue associated with our contracts with the Canadian bloodsystem operators.

 

***A1PI—Prolastin/Prolastin-C***

 

A1PI is anaturally occurring, self-defensive protein produced in the liver. A1PI is usedto treat congenital A1PI deficiency-related emphysema. This deficiency maypredispose an individual to several illnesses but most commonly appears asemphysema in adults. U.S. sales of A1PI have experienced a compound annualgrowth rate of 15% since 1996. Our Prolastin A1PI product represented 76% ofworldwide A1PI sales in 2007 and 67% of U.S. A1PI sales in 2008 according tothe MRB Worldwide Book and the MRB U.S. Book, respectively.

 

Prolastin A1PI hasthe leading share of sales in the U.S., and approximately 90% share of sales inthe European Union. From 1987 when our A1PI product, Prolastin A1PI, wasgranted orphan drug status, until 2003, when competitors began selling in theU.S., Prolastin had 100% share of A1PI sales in the U.S. Prolastin had a 67%share of U.S. sales in 2008. As a result of our first-mover advantage, pricing,brand strength and direct-to-patient distribution model, we have lost very fewof our patients to competitors, which rely on identification of new patients toestablish their market share. We consistently experience patient losses due tothe nature of the disease. Globally, we continue to focus on access to newmarkets and patient identification efforts, including distribution ofdiagnostic kits as a way to increase sales of A1PI, and are seekingreimbursement in several European countries.

 

There areapproximately 11,000 individuals with A1PI deficiency globally with 5,500currently undergoing A1PI treatment, based on internal estimates. There are anestimated 200,000 individuals with A1PI deficiency-related emphysema in NorthAmerica and Europe. Many individuals with symptoms are misdiagnosed beforereceiving a diagnosis of A1PI deficiency-related emphysema. Based on patientregistries in many European countries, we believe that severe A1PI deficiencyis also prevalent in Europe, and that European patients may representapproximately 30% of potential global sales.

 

Epidemiological surveyshave demonstrated that there is significant latent demand as only approximatelyten percent of all patients in need of treatment have been identified (source:Alpha-1-antitrypsin deficiency. High prevalence in the St. Louis areadetermined by direct population screening. Silverman EK, et al. *Am Rev Respir Dis.* 1989; 140:961-966).Even fewer patients are being treated using an A1PI product due to the limitednumber of countries with licensed product. This represents two distinctopportunities for market expansion—improved disease awareness leading toincreased patient identification, and gaining licenses in new markets wherethere has not been access to A1PI.

 

We believeProlastin is differentiated in the United States by its uniquedirect-to-patient distribution and service model, Prolastin Direct, whichprovides easy enrollment, home infusion, access to insurance experts andpatient-centered health management. Prolastin Direct health management providesbetter patient outcomes by reducing the frequency of respiratory exacerbations.Furthermore, Prolastin Direct results in high medication compliance, with over94% of prescribed doses being administered annually and high patient loyalty,with an annual retention rate of over 96%. Unlike our competitors, ourProlastin A1PI product is primarily shipped in the U.S. directly to the patientthrough Centric Health Resources (Centric), a specialized pharmacy. We own 30%of Centric’s common stock as of December 31, 2009.

 

We believe we arewell suited to maintain a leading sales position in, and further increasegrowth of, A1PI due to a number of factors, including the following:

 

·                  We have a well-established and respected brand—Prolastin A1PI—supportedby direct-to-patient service systems in the U.S.

 

·                  In 2006, we completed a Mutual Recognition Procedure to sell product inEuropean countries with significant identified patient populations.  Prolastin is approved in 15 Europeancountries and we are currently established in six of these markets.  We have been in reimbursement discussionswith a number of these countries since late 2007 and these discussions must beconcluded before we can expect to significantly increase sales in thesecountries. Competitors are currently only licensed in the U.S., Spain andFrance.

 

9

----

Table of Contents

 

·                  We have strong physician and patient community relationships developedover 20 years.

 

·                  We continue to devote resources to increase disease awareness andsupport diagnostic testing to increase the identified patient population.

 

·                  Launching Prolastin-C in the U.S. and Canada, a new and improvedProlastin with improved yields, higher concentration, and significantly reducedinfusion time.

 

Forthe years ended December 31, 2009 and 2008, Prolastin A1PI net revenueswere $319.1 million and $316.5 million, respectively.

 

***Hyperimmunes***

 

Hyperimmunesare antibody rich preparations, the majority of which are used to provideantibodies to counter specific antigens. Other products, collectively referredto as hyperimmune globulins, are made from human plasma collected from donorswith immunity to specific diseases. We have one of the broadest lines of FDAapproved hyperimmunes for hepatitis A, hepatitis B, rabies, tetanusand treatment of Rh negative women pregnant with Rh positive children.

 

In2007, sales of hyperimmunes worldwide were $584 million and comprised 6%of global plasma products. In the U.S., hyperimmune sales totaled$270 million in 2008. Our hyperimmune net revenue was $74.2 million and$78.2 million for the years ended December 31, 2009 and 2008,respectively. We had a 22% share of U.S. sales in 2008 and we had the largestshare of sales in the U.S. for HyperRab and HyperTet in 2008 and 2009.

 

***Albumin and PPF***

 

Albuminis the most abundant protein in human plasma. It is a protein synthesized bythe liver and performs multiple functions, including the transport of manysmall molecules in the blood and the binding of toxins and heavy metals, whichprevents damage they might otherwise cause. Recent studies have indicated thetherapeutic benefit of albumin in some surgical settings compared toalternatives such as starch solutions, which has helped increase demand foralbumin recently after a period of declining demand and depressed prices.

 

PlasmaProtein Factor (Human) (PPF) has similar therapeutic uses as albumin and bothare derived from plasma Fraction V. We are licensed to produce and marketalbumin and PPF under the brand names: Plasbumin and Plasmanate. We believethat the advent of substitute products has acted to commoditize prices forsales of albumin.

 

Since2005, pricing for albumin has strengthened considerably, although it stillremains below historical peaks. In 2007, sales of albumin and PPF were$1.3 billion worldwide. Sales in the U.S. were $314.0 million in2008, with a 16% year over year increase in average price per unit and a 0.9%decrease in volume. Albumin units in the U.S. increased from 118,136 grams in2008 to 119,039 grams in 2009, which is a 0.8% increase.  We had anapproximately 12% share of U.S. units in 2009 and a 9% share of U.S. units in2008.

 

Some of our indications for albumin are:

 

·                  Emergency treatment of Hypovolemic Shock

·                  Burn therapy

·                  Hypoproteinemia with or without edema

·                  Adult Respiratory Distress Syndrome (ARDS)

·                  Cardiopulmonary bypass

·                  Acute Liver Failure

·                  Neonatal Hemolytic Disease

·                  Acute Nephrosis

·                  Eythrocyte Resuspension

·                  Renal Dialysis

 

Wehad $84.8 million and $61.1 million in net revenue from the sale ofalbumin and PPF products for the years ended December 31, 2009 and 2008,respectively, excluding contract fractionation revenue associated with ourcontracts with the Canadian blood system operators. During 2008, our albuminsales were negatively impacted by a change in production mix to contracted PPFpowder from albumin as a result of the 2007 settlement of a customer dispute,which resulted in lower quantities of albumin and finished PPF productavailable for sale during 2008. Demand for our albumin products exceeds oursupply. We are expanding production capacity 

 

10

----

Table of Contents

 

to closer meet demand.This is consistent with our overall strategy to sell more products from eachliter of plasma leading to margin expansion opportunities.

 

***Plasma-Derived Hematology Products***

 

Plasma-derivedhematology products are used to treat patients who either lack one of thenecessary factors for blood clotting or suffer from conditions in whichclotting occurs abnormally. There are 13 blood coagulation factors found inhuman blood.

 

·                  We produce plasma-derived Factor VIII. Factor VIII isthe primary treatment for Hemophilia A, a congenital bleeding disorder causedby a deficiency of coagulation agents in the blood. We had $46.5 million and$40.2 million in plasma-derived Factor VIII net revenue for the yearsended December 31, 2009 and 2008, respectively, under our Koate DVIAntihemophilic Factor (human) brand. Koate DVI had a 4% share of sales in theU.S. in 2008 and 3% worldwide in 2007 according to MRB. Sales of plasma-derivedhemostasis products in 2008 were $452.9 million in the U.S. In 2007 saleswere $2.0 billion worldwide (includes plasma-derived Factor VIII, FIX,ATIII, and von Willebrands and FVII). Plasma-derived Factor VIII facessignificant competition from higher priced recombinant products that are notderived from plasma in the U.S. and EU. Growth in the demand for plasma-derivedFactor VIII is being driven by increased patient identification and treatmentin developing countries. The current per capita Factor VIII utilization issignificantly higher in the U.S. and European Union than in developingcountries. Plasma-derived Factor VIII has lost sales to recombinant products,which have generally been perceived to have lower risk of disease transmissionthan plasma-derived Factor VIII products. These recombinant products, however,currently lack proteins essential for the treatment of certain conditions.Demand for Koate also exceeds our ability to supply. We are expandingproduction capabilities in a two phased approach to help meet demand. Increasedsupply enables us to sell more product per liter of plasma helping to drive ourmargin expansion strategy.

 

·                  ATIII is an important anticoagulant and ATIIItherapies are designed to treat and prevent thromboemboli, or spontaneousclotting within vital organs, in patients with congenital ATIII deficiencyduring high risk surgery, trauma, pregnancy, or childbirth. For the years endedDecember 31, 2009 and 2008, we had $24.2 million and $21.3 million,respectively, in ATIII net revenue under the Thrombate III brand. A transgenicATIII product produced in the milk of transgenic goats by GTC Biotherapeutics, Inc.and marketed in the U.S. by Lundbeck Inc. was launched in May of2009. Our Thrombate III product is currently produced for us by Bayer pursuantto a manufacturing agreement. We are currently validating a new productionfacility at our Clayton, North Carolina site with regulatory approval expectedin early 2012. The new facility will increase our capacity and will allow us toincrease supply.

 

***PPF-powderIntermediate Sales***

 

Separately from our sales of PPF packaged for finaluse, we provide PPF powder to Bayer as an intermediate for the fermentation ofKogenate, Bayer’s recombinant Factor VIII product that Bayer retained at thetime of our formation transaction. Recombinant Factor VIII is a Factor VIIIproduct produced by fermentation of cells transfected with human genes. We willcontinue to provide PPF powder to the Bayer Kogenate business through 2012pursuant to a supply agreement with potential extensions at Bayer’s option to2015. We had $40.3 million and $54.6 million in PPF-powder net revenue forthe years ended December 31, 2009 and 2008, respectively. PPF-powder salesduring 2008 were positively impacted by a change in production mix to PPFpowder from albumin and finished PPF product as a result of the settlement of acustomer dispute.

 

**Manufacturing and Raw Materials**

 

Our Clayton, North Carolina manufacturing site is oneof the world’s largest fully integrated facilities for plasma-derivedtherapies. The site includes plasma receiving, fractionation, purification,filling/freeze-drying and packaging capabilities as well as freezer storage,testing laboratories and a cGMP pilot plant for clinical supply manufacture. Inaddition, we have a manufacturing facility in Melville, NewYork that providesadditional fractionation capacity as well as capabilities for other contractmanufacturing services. A small part of our operations (Thrombate IIIproduction) is currently performed by Bayer under a Supply Agreement, but is inthe process of transfer to the Clayton facility. In addition to the on-sitefreezer storage, we also utilize a leased facility which allows for expandedinventory storage capacity.

 

Our manufacturing facilities currently have thecapacity to fractionate approximately 4.2 million liters of human plasma peryear. We processed approximately 3.6 million liters of plasma in 2009, whichrepresents a utilization rate of approximately 85% of our fractionationcapacity. The majority of the capacity is used for internal productionrequirements with a small amount utilized for contract fractionation, mainlyfor the Canadian blood system operators. We anticipate that we will reach our fractionation capacity in the nearterm depending upon the demand for our products, the availability of sourceplasma and the impact of variability in yield among other factors. We plan toutilize available fractionation capacity in the near term which will result inincreased inventory levels in order to maintain pace with projected growth inproduct demand. To allow full fractionation capacity utilization of 4.2 million

 

11

----

Tableof Contents

 

liters, harvest of albumin paste will be capped at 2.3 million liters.For future capacity expansion, a new fractionation facility is planned for 6.0million liters of Crypoprecipitate (Factor VIII) and II+III paste (IGIV) and4.0 million liters for IV-I paste (Alpha-1). Fraction V paste (albumin) willcontinue to be fractionated in our existing facility in the mid-term at acapacity of 4.0 million liters. Purification, filling, and finishing capacities are dependent onfraction mix.

 

***Talecris Plasma Resources***

 

Plasma is the key raw material used in the productionof plasma-derived biological products, representing greater than 50% of ourcost of goods sold. Human plasma can be secured through internal or externalcollection networks or sources. As of December 31, 2009, we operated 69plasma collection centers, of which 64 were FDA licensed.  We fractionatedapproximately 3.6 million liters of plasma in 2009, of which approximately62% came from plasma collection centers we own and approximately 38% came fromthird-party plasma supply contracts.

 

In 2006, we made the strategic decision to verticallyintegrate our plasma supply chain in order to enhance the predictability,sustainability, and profitability of our plasma supply.  In response tothis decision, we formed our wholly-owned plasma procurement subsidiary,Talecris Plasma Resources, Inc. (TPR).  In November 2006, weacquired 21 licensed plasma centers, 12 unlicensed operating centers, and 25development sites from IBR through an asset purchase agreement as the firststep of our vertical integration strategy.  Subsequently, in June 2007we entered into a Purchase and Sale of Assets Agreement with IBR, pursuant towhich we acquired three licensed plasma collection centers in both 2007 and2008 and twelve licensed plasma collection centers in 2009. Concurrently withthe execution of this agreement, we entered into a Plasma Supply Agreement,which provides us with the option to fund the development and purchaseadditional plasma collection centers.

 

The rapid vertical integration of our plasma supplywas accomplished through the development of an extensive infrastructurenecessary to manage the multiple work streams to open and obtain FDA licensesat our centers, as well as the ramp up of their production.  We devotedsignificant resources on the initial build out of our plasma collection centerplatform, which included consulting arrangements with third parties and thehiring of additional corporate management.  We experienced someoperational issues with the rapid expansion of our platform, which requiredadditional resources to address issues with maintaining quality operations inaccordance with our standard operating procedures.  We have addressed theoperational issues that resulted from the maturation of our plasma collectioncenter platform, which has resulted in the termination of the third partyconsultants and rationalization of our TPR corporate infrastructure.

 

Prior to the execution of our vertical integrationstrategy, we relied exclusively on third parties for all of our plasma, asignificant portion of which was provided to us through plasma collection centersowned or controlled by our competitors.  Through the successful executionof our strategy, we have been able to reduce our reliance on third partysuppliers, enhance our flexibility in procuring plasma, increase our operatingefficiencies and, we expect, will ultimately improve our gross margin andprofitability as our collection center platform matures and we are able toreduce levels of under-absorbed TPR infrastructure and start-up costs.

 

We intend to continue to purchase some plasma fromthird parties through plasma supply contracts. On August 12, 2008, wesigned a five-year plasma supply agreement with CSL Plasma Inc., a subsidiaryof CSL Limited, a major competitor.  This agreement provides us withminimum annual purchase commitments that decline from 550,000 liters in 2010 to200,000 liters in 2013, the final year of the agreement.  We have theability to obtain additional volumes above the minimum purchase commitmentsunder the terms of the agreement.  This contract survives the terminationof the merger agreement. In addition to the contract with CSL Plasma Inc., wehave several other contracts to purchase minimum quantities of plasma withvarious third parties.

 

We plan to source our plasma supply through thecontinued growth of our plasma collection center platform and through ourplasma supply contracts with third parties. In addition to the procurement ofplasma on occasion, we have also purchased intermediate materials needed forthe production of specific fractions. These materials are purchased fromfractionators that have either excess capacity or do not have the processes tomanufacture the final product.

 

Until our plasma collection centers reach normaloperating capacity, we charge unabsorbed overhead costs directly to cost ofgoods sold.  We have reduced and plan to continue to reduce both thecollection cost per liter and the amount of excess period costs chargeddirectly to cost of goods sold as TPR matures.

 

***Pathogen safety***

 

Assuringthe pathogen safety of our products is a priority for us. There are a number ofsteps used to help ensure the pathogen safety of the source plasma we use andthe products we produce. The initial step is the application of donorqualification procedures by our plasma suppliers. We also test donated plasma forserum antibodies. The purpose of serological testing is to detect serumantibodies and other biological markers that appear specifically in associationwith certain diseases. Serological testing is provided under contract byqualified laboratories according to our specifications.

 

12

----

Table of Contents

 

Priorto delivery of the source plasma from our suppliers to our manufacturing plant,we internally perform nucleic acid amplification testing, or NAT, for variousviruses, including HBV, HCV, HIV, HAV, and B-19. Our ability to perform NATtesting internally provides us with a strategic advantage over competitors whodo not have such facilities and must contract with a third party, the NationalGenetics Institute. We perform these tests in a 76,000 square foot testingfacility, located in Raleigh, North Carolina. The facility is leased through September 2017,with an option to purchase until September 1, 2011. The laboratory testedover 4.7 million samples in 2009 and is operated by approximately 100operations and quality employees.

 

Once a unit of plasma passes strict donorqualification procedures, the initial round of serological testing and NAT, theunit is held for a period of time to monitor for pathogen development insubsequent donations. Following the inventory hold period, acceptable units arecombined into fractionation pools and a second round of selected serologicaltesting and NAT is performed on the fractionation pool. As purification of thetarget proteins occurs, viral particles and prions can be removed as a resultof the fractionation and downstream processes. In addition, all productsundergo specific virus inactivation steps in the manufacturing process that aredistinct to the particular product being produced. Extensive laboratory studiesare conducted to validate the capacity of the manufacturing processes to removeor inactivate pathogens. The results of these studies undergo rigorousevaluation by our pathogen safety experts and government regulatory agencies.Our safety efforts include use of a zoning concept at our Clayton fractionationsite to tightly control air, material, and personnel flow throughout production.Furthermore, we have received certification from the industry’s tradeassociation, the Plasma Protein Therapeutics Association, as a result of ourvoluntary adoption of safety standards beyond those required by governmentregulators.

 

**Research and Development**

 

As a result of our past and ongoing investment inresearch and development, we believe that we are positioned to continue as aleader in the plasma-derived therapies industry. Innovation by our research anddevelopment operations is critical to our future growth and ability to remaincompetitive in our industry.   We have astrong commitment to science and technology with a track record ofaccomplishments and pipeline opportunities. On December 31, 2009, we hadapproximately 300 scientists and support staff engaged in research anddevelopment activities.  We focus ourresearch and development efforts in three key areas: continued enhancement ofour process technologies (including pathogen safety), life cycle management forour existing products (including new indications), and development of newproducts.  To the extent we wish to addnew products to our research and development pipeline, we anticipate makingopportunistic business acquisitions or partnering with other companies withprojects that fit our expertise.  Ourresearch and development spending was $71.2 million, $66.0 million, and $61.3million for the years ended December 31, 2009, 2008, and 2007,respectively.

 

The following table includes information regarding theclinical development stage of various product candidates currently in ourdevelopment pipeline:

 
| **Product Candidate**                               | ** ** | **Therapeutic Area** | ** ** | **Product Type**               | ** ** | **Use**                                | ** ** | **Development Phase**                                                              |
|-----------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------------|
|                                                |       |                 |       |                           |       |                                   |       |                                                                               |
| Gamunex IGIV—10%                               |       | Immunology           |       | Subcutaneous                   |       | Primary immune deficiency              |       | Licensing clinical trial completed. Pending  regulatory review in U.S. and Canada. |
|                                                |       |                 |       |                           |       |                                   |       |                                                                               |
| Plasmin                                             |       | Thrombolytic         |       | Plasma-derived Plasmin         |       | aPAO                                   |       | Phase I                                                                            |
|                                                |       |                 |       |                           |       |                                   |       |                                                                               |
| recPlasmin                                          |       | Thrombolytic         |       | Recombinant Plasmin            |       | Acute Ischemic Stroke                  |       | Preclinical                                                                        |
|                                                |       |                 |       |                           |       |                                   |       |                                                                               |
| Prolastin-C A1PI                                    |       | Respiratory          |       | IVA1PI                         |       | A1PI deficiency                        |       | Approved in U.S. and Canada                                                        |
|                                                |       |                 |       |                           |       |                                   |       |                                                                               |
| Prolastin A1PI Aerosol (Alpha-1 Aerosol) (TAL-6005) |       | Respiratory          |       | aerosolized                    |       | A1PI deficiency                        |       | Submission planned 2010 for first clinical trial in  U.S.                          |
|                                                |       |                 |       |                           |       |                                   |       |                                                                               |
| Recombinant FVIII                                   |       | Coagulation          |       | intravenous                    |       | hemophilia A                      |       | Preclinical                                                                        |
|                                                |       |                 |       |                           |       |                                   |       |                                                                               |
| Recombinant A1PI                                    |       | Respiratory          |       | intravenous and/or aerosolized |       | A1PI deficiency, COPD, Cystic Fibrosis |       | Preclinical                                                                        |

 

13

----

Table of Contents

 

Thecontent of our development portfolio will change over time as new plasmaproducts progress from pre-clinical to development to market, and as wediscontinue testing of product candidates that do not prove to be promising orfeasible to develop. Due to the uncertainties and difficulties of thedevelopment process, it is not unusual for protein therapeutics, especiallythose in the early stages of investigation, to be terminated or delayed as theyprogress through development.

 

Wecannot assure you that any of the products listed above will eventually beapproved and marketed. The fact that a product candidate is at a late stage ofdevelopment does not necessarily mean that clinical testing will ultimatelysucceed or the product will eventually pass that phase and be approved formarketing. We may at any time discontinue the development of any of theseproducts due to the occurrence of an unexpected side effect or for any otherreason.

 

Whileour current protein products are derived from human plasma, we expect thatrecombinant technologies will be a major source of new protein therapiescommercialized in the future. We have initiated recombinant protein developmentprograms for Plasmin, Factor VIII, and A1PI. Recombinant or recPlasmin is apatentable form of Plasmin that retains key properties of Plasmin that make ita candidate for development as a therapy for ischemic stroke. We have filedcomposition of matter patents covering recPlasmin. We are conducting pre-clinicaldevelopment of recombinant Factor VIII and A1PI utilizing advanced proteinproduction technology licensed from Crucell N.V.

 

***Gamunex IGIV(TAL-05-0002)***

 

Weare developing a subcutaneous route of administration option for Gamunex 10%IGIV to meet a growing demand for subcutaneous self-administration ofimmunoglobulin for PI patients. Our licensure clinical trial for a subcutaneousadministration of our 10% Gamunex product has been completed; a sBLA has beensubmitted to the FDA and a sNDS has been submitted to Health Canada.

 

***Plasmin(TAL-05-00013)***

 

Plasmin,a thrombolytic agent, is our most innovative pipeline product. Plasmin ispurified from human plasma in its inactive, zymogen form, plasminogen.Historically, attempts to use plasminogen in clinical settings have beenimpeded by the inability to provide sufficient quantities of Plasmin at thesite of clotting before it autodegraded or because such attempts requiredpotentially toxic additives. We have avoided these difficulties by convertingplasminogen to Plasmin, the active form of the enzyme, and stabilizing it byplacing it in an acidified solution that allows us to administer it directlyinto patients at appropriate doses and low toxicity to dissolve blood clots asdetermined by pre-clinical investigation. Plasmin is being produced for clinical trials at our R&D clinicalmanufacturing facilities in Clayton, North Carolina. Our use of Plasmin as athrombolytic is protected by patents and patent applications including: methodof use patent as a direct thrombolytic granted in the U.S., European Union andAustralia; formulation patent granted in Australia and allowed in EuropeanUnion and pending in U.S. and Japan; process patent granted in European Unionand Australia and pending in the U.S.

 

Plasminhas an expected advantage over tissue plasminogen activator as it has a reducedlikelihood of causing bleeding. As a natural human plasma enzyme, Plasmin playsa key role in maintaining hemostasis in human and animal physiology. Its mainphysiologic function is dissolution of blood clots. Plasmin is inactivated inless than a second when it is present in the blood stream unless it is bound toa blood clot. To ensure that Plasmin remains active, it is delivered locally toa clot using a catheter. Once Plasmin is delivered to a clot, it binds anddissolves the clot. When the clot is dissolved and Plasmin is released into theblood stream it is immediately inactivated thereby preventing active Plasminfrom circulating and causing bleeding at distal sites within the body. Thebalance between clot binding and systemic inhibition provides the basis fordifferentiation of our Plasmin development product from any other thrombolyticagents, both licensed and those in development.

 

Plasmin’sformulation is designed for direct delivery into clots via state-of-the-artprocedures (catheter-directed thrombolytic therapy) performed incatheterization laboratories of hospitals, rather than by the current methodinvolving intravenous injection into the bloodstream. Studies have found thatcurrent treatment of blood clots involving intravenous injection of tissueplasminogen activator, or tPA, may cause bleeding, including a 1% to 2% chanceof causing a stroke due to intracranial hemorrhage which often results in deathor severe disability. Plasminogen activators continue to carry significant riskof bleeding complication even when delivered through intravascular catheters.This concern regarding hemorrhage may limit the number of patients who receivetPA. In addition, this concern has caused physicians to use lower doses whichsignificantly prolong the length of treatment under conditions requiring urgentclot removal.

 

Potentialapplications of catheter delivered thrombolytics include aPAO, DVT (deep veinthrombosis), and ischemic stroke. Basically, wherever a vessel or device isoccluded by a blood clot and is accessible by catheter, the potential existsfor directed thrombolytic therapy. We have filed Investigational New DrugApplications (IND) for aPAO, DVT and HGO (hemodialysis graft 

 

14

----

Table of Contents

 

occlusion). We believePlasmin may have other significant indications as well. We are also evaluatingthe use of Plasmin for the treatment of clotting for stroke.

 

Wefiled an IND with the FDA in early 2003 and conducted a Phase I safetytrial in hemodialysis patients who have clogged synthetic arterial-venousshunts. This study started in September 2003 and was completed in 2005.Plasmin was well-tolerated with no major bleeding events at all doses testedand there was a dose-dependent response in clot lysis with greater than 75%clot lysis in five of five patients at the highest dose of 24 mg.

 

Basedon the encouraging outcome of this initial trial, we filed an IND in the U.S.and Clinical Trial Applications (CTA) in various European Union and other non-U.S.countries to evaluate Plasmin in the treatment of aPAO. We are now proceedingwith a clinical trial for aPAO, or clots in leg arteries. In patients withaPAO, arterial blood flow to extremities, usually the legs, becomes blocked bya blood clot. Affecting approximately 100,000 people in the U.S. each year,this condition is most common in people with underlying narrowing of arteriesand gradual restriction of blood flow over time resulting from peripheralarterial disease (PAD). Without prompt intervention, aPAO can result insignificant complications such as permanent nerve and muscle damage, and in themost severe cases, even amputation or death.

 

Thereis an unmet medical need for a proven safe thrombolytic agent to treat aPAO.Current methods focus on pharmacologic, mechanical, or surgical removal of theblood clot, or bypass grafting to direct flow around the area of the clot.However, no clot-busting drugs currently are approved for this indication byregulatory authorities, and those currently used (plasminogen activators) mayrequire a prolonged infusion averaging 24 to 36 hours and produceincreased risk of bleeding complications. Talecris has received an orphan drugdesignation in the US for the development of Plasmin for aPAO, which providesincentives for qualified clinical testing expenses and, if approved, market exclusivityfor seven years. We are currently in our seventh and last dosing cohort inPhase I and have begun to design a Phase II trial. Our goal is to commence thistrial during 2010. In Phase I and preclinical trials, Plasmin appears able torapidly dissolve blood clots without an elevated risk of bleeding. Pd-Plasmindelivered by catheter has dissolved blood clots over 30 cm long intwo hours.

 

Wealso have an open IND for Plasmin in deep vein thrombosis but currently have noplans to pursue an indication.

 

Strokeconstitutes a major worldwide health threat, and it is the third leading causeof death in the U.S. Approximately 87% of strokes are ischemic, and it isestimated that 1 million to 1.5 million patients suffering fromischemic stroke are admitted into hospitals in the U.S. and Europe each year.Activase (tPA) is currently the only product approved for use in the treatmentof ischemic stroke, and intravenous administration of tPA to treat strokecaused by blood clot is the standard of care. Although tPA has shown efficacyin this indication, there are three weaknesses of this product which reduce thepopulations of stroke patients eligible for this treatment. First, tPA is onlyindicated for use within 3 hours of onset of stroke, and the average time ofarrival in the Emergency Department is 3 to 6 hours from symptom onset.Second, treatment with tPA is associated with major bleeding. The most seriousbleeding in stroke patients is symptomatic intracranial hemorrhage, which canbe fatal or result in permanent disability, and is a known complication of tPAtherapy of stroke. Third, there are a number of restrictions on the use of tPAbased on the condition of the patient and the presence of other diseases. As aresult of these limitations, 10-15% of stroke patients are eligible fortreatment with current thrombolytic therapy and less than 5% actually receivethrombolytic. Therefore, there is an urgent, unmet medical need for safethrombolytic therapy for patients with acute stroke. The vast majority of strokevictims are essentially untreated. A proof-of-concept trial to treat ischemicstroke has also been approved in six countries, with the first patientenrolled. Our strategy is to develop recombinant Plasmin for ischemic stroke.

 

***Prolastin-C A1PI***

 

We completedpivotal clinical studies and submitted a sBLA with the FDA and a sNDS withHealth Canada for the approval of Prolastin-C A1PI.  Prolastin-C A1PI is a key product life cycleenhancement to Prolastin A1PI. Like Prolastin, Prolastin-C is intended to treatA1PI deficiency, an inherited disorder that causes a significant reduction inthe naturally occurring protein A1PI. The modified production process ofProlastin-C A1PI will allow for increased yield and higher concentration versusour current Prolastin A1PI product, effectively increasing our capacity by 40%.The European Union regulatory authorities have indicated that a successfulefficacy trial will be a prerequisite to applying for marketing authorizationfor Prolastin-C A1PI in the European Union. The sBLA has been approved by the FDA; and a post-approval clinicaltrial is required as a condition for approval. The sNDS has been approved byHealth Canada. Commercial production of Prolastin-C A1PI at our manufacturingfacility, located at the Clayton site, began in 2009 in support of the plannedlaunch in 2010.

 

***A1PI Aerosol(Alpha-1 Aerosol) (TAL-6005)***

 

Alpha-1 Aerosol isan inhaled version of our A1PI product, which, if successful, is expected toprovide an important advancement in the convenience and speed of delivery oftherapy to A1PI-deficient patients, as well as a potential platform for otherrespiratory indications. An inhaled version may also allow for effectivetreatment with dosages lower than those currently used and 

 

15

----

Table of Contents

 

may facilitateadministration to a larger patient population. Progress includes thedevelopment of a commercial scale manufacturing process, an exclusivepartnership for a highly efficient nebulizing device, and the initiation oftoxicology studies. High levels of enzymes known as neutrophil elastase arepresent in the respiratory secretion of patients suffering from A1PI deficiency.These enzymes can lead to degradation of the lung tissue. Future clinicalstudies will assess the safety of A1PI delivered to the lung by aerosoladministration.

 

***Recombinant A1PIand Factor VIII***

 

Weare exploring the potential for human cell line based protein productiontechnology to produce A1PI and Factor VIII with human modifications.Current recombinant forms of A1PI and Factor VIII are produced in animalcell lines and therefore lack key protein modifications characteristic of thehuman plasma version of the two proteins. Human protein modifications have thepotential to make the human recombinant forms physiologically similar to theirplasma-derived counterparts. The availability of recombinant A1PI mayfacilitate the application of A1PI therapy to other respiratory diseases suchas, COPD or cystic fibrosis (CF).

 

***Technical Supportof Manufacturing Operations***

 

Aspart of the R&D function, staff members are allocated to support productionof commercial products currently on the market. This support includes, but isnot limited to, the following:

 

·                  troubleshooting production issues, especially relating to plasmapooling and fractionation, downstream protein purification processes, andfilling and freeze drying operations;

 

·                  providing technical expertise for evaluation and implementation ofimprovements to existing licensed processes, including driving process changesfor improved quality and throughput, and leading process evaluations tomitigate potential failure modes;

 

·                  tracking and trending of production operational parameters to identifyopportunities that can improve gross margins;

 

·                  supporting transfer of production processes into the manufacturingsetting, evaluating commercial opportunities for existing productionintermediates, and implementing lifecycle management programs. Examples includeimplementation of latex free stoppers; Koate reliability, capacity and yieldimprovements and the new fractionation facility; and

 

·                  supporting throughput capability increases by evaluation of new vendor pastesand plasma sources, such as the Canadian blood system plasma collection methodconversion, and evaluation of recovered plasma sources.

 

OurR&D activities also support improvements in manufacturing and testingprocesses that enhance yield and product quality. In addition to the aboveinitiatives, we are working to transfer production of our Thrombate III productfrom Bayer, with whom we currently have a supply agreement. We are currentlyvalidating a new production facility at our Clayton site with regulatoryapproval expected in early 2012. The new facility will increase our capacityand will allow us to increase supply.

 

**Company History**

 

Ourheritage of patient care innovations in therapeutic proteins dates back toCutter Laboratories, which began to produce plasma-derived products in theearly 1940s, and its successor companies, including Miles Inc., BayerCorporation and Bayer Healthcare LLC.

 

Webegan operations as Talecris Biotherapeutics Holdings Corp. on April 1,2005, upon the completion of our acquisition of substantially all of the assetsand specified liabilities of Bayer’s worldwide plasma business (Bayer Plasma),an operating unit of the Biological Products division of Bayer Healthcare LLC,which is a wholly-owned (indirect) subsidiary of Bayer AG (collectively orindividually, Bayer), in a transaction which was effected by Talecris Holdings,LLC.  As part of our overall formationactivities, we also acquired 100% of the outstanding common stock of PrecisionPharma Services, Inc. (Precision) on April 12, 2005 from Ampersand.

 

Inorder to improve the predictability, reliability, and sustainability of ourplasma supply, we pursued a strategy to substantially vertically integrate ourplasma supply chain through the creation of TPR, enabling us to significantlyreduce our reliance on third party suppliers, enhancing our flexibility inprocuring plasma, increasing our operating efficiencies, and as our plasmacollection centers mature, improving our gross margin and profitability.  Pursuant to this strategy, we have acquiredplasma collection centers from third parties, particularly IBR, and developedour own plasma collection centers.  At December 31,2009, our plasma collection center network consisted of 69 centers, of which 64were FDA licensed.

 

16

----

Table of Contents

 

On October 6,2009, we completed our initial public offering (IPO) of 56,000,000 shares ofour common stock at an offering price of $19.00 per share for an aggregateoffering of $1.064 billion.  We receivednet proceeds of $519.7 million from the issuance of 28,947,368 new shares ofcommon stock. These proceeds were used to repay principal under our thenexisting First and Second Lien Term Loans. We did not receive any proceeds from the selling stockholders’ sale of27,052,632 shares of common stock in the offering.

 

On October 21,2009, we completed the issuance of $600.0 million, 7.75% Senior UnsecuredNotes, due November 15, 2016 at a price of 99.321% of par in a privateplacement to certain qualified institutional buyers.  We used the net proceeds to us of $583.9million to repay principal and interest amounts of $499.6 million under ourFirst and Second Lien Term Loans, which were subsequently terminated, $55.6million to repay principal under our Revolving Credit Facility, and $28.7million to settle and terminate certain interest rate swap contracts with anotional amount of $390.0 million. Subsequently, we terminated the remaining interest rate swap contractwith a notional amount of $50.0 million for $6.1 million.

 

As ofDecember 31, 2009, Talecris Holdings, LLC held approximately 50.1% of ouroutstanding common stock.  TalecrisHoldings, LLC is owned by (i) Cerberus-Plasma Holdings LLC, the managingmember of which is Cerberus Partners, L.P., and (ii) limited partnershipsaffiliated with Ampersand Ventures. Substantially all rights of management and control of Talecris Holdings,LLC are held by Cerberus-Plasma Holdings LLC.   Subsequent to December 31, 2009, the ownership of our outstandingcommon stock by Talecris Holdings, LLC was diluted below 50%.

 

**Customers**

 

Threecustomers accounted for approximately 36% and 35% of our net revenues for theyears ended December 31, 2009 and 2008, respectively. Similarly, ouraccounts receivable balances have also been concentrated with a small number ofcustomers. Two customers accounted for approximately 23% and 29% of ouraccounts receivable, net, as of December 31, 2009 and December 31,2008, respectively.  Additionally, we arethe largest supplier of plasma-derived products to the Canadian blood systemoperators, Canadian Blood Services and Hema Quebec, and derive significantrevenue and profits from these contracts. It is estimated that 64% (41% in-patient; 23% out-patient) of IGIV soldin the U.S. in 2008 was purchased by hospitals; physician offices representedabout 19% of IGIV volume; and home healthcare companies and specialtypharmacies represented 17% of the IGIV volume. We expect that sales of ourproducts to a limited number of customers will continue to represent asubstantial amount of our revenues for the foreseeable future. For a discussionof certain risks related to our customer concentration, please see “RiskFactors—A substantial portion of our revenue is derived from a small number ofcustomers, and the loss of one or more of these customers could have a materialadverse effect on us.”

 

Approximately 34% of our net revenue for 2009 and 2008and approximately 33% of our net revenue for 2007 was generated from outside ofthe United States.  The following tableincludes a geographic breakdown of our net revenues:

 
| ** **        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------|------------|-----------------------------------|------------|
| ** **        | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| United States     |       | $                                 | 1,011,468  |   | $ | 906,376 |   | $ | 817,276 |   |
| Canada            |       | 214,883                           |       | 215,964 |   | 189,923 |   |
| Europe            |       | 185,297                           |       | 168,081 |   | 136,972 |   |
| Other             |       | 121,561                           |       | 83,871 |   | 74,338 |   |
| Total net revenue |       | $                                 | 1,533,209  |   | $ | 1,374,292 |   | $ | 1,218,509 |   |

 

Our international business is subject, in variousdegrees, to a number of risks inherent in conducting business in othercountries.  These include, but are notlimited to, currency exchange rate fluctuations, capital and exchange controlregulations, expropriation and other restrictive government actions.  Our international business is also subject togovernment-imposed constraints, including laws on pricing, reimbursement, andaccess to our products.

 

Our worldwide net revenue does not reflect asignificant degree of seasonality.  Wegenerally experience a favorable revenue and gross margin benefit during thesecond and third quarters due to higher sales of our hyperimmune therapies forthe treatment of exposure to rabies.

 

**Contract Services**

 

Apart from the contracts with the Canadian bloodsystem operators discussed elsewhere, including under “Business—CompetitiveStrengths—Favorable Distribution Arrangements,” we also provide a variety ofcontract manufacturing or process services, including plasma fractionation,manufacturing, and analytical testing. These contracts are for a limited numberof batches of 

 

17

----

Tableof Contents

 

product and development services during the clinical development phaseof a project and then change to a guaranteed annual minimum purchase commitmentfor a term of typically three to five years during the commercial phase of eachagreement.

 

**Sales, Marketing and Distribution**

 

Oursales and marketing department consists of approximately 240 full timeprofessionals as of December 31, 2009, including a U.S. sales force ofapproximately 120 field sale representatives. Within the U.S., our core market,we have developed a “push-pull” distribution network comprised of both directand indirect channels. Our direct channel is comprised of three specialty salesteams: Immunology/Neurology, Pulmonary, and Hematology/Specialty. Our specialtysales representatives are experienced professionals with a combination ofextensive commercial and healthcare related experience calling on a variety oftouch points including physicians, pharmacists, and homecare companies.

 

·                  The Immunology/Neurology team is primarily focused on promoting Gamunexfor the use in PI, CIDP, and ITP. It is also responsible for promoting ourportfolio of hyperimmune products and Plasbumin. This team calls on office-basedand hospital-based specialty physicians including neurologists andimmunologists. They also call on a variety of healthcare providers within thehospital and home-care settings (physicians, nurses, pharmacists).

 

·                  The Pulmonary team promotes Prolastin, focusing on identification ofA1PI patients and driving brand choice for Prolastin, which is the mostprescribed A1PI therapy in the U.S.

 

·                  The Hematology/Specialty team promotes Koate, Thrombate III, and ourportfolio of hyperimmune products calling on hematologists and other healthcareproviders within the hospital and specialty treatment centers.

 

·                  In addition to our direct sales force, we have a managed markets salesteam that manages relationships and contracting efforts with GPOs,distributors, home healthcare and specialty pharmacy providers and privatecommercial payors.

 

Wesell, market and distribute our various products through both our direct salespersonnel and our network of distributors. Our sales, marketing anddistribution efforts focus on strengthening our relationships with physicians,pharmacists, nurses, patients, GPOs, distributors, home healthcare andspecialty pharmacy providers. In the U.S., our Prolastin Direct Program hasengaged a prescription fulfillment provider to ensure that Prolastin A1PI canbe shipped directly to patients. This direct-to-patient distribution service isdesigned to enhance user convenience and ensure the patient of an uninterruptedsupply of Prolastin A1PI, while providing us with valuable information abouttheir usage patterns.  We are the onlyA1PI provider to have completed a Mutual Recognition Procedure in the EuropeanUnion.  Prolastin A1PI is approved in 15European countries and we are currently established in six of these markets. Wehave been in reimbursement discussions with a number of these countries since late2007 and these discussions must be concluded before we can expect tosignificantly increase sales in these countries.

 

*Packagingand Distribution Contracts*

 

Since2005, we significantly reduced the number of our distributors andsimultaneously entered into long-term distribution agreements with majorhospital group purchasing organizations, or GPOs, distributors, home care andspecialty pharmacy providers and distributors which we believe grant usfavorable volume, pricing, and payment terms, including in certain casesfinancial penalties if they fail to purchase the agreed volume of products.

 

Inaddition, we have an agreement with Catalent Pharma Solutions pursuant to whichthey provide packaging, labeling and testing services for us in connection withthe distribution of our products in Europe. The agreement expires in 2013,though we have the option to extend it twice, each time for a period of twoyears. We may terminate the agreement upon 12 months notice, and Catalentmay terminate the agreement upon 24 months notice, beginning in 2011.Either party may terminate the agreement upon the bankruptcy of the other partyor if there is a material breach which is not cured within 30 business days.

 

**Patents and Other Intellectual Property Rights**

 

Our success depends inpart on our ability to obtain and maintain proprietary protection for ourproduct candidates, technology and know-how, to operate without infringing theproprietary rights of others and to prevent others from infringing ourproprietary rights. Our policy is to seek to protect our proprietary positionby, among other methods, filing U.S. and foreign patent applications related toour proprietary technology, inventions and improvements that are important tothe development of our business. We also rely on trade secrets, legal opinions,know-how, continuing technological innovation and in-licensing opportunities todevelop and maintain our proprietary position.

 

*Patents.* As of December 31, 2009, we owned or licensed for uses within ourfield of business over 130 U.S. patents and 

 

18

----

Tableof Contents

 

U.S. patent applications as well as numerous foreigncounterparts to many of these patents and patent applications. At present, wedo not consider any individual patent, patent application or patent family tobe material to the operation of our business as a whole. Our patent portfolioincludes patents and patent applications with claims directed to thecomposition of matter, manufacturing processes, pharmaceutical formulation andmethods of use of many of our compounds and products, including a compositionof matter patent application for a recombinant Plasmin molecule and amanufacturing process patent for Gamunex IGIV. We vigorously defend ourintellectual property to preserve our rights and gain the benefit of ourinvestment.

 

The patent positions ofcompanies like ours are generally uncertain and involve complex legal andfactual questions. Our ability to maintain and solidify our proprietaryposition for our technology will depend on our success in obtaining effectiveclaims and enforcing those claims once granted. We do not know whether any ofour patent applications or those patent applications that we license willresult in the issuance of any patents. Our issued patents and those that mayissue in the future, or those licensed by us, may be challenged, narrowed,circumvented or found to be invalid or unenforceable, which could limit ourability to prevent competitors from marketing related products or the length ofterm of patent protection that we may have for our products. Neither we nor ourlicensors can be certain that we were the first to invent the inventionsclaimed in our owned or licensed patents or patent applications. In addition,our competitors may independently develop similar technologies or duplicate anytechnology developed by us, and the rights granted under any issued patents maynot provide us with any meaningful competitive advantages against thesecompetitors. Furthermore, because of the extensive time required fordevelopment, testing and regulatory review of a potential product, it ispossible that, before any of our products can be commercialized, any relatedpatent may expire or remain in force for only a short period followingcommercialization, thereby reducing any advantage of the patent.

 

We continuously monitorthe proprietary positions of third parties, and particularly the proprietarypositions of our business competitors, in order to guide the development of ourproduct candidates and avoid the possibility of infringement. Periodically we commission formal legalopinions in order to confirm our freedom to operate.

 

*Trademarks.* Given the importance of our name brands, particularly with respect toIGIV and Alpha-1-Antitrypsin (A1PI) products, we rely heavily on the protectionof trade names and trademarks. We have registered trademarks for a number ofour products, including Gamunex®,Gaminex 10%®, Prolastin®,Prolastin-C®, Plasbumin®,Plasmanate®, Koate®,Thrombate III®, GamaStan®,HyperHepB®, HyperRho®,HyperRab®, HyperTet®,Gamimune®, Talecris Direct®, and Prolastin Direct®.

 

*TradeSecrets.*  We may rely, in some circumstances, on tradesecrets to protect our technology. However, trade secrets can be difficult toprotect. We seek to protect our proprietary technology and processes, in part,by maintaining a trade secret registry and by implementing confidentiality agreementswith our employees, consultants, scientific advisors and contractors. We alsoseek to preserve the integrity and confidentiality of our data and tradesecrets by maintaining physical security of our premises and physical andelectronic security of our information technology systems. While we haveconfidence in these individuals, organizations and systems, agreements orsecurity measures may be breached, and we may not have adequate remedies forany breach. In addition, our trade secrets may otherwise become known or beindependently discovered by competitors.

 

*In-License Agreements.* We license from Bayer HealthCare LLC certain intellectual propertyrights not acquired by us in connection with our formation transaction. On August 1,2006 we entered into a collaboration and development agreement with ActivaeroGmbH which grants Talecris exclusive rights to use the AkitaTM inhalation devicefor the aerosol delivery of A1PI for any indication. Under that agreement, weare committed to a minimal level of spending each year during development andshould the product reach commercialization we must pay a royalty on sales, withno milestone payments due to Activaero GmbH. The agreement is valid until thelast to expire applicable patent right—currently not expected until 2025.Talecris has the right to terminate with up to 120 days notice, but must pay aprogressively higher termination fee determined by considering both the reasonfor Talecris’ termination and the number of years since the effective date ofthe agreement. On September 4, 2008 and December 17, 2008, we enteredinto exclusive commercial licenses with Crucell N.V. for two recombinantproteins, A1PI and Factor VIII (alone or combined with recombinant VonWillebrand Factor), respectively, utilizing advanced protein technology. Wepaid Crucell license fees and committed to pay them milestone payments whencertain research and clinical targets have been met and royalty payments uponcommercialization, while reserving the right for us to terminate the agreementswithout penalty upon 90 days notice.

 

**Competition**

 

The plasma products industry is highly competitivewith changing competitive dynamics.  Weface, and will continue to face, competition from both U.S.-based and foreignproducers of plasma-derived therapies, some of which have lower cost structure,greater capital, manufacturing facilities, resources for research anddevelopment, and marketing capabilities. In addition to competition from other large worldwide plasma productsproviders, we face competition in local areas from smaller entities.  For example, in Europe, where the industry ishighly regulated and health care systems vary from country to country, localentities may have greater knowledge of local health care systems, moreestablished infrastructure and have existing regulatory approvals or a betterunderstanding of the local regulatory process, allowing them to market theirproducts more quickly.  Moreover,plasma-derived therapies generally face competition from non-plasma productsand other courses of treatment.

 

19

----

Table of Contents

 

In2007, we were ranked third in global plasma product sales, with a 12% share ofworldwide sales. According to MRB, our principal plasma derivatives competitorsare Baxter International, Inc., CSL Behring, Octapharma AG and Grifols,representing 22%, 18%, 9% and 8%, respectively, of worldwide plasma derivativesales in 2007. We also face competition in specific countries from localnon-profit organizations.

 

Withregard to other large plasma product providers and certain key products of theplasma product business, the competition we face, and the principal bases onwhich we compete, vary from product class to product class.

 

*IGIV*

 

Themajority of competing IGIV products were, prior to 2007, either lyophilizedpowders that required time consuming reconstitution or lower concentratedliquid, most of which contain high levels of sugars and salt that poseincreased risk of adverse events particularly in patients with cardiovascularrisk factors and/or renal insufficiency. We believe our use of a caprylatepurification process gives our product an advantage over competitors’ productsthat are purified by harsher solvent processes. Since 2002, the majority ofsales for IGIV products have shifted from lyophilized to liquid with liquidscapturing 29% of the market in 2002 and 80% in 2008. Liquid IGIV products areviewed as preferable because they are ready-to-use (i.e., they require noreconstitution), with generally excellent efficacy and tolerability profiles.Product margin improvement opportunities are being driven by the transitionfrom lower priced lyophilized products to higher priced liquids usingmanufacturing processes that deliver improved IgG (immune gamma globulin) yields.

 

Therehas been considerable consolidation among IGIV producers in the U.S. In 2003,CSL acquired the assets from Aventis Behring, and Grifols acquired a range ofassets from Mitsubishi’s Alpha Therapeutics that led to the exit of two IGIVbrands. A year later, Octapharma and Grifols launched lower concentrationliquids. Grifols has recently received FDA approval for its new manufacturingprocess: Flebogamma 5% DIF with double virus inactivation and filtering. CSLreceived U.S. regulatory approval for its liquid 10% IGIV and launched itsproduct in 2008. CSL has a second generation subcutaneous product indevelopment for a PI indication and launched Rhophylac for ITP in 2007. In2006, Baxter Bioscience launched Gammagard Liquid 10% soon after its purchase ofthe American Red Cross IGIV product line (Panglobulin and Polygam). OtherBaxter efforts in subcutaneous formulation and delivery in flexible containershave also been announced. We expect additional producers of IGIV outsidethe U.S. to introduce products into the U.S. in the next few years. For example, Bio Products Laboratory, a not-for-profit organizationwholly-owned by the U.K. government, received approval from the FDA for its 5percent concentration IGIV for PI and Octapharma and Grifols have filed forapproval of a 10% liquid IGIV.  Amongproducers of liquid IGIV products, we intend to compete primarily on the basisof our first-line positioning as the premium liquid IGIV brand with extensiveclinical experience and well developed brand loyalty supplemented in the mediumterm with new indications and formulations.

 

*A1PI*

 

Until2003, our A1PI product, Prolastin A1PI, was the only plasma product licensedand sold for therapy of congenital A1PI deficiency-related emphysema in theU.S. As new competitors introduced products into the U.S., our share of unitssold of Prolastin A1PI in the U.S. was approximately 67% of all A1PI productsales in 2008 according to MRB. In August 2009 Kamada’s A1PI intravenoustherapy was approved by the FDA and we expect them to begin sales in the U.S.in 2010. We expect to compete with increased competition on the basis of ourlong clinical history as well as brand name recognition and customeracceptance. In that regard, we believe we have a significant advantage because ofour existing direct-to-patient delivery program, Prolastin Direct, which is ourprimary distribution mode in the U.S. We believe Prolastin is differentiated inthe United States by its unique direct-to-patient distribution and servicemodel, Prolastin Direct, which provides easy enrollment, home infusion, accessto insurance experts and patient-centered health management. Prolastin Directhealth management provides better patient outcomes by reducing the frequency ofrespiratory exacerbations. Furthermore, Prolastin Direct results in highmedication compliance, with over 94% of prescribed doses being administeredannually and high patient loyalty with, an annual retention rate of over 96%.New entrants will likely continue to gain some share of product sales for newpatients (competitors have also invested in new patient identificationefforts), but we have not incurred significant erosion of our existing customerbase due to patients’ switching to alternative A1PI products and we have beensuccessful in identifying new patients. We experience continual patient lossesdue to the nature of the disease.

 

Othermanufacturers began selling A1PI products in the United States and Spainbeginning in 2003 and France in 2005. In 2006, we completed a Mutual RecognitionProcedure in the European Union covering countries where over 1,300 symptomaticpatients have been identified but have had no access to a licensed A1PIproduct.  Prolastin A1PI is approved in15 European countries and we are currently established in six of thesemarkets.  We have been in reimbursementdiscussions with a number of these countries since late 2007 and thesediscussions must be concluded before we can expect to significantly increasesales in these countries.  In October 2009,we received FDA approval, and in February 2010, we received Health Canadaapproval for Prolastin-C A1PI, a new concentrated version of our Prolastin A1PIproduct, which delivers the same amount of active protein, but withsignificantly reduced 

 

20

----

Table of Contents

 

infusion time.  This product was developed using advances inmanufacturing technology. We expect to launch sales of Prolastin-C A1PI in thefirst half of 2010.

 

*Albumin*

 

Recently, industry-wide albumin sales have increasedsignificantly driven by both favorable volume demand and price. Among albuminproducts, competition is generally based on price, given that the products tendto be homogenous. In 2007, we had an approximate 7% share of global albumin andPPF sales. Most of our albumin sales are in the U.S.

 

*Thrombate*

 

We have the only plasma-derived brand ATIII licensedin the U.S.  Recently, GTCBiotherapeutics received FDA approval for a competing product—Atryn, transgenicATIII (produced in transgenic goats) for the treatment of hereditaryantithrombin deficiency. The product was launched by Lundbeck, Inc. in theU.S. in May 2009.

 

**Government Regulation**

 

Governmentauthorities in the U.S., at the federal, state and local level, and in othercountries extensively regulate, among other things, the research, development,testing, approval, manufacturing, labeling, post-approval monitoring andreporting, packaging, promotion, storage, advertising, distribution, marketingand export and import of pharmaceutical products such as those we aredeveloping. The process of obtaining regulatory approvals and the subsequentsubstantial compliance with appropriate federal, state, local and foreign statutesand regulations require the expenditure of substantial time and financialresources. The following is a summary of overall regulatory landscape for ourbusiness.

 

*United States Government Regulation.* In the U.S., the FDA regulates drugs under the Federal Food, Drug, andCosmetic Act and implementing regulations. Failure to comply with theapplicable FDA requirements at any time during the product development process,approval process or after approval may result in administrative or judicialsanctions. These sanctions could include the FDA’s imposition of a clinicalhold on trials, refusal to approve pending applications, withdrawal of anapproval, warning letters, product recalls, product seizures, total or partialsuspension of production or distribution, injunctions, fines, civil penaltiesor criminal prosecution, or any combination of these sanctions. Any agency orjudicial enforcement action could have a material adverse effect on us.

 

*The BLA Approval Process.*  Drugs that arealso biological products must also satisfy the requirements of the PublicHealth Services Act and its implementing regulations. In order for a biologicaldrug product to be legally marketed in the U.S., the product must have aBiologic License Application (BLA), approved by the FDA.

 

Thesteps for obtaining FDA approval of a BLA to market a biological product in theU.S. include:

 

·                  completion of preclinical laboratorytests, animal studies and formulation studies under the FDA’s good laboratorypractices regulations;

 

·                  submission to the FDA of anInvestigational New Drug Application (IND), for human clinical testing, whichmust become effective before human clinical trials may begin and which mustinclude independent Institutional Review Board, or IRB, approval at eachclinical site before the trials may be initiated;

 

·                  performance of adequate andwell-controlled clinical trials in accordance with Good Clinical Practices toestablish the safety and efficacy of the product for each indication;

 

·                  submission to the FDA of a BLA, whichcontains detailed information about the chemistry, manufacturing and controlsfor the product, reports of the outcomes and full data sets of the clinicaltrials, and proposed labeling and packaging for the product;

 

·                  satisfactory review of the contents ofthe BLA by the FDA, including the satisfactory resolution of any questionsraised during the review;

 

·                  satisfactory completion of an FDAAdvisory Committee review, if applicable;

 

21

----

Table of Contents

 

·                  satisfactory completion of an FDAinspection of the manufacturing facility or facilities at which the product isproduced to assess compliance with cGMP regulations, to assure that thefacilities, methods and controls are adequate to ensure the product’s identity,strength, quality and purity; and

 

·                  FDA approval of the BLA includingagreement on post-marketing commitments, if applicable.

 

Preclinicaltests include laboratory evaluations of product chemistry, toxicity andformulation, as well as animal studies. An IND sponsor must submit the results ofthe preclinical tests, together with manufacturing information and analyticaldata, to the FDA as part of the IND. Some preclinical testing may continueafter the IND is submitted. The IND must become effective before human clinicaltrials may begin. An IND will automatically become effective 30 days afterreceipt by the FDA, unless before that time the FDA raises concerns orquestions about issues such as the conduct of the trials and or supportingpreclinical data as outlined in the IND. In that case, the IND sponsor and theFDA must resolve any outstanding FDA concerns or questions before clinicaltrials can proceed. In other words, submission of an IND may not result in theFDA allowing clinical trials to commence.

 

Clinicaltrials involve the administration of the investigational product to humansubjects under the supervision of qualified investigators. Clinical trials areconducted under strict requirements to ensure the protection of human subjectsparticipating in the trial and protocols detailing, among other things, theobjectives of the study, the parameters to be used in monitoring safety and theeffectiveness criteria to be evaluated. A protocol for each clinical trial andany subsequent protocol amendments must be submitted to the FDA as part of theIND. In addition, an institutional review board, or IRB, at each site at whichthe study is conducted must approve the protocol, subject consent form and anyamendments. All research subjects must be informed, among other things, aboutthe risks and benefits of the investigational product and provide theirinformed consent in writing.

 

Clinicaltrials typically are conducted in three sequential phases, but the phases mayoverlap or be combined. Phase I trials usually involve the initialintroduction of the investigational drug into a small group of healthyvolunteers (e.g., 10 to 20) to evaluate the product’s safety, dosagetolerance and pharmacokinetics and, if possible, to gain an early indication ofits effectiveness.

 

Phase IItrials usually involve controlled trials in a larger but limited patientpopulation (e.g., a few hundred) to:

 

·                  evaluate dosage tolerance and appropriate dosage;

 

·                  identify possible adverse effects and safety risks; and

 

·                  provide a preliminary evaluation of the efficacy of the drug forspecific indications.

 

Phase IIItrials usually further evaluate clinical efficacy and test further for safetyin an expanded patient population (e.g., several hundred to several thousand).Phase III trials usually involve comparison with placebo, standardtreatments or other active comparators. Usually two well-controlled largePhase III or pivotal trials demonstrating safety and efficacy arerequired. These trials are intended to establish the overall risk-benefitprofile of the product and provide an adequate basis for physician labeling.Phase III trials are usually larger, more time consuming, more complex andmore costly than Phase I and Phase II trials. Since most of ourproducts are aimed at very small populations where it is not always possible toconduct two large studies, regulators may accept one study on a smaller numberof patients than would typically be required for pharmaceutical products ingeneral provided the data are sufficiently robust.

 

Phase I,Phase II and Phase III testing may not be completed successfullywithin any specified period, if at all. Furthermore, the FDA or we may suspendor terminate clinical trials at any time on various grounds, including afinding that the subjects or patients are being exposed to an unacceptablehealth risk, have experienced a serious and unexpected adverse event, or thatcontinued use in an investigational setting may be unethical. Similarly, an IRBcan suspend or terminate approval of research if the research is not beingconducted in accordance with the IRB’s requirements or if the research has beenassociated with unexpected serious harm to patients.

 

Assumingsuccessful completion of the required clinical testing, the results of thepreclinical studies and of the clinical trials, together with other detailedinformation, including information on the chemistry, manufacture andcomposition of the product, are submitted to the FDA in the form of a BLArequesting approval to market the product for one or more indications. In mostcases, the BLA must be accompanied by a substantial user fee. The FDA willinitially review the BLA for completeness before it accepts the BLA for filing.After the BLA submission is accepted for filing, the FDA reviews the BLA todetermine, among other things, whether a product is safe and effective for itsintended use and whether the product is being manufactured in accordance withcGMP to assure and preserve the product’s identity, strength, quality, purityand potency.

 

Underthe Pediatric Research Equity Act of 2003, or PREA, BLAs or supplements to BLAsmust contain data to assess the safety and effectiveness of the drug for theclaimed indications in all relevant pediatric subpopulations and to supportdosing and administration for each pediatric subpopulation for which the drugis safe and effective. The FDA may grant deferrals for submission 

 

22

----

Table of Contents

 

of data or full or partialwaivers. Unless otherwise required by regulation, PREA does not apply to anydrug for an indication for which orphan designation has been granted.

 

Beforeapproving a BLA, the FDA generally will inspect the facility or the facilitiesat which the product is manufactured. The FDA will not approve the product ifit finds that the facility does not appear to be in cGMP compliance. If the FDAdetermines the application, manufacturing process or manufacturing facilitiesare not acceptable, it will either disapprove the application or issue anapprovable letter in which it will outline the deficiencies in the BLA andprovide the applicant an opportunity to meet with FDA representatives andsubsequently to submit additional information or data to address the deficiencies.Notwithstanding the submission of any requested additional information, the FDAultimately may decide that the application does not satisfy the regulatorycriteria for approval.

 

Thetesting and approval process requires substantial time, effort and financialresources, and each may take several years to complete. Data obtained fromclinical activities are not always conclusive and may be susceptible to varyinginterpretations, which could delay, limit or prevent regulatory approval. TheFDA may not grant approval on a timely basis, or at all. We may encounterdifficulties or unanticipated costs in our efforts to secure necessarygovernmental approvals, which could delay or preclude us from marketing ourproducts. The FDA may limit the indications for use or place other conditionson any approvals that could restrict the commercial application of theproducts. After approval, some types of changes to the approved product, suchas adding new indications, manufacturing changes and additional labelingclaims, are subject to further testing requirements and FDA review andapproval.

 

*Post-Approval Requirements.*  Afterregulatory approval of a product is obtained, we are required to comply with anumber of post-approval requirements. For example, as a condition of approvalof a BLA, the FDA may require post marketing testing and surveillance tomonitor the product’s safety or efficacy. In addition, holders of an approvedBLA are required to keep extensive records, to report certain adverse reactionsand production problems to the FDA, to provide updated safety and efficacyinformation and to comply with requirements concerning advertising andpromotional labeling for their products. Also, quality control andmanufacturing procedures must continue to conform to cGMP regulations as wellas the manufacturing conditions of approval set forth in the BLA. The FDAperiodically inspects manufacturing facilities to assess compliance with cGMPregulations, which imposes certain procedural, substantive and recordkeepingrequirements. Accordingly, manufacturers must continue to expend time, moneyand effort in the area of production and quality control to maintain compliancewith cGMP and other aspects of regulatory compliance.

 

FutureFDA inspections may identify compliance issues at our facilities or at thefacilities of our contract manufacturers that may disrupt production ordistribution, or require substantial resources to correct and preventrecurrence of any deficiencies. In addition, discovery of problems with aproduct or the failure to comply with applicable requirements may result inrestrictions on a product, manufacturer or holder of an approved BLA, includingwithdrawal or recall of the product from the market or other voluntary,FDA-initiated or judicial action that could delay or prohibit furthermarketing. Newly discovered or developed safety or effectiveness data mayrequire changes to a product’s approved labeling, including the addition of newwarnings and contraindications. Also, new government requirements, includingthose resulting from new legislation, may be established that could delay orprevent regulatory approval of our products under development.

 

*Orphan Drug Designation.*  The FDA maygrant orphan drug designation to drugs intended to treat a “rare disease orcondition” that affects fewer than 200,000 individuals in the U.S., or morethan 200,000 individuals in the U.S. and for which there is no reasonableexpectation that the cost of developing and making available in the U.S. a drugfor this type of disease or condition will be recovered from sales in the U.S.for that drug. Orphan drug designation must be requested before submitting anapplication for marketing approval. Orphan drug designation does not convey anyadvantage in, or shorten the duration of, the regulatory review and approvalprocess. Orphan drug designation can provide opportunities for grant fundingtowards clinical trial costs, tax advantages and FDA user-fee benefits. Inaddition, if a product which has an orphan drug designation subsequentlyreceives the first FDA approval for the indication for which it has suchdesignation, the product is entitled to orphan drug exclusivity, which meansthe FDA may not approve any other application to market the same drug for thesame indication for a period of seven years, except in limited circumstances,such as a showing of clinical superiority to the product with orphanexclusivity or a meaningfully different mode of administration. Competitors mayreceive approval of different drugs or biologics for the indications for whichthe orphan product has exclusivity. However, if a company with orphan drugexclusivity is not able to supply the market, the FDA could allow anothercompany with the same drug a license to market for said indication.

 

*Fast Track Designation.*  The FDA’s fasttrack programs, one of which is fast track designation, are designed tofacilitate the development and review of new drugs that are intended to treatserious or life threatening conditions and that demonstrate the potential toaddress unmet medical needs for the conditions. Fast track designation appliesto a combination of the product and the specific indication for which it isbeing studied. Thus, it is the development program for a specific drug for aspecific indication that receives fast track designation. The sponsor of aproduct designated as being in a fast track drug development program may engagein close early communication with the FDA including through timely meetings andfeedback on clinical trials. Products in fast track drug 

 

23

----

Table of Contents

 

development programs alsomay receive Priority Review or accelerated approval (i.e., where the reviewcycle is set with a six-month review clock instead of 10- or 12-monthreview clock). Sponsors may also be able to submit completed portions of anapplication before the entire application is completed; however, the reviewclock will not officially begin until the entire completed BLA is submitted toand filed by the FDA. The FDA may notify a sponsor that its program is nolonger classified as a fast track development program if the fast trackdesignation is no longer supported by emerging data, the designated drugdevelopment program is no longer being pursued, or another product that meetsthe unmet medical need for the same indication is approved first.

 

*Regulation Outside the United States.* In addition to regulations in the U.S., we are subject to a variety ofregulations in other jurisdictions governing clinical trials and commercialsales and distribution of our products. Whether or not we obtain FDA approvalfor a product, we must obtain approval of a product by the comparable regulatoryauthorities of countries outside the U.S. before we can commence clinicaltrials or marketing of the product in those countries. The approval processvaries from country to country, and the time may be longer or shorter than thatrequired for FDA approval. The requirements governing the conduct of clinicaltrials, product licensing, pricing and reimbursement vary greatly from countryto country.

 

Toobtain regulatory approval of a drug under European Union regulatory systems,we may submit marketing authorizations either under a centralized ordecentralized procedure. The centralized procedure, which is compulsory formedicines produced by certain biotechnological processes and optional for thosewhich are highly innovative, provides for the grant of a single marketingauthorization that is valid for all European Union member states. All marketingauthorizations for products designated as orphan drugs must be granted inaccordance with the centralized procedure. The decentralized procedure providesfor approval by one or more other, or concerned, member states of an assessmentof an application performed by one member state, known as the reference memberstate. Under this procedure, an applicant submits an application, or dossier,and related materials including a draft summary of product characteristics, anddraft labeling and package leaflet, to the reference member state and concernedmember states. The reference member state prepares a draft assessment anddrafts of the related materials within 120 days after receipt of a validapplication. Within 90 days of receiving the reference member state’sassessment report, each concerned member state must decide whether to approvethe assessment report and related materials. If a member state cannot approvethe assessment report and related materials on the grounds of potential seriousrisk to the public health, the disputed points may eventually be referred tothe European Commission, whose decision is binding on all member states.

 

TheEuropean Agency for the Evaluation of Medicinal Products grants orphan drugdesignation to promote the development of products that may offer therapeuticbenefits for life-threatening or chronically debilitating conditions affectingnot more than five in 10,000 people in the European Union. In addition, orphandrug designation can be granted if the drug is intended for a life threatening,seriously debilitating or serious and chronic condition in the European Unionand that without incentives it is unlikely that sales of the drug in theEuropean Union would be sufficient to justify developing the drug. Orphan drugdesignation is only available if there is no other satisfactory method approvedin the European Union of diagnosing, preventing or treating the condition, orif such a method exists, the proposed orphan drug will be of significantbenefit to patients. Orphan drug designation provides opportunities for freeprotocol assistance, fee reductions for access to the centralized regulatoryprocedures before and during the first year after marketing authorization and10 years of market exclusivity following drug approval. Fee reductions arenot limited to the first year after authorization for small and mediumenterprises. The exclusivity period may be reduced to six years if the designationcriteria are no longer met, including where it is shown that the product issufficiently profitable not to justify maintenance of market exclusivity.

 

FDA-approvedTalecris products are required to be registered and approved by localregulatory agencies in the majority of countries outside North America andEurope. There are a limited number of countries (Bahamas, Bermuda, Guam, Omanand Quatar) which do not require further local product registration and productmay be distributed based on the existing FDA approval. In addition, any changesin the distributors supporting our export business could result in a loss ofsales.

 

**Pharmaceutical Pricing andReimbursement**

 

Inthe United States and markets in other countries, sales of any products forwhich we receive regulatory approval for commercial sale will depend in part onthe availability of reimbursement from third-party payors. Third-party payorsinclude government health programs, managed care providers, private healthinsurers and other organizations. These third-party payors are increasinglychallenging the price and examining the cost-effectiveness of medical productsand services. In addition, significant uncertainty exists as to thereimbursement status of newly approved healthcare products. Our products maynot be considered cost-effective. Adequate third-party reimbursement may not beavailable to enable us to maintain price levels sufficient to realize anappropriate return on our investment in product development.

 

Inthe U.S., Talecris’ products are reimbursed or purchased under severalgovernment programs, including, Medicaid, Medicare Parts B and D, the340B/Public Health Service (“PHS”) program, and pursuant to our contract withthe Department of Veterans Affairs. Medicaid is a joint state and federal government health plan thatprovides covered outpatient prescription drugs for low-income individuals.  Under Medicaid, drug manufacturers payrebates to the states based on utilization data provided by the states.  The rebate amount for branded drugs is equalto 15.1% of the Average Manufacturer Price (“AMP”) or AMP less Best Price 

 

24

----

Table of Contents

 

(“BP”), whichevergreater.  The government has proposedincreasing the size of the Medicaid rebates paid by drug manufacturers to 23.1%of the AMP.

 

MedicarePart B reimburses providers for drugs provided in the outpatient settingbased upon Average Sales Price (“ASP”). Recent federal government reforms to Medicare Part B have reducedthe reimbursement rates for IGIV. Beginning January 1, 2008, CMS reduced the reimbursement forseparately covered outpatient drugs and biologicals, including IGIV in thehospital outpatient setting, from ASP +6% to ASP +5% using 2006 Medicare claimsdata as a reference for this reduction. CMS reduced this reimbursement furtherin 2009 to ASP +4% using aggregate hospital cost report data as a reference forthe reduction.  Additional reductions inMedicare Part B reimbursement rates could restrict access to our products.

 

MedicarePart D is a partial, voluntary prescription drug benefit created by thefederal government primarily for persons 65 years old and over.  The Part D drug program is administeredthrough private insurers that contract with CMS.  Government payment for some of the costs ofprescription drugs may increase demand for any products for which we receivemarketing approval.  However, to obtainpayments under this program, we are required to negotiate prices with privateinsurers operating pursuant to federal program guidance. These prices may belower than we might otherwise obtain.

 

Somepayors, including Medicare Part D plans and some state Medicaid programs,reimburse providers for drugs based upon a discount off of the AverageWholesale Price (“AWP”).   AWP is a list price determined by thirdparty publishers, which does not reflect actual transactions in thedistribution chain.  We do not publish an AWP for any of our products. We may be at a competitive disadvantage where providers are reimbursed on anAWP basis and competitors’ products are reimbursed at higher rates than ourcorresponding product.

 

The availabilityof federal funds to pay for our products under the Medicaid and Medicare Part Bprograms requires that we extend discounts under the 340B/PHS drug pricingprogram. The 340B drug pricing program extends discounts to a variety ofcommunity health clinics and other entities that receive health services grantsfrom the PHS, as well as hospitals that serve a disproportionate share ofcertain low income individuals.  The PHSprice or “ceiling price” cannot exceed the AMP (as reported to CMS under theMedicaid drug rebate program) less the Medicaid unit rebate amount.  Talecris has entered into a PharmaceuticalPricing Agreement (“PPA”) with the government in which the company has agreedto participate in the 340B/PHS program by charging eligible entities no morethan the PHS ceiling price for drugs intended for outpatient use.  The government has recently proposedamendments to the 340B program that would extend the availability of PHSpricing to drugs administrated by eligible entities in the inpatient setting,impose a “must sell” obligation on manufacturers, and/or eliminate a programrestriction that prohibits entities from participating in the 340B programwhile also participating in a GPO or group purchasing arrangement foroutpatient drugs.  If enacted, theseproposals could require us to allocate even more of our products for sale underthe 340B program in order to maintain the availability of federal funds to payfor our products under Medicaid and Medicare Part B coverage.

 

We also make ourproducts available for purchase by authorized government users of the FederalSupply Schedule (“FSS”) pursuant to our FSS contract with the Department ofVeterans Affairs.  Under the VeteransHealth Care Act of 1992, or the VHC Act, we are required to offer discountedFSS contract pricing to four Federal agencies — the Department of VeteransAffairs, the Department of Defense, the Coast Guard and the Public HealthService (including the Indian Health Service) — for federal funding to bemade available for reimbursement of any of our products under the Medicaidprogram and for our products to be eligible to be purchased by those fourFederal agencies.  FSS pricing to thosefour Federal agencies must be equal to or less than the “Federal Ceiling Price,”which is, at a minimum, 24% off the Non-Federal Average Manufacturer Price, or “Non-FAMP”,for the prior fiscal year.

 

Themarketability of any products for which we receive regulatory approval forcommercial sale may suffer if the government and third-party payors fail toprovide adequate coverage and reimbursement. Federal, state and local governments in the U.S. continue to considerlegislation to limit the growth of healthcare costs, including the cost ofprescription drugs. Future legislation could limit payments for pharmaceuticalssuch as the drug candidates that we are developing, including possiblypermitting the federal government to negotiate prices directly withmanufacturers.  In addition, anincreasing emphasis on managed care in the U.S. has increased and will continueto increase the pressure on pharmaceutical pricing. For a discussion of certainrisks related to reimbursement and pricing, please see “Risk Factors—RisksRelated to Healthcare Reform and Reimbursement—We could be adversely affectedif government or private third-party payors decrease or otherwise limit theamount, price, scope or other eligibility requirements for reimbursement forthe purchasers of our products.”

 

**Other**

 

Our operations and many of the products we manufactureor sell are subject to extensive regulation by numerous other governmentalagencies, both within and outside the United States. In the United States,apart from the agencies discussed above, our facilities, operations, employees,products (their manufacture, sale, import and export) and services areregulated by the Drug Enforcement Agency, the Environmental Protection Agency,the Occupational Health & Safety Administration, the Department of 

 

25

----

Tableof Contents

 

Agriculture, the Department of Labor, Customs and Border Protection,the Department of Commerce, the Department of Treasury, the Department ofJustice and others. Furthermore, because we supply products and services tohealthcare providers that are reimbursed by federally funded programs such asMedicare, our activities are also subject to regulation by the Centers forMedicare and Medicaid Services and enforcement by the Office of the InspectorGeneral within the Department of Health and Human Services. State agencies alsoregulate our facilities, operations, employees, products and services withintheir respective states. Government agencies outside the United States alsoregulate public health, product registration, manufacturing, environmentalconditions, labor, exports, imports and other aspects of the company’s globaloperations. For further discussion of the impact of regulation on our business,see “Risk Factors—Risks Related to Our Business—Certain of our other businesspractices are subject to scrutiny by regulatory authorities.”

 

**Employees**

 

As of December 31, 2009, we had approximately5,000 full-time employees, none of which are represented by labor unions or coveredby collective bargaining agreements.  Weconsider our relationships with our employees to be good.

 

Ofour workforce, 303 employees are engaged in research and development at December 31,2009 as described below:

 
| **Functional  area**       | ** ** | **Headcount** | ** ** | **Core responsibilities** |
|----------------------------|------------|---------------|------------|---------------------------|
| Preclinical                |       | 28            |       |                      | Candidate  identification, pre-clinical research, candidate advancement to development  decision, candidate screening based on proof of principle or clear mechanism  of action. |
| Administration             |       | 12            |       |                      | Office of the Executive  Vice President, R&D, R&D Pre-Clinical and Clinical Compliance, and  R&D facilities personnel. |
| Program Management  Office |       | 7             |       |                      | Oversight of the  systems for and management of the execution of, strategic development  projects for new products, new indications, and new processes. |
| Technology                 |       | 87            |       |                      | Process development and  improvement for plasma-based products (including technical support for  operations), technology exploration, process/product development, and  clinical manufacturing operations. |
| Pathogen safety            |       | 36            |       |                      | Exploration,  introduction, validation of viral and prion detection and reduction  technologies. |
| BioAnalytics               |       | 63            |       |                      | Exploration,  implementation of new technologies for analytics, support of R&D  functions, development of new and improved test methods for operations. |
| Medical Affairs            |       | 52            |       |                      | Continuing medical  education, medical writing and publication, communicating medical information  to health care providers. Trial design, execution, monitoring, data  collection, analysis, report creation, regulatory agency interaction  (supplemented by external contract research organizations). |
| NAT Development            |       | 18            |       |                      | To develop, validate,  and support the operational setting of the Nucleic Acid Technology  operational group located at our Raleigh Test Lab, primarily serving manufacturing  operations in the testing of all incoming plasma units for blood born  pathogens. |
| Total                      |       | 303           |       |                      |

 

26

----

Tableof Contents

 

**Industry**

 

**Overviewof the Plasma Products Industry**

 

*IndustryDynamics.*  The humanplasma-derived products industry has demonstrated revenue growth at a compoundannual rate of approximately 8% globally over the past 21 years withworldwide sales of approximately $9.7 billion in 2008 based on MRB data.U.S. sales have grown at a compound annual rate of approximately 10% over thepast 18 years with sales of $4.0 billion in 2008, representing a13.5% increase over 2007, according to the MRB U.S. Book. Consistent worldwidegrowth in demand and favorable supply/demand dynamics have generally provided abasis for price increases over the past five years.

 

Significant industry consolidation has reduced thenumber of major producers of plasma-derived products in the U.S. to fivecompanies, including us. Three companies, including us, currently collectivelyaccount for almost 81% of U.S. sales according to the MRB U.S. Book. Theindustry today has fewer participants, which tend to be larger, verticallyintegrated and profit driven, with the scale necessary to permit investment inthe development of new therapies and indications, and more efficient andcompliant facilities to serve the patient community.

 

We believe that many plasma-derived products areunderutilized and have positive growth outlook. We believe worldwide unitvolume demand for plasma-derived products will grow over the long term at acompound annual rate of approximately 6% to 8%, driven principally by thefollowing factors:

 

·                  population growth;

 

·                  discovery and approval of newapplications and indications for plasma-based products;

 

·                  growth of diagnosed cases;

 

·                  increased treatment of untreated butdiagnosed patients;

 

·                  increased patient compliance andappropriate dosing levels for diagnosed, treated patients; and

 

·                  geographic expansion.

 

There are significant barriers to entry into theplasma derivatives manufacturing business, including the operationally complexnature of the business, which requires a highly skilled workforce withspecialized know-how; significant intellectual property, including tradesecrets relating to purification of products and pathogen safety; the need todevelop recognized and trusted brands as well as sales, marketing anddistribution infrastructures and relationships; and the ability to comply withextensive regulation by the FDA and comparable authorities worldwide.Additionally, the construction and maintenance, including regular improvementsnecessitated by evolving standards of current Good Manufacturing Practices(cGMP), of production facilities requires extensive capital expenditures andmay involve long lead times to obtain necessary governmental approval. Forexample, we have invested approximately $630 million in our primarymanufacturing facility since 1995. Further, unlike small moleculepharmaceutical products, which are often subject to patent expirations on adefined date, plasma-derived protein therapies are usually protected throughintellectual property relating to process, including trade secrets, which maynot have a scheduled expiration. New entrants may, however, develop and marketcompeting products by subcontracting portions of the manufacturing process,such as fractionation or purification, from existing plasma derivativemanufacturers. Also, existing fractionators with operations in one region mayhave lower barriers to entering other regional areas. In addition, while theindustry’s plasma supply constraint has eased, any new competitors in the U.S.would need to secure an adequate supply of U.S. plasma since, as a practicalmatter, although plasma collected in the U.S. may be certified for use inproducts sold in Europe and Canada, only plasma collected in the U.S. iscertified for use in products sold in the U.S. Since there are currently a verylimited number of independent plasma suppliers, much of whose plasma collectionand center development capacity is already contracted to existingfractionators, any new competitor would likely have to eventually develop theirown U.S. based plasma collection centers and related infrastructure.

 

**Plasma-Derived Products**

 

The three largest selling plasma proteins, whichtogether constituted approximately 71% and 73% of plasma-derived product salesin the world in 2007 and the U.S. in 2008, respectively, and their therapeuticproperties are:

 

·                  *IGIV*products, which are antibody-rich plasma therapies that have long been used inthe treatment of immune related disorders such as primary immune deficiencies(PI) and certain autoimmune disorders, such as CIDP, where IGIV is thought toact as an immune modulator. Physicians frequently prescribe IGIV for a widevariety of diseases even though these uses are not described in the product’slabeling and differ from those tested in clinical studies and approved by theFDA or similar regulatory authorities in other countries. These unapproved, or “off-label,”uses are common across 

 

27

----

Tableof Contents

 

medical specialties, and physicians may believe suchoff-label uses constitute the preferred standard of care or treatment of lastresort for many patients in varied circumstances. We believe that a significantportion of IGIV volume may be used to fill physician prescriptions for indicationsnot approved by the FDA or similar regulatory authorities. We estimateneurologists are the largest prescribers in the U.S., representing 48% of thetotal IGIV volume. We further estimate CIDP, PI and idiopathic thrombocytopenicpurpura (ITP) collectively represent approximately 61% of U.S. IGIV volume.Demand for IGIV has increased rapidly in recent years, and it now representsthe largest plasma-derived product by sales value. It is one of the key growthdrivers of the industry largely due to the increasing number of medicalconditions for which IGIV is used. We expect worldwide unit volume demand togrow over the long term at a compound annual rate of approximately 6% to 8%with similar growth in the U.S. Because IGIV is a complex mixture of antibodymolecules, no recombinant (or synthetic) means of production currently exists.Thus, IGIV can only be derived from human plasma. Our most significant revenuegenerating product, Gamunex, Immune Globulin Intravenous (Human), 10%Caprylate/Chromatography Purified, is one of the leading revenue products inthe IGIV market, with a reputation as a premium product.

 

·                  *Factor VIII,* which is a blood coagulationfactor for the treatment of Hemophilia A. Hemophilia A is a hereditarycondition that affects an estimated 380,000 patients worldwide; however, weestimate that only one-third of those have been identified and are beingtreated. A recombinant substitute has been developed for Factor VIII.Recombinant Factor VIII is currently priced higher than plasma-derived FactorVIII because recombinants have generally been perceived to be safer. In 2007,worldwide sales of plasma-derived Factor VIII were $1.2 billion andcomprised 12% of the global plasma product sales. In 2008, Recombinant FactorVIII sales in 2007 were $3.5 billion worldwide. Recombinant Factor VIIIwas more prevalent in the U.S. in 2008 with 86% of total Factor VIII sales and81% of units according to MRB data. In Europe, recombinant Factor VIII had73% of sales and 63% of the units. The plasma-derived Factor VIII markethad a compound annual growth rate of 6% over the past ten years. The globalmarket for plasma-derived Factor VIII is supply constrained resulting inunmet demand. Growth in plasma-derived Factor VIII is being driven byincreased patient identification and treatment in developing countries. Thecurrent per capita Factor VIII utilization is significantly higher in the U.S.and European Union (EU) than in developing countries. We produce and marketplasma-derived Factor VIII under our Koate DVI Antihemophilic Factor (human)brand.

 

·                  *Albumin,* which is used as an expander ofplasma volume after significant blood losses during surgery or trauma, forsevere burns or for patients with acute liver or kidney failures. Prices of,and demand for, albumin have stabilized recently as prescribers have recognizedthat albumin has therapeutic significance. The demand for albumin has increasedsince 2000 and is projected to grow moderately over the next few years. Pricesfor albumin have increased significantly since 2005, although they have notreached historical highs, as the average selling price for albumin reached$50.15 in 1998. The U.S. average selling price in 2008 was $33.09, having grownat a compound annual rate of 28.5% since 2005, when the average selling pricewas $15.58. We produce and market albumin and Plasma Protein Factor (human)(PPF) under two brand names: Plasbumin and Plasmanate, both of which arederived from plasma Fraction V.

 

A1PI is a fourth protein that is financially importantto us and is growing in sales. From December 1987 to December 2002 wehad the only FDA approved A1PI product, Prolastin A1PI, which had net revenueof $319.1 million in 2009 and $316.5 million in 2008. In December 2003,two competing A1PI products were introduced into the market. We expect thatincreased spending on patient identification and physician education, as wellas product introduction in additional countries, will increase the demand forA1PI products. We received FDA approval for our next generation A1PI product,Prolastin-C, in October 2009 and received Health Canada approval in February 2010and are currently in the process of launching it in the U.S. and Canada.

 

The following chart presents a breakdown of worldwidesales of plasma derivatives by product category in 2007.

 

28

----

Tableof Contents

 

**2007Plasma Derivative Worldwide Sales by Category**

 

 

**Plasma-DerivedProducts Sales by Geographic Region**

 

Due to the high demand and cost of plasma-derivedtherapies, the majority of plasma sales are derived from the more economicallydeveloped regions in the world. Compared to the U.S. and Canada, where theindustry is open, though highly regulated, Europe is characterized by localfractionators, considerable government control, and divergent health caresystems. Japan is mainly supplied by local producers. The following chartpresents a breakdown of the global sales of plasma derivatives by region interms of sales in 2007.

 

**Estimated2007 Plasma Derivative Worldwide Sales by Region**

 

 

**PlasmaCollection and Testing**

 

Plasma may be obtained in two different ways. Thetraditional method is through the separation of plasma from blood obtained froma blood donation. This is referred to as “recovered plasma.” This plasma is theby-product of donations made at blood banks or transfusion centers because themain objective of these banks and centers is to obtain the blood cells andplatelets.

 

The second method for obtaining plasma is through aprocess called “plasmapheresis” whereby plasma is mechanically separated fromthe cellular elements of blood (such as red and white cells and platelets)through centrifugation or membrane filtration at the time the donation is made.These cellular elements are then returned to the donor as part of the same procedure.Because blood cells are returned, it is possible for individuals to donateplasma more frequently than whole blood. Plasma obtained through 

 

29

----

Tableof Contents

 

plasmapheresis is referred to as “source plasma.” We believe thatsource plasma constitutes roughly two-thirds of plasma processed byfractionators.

 

In order to prevent the deterioration of coagulationfactors, plasma is typically frozen as soon as possible after collection.Source plasma is generally frozen within six hours following donation, whereasrecovered plasma must first be separated from the blood cells. Freezing must becarried out within 24 to 72 hours if intended for the fractionation andpurification of proteins.

 

U.S. and European regulatory authorities imposestringent requirements to avoid the transmission of blood borne diseases. Eachdonation is typically tested for the following infections: Hepatitis A,Hepatitis B, Hepatitis C, Parvo B-19 and HIV. Then it is sent to afractionator, where it undergoes additional viral marker testing as well asnucleic acid testing in the production environment. Thereafter, it is brokendown into its constituent parts, or “fractions.” “Bulk” fractions are furtherrefined into final products through various purification processes, formulationand aseptic filling.

 

As a practical matter, although plasma collected inthe U.S. may be certified for use in products sold in Europe, only plasmacollected in the U.S. is certified for use in products sold in the U.S.

 

**Productionof Plasma-Derived Products (Fractionation)**

 

Three principle techniques are used to separateproteins into bulk fractions: the Cohn, Kistler-Nitschmann and Chromatographytechniques.

 

·                  *Cohn*. Cohn, the most widely employed technique and the one we use, subjectsplasma to varying conditions of alcohol concentration, pH level and temperatureto separate specific protein fractions from the plasma. The fractions are thencollected using centrifugation or filtration. Following fractionation, theprotein pastes are purified using steps such as solvent detergent treatment,caprylate incubation, column chromatography, and various methods of filtration.In 2003, we began use of the more advanced chromatography technique forpurification of fraction II and III paste to produce our Gamunex IGIV product.

 

·                  *Kistler-Nitschmann*.  Kistler-Nitschmann is derived from the Cohnprocess and is often used in smaller fractionation facilities. This techniqueproduces a limited product range, consisting of primarily immunoglobulins andalbumin.

 

·                  *Chromatography*.  Chromatography separates plasma proteins byspecifically targeting the unique characteristics of each protein, whichinclude: molecular size, using gel filtration; charge, using ion exchangechromatography; and known reactions with specific molecules, using affinitychromatography. Chromatography has higher product purity and superior productyields compared to the Cohn technique. However, regulatory hurdles, includingthe approval process for the procedure and the type of production facilityrequired, have made the cost of switching to chromatography very expensive. Asa result, few plasma fractionators have adopted this technique forfractionation, although many use it for purification.

 

Once the plasma has been broken down into bulkfractions using one of these separation techniques, each fraction undergoes aseries of production steps including purification, filling, freeze-drying (forthose products requiring lyophilisation), packaging and distribution.Purification involves the further isolation of the fraction, as well as viralremoval/inactivation steps, using a variety of technologies. The specificprocedures used differentiate the end product and are generally proprietary toeach fractionator.

 

**PlasmaSupply Consolidation and Rationalization**

 

Plasma-derived product manufacturers secure humanplasma in the United States from either third-party supply contracts (e.g.,with a blood bank or with an independent plasma collection company) or fromvertically integrated plasma collection centers. Historically, several of thelargest global fractionators relied on smaller, independently owned U.S. sourceplasma collection companies to supply a portion of their plasma supply. Overtime, fractionators chose to vertically integrate and acquire many of thesesuppliers. As of 2009, all five of the largest global fractionators are eitherfully integrated or, like us, have a significant percent of their total plasmacollection internalized as a result of vertical integration.

 

The vertical integration of the plasma supply hasresulted in fewer, but more efficient, plasma collection centers in the UnitedStates producing more U.S. source plasma. From 1996 to 2008, we believe thatthe number of U.S. plasma collection centers decreased from 454 to 389, whilethe volume of source plasma has increased from 11.8 million liters to15.4 million liters.

 

The growth in U.S. source plasma collections over thepast several years has been higher than in other geographic areas, primarilydue to the desire of fractionators to have the flexibility to export U.S.source plasma for the manufacture of products outside 

 

30

----

Tableof Contents

 

the U.S., the favorable collection environment for source plasmacenters in the U.S., and by the decreasing availability of recovered plasmaworldwide.

 

Market estimates continue to point to new growth inU.S. source plasma, as new centers are developed in the U.S. and individualplasma center productivity improves. Despite the growth in U.S. source plasmasupply, a continued increase in demand for plasma products in recent years hasled to industry supply constraints, which supported pricing increases for manyplasma products and stimulated the addition of new plasma collection centers tomeet the increased need for source plasma. As a result of demand and as aresult of increased collection and testing costs, prices for key plasma-derivedproducts have generally increased over the past three years.

 

In response to IGIV demand, we and some of ourcompetitors and independent suppliers opened a significant number of new plasmacollection centers. We believe that worldwide plasma collection is increasingand will continue to increase in future years, primarily driven by increasedplasma collection in the U.S. The supply of plasma has sufficiently increasedproviding a more balanced level of IGIV supply and demand. As a result, thesupply of IGIV inventory has been increasing throughout the distributionchannel from the previous low levels.

 

**Fractionationand Purification Capacity Rationalization**

 

As overall plasma supply was reduced from 2000 to2005, industry utilization of facilities and in some cases capacity forfractionation was also reduced. Currently, product production capacity may belimited by fractionation capacity or purification capacity. Our competitors andwe have announced plans to invest in the development of additionalfractionation and purification capacity, which should allow production ofplasma-derived therapies to meet the pace of demand.

 

**IndustryConsolidation**

 

We believe that, in addition to the capacityreductions described above, the plasma products industry has been transformedin the past decade by the exit of traditional pharmaceutical companies, such asAventis S.A., Bayer AG and Mitsubishi Pharma Corporation, and of majornon-profits, such as the American Red Cross, from the plasma proteins business.Over the same period, the industry had undergone sudden restrictions in productsupply, with the imposition of consent decrees resulting from regulatory actionby the FDA against certain manufacturers, which limited their ability torelease product for sale. These restrictions on product release were lifted inrelatively close proximity in 2000 and 2001, creating an excess supplyenvironment in subsequent years. In response, the remaining producerssubsequently rationalized production and plasma collection capacity and beganto vertically integrate. The number of major producers of plasma productsglobally decreased from 13 in 1990 to 8 in 2002 and to 5 in 2005. Three majorproducers, including us, collectively accounted for almost 81% of 2008 U.S.sales of plasma-derived products. The resulting industry has fewer participants,that tend to be larger and vertically integrated.

 

**RecombinantManufacturing**

 

During the late 1970s and early 1980s, some plasma-derivedFactor VIII patients were exposed to HIV and Hepatitis C throughcontaminated Factor VIII products. In an effort to eliminate the risk ofpathogen transmission, scientists developed recombinant or syntheticalternatives to plasma-derived Factor VIII products for the treatment ofHemophilia A and Hemophilia B.

 

Recombinant products have taken a significant share ofFactor VIII sales due to their near independence from human plasma. Of the6.2 billion units of Factor VIII sold in 2007, approximately 60% wererecombinant. On a per unit basis, recombinants are priced approximately 94%higher than plasma-derived products and have been adopted more rapidly in theU.S. and industrialized nations. The high cost of recombinant products preventstheir use in developing markets where plasma derivatives are the standard. Weare conducting pre-clinical development of recombinant Factor VIIIproteins utilizing advanced protein production technology.

 

Although recombinant technology could be used toproduce any of the coagulation proteins found in blood, its use is limited tolarger, more developed markets, which have the demand to sustain the high costof development. Most other plasma products, such as IGIV and A1PI, are notcurrently produced using recombinant technologies for human therapeutic use.

 

In the case of IGIV, this is due to its nature as acollection of different types of antibodies, which makes the development of arecombinant version very difficult. In the case of A1PI, we believe that norecombinant competitor for the therapy of Alpha-1 deficiency has developed amolecule that could have a half-life equivalent to the plasma-derived protein;however, emerging protein production technologies could make a recombinantcompetitor feasible. We are conducting pre-clinical development of recombinantA1PI using advanced protein production technology.

 

31

----

Tableof Contents

 

We have begun work to develop a recombinant version ofPlasmin. We have secured intellectual property rights around this product andhope to eventually commercialize recombinant Plasmin for the treatment ofischemic stroke. The ability for us to produce therapeutic proteins byrecombinant means would significantly expand our opportunities to produceadditional products in the future.

 

**U.S.Plasma Products Distribution**

 

Historically, manufacturers of plasma-derived productssought to distribute their finished product through the same distributionchannels as pharmaceuticals, typically through wholesalers, which purchasedproducts at fixed prices, re-sold them at contract prices and charged thedifference to the manufacturer. The plasma therapeutics market, however, hasevolved from wholesalers to highly specialized plasma distributors, including:

 

·                  “GroupPurchasing Organizations,” or GPOs, which are umbrella buying groupsrepresenting inpatient and outpatient hospitals and non-acute members whobenefit through consolidated supply contracts. GPOs do not purchase productsdirectly, rather, they select authorized distributors which purchase inventoryand handle all product logistics for their members.

 

·                  Wholesalers/Distributorseither provide product directly to, or enter into distribution agreements with,hospitals, GPOs, and physician offices. The distributor is generally paidservice fees for “encumbered” products on a GPO contract, or they purchase “unencumbered”products directly from manufacturers which are not part of a GPO contract.

 

·                  Homecare andspecialty pharmacy providers are a growing segment which provides patienttreatment in the home, either through self-medication or with the assistance ofa nurse. These providers either purchase products direct from manufacturers orthrough GPOs.

 

·                  ManufacturingDirect programs distribute products directly to a physician’s office or patient’shome.

The distribution by product line and type are summarizedas follows:

 

·                  We estimate that64% (41% in-patient; 23% out-patient) of the IGIV sold in the U.S. in 2008 waspurchased by hospitals for both in-patient and out-patient use; physicianoffices represented about 18% of IGIV volume; and homecare companies andspecialty pharmacies represented 17% of the IGIV volume.

 

·                  A1PI isgenerally distributed by homecare companies and specialty pharmacies andadministered by a nurse at home or at a hospital infusion suite. In the U.S.,Prolastin A1PI is sold directly to patients through our Prolastin Directprogram, which includes nursing, reimbursement, and health management services.These services are administered by Centric Health Resources, in which we hold a30% equity interest as of December 31, 2009. Competing products in theU.S. generally sell to homecare providers.

 

·                  Albumin isgenerally used in surgical and trauma settings and is generally sold tohospital groups.

 

Clotting factors, such asFactor VIII, generally are self administered by patients and are mainlychanneled from manufacturers to patients through home care companies andsimilar agencies.

 

**Available Information**

 

Our Internet websiteaddress is www.talecris.com.  Our AnnualReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reportson Form 8-K, and amendments to those reports filed or furnished pursuantto section 13(a) or 15(d) of the Exchange Act are available free ofcharge through our website as soon as reasonably practicable after weelectronically file with or furnish them to the Securities and ExchangeCommission (SEC) and are available in print to any stockholder who requests acopy.  The public may also read and copyany materials that we file with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website that contains reports, proxystatements, information statements and other information regarding issuers,including us, that file electronically with the SEC at www.sec.gov.

 

**ITEM1A.  RISK FACTORS**

 

**RisksRelated to Healthcare Reform and Reimbursement**

 

***We could be adversely affected if healthcare reform measuressubstantially change the market for medical care or healthcare coverage in theUnited States.***

 

32

----

Tableof Contents

 

Substantial changes could be made to the currentsystem for paying for healthcare in the U.S., including changes made in orderto extend medical benefits to those who currently lack insurance coverage.Approximately 47 million Americans currently lack health insurance of anykind. Extending coverage to such a large population could substantially changethe structure of the health insurance system and the methodology forreimbursing medical services, drugs and devices. These structural changes couldentail modifications to the existing system of private payors and governmentprograms (Medicare, Medicaid and State Children’s Health Insurance Program),creation of a government-sponsored healthcare insurance source, or somecombination of both, as well as other changes. Restructuring the coverage ofmedical care in the U.S. could impact the reimbursement for prescribed drugs andbiopharmaceuticals, such as those produced and marketed by us. If reimbursementfor these products is substantially reduced in the future, or rebateobligations associated with them are substantially increased (discussed in moredetail below), our business could be materially impacted.

 

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

 

More specific changes to the current system ofcoverage and reimbursement could also be significant. For instance, Talecrisand other pharmaceutical and biopharmaceutical companies currently pay rebatesto states for outpatient drugs provided under Medicaid programs. These rebatescomprise a fixed percentage of sales plus an adjustment for inflation tied tothe date a particular drug was introduced to the market (inflationary penalty).Should the Medicaid rebate percentage or the inflationary penalty be increased,our business could be materially impacted. Moreover, if the Medicaid rebate isextended to drugs paid for under Medicaid Managed Care plans, there could be anadditional adverse impact on our business. Similarly, if the Medicaid rebaterequirements are extended to the Medicare Part D program, there could be amaterially adverse impact on our business. Currently the “340B program” in theU.S. extends Public Health Service pricing to hospitals serving somedisadvantaged populations. If eligibility for the 340B program is expanded toadditional types of hospitals, or if the program is expanded to apply to theinpatient purchases of participating hospitals, our business could bematerially adversely impacted.

 

There is substantial uncertainty regarding the exactprovisions of healthcare reform that may be enacted, if at all. All of thechanges discussed above, and others, are under consideration by Congress. Thisuncertainty limits our ability to forecast changes that may occur in the futureand to manage our business accordingly.

 

***We could be adversely affected if government or privatethird-party payors decrease or otherwise limit the amount, price, scope orother eligibility requirements for reimbursement for the purchasers of ourproducts.***

 

Independent of healthcare reform initiatives, we haveexperienced and expect to experience pricing pressures on our current productsand pipeline products from initiatives aimed at reducing healthcare costs bygovernmental and private third-party payors, the increasing influence of healthmaintenance organizations, and regulatory proposals, both in the United Statesand in foreign markets. Healthcare reform in the United States is likely toincrease the pressure, which may include the effect of such proposed changes asthe possible introduction of a biosimilar pathway and the possible redefinitionof the term “single source” products which plays a key role in determiningreimbursements under the Medicare Part B program. In addition, prices inmany European countries are subject to local regulation. If payors reduce theamount of reimbursement for a product, it may cause groups or individualsdispensing the product to discontinue administration of the product, toadminister lower doses, to substitute lower cost products or to seek additionalprice related concessions. These actions could have a negative effect on ourfinancial results, particularly in cases where we have a product that commandsa premium price in the marketplace, or where changes in reimbursement induce ashift in the site of treatment. For example, beginning in 2005, the Medicaredrug reimbursement methodology for physician and hospital outpatient paymentschedules changed to Average Sales Price (ASP) +6%. This payment was based on avolume-weighted average of all brands under a common billing code. Medicarepayments to physicians between the fourth quarter of 2004 and the first quarterof 2005 dropped 14% for both the powder and liquid forms of IGIV. Medicarepayments to hospitals fell 45% for powder IGIV and 30% for liquid IGIV betweenthe fourth quarter of 2005 and the first quarter of 2006. The Medicarereimbursement changes resulted in the shift of a significant number of MedicareIGIV patients to hospitals from physicians’ offices beginning in 2005 as manyphysicians could no longer recover their costs of obtaining and administeringIGIV in their offices and clinics. After 2006, some hospitals reportedly beganto refuse providing IGIV to Medicare patients due to reimbursement rates thatwere below their acquisition costs. While subsequent changes have improved someof these Medicare reimbursement issues, on January 1, 2008, the Centersfor Medicare & Medicaid Services (CMS) reduced the reimbursement forseparately covered drugs and biologicals, including IGIV, in the hospitaloutpatient setting from ASP +6% to ASP +5% using 2006 Medicare claims data as areference for this reduction. In addition, CMS reduced a hospital add-on 

 

33

----

Tableof Contents

 

payment from $75 to $38 per infusion. Beginning January 1, 2009,CMS further reduced the hospital outpatient reimbursement for separatelycovered outpatient drugs, including IGIV, to ASP +4%, and eliminated theadd-on payment.

 

Additionally, physicians frequently prescribe legallyavailable therapies for uses that are not described in the product’s labelingand that differ from those tested in clinical studies and approved by the FDAor similar regulatory authorities in other countries. These unapproved, or “off-label,”uses are common across medical specialties, and physicians may believe suchoff-label uses constitute the preferred treatment or treatment of last resortfor many patients in varied circumstances. We believe that a significantportion of our IGIV volume may be used to fill physician prescriptions forindications not approved by the FDA or similar regulatory authorities. Ifreimbursement for off-label uses of our products, including IGIV, is reduced oreliminated by Medicare or other third-party payors, including those in theUnited States or the European Union, we could be adversely affected.

 

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

 

The U.S. economic stimulus legislation enacted in February 2009provided significant funding for the federal government to conduct ComparativeEffectiveness Research (CER). While the stated intent of CER is to developinformation to guide providers to the most efficacious therapies, outcomes ofCER could influence the reimbursement or coverage for therapies that aredetermined to be less cost-effective than others. Should any of our products bedetermined to be less cost-effective than alternative therapies, the levels ofreimbursement for these products, or the willingness to reimburse at all, couldbe impacted, which could materially impact our financial results.

 

Additionally, the settlement of class actionlitigation against First DataBank and others will result in the downwardrevision and possible eventual elimination of the published Average WholesalePrices (AWPs) which are an important basis for reimbursement used by many third-partypayors for our products. Under the settlement, the revision became effective inSeptember 2009. First DataBank and other pricing compendia have statedthat they will or may discontinue publishing AWP within two years.Consequently, given the nature of our Prolastin Direct Model in the U.S., weanticipate a decrease in Prolastin AWPs resulting in a decrease in our netprice subsequent to the settlement. We currently estimate the annual impact ofthe First DataBank settlement to be a reduction in the net revenue between$3 million and $6 million.

 

Some payors, including Medicare Part D plans andsome state Medicaid programs, reimburse providers for drugs based upon adiscount off of the AWP.   AWP is a list price determined by thirdparty publishers, which does not reflect actual transactions in the distributionchain.  We do not publish an AWP for any of our products.  We may beat a competitive disadvantage where providers are reimbursed on an AWP basisand competitors’ products are reimbursed at higher rates than our correspondingproduct.

 

**RisksRelated to Our Business**

 

***Our business is highly concentrated on our two largestproducts, Gamunex IGIV and Prolastin A1PI, and our largest geographic region,the U.S. Any adverse market event with respect to either product or the U.S.region would have a material adverse effect on us.***

 

We rely heavily upon the sales of two of our products:Gamunex IGIV and Prolastin A1PI. Sales of Gamunex IGIV and Prolastin A1PItogether comprised approximately 74.7% and 72.3% of our total net revenue forthe years ended December 31, 2009 and 2008, respectively. Sales of GamunexIGIV comprised approximately half of our total net revenue in each of theseperiods. If either Gamunex IGIV or Prolastin A1PI lost significant sales, orwere substantially or completely displaced in the market, we would lose asignificant and material source of our net revenue. Similarly, if eitherGamunex IGIV or Prolastin A1PI were to become the subject of litigation and/oran adverse governmental ruling requiring us to cease sales of either product,our business would be adversely affected.

 

We rely heavily upon sales from the U.S. region, whichcomprised approximately 66.0% of our net revenue for both 2009 and 2008. If ourU.S. sales were significantly impacted by either material changes to governmentor private payor reimbursement, by other regulatory developments, or bycompetition, then our business would be adversely affected.

 

***Our manufacturing processes are complex and involvebiological intermediates that are susceptible to contamination and variationsin yield.***

 

34

----

Tableof Contents

 

Plasma is a raw material that is susceptible to damageand contamination and may contain human pathogens, any of which would renderthe plasma unsuitable as raw material for further manufacturing. For instance,improper storage of plasma, by us or third-party suppliers, may require us todestroy some of our raw material. If unsuitable plasma is not identified anddiscarded prior to the release of the plasma to our manufacturing process, itmay be necessary to discard intermediate or finished product made from thatplasma or to recall any finished product released to the market, resulting in acharge to cost of goods sold.

 

The manufacture of our plasma products is an extremelycomplex process of fractionation, purification, filling and finishing. Althoughwe attempt to maintain high standards for product testing, manufacturing,process controls and quality assurance, our products can become non-releasableor otherwise fail to meet our stringent specifications through a failure of oneor more of these processes. Extensive testing is performed throughout theprocess to ensure the safety and effectiveness of our products. We may,however, detect instances in which an unreleased product was produced withoutadherence to our manufacturing procedures or plasma used in our productionprocess was not collected or stored in a compliant manner consistent with our currentGood Manufacturing Practices (cGMP) or other regulations. Such an event ofnon-compliance would likely result in our determination that the impactedproducts should not be released and therefore should be destroyed. For example,a malfunction of the Gamunex IGIV chromatography system just prior to ourformation transaction in 2005 resulted in the processing of IGIV productscontaining elevated levels of antibodies for over one month. Our total costrelated to this incident, including the costs of product loss, investigation,testing, disposal, and other remedial actions, was approximately$41.6 million.  We subsequentlyrecovered from Bayer $10.7 million through our 2005 working capitaladjustment and $9.0 million in the first quarter of 2007 through asettlement.

 

Once we have manufactured our plasma derivativeproducts, they must be handled carefully and kept at appropriate temperatures.Our failure, or the failure of third parties that supply, ship or distributeour products, to properly care for our products may require that those productsbe destroyed.

 

While we expect to write off small amounts ofwork-in-progress in the ordinary course of business due to the complex natureof plasma, our processes and our products, unanticipated events may lead towrite-offs and other costs materially in excess of our expectations and thereserves we have established for these purposes. We have in the past had issueswith product quality and purity that have caused us to write off the value ofthe product. Such write-offs and other costs could cause material fluctuationsin our profitability. Furthermore, contamination of our products could causeinvestors, consumers, or other third parties with whom we conduct business tolose confidence in the reliability of our manufacturing procedures, which couldadversely affect our sales and profits. In addition, faulty or contaminatedproducts that are unknowingly distributed could result in patient harm,threaten the reputation of our products and expose us to product liabilitydamages and claims from companies for whom we do contract manufacturing.

 

Additionally, due to the nature of plasma there willbe variations in the biologic properties of the plasma we collect or purchasefor fractionation that may result in fluctuations in the obtainable yield ofdesired fractions, even if cGMP is followed. Lower yields may limit production of our plasma-derived products due tocapacity constraints.  If these batchesof plasma with lower yields impact production for extended periods, it mayreduce the total capacity of product that we could market and increase our costof goods sold, thus reducing our profitability.

 

***Our business requires substantial capital to operate and grow and toachieve our strategy of realizing increased operating leverage, including thecompletion of several large capital projects.***

 

We intend to undertake several large capital projectsto maintain compliance with cGMP and expand capacity.  These projects are required for us to expandour production capabilities and achieve our strategy of realizing operatingleverage. Capital projects of this magnitude involve technology and projectmanagement risks. Technologies that have worked well in a laboratory or in apilot plant may cost more or not perform as well, or at all, in full scaleoperations. Projects may run over budget or be delayed. We cannot be certainthat these projects will be completed in a timely manner or that we willmaintain our compliance with cGMP, and we may need to spend additional amountsto achieve compliance. Additionally, by the time these multi-year projects arecompleted, market conditions may differ significantly from our assumptionsregarding the number of competitors, customer demand, alternative therapies,reimbursement and public policy, and as a result capital returns might not berealized.

 

We plan on spending substantial sums in capital andoperating expense over the next five years to obtain FDA approval for newindications for existing products, to enhance the facilities in which andprocesses by which we manufacture existing products, to develop new productdelivery mechanisms for existing products, to strengthen our plasma collectionsystem and to develop innovative product additions. We face a number ofobstacles to successfully converting these efforts into profitable productsincluding but not limited to the successful development of a experimentalproduct for use in clinical trials, the design of clinical study protocolsacceptable to FDA, the successful outcome of clinical trials, our ability toscale our manufacturing processes to produce commercial quantities orsuccessfully transition technology, FDA approval of our product or process andour ability to successfully market an approved product with our new process ornew indication.

 

35

----

Tableof Contents

 

Our planned capital expenditures are significant overthe next five years, which we currently estimate to be in the range of$750 million to $800 million on a cumulative basis through 2014. Theamount and timing of future capital spending is dependent upon a number offactors, including market conditions, regulatory requirements, and the extentand timing of particular projects, among other things. Given our expectationsthat we will need fractionation capacity in the near term, our ability to growour business is dependent upon the timely completion of these facilities andobtaining the requisite regulatory approvals.

 

To finance these various activities, we may need toincur future debt or issue additional equity if our cash flows and capitalresources are insufficient, and we may not be able to structure our debtobligations on favorable economic terms. A failure to fund these activities mayharm our competitive position, quality compliance and financial condition.

 

***Our ability to continue manufacturing and distributing ourproducts depends on our and our suppliers’ continued adherence to cGMPregulations.***

 

The manufacturing processes for our products aregoverned by detailed written procedures and federal regulations that set forthcGMP requirements for blood and blood products. Our Quality Operations unitmonitors compliance with these procedures and regulations, and the conformanceof materials, manufacturing intermediates, and final products to theirspecifications. Failure to adhere to established procedures or regulations, orto meet a specification, could require that a product or material be rejectedand destroyed. There are relatively few opportunities for us to rework,reprocess or salvage nonconforming materials or products.

 

Our adherence to cGMP regulations and theeffectiveness of our quality systems are periodically assessed throughinspections of our facilities by the FDA in the U.S. and analogous regulatoryauthorities in other countries. While we believe that our manufacturingfacilities are currently in substantial compliance with cGMP regulations, wecannot assure you that we will not be cited for deficiencies in the future. Ifdeficiencies are noted during an inspection, we must take action to correctthose deficiencies and to demonstrate to the regulatory authorities that ourcorrections have been effective. If serious deficiencies are noted or if we areunable to prevent recurrences, we may have to recall product or suspendoperations until appropriate measures can be implemented. We are required toreport some deviations from procedures to the FDA. Even if we determine thatthe deviations were not material, the FDA could require us to take similarmeasures. Since cGMP reflects ever evolving standards, we regularly need toupdate our manufacturing processes and procedures to comply with cGMP. Thesechanges may cause us to incur costs without improving our profitability or thesafety of our products. For example, more sensitive testing assays may berequired (if and when they become available) or existing procedures orprocesses may require revalidation, all of which may be costly andtime-consuming and could delay or prevent the manufacturing of a product orlaunch of a new product.

 

Changes in manufacturing processes, including a changein the location where the product is manufactured or a change of a third-partymanufacturer, may require prior FDA review and approval or revalidation of themanufacturing process and procedures in accordance with cGMP. There may becomparable foreign requirements. For example, we are currently in the processof transferring the manufacture of our Thrombate III product from Bayer’sBerkeley, California, biologics manufacturing facility to our Claytonmanufacturing facility. To validate our manufacturing processes and proceduresfollowing completion of upgraded facilities, we must demonstrate that theprocesses and procedures at the upgraded facilities are comparable to thosecurrently in place at our facilities. In order to provide such a comparativeanalysis, both the existing processes and the processes that we expect to beimplemented at our upgraded facilities must comply with the regulatorystandards prevailing at the time that our expected upgrade is completed. Inaddition, regulatory requirements, including cGMP regulations, continuallyevolve. Failure to adjust our operations to conform to new standards asestablished and interpreted by applicable regulatory authorities would create acompliance risk that could impair our ability to sustain normal operations.

 

Our Thrombate III product is currently being producedfor us at Bayer’s Berkeley, California biologics manufacturing facility. Thefailure of Bayer or of our other suppliers to comply with cGMP standards ordisagreements between us and Bayer as to requirements could result in ourproduct being rejected, production being slowed down or halted, or productreleases being delayed. We are in the process of transferring thismanufacturing to our Clayton Facility. If the FDA does not approve thetransfer, our ability to market our Thrombate III product will be seriouslyimpaired or eliminated.

 

A number of inspections by the FDA and foreign controlauthorities, including the German Health Authority (GHA), have been conductedor are expected at our plasma collection centers in 2010. Some of theseinspections are of licensed centers to assess ongoing compliance with cGMP,while others are of our currently unlicensed centers as a prerequisite to finalapproval of the centers’ license applications. If the FDA (or otherauthorities) finds these centers not to be in compliance, our ongoingoperations and/or plans to expand plasma collections would be adverselyaffected.

 

***We must continually monitor the performance of our productsonce approved and marketed for signs that their use may elicit serious andunexpected side effects, which could jeopardize our ability to continuemarketing the products. We may also be required to conduct post-approvalclinical trials as a condition to licensing a product.***

 

36

----

Table of Contents

 

Asfor all pharmaceutical products, the use of our products sometimes producesundesirable side effects or adverse reactions or events (referred tocumulatively as “adverse events”). For the most part, these adverse events areknown, are expected to occur at some frequency and are described in theproducts’ labeling. When adverse events are reported to us, we investigate eachevent and circumstances surrounding it to determine whether it was caused byour product and whether it implies a previously unrecognized safety issueexists. Periodically, we report summaries of these events to the applicableregulatory authorities.

 

Inaddition, the use of our products may be associated with serious and unexpectedadverse events, or with less serious reactions at a greater than expectedfrequency. This may be especially true when our products are used in criticallyill patient populations. When these unexpected events are reported to us, wemust make a thorough investigation to determine causality and implications forproduct safety. These events must also be specifically reported to theapplicable regulatory authorities. If our evaluation concludes, or regulatoryauthorities perceive, that there is an unreasonable risk associated with theproduct, we would be obligated to withdraw the impacted lot(s) of that product.Furthermore, an unexpected adverse event of a new product could be recognizedonly after extensive use of the product, which could expose us to productliability risks, enforcement action by regulatory authorities and damage to ourreputation and public image.

 

Wehave received reports that some Gamunex patients have experienced transienthemolysis and/or hemolytic anemia, which are known potential side effects forthis class of drugs. Since 2005, a disproportionate number of these reportshave been received from Canada, where our product accounted for 80% of all IGIVdistributed in 2008. The Canadian product labeling was updated in 2005 afterthese hemolysis events were first reported to Health Canada. Subsequently,Talecris provided annual updates on these events to Health Canada from 2006 to2008, but no further action was recommended by the Canadian regulators. A seriousadverse finding concerning the risk of hemolysis by any regulatory authorityfor intravenous immune globulin products in general, or Gamunex in particular,could adversely affect our business and financial results.

 

Oncewe produce a product, we rely on physicians to prescribe and administer them aswe have directed and for the indications described on the labeling. It is not,however, unusual for physicians to prescribe our products for “off-label” usesor in a manner that is inconsistent with our directions. For example, aphysician may prescribe an infusion rate for our Gamunex IGIV product that isgreater than our directed infusion rate, which in turn may reduce its efficacyor result in some other adverse affect upon the patient. Similarly, a physicianmay prescribe a higher or lower dosage than the dosage we have indicated, whichmay also reduce our product’s efficacy or result in some other adverse affectupon the patient. To the extent such off-label uses and departures from ouradministration directions become pervasive and produce results such as reducedefficacy or other adverse effects, the reputation of our products in themarketplace may suffer.

 

Whena new product is approved, the FDA or other regulatory authorities may requirepost-approval clinical trials, sometimes called Phase IV clinical trials.  For example, FDA has required such trials forA1PI products, including our recently approved A1PI next generation product,Prolastin-C.  If the results of suchtrials are unfavorable, this could result in the loss of the license to marketthe product, with a resulting loss of sales.

 

***Our products face increased competition.***

 

Recently,certain of our products have experienced increased competition.

 

Until2004, we were one of two North American suppliers with an approved liquid IGIVproduct. In 2004, Grifols launched Flebogamma® 5% liquidIGIV and Octapharma launched Octagam® 5% liquidIGIV. In 2005, Baxter’s Gammaguard® 10% liquidIGIV was launched. In 2007 CSL Behring received approval for Privigen® 10% liquid IGIV. Privigen® was launched in the U.S. in 2008. We expectOctapharma and Grifols to launch 10% liquid IGIV products. Omrix and Biotestare both seeking approval for liquid IGIV products in the U.S., which, ifapproved, will further increase competition among liquid IGIV products.Additionally, Bio Products Laboratory received approval from the FDA for its 5percent concentration IGIV for PI. If third-party payors, group purchasingorganizations and physicians, or others demand the lower-priced products ofsome of our competitors, we may lose sales or be forced to lower our prices.

 

Inaddition, in Canada where we have been the “supplier of record” since the1980s, one of the Canadian blood system operators, Canadian Blood Services, haselected to pursue a dual source strategy, with our share being reduced to 65%in 2009. Overall in 2010, we expect to fractionate 70% of the plasma collectedin Canada. The Canadian blood system operators are seeking to diversify theirsuppliers, which we expect to result in a further decline in our share of salesin Canada.

 

***Our financial performance will suffer if wedo not improve the cost efficiency of our plasma collection platform.***

 

Webelieve our current cost per liter of plasma may exceed that of our largercompetitors. The opening of new plasma centers, which take up to several yearsto reach efficient production capacity, and the creation of a corporateinfrastructure to support

 

37

----

Table of Contents

 

ourvertical integration strategy have significantly increased our per liter costof plasma. We charge excess unabsorbed overhead costs directly to cost of goodssold until our plasma collection centers reach normal operating capacities.

 

Inthe event that our plasma collection centers do not reach efficient operatingcapacities, or there are delays in the ability of our plasma collection centersto reach efficient operating capacities, we will continue to charge unabsorbedoverhead costs directly to cost of goods sold, which will result in highercosts of operations, lower margins and lower cash flow than our competitors. Ifby attempting to reduce these costs, we adversely affect compliance with cGMP,we may be required to write-off plasma and any intermediates and productsmanufactured with non-compliant plasma and we may face shortages of plasmaneeded to manufacture our products.

 

***We would become supply-constrained and ourfinancial performance would suffer if we could not obtain adequate quantitiesof FDA-approved source plasma.***

 

Inorder for plasma to be used in the manufacturing of our products, theindividual centers at which the plasma is collected must be licensed by the FDA,and approved by the regulatory authorities, such as the GHA, of those countriesin which we sell our products. When a new plasma center is opened, and on anongoing basis after licensure, it must be inspected by the FDA and GHA forcompliance with cGMP and other regulatory requirements. An unsatisfactoryinspection could prevent a new center from being licensed or risk thesuspension or revocation of an existing license.

 

Inorder to maintain a plasma center’s license, its operations must continue to conformto cGMP and other regulatory requirements. In the event that we determine thatplasma was not collected in compliance with cGMP, we may be unable to use andmay ultimately destroy plasma collected from that center, which would berecorded as a charge to cost of goods. Additionally, if non-compliance in theplasma collection process is identified after the impacted plasma has beenpooled with compliant plasma from other sources, entire plasma pools,in-process intermediate materials and final products could be impacted.Consequently, we could experience significant inventory impairment provisionsand write-offs which could adversely affect our business and financial results.During 2008, we experienced such an event at one of our plasma collection centers,which resulted in a charge to cost of goods sold of $23.3 million, for which wesubsequently recovered $19.4 million through December 31, 2009. In thisparticular instance, a portion of the impacted plasma had been released tomanufacturing prior to our detection of the issue.

 

Weplan to increase our supplies of plasma for use in our manufacturing processesthrough increased collections at our plasma collection centers and throughselective acquisitions or remodeling and relocations of existing centers. Thisstrategy is dependent upon our ability to successfully integrate new centers,to obtain FDA and GHA approval for the remaining unlicensed plasma centers, tomaintain a cGMP compliant environment in all plasma centers while changing ourstandard operating procedures, or SOPs, and to expand production and attractdonors to our centers.

 

Ourability to maintain a cGMP compliant environment in all plasma centers may bechallenged when we roll-out a comprehensive set of new SOPs which have beenapproved by the FDA. Implementing the revised SOPs will be a substantialproject, which will temporarily increase cost and reduce plasma collectionvolumes. By December 31, 2009, we had converted 34 of 69 collection centers tothese new SOP’s and expect to complete this project in 2010. The change inSOPs, although intended to improve quality and compliance, could temporarilylead to an increase in issues and audit findings by us, the FDA, the GHA orother regulatory agencies.

 

Ourability to expand production and increase our plasma collection centers to moreefficient production levels may be affected by changes in the economicenvironment and population in selected regions where TPR operates plasmacenters, by the entry of competitive plasma centers into regions where TPRoperates, by misjudging the demographic potential of individual regions whereTPR expects to expand production and attract new donors, by unexpected facilityrelated challenges, or by unexpected management challenges at selected plasmacenters.

 

***Our financial performance is dependent uponthird-party suppliers of FDA-approved source plasma******.***

 

In2008, we obtained 25.8% of our plasma and in 2009 we obtained 14.3% of ourplasma under a five-year supply arrangement with CSL Plasma Inc., a subsidiaryof CSL, a major competitor. The agreement with CSL Plasma Inc. provides thatour minimum purchase obligations are: (i) 550,000 liters for calendar year2010; (ii) 300,000 liters of plasma for each of calendar years 2011 and 2012;and (iii) 200,000 liters of plasma for calendar year 2013. Each quarter, CSLPlasma Inc. is obligated to deliver at least 20% of our minimum purchaseobligation for that year. Either we or CSL Plasma Inc. may terminate theagreement in the event of material nonperformance after a 30-day cure period.Another 8.5% was purchased from Interstate Blood Bank, Inc. (IBBI). Theagreement with IBBI requires us to make a minimum purchase of 330,000 liters ofplasma for each year during the term of the agreement, which terminates at theend of 2016. We have a right of first refusal with respect to any materialquantities of plasma that IBBI has available for sale in excess of this amount,as well as a right of first refusal with respect to the transfer of any asset,equity, or controlling interest of IBBI related to any of the centers whichsupply us. We also agreed to provide secured financing for additional

 

38

----

Table of Contents

 

centersapproved by us and the relocation of IBBI’s plasma centers in a maximum amountof $1.0 million per center and $3.0 million in the aggregate. Either we or IBBImay terminate the agreement in the event of material nonperformance after a 30 daycure period. Were any dispute to arise or were CSL Plasma Inc. or IBBI toexperience any plasma collection difficulties, it could be difficult orimpossible for us to replace the shortfall, which would materially adverselyaffect our business.

 

Plasmavolumes obtained under arrangements with independent third parties have notalways met expectations. An inability of any of our suppliers to operate theirbusiness successfully and satisfy their obligations in a timely manner maycause a disruption in our plasma supply, which could materially adverselyaffect our business.

 

***Industry-wide disruptions could reduce theavailability of FDA-approved source plasma and our financial performance wouldsuffer.***

 

Anumber of other factors could disrupt our ability to increase source plasmacollections, including but not limited to:

 

·                  *Alack of alternative plasma supply sources. *In recent years, there has been consolidation in the industry asseveral plasma derivatives manufacturers have acquired plasma collectors andreduced capacity. As a result, it could be difficult or impossible to resolveany significant disruption in the supply of plasma or an increased demand forplasma with plasma from alternative sources.

 

·                  *Areduction in the donor pool. *Regulators inmost of the large markets for plasma derivative products, including the UnitedStates, restrict the use of plasma collected from specific countries andregions in the manufacture of plasma derivative products. For example, theappearance of the variant Creutzfeldt-Jakob disease, commonly referred to as“mad cow” disease (which resulted in the suspension of the use of plasmacollected from U.K. residents), and concern over the safety of blood products(which has led to increased domestic and foreign regulatory control over thecollection and testing of plasma and the disqualification of certain segmentsof the population from the donor pool), have significantly reduced thepotential donor pool.

 

***Our products have historically been subjectto supply-driven price fluctuations.***

 

Ourproducts, particularly IGIV, have historically been subject to pricefluctuations as a result of changes in the production capacity available in theindustry, the availability and pricing of plasma, development of competingproducts and the availability of alternative therapies. Higher prices forplasma-derived products have traditionally spurred increases in plasmaproduction and collection capacity, resulting over time in increased productsupply and lower prices. As demand continues to grow, if plasma supply andmanufacturing capacity do not commensurately expand, prices tend to increase.

 

Since2005 the industry has experienced a favorable pricing environment for plasmaproducts. The robust demand, particularly for IGIV, over the last few years hasresulted in efforts on the part of companies, including ourselves, to increasemanufacturing capacity and open new plasma collection centers to increase theavailability of source plasma. Some of our competitors have announced plans togrow product supply at a rate above expected demand growth. The growth in demandfor IGIV has been outpaced by the recent supply growth, as evidenced byincreased supply in the distribution channel. We, or our competitors, maymisjudge demand growth and over-invest in expanding plasma collection ormanufacturing capacity, which ultimately may result in lower prices for, orinability to sell, our products.

 

Whilewe have recently submitted a sBLA in the U.S. for FDA licensure of Gamunexsubcutaneous administration for the treatment of PI, we currently do not have,and may never receive, FDA approval, which could be a competitive disadvantage.Furthermore, we believe that our competitors are developing several newproducts and technologies potentially offering an improved route ofadministration and even for indications beyond PI. If these development effortsare successful and our effort fails, then we could be at a competitivedisadvantage which may impact our Gamunex sales.

 

UntilDecember 2002, our A1PI product, Prolastin A1PI, was the only plasma productlicensed and marketed for therapy of congenital A1PI deficiency-relatedemphysema in the U.S. Accordingly, until that time, Prolastin A1PI hadvirtually 100% market share in its category. In December 2002 and July 2003,Baxter and CSL Behring received licenses for Aralast and Zemaira, respectively,which were launched in the U.S. in 2003, and Grifols received marketingauthorization for Trypsone in Spain in 2003. The competing products wereintroduced at significantly higher prices than Prolastin A1PI. Due in part toour inability to fully meet demand for A1PI product, as well as patient lossesdue to the nature of the disease, our share of sales has dropped toapproximately 67% in the U.S. and 76% globally. These and other futurecompetitors may increase their sales, lower their prices or change theirdistribution model which may harm our product sales and financial condition.Also, if the attrition rate of our existing Prolastin patient base acceleratesfaster than we have forecast, we would have fewer patients and lower sales volume.In addition, Kamada Ltd. has completed clinical trials for licensure in theU.S. and submitted a BLA for their A1PI product. In the European Union we havea 90% share of A1PI sales and have the only licensed A1PI product, other thanGrifols, which has marketing authorization for Trypsone

 

39

----

Table of Contents

 

A1PIin Spain and LFB which sells Alfalastin in France. Our competitors arecurrently pursuing licensing trials in Europe. Should our competitors receiveapprovals in the European Union sooner than expected, this will impact our unitvolumes and share of sales.

 

Newproducts may reduce demand for plasma-derived A1PI. A recombinant form of A1PI(recA1PI) could gain market share through the elimination of the risk ofplasma-borne pathogens, or through a reduced price permitted by significantlydecreased costs (since the recA1PI would not be sourced from plasma). Inaddition to ourselves, Arriva and GTC Biotherapeutics are in the early stagesof development for a recombinant form of recA1PI. Although we are not aware ofany active clinical trials for a recA1PI product, a successful recA1PI, priorto our developing a similar product, could gain first mover advantage andresult in a loss of our A1PI market share. Similarly, if a new formulation ofA1PI is developed that has a significantly improved rate of administration,such as aerosol inhalation, prior to our developing a similar product, themarket share of Prolastin A1PI could be negatively impacted. Similarly, severalcompanies are attempting to develop products which would be substitutionthreats in the A1PI sector, including retinoic acid, oral synthetic elastaseinhibitors and gene therapy. While these products are all in early stages ofdevelopment, the potential for successful product development and launch cannotbe ruled out.

 

Inaddition, our plasma therapeutics face competition from non-plasma products andother courses of treatments. For example, two RhD hyperimmune globulins forintravenous administration, Cangene’s WinRho® SDF and CSLBehring’s Rhophylac®, are nowapproved for use to treat ITP, and GSK and Amgen launched thrombopoietininhibitors targeting ITP patients in 2008 that may reduce the demand for IGIVto treat this immune disorder. There is also a risk that indications for whichour products are now used will be susceptible to new treatments, such as smallmolecules, monoclonal or recombinant products. Recombinant Factor VIII productcompetes with our own plasma-derived product in the treatment of Hemophilia Aand is perceived by many to have lower risks of disease transmission.Additional recombinant products or the use of monoclonal antibodies, smallmolecules, or stem cell transplantations could compete with our products andreduce the demand for our products. Crucell and Sanofi Pasteur have completedPhase II clinical trials for a monoclonal rabies product to compete with ourrabies hyperimmune product. If successful, we estimate that the monoclonalproduct could take a significant portion of the rabies market in yearssubsequent to its introduction. Also, in February 2009, GTC Biotherapeuticsobtained FDA approval of a competitive ATIII product for the treatment ofhereditary antithrombin deficiency, which is derived from the milk oftransgenic goats. This product now directly competes with our product,Thrombate III (Human), which had been the only FDA approved product.

 

Wedo not currently sell any recombinant products. Although we are attempting todevelop recombinant versions of Plasmin, A1PI and Factor VIII, we cannot becertain that they will ever be approved or commercialized. As a result, ourproduct offerings may remain plasma-derived, even if our competitors offercompeting recombinant products.

 

***Developments in the economy may adverselyimpact our business.***

 

Therecessionary economic environment may adversely affect demand for our products.Prolastin A1PI is sold directly to patients in the U.S. As a result of loss ofjobs, patients may lose medical insurance and be unable to purchase supply ormay be unable to pay their share of deductibles or co-payments. Gamunex IGIV isprimarily sold to hospitals and specialty pharmacies. Hospitals adversely affectedby the economy may steer patients to less costly therapies, resulting in areduction in demand, or demand may shift to public health hospitals, whichpurchase at a lower government price. While to date we cannot directly traceany material reduction in demand to the recession, if economic conditions donot improve, the impact may become material.

 

***We are investigating potential ForeignCorrupt Practices Act violations.***

 

Weare conducting an internal investigation into potential violations of theForeign Corrupt Practices Act (FCPA) that we became aware of during the conductof an unrelated review. The FCPA investigation is being conducted by outsidecounsel under the direction of a special committee of the Board of Directors.The investigation initially focused on sales to certain Eastern European andMiddle Eastern countries, but our investigation is also reviewing salespractices in other countries as determined appropriate.

 

InJuly 2009, we voluntarily contacted the U.S. Department of Justice (DOJ) to advisethem of the investigation and to offer our cooperation in any investigationthat they want to conduct or they want us to conduct. The DOJ has not indicatedwhat action it may take, if any, against us or any individual, or the extent towhich it may conduct its own investigation. The DOJ or other federal agenciesmay 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 andtraining programs. Other countries in which we do business may initiate theirown investigations and impose similar penalties. As a result of thisinvestigation, we suspended shipments to some countries while we put additionalsafeguards in place. In some cases, safeguards involved terminating consultantsand suspending relations with or terminating distributors in countries underinvestigation.  These actions unfavorablyaffected revenue from these countries in 2009. We have resumed sales in countries where we have appropriate safeguards inplace and are reallocating product to other countries as necessary.  To the extent that we conclude, or the DOJconcludes, that we cannot implement adequate safeguards or otherwise need tochange our business practices, distributors, or 

 

40

----

Table of Contents

 

consultantsin affected countries or other countries, this may result in a permanent lossof business from those countries. These sanctions or the permanent loss ofbusiness, if any, could have a material adverse effect on us or our results ofoperations.

 

***A pending investigation relating to our compliance with******the terms of the Pharmaceutical Pricing Agreement underthe Public Health Service program may result in our being barred fromallocating a fixed amount of IGIV as available for sale at the Public HealthService price.***

 

InNovember 2009, the company received a letter from the United States Attorney’sOffice for the Eastern District of Pennsylvania (“USAO”). The USAO requested ameeting to review the company’s compliance with the terms of the PharmaceuticalPricing Agreement (“PPA”) under the Public Health Service program.Specifically, the USAO asked for information related to the sale of our IGIVproduct, Gamunex, under that program.  Inorder to have federal financial participation apply to their products under theMedicaid program and to obtain Medicare Part B coverage, manufacturers arerequired to enter into a PPA. The PPA obligates manufacturers to charge coveredentities the Public Health Service price for drugs intended for outpatient use.The Public Health Service price is based on the Medicaid rebate amount. Thecompany believes that it has complied with the terms of the PPA and federallaw.  If the USAO determines that thecompany’s practices are inconsistent with the terms of the PPA, the USAO hasstated that it may file a civil action against the company under the Anti-fraudInjunction Act and seek a court order directing the company to comply with thePPA or, potentially, proceed under some other legal theory.  An adverse outcome in an Anti-fraud InjunctionAct action could have a material adverse effect on us or our results ofoperation to the extent that the company is barred from allocating a fixedamount of IGIV as available for sale at the Public Health Service price and isforced to give a preference to those purchasers over all other customers.  The company could also be subject to fines,damages, penalties, appointment of a monitor, or enhancement of existingcompliance and training programs as a result of government action. The Companyis cooperating with the investigation and intends to respond to informationrequests from the USAO.

 

***Our ability to export products to Iranrequires annual export licenses.***

 

In2009, 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 berenewed annually. There can be no assurance that we will be able to renew ourlicense. In particular, should political tensions between the U.S. and Iranescalate, the export license might be revoked or not renewed, resulting in theloss of these sales.

 

***Our ability to continue to produce safe andeffective products depends on the safety of our plasma supply againsttransmittable diseases.***

 

Despiteoverlapping safeguards, including the screening of donors and other steps toremove or inactivate viruses and other infectious disease causing agents, therisk of transmissible disease through blood plasma products cannot be entirelyeliminated. For example, since plasma-derived therapeutics involve the use andpurification of human plasma, there has been concern raised about the risk oftransmitting HIV, prions, West Nile virus, H1N1 virus or “swine flu” and otherblood-borne pathogens through plasma-derived products. There are also concernsabout the future transmission of H5N1 virus, or “bird flu.” In the 1980s,thousands of hemophiliacs worldwide were infected with HIV through the use ofcontaminated Factor VIII. Bayer and other producers of Factor VIII, though notus, are defendants in numerous lawsuits resulting from these infections.

 

Newinfectious diseases emerge in the human population from time to time. If a newinfectious disease has a period during which time the causative agent ispresent in the bloodstream but symptoms are not present, it is possible thatplasma donations could be contaminated by that infectious agent. Typically,early in an outbreak of a new disease, tests for the causative agent do notexist. During this early phase, we must rely on screening of donors (e.g., forbehavioral risk factors or physical symptoms) to reduce the risk of plasmacontamination. Screening methods are generally less sensitive and specific thana direct test as a means of identifying potentially contaminated plasma units.

 

Duringthe early phase of an outbreak of a new infectious disease, our ability tomanufacture safe products would depend on the manufacturing process’ capacityto inactivate or remove the infectious agent. To the extent that a product’smanufacturing process is inadequate to inactivate or remove an infectiousagent, our ability to manufacture and distribute that product would beimpaired.

 

Ifa new infectious disease were to emerge in the human population, the regulatoryand public health authorities could impose precautions to limit thetransmission of the disease that would impair our ability to procure plasma,manufacture our products or both. Such precautionary measures could be takenbefore there is conclusive medical or scientific evidence that a disease posesa risk for plasma-derived products.

 

Inrecent years, new testing and viral inactivation methods have been developedthat more effectively detect and inactivate infectious viruses in collectedplasma. There can be no assurance, however, that such new testing andinactivation methods will adequately screen for, and inactivate, infectiousagents in the plasma used in the production of our products.

 

41

----

Table of Contents

 

***If our Clayton facility or other majorfacilities, or the facilities of our third-party suppliers, were to suffer acrippling accident, or a force majeure event materially affected our ability tooperate and produce saleable products, a substantial part of our manufacturingcapacity could be shut down for an extended period.***

 

Substantiallyall of our revenues are derived from products manufactured, and servicesperformed, at our plant located in Clayton, North Carolina. In addition, asubstantial portion of our plasma supply is stored at facilities in Benson,North Carolina, and our Clayton facility. Although we believe we have adoptedand maintain safety precautions, including separate areas for differentmanufacturing processes, if any of these facilities were to be impacted by anaccident or a force majeure event such as an earthquake, major fire orexplosion, major equipment failure or power failure lasting beyond thecapabilities of our backup generators our revenues would be materiallyadversely affected. In this situation, our manufacturing capacity could be shutdown for an extended period and we could experience a loss of raw materials,work in process or finished goods inventory. Other force majeure events such asterrorist acts, influenza pandemic or similar events could also impede ourability to operate our business. In addition, in any such event, thereconstruction of our Clayton fractionation plant or our plasma storagefacilities, the regulatory approval of the new facilities, and thereplenishment of raw material plasma could be time-consuming. During thisperiod, we would be unable to manufacture our products at other plants due tothe need for FDA and foreign regulatory authority inspection and certificationof such facilities and processes. While we maintain property damage andbusiness interruption insurance with limits of $1 billion, these amounts maystill be insufficient to mitigate the losses from any such event. We may alsobe unable to recover the value of the lost plasma or work-in-progress, as wellas the sales opportunities from the products we would be unable to produce.

 

Asignificant number of our plasma collection centers are in Texas and in 2009approximately 20% of our internally sourced plasma came from collection centerslocated on the United States border with Mexico. Donations at these centerscould be impacted by changes in U.S. visa rules. In addition, we have a numberof plasma centers in regions of the southeast which could be affected bynatural disasters such as hurricanes. A disruption in our source of plasma dueto events arising in a geographic region where many of our collection centersare located would limit our ability to maintain our current production levelsof plasma-derived products.

 

***If we experience equipment difficulties orif the suppliers of our equipment or disposable goods fail to deliver keyproduct components or supplies in a timely manner, our manufacturing abilitywould be impaired and our product sales could suffer.***

 

Wedepend on a limited group of companies that supply and maintain our equipmentand provide supplies such as chromatography resins, filter media, glass andstoppers used in the manufacture of our products. In some cases we have onlyone qualified supplier. If our equipment should malfunction, the repair orreplacement of the machinery may require substantial time and cost, which coulddisrupt our production and other operations. Our plasma collection centers relyon disposable goods supplied by Haemonetics Corporation and informationtechnology systems hosted by a subsidiary of Haemonetics Corporation. Ourplasma centers cannot operate without an uninterrupted supply of thesedisposable goods and the operation of these systems. We have experiencedperiodic outages of these systems, but a material outage would affect ourability to operate our collection centers. Alternative sources for keycomponent parts or disposable goods may not be immediately available. Any newequipment or change in supplied materials may require revalidation by us and/orreview and approval by the FDA, or foreign regulatory authorities, includingthe German Health Authority, which may be time-consuming and require additionalcapital and other resources. We may not be able to find an adequate alternativesupplier in a reasonable time period, or on commercially acceptable terms, ifat all. As a result, shipments of affected products may be limited or delayed.Our inability to obtain our key source supplies for the manufacture of ourproducts may require us to delay shipments of products, harm customerrelationships and force us to curtail operations.

 

***We purchase nearly all of our specialtyplasma used for the production of hyperimmunes from a limited number ofcompanies under short-term contracts.***

 

Wecurrently rely on three companies—Biotest Pharmaceuticals Corporation,Octapharma AG, and Advanced Bioservices, LLC (ABS), a subsidiary of KedrionSpA, all of which are our direct competitors—to supply nearly all of ourspecialty plasma required for the production of our hyperimmunes, whichrepresented $74.2 million, or 4.8%, of our net revenue in 2009.  Specialty plasma is plasma that containsantibodies to specific diseases, usually because the donor has been vaccinated.Our contracts with suppliers of specialty plasma are usually on a short termbasis. Our contracts with Octapharma and ABS are set to expire on December 31,2010 and our agreement with Biotest expires at year-end 2011. We arenegotiating with Octapharma and ABS to extend these agreements. Depending uponthese competitors’ production plans, it may be difficult to increase theamounts of plasma we purchase from them or to renew our contracts in thefuture. Our inability to replace the volumes provided by these suppliersthrough our own plasma collection efforts or through increased specialty plasmadeliveries from other third parties would materially adversely affect ourbusiness. To the extent that we develop a supply of specialty plasma from ourown collection centers, such specialty plasma may come at the expense of theplasma we use for our other products. It would also take significant time toobtain the necessary regulatory approvals and develop a sufficient donor base.

 

42

----

Table of Contents

 

***We rely in large part on third parties forthe sale, distribution and delivery of our products.***

 

Inthe U.S., we regularly enter into distribution, supply and fulfillmentcontracts with group purchasing organizations, home care companies, alternateinfusion sites, hospital groups, and others. We are highly dependent on thesecontracts for the successful sale, distribution and delivery of our products.For example, we rely principally on group purchasing organizations and on our distributorsto sell our IGIV product and on Centric Health Resources to fulfillprescriptions for Prolastin A1PI. If the parties with which we contract breach,terminate, or otherwise fail to perform under the agreements, our ability toeffectively distribute our products will be impaired and our business may bematerially and adversely affected. In addition, through circumstances outsideof our control, such as general economic decline, market saturation, orincreased competition, we may be unable to successfully renegotiate ourcontracts or secure terms which are as favorable to us. In addition, we rely ondistributors for sales of our products outside the U.S. Disagreements ordifficulties with our distributors supporting our export business could resultin a loss of sales.

 

***Product liability lawsuits against us couldcause us to incur substantial liabilities, limit sales of our existing productsand limit commercialization of any products that we may develop.***

 

Ourbusiness exposes us to the risk of product liability claims that are inherentin the manufacturing, distribution, and sale of plasma-derived therapeuticprotein products. We face an inherent risk of product liability exposurerelated to the testing of our product candidates in human clinical trials andan even greater risk when we commercially sell any products. If we cannotsuccessfully defend ourselves against claims that our product candidates orproducts caused injuries, we could incur substantial liabilities. Regardless ofmerit or eventual outcome, liability claims may result in:

 

·                  decreaseddemand for our products and any product candidates that we may develop;

 

·                  injury to ourreputation;

 

·                  withdrawal ofclinical trial participants;

 

·                  costs to defendthe related litigation;

 

·                  substantialmonetary awards to trial participants or patients;

 

·                  loss ofrevenue; and

 

·                  the inabilityto commercialize any products that we may develop.

 

Bayeris the defendant in continuing litigation alleging that use of productsmanufactured at our Clayton site in the 1980s, prior to our formationtransaction and carve-out from Bayer, resulted in the transmission of HepatitisC virus and HIV to patients. Bayer is also a defendant in litigation allegingthat thimerosal, a preservative that was added to some intra muscular(hyperimmune) immune globulin products until 1996 (at which time its use wasdiscontinued), was the cause of autism and other disorders in children whoreceived these products. While we are not a party to any of these actions, andBayer has agreed to fully indemnify us from any claims or losses arising out ofthese actions, we cannot assure you that our products or any of theirconstituents or additives may not someday give rise to similar productliability claims that we will be forced to defend and which may have a materialadverse affect on our business.

 

Wehave a global insurance policy with limits of $100 million with a per claimdeductible of $5 million and an aggregate deductible of $10 million. Thisamount of insurance may not be adequate to cover all liabilities that we mayincur. We intend to expand our insurance coverage as our sales grow. Insurancecoverage is, however, increasingly expensive. We may not be able to maintaininsurance coverage at a reasonable cost and we may not be able to obtaininsurance coverage that will be adequate to satisfy any liability that mayarise.

 

***Our products and manufacturing processesare subject to regulatory requirements and authority, including over ourmanufacturing practices and any product recalls.***

 

Ourproducts, and our advertising and promotional activities for such products, aresubject to regulatory requirements, ongoing review, and periodic inspections bythe FDA, the Office of the Inspector General of the Department of Health andHuman Services and other regulatory bodies. In addition, the manufacture andpackaging of plasma products are regulated by the FDA and comparable regulatorybodies in Canada, Europe and elsewhere and must be conducted in accordance withthe FDA’s cGMP regulations and comparable requirements of foreign regulatorybodies, including the GHA.

 

43

----

Table of Contents

 

Laterdiscovery of previously unknown problems with our products or failure by us orany third-party manufacturers, including Bayer, to comply with cGMPregulations, or failure to comply with regulatory requirements, may result in,among other things:

 

·                  restrictions onsuch products or manufacturing processes;

 

·                  withdrawal ofproducts from the market;

 

·                  voluntary ormandatory recall;

 

·                  suspension orwithdrawal of regulatory approvals and licenses;

 

·                  cessation ofour manufacturing activities, which may be for an extended or indefinite periodof time;

 

·                  productseizure; and

 

·                  injunctions orthe imposition of civil or criminal penalties.

 

Wecould also be required to add warnings to our packaging or labeling that couldnegatively differentiate our product in the view of customers or patients.

 

Forexample, we settled a dispute with a customer in September 2007 regardingintermediate material manufactured by us, which is used by this customer intheir manufacturing process. We recorded a charge to cost of goods sold of $7.9million during the year ended December 31, 2007 for inventory impairmentrelated to this material, which we recovered in its entirety during 2008 as therelated material was determined to be saleable, converted into final product,and sold to other customers. Similarly, during 2008, we recorded an additionalinventory impairment provision of $2.6 million related to this dispute forproducts held in Europe, for which we recovered $0.8 million and $1.8 millionduring the years ended December 31, 2009 and 2008, respectively, as theimpacted material was determined to be saleable, converted into final product,and sold to other customers.

 

Separately,our plans to transition from Prolastin to our next generation therapy could beaffected by the approval timing of regulatory authorities. Our current plancalls for a simultaneous transition in the U.S. and Canada over severalquarters. The launch in Europe will be delayed beyond the launch in NorthAmerica because we have yet to receive European regulatory approval.  Presently additional clinical trials arebeing required by European regulators as a precursor to Prolastin-C approval.Additionally, we could face further delays with respect to launches in specificEuropean countries. To the extent regulatory authorities do not act within thesame time-frame, we will need to operate both new and old manufacturingprocesses in parallel with overlapping crews, higher costs, and lower yields.

 

***Certain of our other business practices aresubject to scrutiny by regulatory authorities.***

 

Thelaws governing our conduct are enforceable by criminal, civil andadministrative penalties. Violations of laws such as the Federal Food, Drug andCosmetic Act, the False Claims Act and the Anti-Kickback Law, and any regulationspromulgated under their authority, may result in jail sentences, fines, orexclusion from federal and state programs, as may be determined by Medicare,Medicaid and the Department of Defense and other regulatory authorities.Certain business practices, such as entertainment and gifts for healthcareproviders, sponsorship of educational or research grants, charitable donations,and support for continuing medical education programs, must be conducted withinnarrowly prescribed and controlled limits to avoid any possibility ofinfluencing healthcare providers to prescribe particular products. Additionaland stricter prohibitions could be implemented by federal and stateauthorities. Where such practices have been found to be improper incentives touse such products, government investigations and assessments of penaltiesagainst manufacturers have resulted. Many manufacturers have been required toenter into consent decrees or orders that prescribe allowable corporateconduct. We have developed and implemented a comprehensive HealthcareCompliance Program and provide an initial and annual refresher training for allemployees whose activities may be subject to these requirements. There can beno assurance, however, that our marketing activities will not come under thescrutiny of regulators and other government authorities or that our practiceswill not be found to violate applicable laws rules and regulations.

 

Inaddition, while regulatory authorities generally do not regulate physicians’discretion in their choice of treatments for their patients, they do restrictcommunications by manufacturers on unapproved uses of approved drugs or on thepotential safety and efficacy of unapproved products in development. Companiesin the U.S., Canada and European Union cannot promote approved products forother indications that are not specifically approved by the competentregulatory authorities (e.g., FDA in the U.S.), nor can companies promoteunapproved products. In limited circumstances companies may disseminate tophysicians information regarding unapproved uses of approved products orresults of studies involving investigational products. If such activities failto

 

44

----

Table of Contents

 

complywith applicable regulations and guidelines of the various regulatoryauthorities, we may be subject to warnings from, or enforcement action by,these authorities. Furthermore, if such activities are prohibited, it may harmdemand for our products.

 

Promotionof unapproved drugs or unapproved indications for a drug is a violation of theFederal Food, Drug and Cosmetic Act and subjects us to civil and criminalsanctions. Furthermore, sanctions under the Federal False Claims Act haverecently been brought against companies accused of promoting off-label uses ofdrugs, because such promotion induces the use, and subsequent claims forreimbursement under Medicare and other federal programs. Similar actions foroff-label promotion have been initiated by several states for Medicaid fraud.Violations or allegations of violation of the foregoing restrictions couldmaterially and adversely affect our business.

 

Tomarket and sell our products outside of the U.S., we must obtain and maintainregulatory approvals and comply with regulatory requirements in suchjurisdictions. The approval procedures vary among countries in complexity andtiming. We may not obtain approvals from regulatory authorities outside the UnitedStates on a timely basis, if at all, which would preclude us fromcommercializing our products in those markets. For example, while we completeda Mutual Recognition Procedure in the European Union, facilitating our abilityto sell Prolastin A1PI in 15 European countries, we are in the process ofdiscussing reimbursement on a country-by-country basis, which must be concludedbefore we can expect to significantly increase sales in a number of thesecountries. We have not been successful in receiving reimbursements to date andthere can be no assurance when, if ever, we will receive reimbursement withinthose countries for Prolastin A1PI.

 

Inaddition, some countries, particularly the countries of the European Union,regulate the pricing of prescription pharmaceuticals. In these countries,pricing discussions with governmental authorities can take considerable timeafter the receipt of marketing approval for a product. To obtain reimbursementor pricing approval in some countries, we may be required to conduct a clinicaltrial that compares the cost-effectiveness of our product candidate to otheravailable therapies. Such trials may be time-consuming, expensive, and may notshow an advantage in efficacy for our products. If reimbursement of ourproducts is unavailable or limited in scope or amount, or if pricing is set atunsatisfactory levels, in either the United States or the European Union, wecould be adversely affected.

 

Ourbusiness involves the controlled use of hazardous materials, various biologicalcompounds and chemicals. Although we believe that our safety procedures forhandling and disposing of these materials comply with the standards prescribedby state and federal regulations, the risk of accidental contamination orinjury from these materials cannot be eliminated. If an accident occurs, wecould be held liable for resulting damages, which could be substantial. We arealso subject to numerous environmental, health and workplace safety laws andregulations, including those governing laboratory procedures, exposure toblood-borne pathogens and the handling of biohazardous materials and chemicals.Although we maintain workers’ compensation insurance to cover us for costs andexpenses we may incur due to injuries to our employees resulting from the useof these materials, this insurance may not provide adequate coverage againstpotential liabilities. We do not maintain insurance for environmental liabilityor toxic tort claims that may be asserted against us. Additional federal,state, and local laws and regulations affecting our operations may be adoptedin the future. We may incur substantial costs to comply with, and substantialfines or penalties if we violate, any of these laws or regulations.

 

Inaddition, we export our products to a variety of countries whose legal regimesand business customs and practices differ significantly from those in theUnited States. A failure to comply with laws and regulations applicable to ourinternational operations or export sales could expose us to significant penalties.These laws and regulations include data privacy requirements, labor relationslaws, tax laws, anti-competition regulations, anti-money laundering, import andtrade restrictions, export requirements, including those of the U.S. Office ofForeign Assets Control, U.S. laws such as the Foreign Corrupt Practices Act,and local laws which also prohibit corrupt payments to governmental officials.While we require our employees to comply with applicable laws and we monitorlegal compliance, we cannot be certain that our employees or agents will complyin all instances or that we will promptly identify violations. Violations ofthese laws and regulations could result in fines, criminal sanctions againstus, our officers or our employees, and prohibitions on the conduct of ourbusiness. Any such violations could result in prohibitions on our ability tooffer our products in one or more countries, and could also materially damageour reputation, our products’ reputations, our international expansion efforts,our ability to attract and retain employees, our business and our operatingresults.

 

***We are required to provide accurate pricinginformation to the U.S. government for the purpose of calculating reimbursementlevels by the Centers for Medicare and Medicaid Services (CMS) and forcalculating certain federal prices and federal rebate obligations.***

 

Weare required to report detailed pricing information, net of included discounts,rebates and other concessions, to CMS for the purpose of calculating nationalreimbursement levels, certain federal prices, and certain federal rebateobligations. We have established a system for collecting and reporting thisdata accurately to CMS and have instituted a compliance program to assure thatthe information we collect is complete in all respects. If we report pricinginformation that is not accurate to the federal government, we could be subjectto fines and other sanctions that could adversely affect our business. Inaddition, the government could change its calculation of reimbursement, federalprices, or federal rebate obligations which could negatively impact us.

 

45

----

Table of Contents

 

***We seek to obtain and maintain protectionfor the intellectual property relating to our technology and products.***

 

Oursuccess depends in large part on our ability to obtain and maintain protectionin the United States and other countries for the intellectual property coveringor incorporated into our technology and products, especially intellectualproperty related to our purification processes. The patent situation in thefield of biotechnology and pharmaceuticals generally is highly uncertain andinvolves complex legal and scientific questions. We may not be able to obtainadditional issued patents relating to our technology or products. Even ifissued, patents issued to us or our licensors may be challenged, narrowed,invalidated, held to be unenforceable or circumvented, which could limit ourability to stop competitors from marketing similar products or limit the lengthof term of patent protection we may have for our products. Additionally, mostof our patents relate to the processes we use to produce our products, not theproducts themselves. In many cases, the plasma-derived products we produce ordevelop in the future will not, in and of themselves, be patentable. Since ourpatents relate to processes, if a competitor is able to design and utilize aprocess that does not rely on our protected intellectual property, thatcompetitor could sell a plasma-derived product similar to one we developed orsell. Changes in either patent laws or in interpretations of patent laws in theUnited States and other countries may diminish the value of our intellectualproperty or narrow the scope of our patent protection. In addition, we are aparty to a number of license agreements which may impose various obligations onus, including milestone and royalty payments. If we fail to comply with theseobligations, the licensor may terminate the license, in which event we mightnot be able to market any product that is covered by the licensed patents.

 

Ourpatents also may not afford us protection against competitors with similartechnology. Because patent applications in the United States and many otherjurisdictions are typically not published until 18 months after filing, or insome cases not at all, and because publications of discoveries in thescientific literature often lag behind actual discoveries, neither we nor ourlicensors can be certain that we or they were the first to make the inventionsclaimed in our or their issued patents or pending patent applications, or thatwe or they were the first to file for protection of the inventions set forth inthese patent applications. If a third party has also filed a U.S. patentapplication covering our product candidates or a similar invention, we may haveto participate in an adversarial proceeding, known as an interference, declaredby the U.S. Patent Office to determine priority of invention in the UnitedStates. The costs of these proceedings could be substantial and it is possiblethat our efforts could be unsuccessful, resulting in a loss of our anticipatedU.S. patent position.

 

Wealso rely on unpatented technology, trade secrets, know-how and confidentialityagreements with our employees, consultants and third parties to protect ourunpatented proprietary technology, processes and know-how. We require ourofficers, employees, consultants and advisors to execute proprietaryinformation and invention and assignment agreements upon commencement of theirrelationships with us. There can be no assurance, however, that theseagreements will provide meaningful protection for our inventions, trade secretsor other proprietary information in the event of unauthorized use or disclosureof such information. These agreements may be breached and we may not haveadequate remedies for any such breach. In addition, our trade secrets mayotherwise become known or be independently developed by competitors. If anytrade secret, know-how or other technology not protected by a patent were to bedisclosed to or independently developed by a competitor to develop alternativeproducts, we could face increased competition and lose a competitive advantage.

 

We,like other companies in the pharmaceutical industry, may become aware ofcounterfeit versions of our products becoming available domestically andabroad. Counterfeit products may use different and possibly contaminatedsources of plasma and other raw materials, and the purification processinvolved in the manufacture of counterfeit products may raise additional safetyconcerns, over which we have no control. Any reported adverse events involvingcounterfeit products that purport to be our products could harm our reputationand the sale of our products, in particular, and consumer willingness to use plasma-derivedtherapeutics generally.

 

***We may infringe or be alleged to infringeintellectual property rights of third parties.***

 

Ourproducts or product candidates may infringe or be accused of infringing one ormore claims of an issued patent or may fall within the scope of one or moreclaims in a published patent application that may be subsequently issued and towhich we do not hold a license or other rights. Third parties may own orcontrol these patents or patent applications in the United States and abroad.These third parties could bring claims against us or our collaborators thatwould cause us to incur substantial expenses and, if successful against us,could cause us to pay substantial damages. Further, if a patent infringementsuit were brought against us or our collaborators, we or they could be forcedto stop or delay research, development, manufacturing or sales of the productor product candidate that is the subject of the suit.

 

OnMay 21, 2008, Baxter Healthcare Corporation (Baxter) and National GeneticsInstitute (NGI), a wholly-owned subsidiary of Laboratory Corporation ofAmerica, filed a complaint in the U.S. District Court for the Eastern Districtof 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 screeninglarge

 

46

----

Table ofContents

 

numbersof biological samples utilizing various pooling and matrix array strategies,and the complaint alleges that the patents are owned by Baxter and exclusivelylicensed to NGI.

 

Ifwe are found to infringe the patent rights of a third party, or in order toavoid potential claims, we or our collaborators may choose or be required toseek a license from a third party and be required to pay license fees orroyalties or both. These licenses may not be available on acceptable terms, orat all. Even if we or our collaborators were able to obtain a license, therights may be nonexclusive, which could result in our competitors gainingaccess to the same intellectual property. Ultimately, we could be preventedfrom commercializing a product, or be forced to cease some aspect of ourbusiness operations, if, as a result of actual or threatened patentinfringement claims, we or our collaborators are unable to enter into licenseson acceptable terms.

 

Therehas been substantial litigation and other proceedings regarding patent andother intellectual property rights in the pharmaceutical and biotechnologyindustries. In addition to infringement claims against us, we may become aparty to other patent litigation and other proceedings, including interferenceproceedings declared by the United States Patent and Trademark Office andopposition proceedings in the European Patent Office, regarding intellectualproperty rights with respect to our products. The cost to us of any patentlitigation or other proceeding, even if resolved in our favor, could besubstantial. Some of our competitors may be able to sustain the costs of suchlitigation or proceedings more effectively than we can because of theirsubstantially greater financial resources. Uncertainties resulting from theinitiation and continuation of patent litigation or other proceedings couldhave a material adverse effect on our ability to compete in the marketplace.Patent litigation and other proceedings may also absorb significant managementtime.

 

Manyof our employees were previously employed at universities or otherbiotechnology or pharmaceutical companies, including our competitors orpotential competitors. We try to ensure that our employees do not use theproprietary information or know-how of others in their work for us. We may,however, be subject to claims that we or these employees have inadvertently orotherwise used or disclosed intellectual property, trade secrets or otherproprietary information of any such employee’s former employer. Litigation maybe necessary to defend against these claims and, even if we are successful indefending ourselves, could result in substantial costs to us or be distractingto our management. If we fail to defend any such claims, in addition to payingmonetary damages, we may lose valuable intellectual property rights orpersonnel.

 

***We may not be able to commercializeproducts in development.***

 

Beforeobtaining regulatory approval for the sale of our product candidates or formarketing of existing products for new indicated uses, we must conduct, at ourown expense, extensive preclinical tests to demonstrate the safety of ourproduct candidates in animals and clinical trials to demonstrate the safety andefficacy of our product candidates in humans. Preclinical and clinical testingis expensive, difficult to design and implement, can take many years tocomplete and is uncertain as to outcome. A failure of one or more of ourclinical trials can occur at any stage of testing. We may experience numerousunforeseen events during, or as a result of, preclinical testing and theclinical trial process that could delay or prevent our ability to receiveregulatory approval or commercialize our product candidates, including:

 

·                  regulators orinstitutional review boards may not authorize us to commence a clinical trialor conduct a clinical trial within a country or at a prospective trial siterespectively;

 

·                  the regulatoryrequirements for product approval may not be explicit, may evolve over time andmay diverge by jurisdiction;

 

·                  our preclinicaltests or clinical trials may produce negative or inconclusive results, and wemay decide, or regulators may require us, to conduct additional preclinicaltesting or clinical trials or we may abandon projects that we had expected tobe promising;

 

·                  the number ofpatients required for our clinical trials may be larger than we anticipate,enrollment in our clinical trials may be slower than we currently anticipate,or participants may drop out of our clinical trials at a higher rate than weanticipate, any of which would result in significant delays;

 

·                  our third-partycontractors may fail to comply with regulatory requirements or meet theircontractual obligations to us in a timely manner;

 

·                  we might haveto suspend or terminate our clinical trials if the participants are beingexposed to unacceptable health risks or if any participant experiences anunexpected serious adverse event;

 

·                  regulators orinstitutional review boards may require that we hold, suspend or terminateclinical research for various reasons, including non-compliance with regulatoryrequirements;

 

47

----

Table of Contents

 

·                  undetected orconcealed fraudulent activity by a clinical researcher, if discovered, couldpreclude the submission of clinical data prepared by that researcher, lead tothe suspension or substantive scientific review of one or more of our marketingapplications by regulatory agencies, and result in the recall of any approvedproduct distributed pursuant to data determined to be fraudulent;

 

·                  the cost of ourclinical trials may be greater than we anticipate;

 

·                  the supply orquality of our product candidates or other materials necessary to conduct ourclinical trials may be insufficient or inadequate because we do not currentlyhave any agreements with third-party manufacturers for the long-term commercialsupply of any of our product candidates;

 

·                  an audit ofpreclinical or clinical studies by the FDA or other regulatory authority mayreveal non-compliance with applicable regulations, which could lead todisqualification of the results and the need to perform additional studies; and

 

·                  the effects ofour product candidates may not be the desired effects or may includeundesirable side effects or the product candidates may have other unexpectedcharacteristics.

 

Ifwe are required to conduct additional clinical trials or other testing of ourproduct candidates beyond those that we currently contemplate, if we are unableto successfully complete our clinical trials or other testing, if the resultsof these trials or tests are not positive or are only modestly positive or ifthere are safety concerns, we may:

 

·                  be delayed inobtaining marketing approval for our product candidates;

 

·                  not be able toobtain marketing approval;

 

·                  not be able toobtain reimbursement for our products in some countries;

 

·                  obtain approvalfor indications that are not as broad as intended; or

 

·                  have theproduct removed from the market after obtaining marketing approval.

 

Ourproduct development costs will also increase if we experience delays in testingor approvals. We do not know whether any preclinical tests or clinical trialswill begin as planned, will need to be restructured or will be completed onschedule, if at all. Significant preclinical or clinical trial delays alsocould shorten the patent protection period during which we may have theexclusive right to commercialize our product candidates or allow ourcompetitors to bring products to market before we do and impair our ability tocommercialize our products or product candidates.

 

Evenif preclinical trials are successful, we may still be unable to commercializethe product due to difficulties in obtaining regulatory approval for theprocess or problems in scaling the engineering process to commercialproduction. Additionally, if produced, the product may not achieve an adequatelevel of market acceptance by physicians, patients, healthcare payors andothers in the medical community to be profitable. The degree of marketacceptance of our product candidates, if approved for commercial sale, willdepend on a number of factors, some of which are beyond our control, including:

 

·                  the prevalenceand severity of any side effects;

 

·                  the efficacyand potential advantages over alternative treatments;

 

·                  the ability tooffer our product candidates for sale at competitive prices;

 

·                  relativeconvenience and ease of administration;

 

·                  the willingnessof the target patient population to try new therapies and of physicians toprescribe these therapies; the strength of marketing and distribution support;and

 

·                  sufficientthird-party coverage or reimbursement.

 

Therefore,we cannot guarantee that any products which we may seek to develop will ever besuccessfully commercialized, and to the extent they are not, such productscould be a significant expense with no reward.

 

48

----

Table of Contents

 

***If we experienced material weaknesses orfail to otherwise maintain effective internal control over financial reporting,there is more than a remote likelihood that a material misstatement of ourannual or interim financial statements will not be prevented or detected by ourinternal controls.***

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Our internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements inaccordance with generally accepted accounting principles. A material weaknessis a control deficiency, or combination of control deficiencies, that resultsin more than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. We haveidentified and remediated material weaknesses in internal control overfinancial reporting in the past.

 

Underthe provisions of Section 404 of the Sarbanes-Oxley Act of 2002, we will berequired to include a report by our management on the effectiveness of ourinternal control over financial reporting beginning with our Annual Report on Form10-K for the fiscal year ending December 31, 2010. This report must contain anassessment by management of the effectiveness of our internal control overfinancial reporting as of the end of our fiscal year and a statement as towhether or not our internal control over financial reporting is effective. Ourannual report for the fiscal year ending December 31, 2010 must also contain astatement that our independent registered public accountants have issued anattestation report on the effectiveness of our internal control over financialreporting. If we are unable to conclude that our internal control overfinancial reporting is effective, or if our independent registered publicaccountants are unable to attest to the effectiveness of our internal controlover financial reporting, the market’s perception of our financial conditionand the trading price of our stock may be adversely affected. Our inability toconclude that our internal control over financial reporting is effective wouldalso adversely affect the results of the periodic management evaluations of ourdisclosure controls and procedures and internal control over financialreporting that will be required under the Sarbanes-Oxley Act of 2002.

 

***Our future success depends on our abilityto retain members of our senior management and to attract, retain and motivatequalified personnel.***

 

Weare highly dependent on the principal members of our executive and scientificteams. The loss of the services of any of these persons might impede theachievement of our research, development, operational and commercializationobjectives. In particular, we believe the loss of the services of Lawrence D.Stern, John M. Hanson, Mary J. Kuhn, Thomas J. Lynch, John R. Perkins, Joel E.Abelson, Stephen R. Petteway, John F. Gaither, Kari D. Heerdt, Daniel L.Menichella, James R. Engle and Bruce Nogales would significantly and negativelyimpact our business. We do not maintain “key person” insurance on any of ourexecutive officers. We have employment contracts only with Messrs. Stern(through March 31, 2012), Hanson (through October 10, 2010) and Gaither(through September 5, 2010) and Ms. Heerdt (through April 1, 2010) and theseexpire on the dates indicated unless renewed. Our risk of key employee turnovermay increase after the vesting of options in April 2010.

 

Recruitingand retaining qualified operations, finance and accounting, scientific,clinical and sales and marketing personnel will be critical to our success. Wemay not be able to attract and retain these personnel on acceptable terms,given the competition among numerous pharmaceutical and biotechnology companiesfor similar personnel. We also experience competition for the hiring ofscientific and clinical personnel from universities and research institutions.In addition, we rely on consultants and advisors, including scientific andclinical advisors, to assist us in formulating our research and development andcommercialization strategy. Our consultants and advisors may be employed byemployers other than us and may have commitments under consulting or advisorycontracts with other entities that may limit their availability to us.

 

FederalcGMP regulations also require that the personnel we employ and hold responsiblefor the collection, processing, testing, storage or distribution of blood orblood components be adequate in number, educational background, training andexperience, including professional training as necessary, or combinationthereof, and have capabilities commensurate with their assigned functions, athorough understanding of the procedures or control operations they perform,the necessary training or experience, and adequate information concerning theapplication of relevant cGMP requirements for their individualresponsibilities. Our failure to attract, retain, and motivate qualifiedpersonnel may result in a regulatory violation, affect product quality, requirerecall or market withdrawal of affected product, or a suspension or terminationof our license to market our products, or any combination thereof.

 

***A substantial portion of our revenue isderived from a small number of customers, and the loss of one or more of thesecustomers could have a material adverse effect on us.***

 

Threecustomers accounted for approximately 36% and 35% of our net revenues for theyears ended December 31, 2009 and 2008, respectively. Similarly, our accountsreceivable balances have also been concentrated with a small number ofcustomers. Two customers accounted for approximately 23% and 29% of ouraccounts receivable, net, as of December 31, 2009 and 2008, respectively. Inthe event that any of these customers were to suffer an adverse downturn intheir business or a downturn in their supply needs, our business could be materiallyadversely affected. We cannot guarantee that these customers will continuepurchasing our products at past volumes, or, in the event that any of them wereto cease doing business with us, that we could replace such

 

49

----

Table of Contents

 

customeron substantially similar terms or at all. Therefore, the loss of one or more ofthese customers could have a material adverse effect on our net sales, grossprofit and financial condition. Under certain market conditions, our customers’liquidity may worsen and they may demand longer payment terms, higher earlypayment discounts, volume rebates and other concessions which would have adversefinancial consequences on us.

 

Asignificant amount of our U.S. Gamunex volume is contracted.  As these contracts expire over the next fewyears, beginning in 2011, we may not be able to renew the commitments on asfavorable terms, or at all.

 

Sincethe late 1980s we have been the “supplier of record” for the Canadian bloodsystem. Under existing contracts, we are the largest supplier of plasma-derivedproducts to the Canadian blood system operators, Canadian Blood Services andHema Quebec. We transport plasma from Canadian Blood Services and Hema Quebeccollection centers to our manufacturing facility in Clayton, North Carolina formanufacture, and return the finished product, along with commercial product,for sale to Canadian Blood Services and Hema Quebec. Pricing for our productsand services is set at the beginning of the contract period, subject toadjustment for inflation. The U.S. dollar based contracts are terminable upondefault, or the occurrence of certain events, including a third party obtainingCanadian regulatory approval to introduce a significantly superior product orfractionation service, our products or services becoming obsolete, or if wemake certain nonrelated improvements and Canadian Blood Services or Hema Quebecdo not accept the associated price increase. We were awarded new five yearcontracts in December 2007, which became effective April 1, 2008. The contractsmay be extended for two one-year terms upon agreement of the parties. Underthese contracts, we fractionate 100% of the Canadian plasma initially and amajority of the Canadian plasma throughout the contract period and supply amajority of the Canadian requirements for IGIV during the contract term aswell. Canadian Blood Services has elected to pursue a dual-source strategy andalthough we will continue to be the primary supplier, we anticipate annualvolume declines because of their strategy. Hema Quebec has a sole source strategy for fractionation of their plasmaand we expect our IGIV share to remain relatively constant through the durationof the contract. We derive significant revenue and profits under thesecontracts, and a failure to maintain contracts with the Canadian blood systemoperators or any diminution in the volume or price under future contracts couldhave a material adverse effect on our financial results.

 

***Potential business combinations couldrequire significant management attention and prove difficult to integrate withour business.***

 

Ifwe become aware of potential business combination candidates that arecomplementary to our business, we may decide to combine with such businesses oracquire their equity or assets. We have acquired businesses or product lines inthe past. For example, in April 2005, we acquired Precision Pharma Services, Inc.,a contract fractionator located in Melville, New York, and in November 2006 andJune 2007 we acquired groups of plasma collection centers in varying stages ofdevelopment and assumed certain liabilities from IBR, a supplier of sourceplasma. We have since acquired additional plasma collection centers on a caseby case basis. Business combinations generally may involve a number ofdifficulties and risks to our business, including:

 

·                  failure tointegrate management information systems, personnel, research and development,marketing, operations, sales and support;

 

·                  potential lossof key current employees or employees of the acquired company;

 

·                  disruption ofour ongoing business and diversion of management’s attention from otherbusiness concerns;

 

·                  potential lossof the acquired company’s customers;

 

·                  failure todevelop further the other company’s technology successfully;

 

·                  unanticipatedcosts and liabilities; and

 

·                  otheraccounting and operational consequences.

 

Inaddition, we may not realize the anticipated benefits from any businesscombination we may undertake in the future and any benefits we do realize maynot justify the acquisition price. Any integration process would requiresignificant time and resources, and we may not be able to manage the process successfully.If our customers are uncertain about our ability to operate on a combinedbasis, they could delay or cancel orders for our products. We may notsuccessfully evaluate or utilize the acquired technology or accurately forecastthe financial impact of a combination, including accounting charges orvolatility in the stock price of the combined entity. If we fail tosuccessfully integrate other companies with which we may combine in the future,our business and financial results could be harmed.

 

50

----

Table of Contents

 

***Talecris Holdings, LLC and its affiliatedentities will continue to exercise significant control over us and could delayor prevent a change in corporate control.***

 

Asof February 10, 2010, Talecris Holdings, LLC owned approximately 49.9% of ouroutstanding common stock. Talecris Holdings, LLC is owned by (i) Cerberus-PlasmaHoldings LLC, the managing member of which is Cerberus Partners, L.P., and (ii)limited partnerships affiliated with Ampersand Ventures. Substantially allrights of management and control of Talecris Holdings, LLC are held byCerberus-Plasma Holdings LLC.

 

Aslong as Talecris Holdings, LLC owns or controls such a substantial portion ofour outstanding voting power, it may have the ability to delay or prevent achange in control of us that may be favored by other stockholders and mayotherwise exercise substantial control over all corporate actions requiringstockholder approval:

 

·                  the electionand removal of directors and the size of our board;

 

·                  any amendmentof our certificate of incorporation or bylaws;

 

·                  the approval ofmergers and other significant corporate transactions, including a sale ofsubstantially all of our assets; or

 

·                  the defeat ofany non-negotiated takeover attempt that might otherwise benefit our otherstockholders.

 

***A majority of our board of directors willnot be considered “independent” under the rules of The Nasdaq Global SelectMarket.***

 

UntilJanuary 21, 2010 a majority of our common stock was owned by Talecris Holdings,LLC. As a result, we are now phasing in the requirements under Nasdaqrules.  A majority of the directors oneach of our compensation committee and our nominating committee must continue tomeet Nasdaq independence requirements after April 20, 2010.  All directors on these committees will needto meet Nasdaq independence requirements by January 21, 2011.  In addition, by January 21, 2011, a majorityof our board of directors will need to be “independent” under Nasdaqrules.  Failure to meet theserequirements could result in our delisting. Currently, our board has determined that four of our directors are“independent.”

 

***Provisions in our corporate charterdocuments and under Delaware law could make an acquisition of us more difficultand may prevent attempts by our stockholders to replace or remove our currentmanagement, even if beneficial to our stockholders.***

 

Provisionsin our corporate charter and our bylaws may discourage, delay or prevent amerger, acquisition or other change in control of us that stockholders mayconsider favorable, including transactions in which stockholders mightotherwise receive a premium for their shares. These provisions could also limitthe price that investors might be willing to pay in the future for shares ofour common stock, thereby depressing the market price of our common stock. Inaddition, these provisions may frustrate or prevent any attempts by ourstockholders to replace or remove our current management by making it moredifficult for stockholders to replace members of our board of directors.Because our board of directors is responsible for appointing the members of ourmanagement team, these provisions could in turn affect any attempt by our stockholdersto replace current members of our management team. Among others, theseprovisions:

 

·                  establish aclassified board of directors such that not all members of the board areelected at one time;

 

·                  allow theauthorized number of our directors to be changed only by the affirmative voteof two-thirds of our shares of capital stock or by resolution of our board ofdirectors;

 

·                  limit themanner in which stockholders can remove directors from the board;

 

·                  establishadvance notice requirements for stockholder proposals that can be acted on atstockholder meetings and nominations to our board of directors;

 

·                  require thatstockholder actions must be effected at a duly called stockholder meeting andprohibit actions by our stockholders by written consent;

 

·                  impose a “fairprice” requirement that prohibits an acquiror attempting to effect a takeoverof our company from utilizing a two tier price structure as part of a two stageacquisition of our outstanding stock;

 

·                  limit who maycall stockholder meetings;

 

51

----

Table of Contents

 

·                  require anystockholder (or group of stockholders acting in concert) who seek to transactbusiness at a meeting or nominate directors for election to submit a list ofderivative interests in any company securities, including any short interestsand synthetic equity interests held by such proposing stockholder;

 

·                  require anystockholder (or group of stockholders acting in concert) who seek to nominatedirectors for election to submit a list of “related party transactions” withthe proposed nominee(s) (as if such nominating person were a registrantpursuant to Item 404 of Regulation S-K, and the proposed nominee was anexecutive officer or director of the “registrant”); and

 

·                  authorize ourboard of directors to issue preferred stock without stockholder approval, whichcould be used to institute a “poison pill” that would work to dilute the stockownership of a potential hostile acquiror, effectively preventing acquisitionsthat have not been approved by our board of directors.

 

Forexample, our certificate of incorporation authorizes the board of directors toissue up to 40,000,010 shares of preferred stock. The preferred stock may beissued in one or more series, the terms of which may be determined by our boardof directors at the time of issuance or fixed by resolution without furtheraction by the stockholders. These terms may include voting rights, preferencesas to dividends and liquidation, conversion rights, redemption rights, andsinking fund provisions. The issuance of preferred stock could diminish therights of holders of our common stock, and therefore could reduce the value ofour common stock. In addition, specific rights granted to holders of preferredstock could be used to restrict our ability to merge with, or sell assets to, athird party. The ability of our board of directors to issue preferred stockcould make it more difficult, delay, discourage, prevent, or make it morecostly to acquire or effect a change in control, thereby preserving the currentstockholders’ control.

 

Moreover,because we are incorporated in Delaware, we are governed by the provisions of Section203 of the Delaware General Corporation Law, which prohibits a person who ownsin excess of 15% of our outstanding voting stock from merging or combining withus for a period of three years after the date of the transaction in which theperson acquired in excess of 15% of our outstanding voting stock, unless themerger or combination is approved in a prescribed manner. The restrictionscontained in Section 203 are not applicable to any of our existing stockholders that own 15% or more of our outstanding voting stock.

 

***Our quarterly results of operations mayfluctuate and this fluctuation may cause our stock price to decline, resultingin losses to our investors.***

 

Ourquarterly operating results are likely to fluctuate. A number of factors, manyof which are not within our control, could cause variability in our operationsand our operating results and may result in fluctuations in our stock price.These factors include the risks discussed elsewhere in this section, and mayinclude:

 

·                  contaminationof products or material that does not meet specifications in production orfinal product which could result in recalls, write-offs and other costs;

 

·                  changes inplasma procurement costs, yield, or other manufacturing costs that may increaseour cost of goods sold for the period;

 

·                  non-capitalizablecosts associated with our capital projects;

 

·                  seasonality ofsales, particularly our hyperimmune products;

 

·                  competitoractivities, including new product introductions;

 

·                  variations inproduct demand or price;

 

·                  regulatorydevelopments in the United States and elsewhere;

 

·                  the departureof key personnel;

 

·                  interest ratefluctuations impacting our floating rate revolving credit facility and foreigncurrency exchange rate fluctuations in the international markets in which weoperate; and

 

·                  general andindustry-specific economic conditions that may affect our operations.

 

Ifour quarterly operating results fail to meet the expectations of stock marketanalysts and investors, the price of our

 

52

----

Table of Contents

 

commonstock may rapidly decline, resulting in losses to our investors.

 

***If our stock price is volatile, purchasersof our common stock could incur substantial losses.***

 

Ourstock price is likely to be volatile. The stock market has at times experiencedextreme volatility that has often been unrelated to the operating performanceof particular companies. As a result of this volatility, investors may not beable to sell their common stock at or above the price at which they purchasedtheir shares. The market price for our common stock may be influenced by manyfactors, including, but not limited to:

 

·                  disruptions in,or shortages of, our plasma supply;

 

·                  disruption ofproduct supply, product availability, or product recalls;

 

·                  results ofclinical trials and regulatory review of our product candidates or those of ourcompetitors;

 

·                  introduction ofcompeting products or the announcement by our competitors of their plans to doso;

 

·                  new therapeutictechnologies that may replace plasma-derived proteins;

 

·                  regulatory orlegal developments in the United States and other countries;

 

·                  variations inour financial results or those of companies that are perceived to be similar tous;

 

·                  healthcarereform legislation or other changes in the structure of healthcare paymentsystems;

 

·                  pricingfluctuations due to changing market conditions in the pharmaceutical andbiotechnology sectors and issuance of new or changed securities analysts’reports or recommendations;

 

·                  generaleconomic, industry and market conditions; and

 

·                  other factorsdescribed in this “Risk Factors” section.

 

***A significant portion of our total outstanding shares arerestricted from immediate resale but may be sold into the market in the nearfuture. This could cause the market price of our common stock to dropsignificantly, even if our business is doing well.***

 

Sales of a substantialnumber of shares of our common stock in the public market could occur at anytime. These sales, or the perception in the market that the holders of a largenumber of shares intend to sell shares, could reduce the market price of ourcommon stock. We have outstanding 122,552,847 shares of common stock as of February 10,2010.  Of these shares, 61,175,236 heldby Talecris Holdings, LLC and 1,689,420 shares held by our directors and employeeswill become eligible for sale when certain lock-up agreements expire on March 29,2010.  Talecris Holdings, LLC has rights,subject to some conditions, to require us to file registration statementscovering their shares or to include their shares in registration statementsthat we may file for ourselves or other stockholders. We also have registeredall shares of common stock that we may issue under our equity compensationplans. These shares can be freely sold in the public market upon exercise orvesting, subject to the expiration of the lock-up agreements.  Inaddition, as of February 10, 2010, we had exercisable options to purchase 1,429,425shares of our common stock that were not subject to lock-up agreements.  On April 1, 2010, it is expected thatthere will be 9,722,727 additional shares subject to stock options availablefor exercise and 2,416,676 additional shares available for sale as a result ofthe vesting of stock options and restricted stock grants and expiration of thelock-up agreements.  Sales of shares byour directors and employees are generally subject to the limitations discussedelsewhere in this Annual Report under the heading “Shares Eligible for FutureSale.”

 

***We do not anticipate paying dividends inthe foreseeable future.***

 

Althoughwe declared a $73.2 million dividend to our stockholders on December 30, 2005and a $760.0 million dividend to our stockholders on December 6, 2006, wecurrently anticipate that we will retain all funds for use in the operation ofour business, and we do not anticipate paying any further cash dividends on ourcommon stock for the foreseeable future. Therefore, any return on investment inour common stock is solely dependent upon the appreciation of the price of ourcommon stock on the open market. We cannot guarantee that our common stock willappreciate in value. See the discussion contained elsewhere in this AnnualReport under the heading “Dividend Policy.”

 

***Talecris Holdings, LLC has certain registration rights for its sharesof our common stock, which, if exercised, may result in additional shares ofour common stock being publicly available and******may cause our stock price to decline, resulting inlosses to our***

 

53

----

Table of Contents

 

***investors.***

 

TalecrisHoldings, LLC, the holder of 61,175,236 shares of our common stock, has theright to require us to register these shares under the Securities Act underspecified circumstances, as follows:

 

·                  *Demandand Form S-3 Registration Rights.*  Beginning April 6, 2010, Talecris Holdings LLC,subject to specified limitations, may require that we register all or part ofits shares of our common stock for sale under the Securities Act on anunlimited number of occasions. In addition, Talecris Holdings, LLC may fromtime to time make demand for registrations on Form S-3, a short formregistration statement, when we are eligible to use this form.

 

·                  *IncidentalRegistration Rights.*  If weregister any of our common stock, either for our own account or for the accountof other securityholders, Talecris Holdings, LLC is entitled to notice of theregistration and to include its shares of common stock in the registration.

 

·                  *Limitationsand Expenses.*  Other thanin a demand registration, with specified exceptions, Talecris Holdings, LLC’sright to include shares in a registration is subject to the right of theunderwriters to limit the number of shares included in the offering. All fees,costs and expenses of any demand registrations and any registrations on Form S-3will be paid by us, and all selling expenses, including underwriting discountsand commissions, will be paid by the holders of the securities beingregistered.

 

Uponexercise of any of these registration rights, additional shares of our commonstock will be publicly available for purchase and this increased availabilityof shares in the marketplace could cause the price of our common stock to decline,resulting in losses to our investors.

 

***Lock-up Agreements with our directors, executive officersand Talecris Holdings, LLC will soon expire, which may result in increasedsales of our common stock.***

 

We, all of ourdirectors and executive officers and Talecris Holdings, LLC have agreed that,subject to certain exceptions, without the prior written consent of MorganStanley & Co. Incorporated and Goldman, Sachs & Co., we andthey will not, during the period ending March 29, 2010, subject toexceptions specified in the lock-up agreements, offer, sell, contract to sellor otherwise dispose of, directly or indirectly, or hedge our common stock orsecurities convertible into or exchangeable for or exercisable for our commonstock, sell any option or contract to purchase, purchase any option or contractto sell, grant any option, right or warrant to purchase, lend or otherwisedispose of, directly or indirectly, any shares of our common stock or anysecurities convertible into or exercisable for our common stock. Further, weand each such person have agreed that, during this period, they will not makeany demand for, or exercise any right with respect to, the registration of ourcommon stock or warrants or other rights to purchase the common stock.   As of February 10, 2010, we hadoutstanding 122,552,847 shares of common stock. Of these shares, 61,175,236 shares held by Talecris Holdings, LLC and 1,689,420shares held by our directors and employees will become eligible for resale whenthe lock-up agreements expire on March 29, 2010.  Talecris Holdings, LLC has the right torequire us to file one or more registration statements with the SEC to registerthe resale of the shares it holds.  Inaddition as of February 10, 2010, we had exercisable options to purchase 1,429,425shares of our common stock that were not subject to lock-up agreements.  On April 1, 2010, it is expected thatthere will be 9,722,727 additional shares subject to stock options availablefor exercise and 2,416,676 additional shares available for sale as a result ofthe vesting of stock options and restricted stock grants and expiration of thelock-up agreements.  Sales of shares byour directors and employees are generally subject to the limitations discussedelsewhere in this Annual Report under the heading “Shares Eligible for FutureSale.”

 

Once the lock-upagreements expire, sales activity for our common stock may increase. If salesactivity increases, the price of our common stock may decline, resulting inlosses to our investors.

 

***Despiteour current indebtedness levels, we and our subsidiaries may be able to incursubstantially more debt and take other actions that could diminish our abilityto make payments on the 7.75% Notes when due***.

 

We and our subsidiariesmay be able to incur substantially more additional indebtedness in the future,including by accessing approximately $323.0 million of unused availableborrowing capacity under our existing revolving credit facility, based on our December31, 2009 indebtedness.  We are not fullyrestricted under the terms of the indenture governing the 7.75% Notes fromincurring additional debt, securing existing or future debt, recapitalizing ourdebt or taking a number of other actions that are not prohibited by the termsof the indenture governing the 7.75% Notes, any of which actions could have theeffect of diminishing our ability to make payments on the 7.75% Notes when dueand further exacerbate the risks associated with our substantialindebtedness.  Furthermore, the terms ofthe instruments governing our subsidiaries’ indebtedness may not fully prohibitus or our subsidiaries from taking such actions.  Although the indenture for the 7.75% Notesand our revolving credit facility contain covenants limiting indebtedness,these covenants are subject to a number of significant exceptions andqualifications.

 

***Althoughthe 7.75% Notes are referred to as “senior” notes, they are effectivelysubordinated to our and each guarantor’s secured indebtedness and allobligations of our non-guarantor subsidiaries.***

 

The 7.75% Notes are ourunsecured senior obligations and are guaranteed by, subject to limitedexceptions, our current and

 

54

----

Table of Contents

 

future domesticsubsidiaries.  The 7.75% Notes are notguaranteed by our foreign subsidiaries. Subsidiaries that we may establish or acquire in the future that areforeign subsidiaries, or that we may designate as unrestricted subsidiaries inaccordance with the indenture, will not guarantee the 7.75% Notes.  The 7.75% Notes are not secured by any of ourassets.  Our borrowings under ourrevolving credit facility are secured by substantially all of our assets,including’ substantially all of the assets of our domestic subsidiaries (otherthan real property and certain accounts receivable).

 

As a result of thisstructure, the 7.75% Notes are effectively subordinated to (1) all of our andeach guarantor’s secured indebtedness, to the extent of the value of thecollateral, and (2) all indebtedness and other obligations, including tradepayables, of our non-guarantor subsidiaries. The effect of this effective subordination is that, in the event of abankruptcy, liquidation, dissolution, reorganization or similar proceedinginvolving us or a subsidiary, the assets of the affected entity could not beused to pay holders of our 7.75% Notes until after:

 

·                  all securedclaims against the affected entity have been fully paid; and

 

·                  if the affectedentity is a non-guarantor subsidiary, all other claims against that subsidiary,including trade payables, have been fully paid.

 

The lenders under ourrevolving credit facility or the holders of other secured indebtedness will beentitled to exercise the remedies available to a secured lender underapplicable law (in addition to any remedies that may be available underdocuments pertaining to our revolving credit facility or our other securedindebtedness).  The exercise of suchremedies may adversely affect our ability to meet our financial obligationsunder the 7.75% Notes.

 

As of December 31, 2009:

 

·                  we hadoutstanding an aggregate of $10.0 million of secured obligations that areeffectively senior to the 7.75% Notes, comprising capital leases; and

 

·                  thenon-guarantor subsidiaries had outstanding an aggregate of approximately $13.8million of obligations, consisting of trade payables and other accruedexpenses, which are effectively senior to the 7.75% Notes.

 

***Ourbusiness operations may not generate the cash needed to service and repay the7.75% Notes or our other indebtedness.***

 

Our ability to make paymentson our indebtedness, including the 7.75% Notes, and to fund planned capitalexpenditures, will depend on our ability to generate cash in the future.   Our ability to generate cash in the futurewill be subject to general economic, financial, competitive, legislative,regulatory and other factors beyond our control.

 

There can be no assurancethat our business will generate sufficient cash flows from operations or thatwe will have future borrowings available under our revolving credit facility inamounts sufficient to enable us to pay the interest and principal of ourindebtedness when due or to fund other liquidity needs.  At maturity, the entire outstanding principalamount of the 7.75% Notes will become due and payable by us.  Our revolving credit facility matures in Decemberof 2011.  We may not be able to generatesufficient funds from operations to pay the principal of the 7.75% Notes orrevolving credit facility when due.  Inthat event, we will need to raise additional funds through the refinancing ofall or part of our indebtedness on or before the maturity thereof, the sale ofassets or the sale of equity securities. Each of these alternatives is dependent upon financial, business andother general economic factors affecting the credit and equity marketsgenerally or our business in particular, many of which are beyond our control,and we can make no assurances that any such alternatives would be available tous, if at all, on satisfactory terms.  Inparticular, our ability to refinance indebtedness on commercially reasonableterms or at all depends on market conditions at the time of refinancing.  The terms of refinancing indebtedness may bematerially less favorable to us than the terms of our currentindebtedness.  In addition, while we believethat consolidated cash flow generated by our operations will provide adequatesources of long-term liquidity for operations, a significant drop in operatingcash flow resulting from economic conditions, competition or otheruncertainties beyond our control could increase the need for refinancing or newcapital.

 

If we default in thepayment of amounts due on the 7.75% Notes (or other outstanding indebtedness),it would give rise to an event of default under the indenture governing the7.75% Notes and under the revolving credit facility (or the agreementsgoverning our other debt) and possible acceleration of amounts due under theindenture and under the revolving credit facility (or those otheragreements).  A payment default under ourrevolving credit facility or any other debt document, or an acceleration ofamounts due under the revolving credit facility (or other debt documents) wouldcause an event of default under the indenture governing the 7.75% Notes, if theamount of debt involved is $50.0 million or more.  In the event of any acceleration, there canbe no assurance that we will have enough cash to repay our outstandingindebtedness.

 

***Theindenture governing the 7.75% Notes and our revolving credit facility containoperating and financial restrictions on us that***

 

55

----

Table of Contents

 

***maylimit our flexibility in operating our business.***

 

Under the indenturegoverning the 7.75% Notes and under the revolving credit facility, we arerequired to satisfy a number of covenants that may restrict our ability toconduct our operations.  For instance,these covenants limit or prohibit, among other things, our ability to incuradditional debt, pay dividends on, redeem or repurchase capital stock, makecertain investments, enter into certain types of transactions with affiliates,engage in unrelated businesses, incur certain liens; make prepayments ofcertain indebtedness and sell certain assets or merge with or into other’companies.  These covenants couldadversely affect our operating results by significantly limiting our operatingand financial flexibility.

 

Our ability to complywith these covenants may be affected by events beyond our control, and anybreach could require us to seek waivers or amendments of covenants oralternative sources of financing, or to reduce expenditures.  We cannot assure you that such waivers,amendments or alternative financing could be obtained or, if obtained, would beon terms favorable to us.  In addition,under our revolving credit facility, as amended, we are required to satisfy afixed charge coverage ratio of at least 1.10 to 1.00 if our borrowingavailability based on eligible collateral is less than $48.75 million.  If we were unable-to meet this fixed chargecoverage ratio, the lenders could elect to terminate the facility and requireus to repay outstanding borrowings.  Insuch an event, unless we are able to refinance the indebtedness coming due andreplace our revolving credit facility, we would likely not have sufficientliquidity for our business needs to service our debt or fund operations.

 

***Wehave a holding company structure and we will depend in part on distributionsfrom our subsidiaries in order to pay amounts due on the 7.75% Notes; certainprovisions of law or contractual restrictions could limit distributions fromour subsidiaries.***

 

We derive substantiallyall of our operating income from, and hold substantially all of our assetsthrough, our subsidiaries.  The effect ofthis structure is that we will depend in part on the earnings of oursubsidiaries, and the payment or other distribution to it of these earnings, inorder to meet its obligations under the 7.75% Notes and other outstandingdebt.  Provisions of law, such as thoserequiring that dividends be paid only from surplus, could limit the ability ofour subsidiaries to make payments or other distributions to us.  Furthermore, our subsidiaries could incertain circumstances agree to contractual restrictions on their ability tomake distributions.  These restrictionscould also render the subsidiary guarantors financially or contractually unableto make payments under their guarantees of the 7.75% Notes.

 

***If weexperience a change of control, we will be required to make an offer torepurchase the 7.75% Notes.  However, wemay be unable to do so due to lack of funds or covenant restrictions.***

 

If we experience a changeof control (as defined in the indenture governing the 7.75% Notes), we will berequired to make an offer to repurchase all outstanding 7.75% Notes at 101% oftheir principal amount, plus accrued but unpaid interest, if any, to the dateof repurchase. However, we may be unable to do so because:

 

·                  we might nothave enough available funds, particularly since a change of control could causepart or all of our other indebtedness to become due; and

 

·                  the agreementsgoverning our credit facilities and other secured indebtedness would prohibitus from repurchasing the 7.75% Notes, unless we were able to obtain a waiver orrefinance such indebtedness.

 

As a result, a holder of7.75% Notes may have to continue to hold 7.75% Notes even after a change ofcontrol.

 

A failure to make anoffer to repurchase the 7.75% Notes upon a change of control would give rise toan event of default under the indenture governing the 7.75% Notes and couldresult in an acceleration of amounts due thereunder.  In addition, any such default under theindenture governing the 7.75% Notes would trigger a default under our revolvingcredit facility (which could result in the acceleration of all indebtednessthereunder).  A change of control (asdefined in the credit agreement), in and of itself, is also an event of defaultunder our revolving credit facility, which would entitle our lenders toaccelerate all amounts owing thereunder.

 

In the event of any suchacceleration, there can be no assurance that we will have enough cash to repayour outstanding indebtedness, including the 7.75% Notes.

 

***Aguarantee could be voided if the guarantor fraudulently transferred theguarantee at the time it incurred the indebtedness, which could result in thenoteholders being able to rely only on us to satisfy claims.***

 

A guarantee that is foundto be a fraudulent transfer may be voided under the fraudulent transfer lawsdescribed below.  The application-ofthese laws requires the making of complex factual determinations and estimatesas to which there may be different opinions and views.

 

56

----

Table of Contents

 

In general, federal andstate fraudulent transfer laws provide that a guarantee can be voided; orclaims under a guarantee may be subordinated to all other debts of thatguarantor if, among other things, at the time it incurred the indebtednessevidenced by its guarantee:

 

·      the guarantorintended to hinder, delay or defraud any present or future creditor; or

 

·      the guarantorreceived less than reasonably equivalent value or fair consideration for theincurrence of the guarantee; and

 

·      was insolventor rendered insolvent by reason of such incurrence;

 

·      was engaged ina business or transaction for which the guarantor’s remaining assetsconstituted unreasonably small capital; or

 

·      intended toincur, or believed that it would incur, debts beyond its ability to pay thosedebts as they matured.

 

In addition, any paymentby that guarantor under a guarantee could be voided and required to be returnedto the guarantor or to a fund for the benefit of the creditors of theguarantor.

 

The measures ofinsolvency for purposes of fraudulent transfer laws vary depending upon thegoverning law.  Generally, a guarantorwould be considered insolvent if:

 

·      the sum of itsdebts, including contingent liabilities, was greater than the fair saleablevalue of all of its assets;

 

·      the presentfair saleable value of its assets was less than the amount that would berequired to pay its probable liability on its existing debts, includingcontingent liabilities, as they become absolute and mature; or

 

·      it could notpay its debts as they become due.

 

We cannot predict:

 

·      what standard acourt would apply in order to determine whether a guarantor was insolvent as ofthe date it issued the guarantee or whether, regardless of the method ofvaluation, a court would determine that the guarantor was insolvent on thatdate; or 

 

·      whether a courtwould determine that the payments under the guarantee constituted fraudulent transfersor conveyances on other grounds.

 

In the event that theguarantee of the 7.75% Notes by a guarantor is voided as a fraudulentconveyance, holders of the 7.75% Notes would effectively be subordinated to allindebtedness and other liabilities of that guarantor.

 

***Ourcredit ratings may not reflect all the risks of any investment in our 7.75%Notes.***

 

Our credit ratings are anindependent assessment of our ability to pay debt obligations as they becomedue.  Consequently, real, or anticipatedchanges in our credit ratings will generally affect the market value of the7.75% Notes.  Our credit ratings,however, may not reflect the potential impact that risks related to structural,market or other factors may have on the value of our 7.75% Notes.

 

***Aholder of our 7.75% Notes may find it difficult to sell our 7.75% Notes.***

 

A holder of our 7.75%Notes may find it difficult to sell our 7.75% Notes because an active tradingmarket for the 7.75% Notes may not develop.

 

We do not intend to applyfor listing or quotation of the 7.75% Notes or, if issued, the exchange notes,on any exchange.  Therefore, we do notknow the extent to which investor interest will lead to the development of atrading market or how liquid that market might be.  Although the initial purchasers of the 7.75%Notes have advised us that they intend to make a market in the 7.75% Notes,and, if issued, the exchange notes, they are not obligated to do so.  Accordingly, any market-making activities ofthe initial purchasers may be discontinued at any time without notice.

 

If a market for the 7.75%Notes does develop, it is possible that a holder of our 7.75% Notes will not beable to sell our

 

57

----

Table of Contents

 

7.75% Notes or, ifissued, the exchange notes at a particular time or that the prices that aholder would receive upon a sale will be favorable.  It is also possible that any trading marketthat does develop for the 7.75% Notes or any exchange notes will not beliquid.  Future trading prices of the7.75% Notes and any exchange notes will depend on many factors, including:

 

·      our operatingperformance, financial condition and prospects, or the operating performance,financial condition and prospects of companies in the biopharmaceuticalindustry generally;

 

·      our ability tocomplete, if required, the offer to exchange the 7.75% Notes for the exchangenotes;

 

·      the interest ofsecurities dealers in making a market for the 7.75% Notes and any exchangenotes;

 

·      prevailinginterest rates; and

 

·      the market forsimilar securities.

 

Historically,the market for non-investment grade debt has been subject to disruptions thathave caused volatility in prices.  If amarket for the 7.75% Notes develops, it is possible that the market for the7.75% Notes and, if issued, the exchange notes will be subject to disruptionsand price volatility.  Any disruptionsmay have a negative effect on holders of the 7.75% Notes, regardless of ouroperating performance, financial condition and prospects.

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

 

Notapplicable

 

**ITEM 2.  PROPERTIES**

 

Ourprimary facilities are described below. All of our owned real estate is pledged as security under our RevolvingCredit Facility.

 

·      *Clayton Site.  *A 182-acre site that we own, located in Clayton, North Carolina, whichincludes a 14-building complex of office space, lab space, warehouse, freezerstorage, and biopharmaceutical manufacturing facilities consisting of 654,139square feet.  An additional 37,000 squarefeet of administrative office and 23,600 square feet of warehouse space areleased through December 2010 in a building located adjacent to our Claytonsite.  A 30,159 square foot climatecontrolled warehouse located next to the Clayton site is also leased through2014.

 

·      *Research Triangle Park*.  A leased three-buildingheadquarters/administrative office facility. The main building housing our corporate headquarters is leased through February2012, and additional space in two other buildings is leased through July 2013and December 2010.

 

·      *Raleigh Test Lab*.  A laboratory space located in Raleigh, NorthCarolina consisting of 76,000 square feet leased through August 2017, with anoption to purchase through August 2011.

 

·      *Melville Site*.  An 11-acre site that we own, located inMelville, New York consisting of 102,922 square feet of office space, labspace, warehouse, and biopharmaceutical manufacturing facilities.

 

·      *Research Triangle Park*.  An 18-acre site that we own, located inResearch Triangle Park, North Carolina, on which is located a R&D building,consisting of 25,000 square feet of office space and 45,000 square feet oflaboratory facilities.

 

·      *Benson Warehouse*.  A cold storage warehouse of 39,200 square feetused for plasma storage in Benson, North Carolina leased through December 2012.

 

·      *Centennial Campus North Carolina State University*. A combinedoffice and laboratory space in Raleigh, North Carolina consisting of 21,364square feet leased through December 2011.

 

·      *Frankfurt*.  A 2,552 square meters office facility locatedin Frankfurt Germany, which serves as our European headquarters and which isleased until June 30, 2015.

 

·      *Canada.*  A 6,396 square foot office facility locatedin Mississauga, Ontario, which serves as our Canadian headquarters and which isleased until April 30, 2011. We also lease a 2,356 square foot sales office inOttawa, Ontario, which is leased until November 30, 2010.

 

58

----

Table of Contents

 

·      *Plasma Collection Centers*.  As of December 31, 2009, we operated 69plasma collection centers of various sizes under non-cancellable leaseagreements expiring at various dates.

 

Webelieve our properties are adequately maintained and suitable for theirintended use.  We continually evaluateour properties and believe that our current facilities plus any plannedexpansions and upgrades are generally sufficient to meet our expected needs andexpected near-term growth.  Expansionprojects and facility closings are undertaken as necessary in response tomarket needs.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

Weare involved in a number of judicial, regulatory and arbitration proceedings (includingthose described below) concerning matters arising in connection with theconduct of our businesses. We believe, based on currently availableinformation, that the results of such proceedings, in the aggregate, will nothave a material adverse effect on our financial condition, but might bematerial to our operating results for any particular period, depending, inpart, upon the operating results for such period.

 

InMay 2008, Baxter Healthcare Corporation (Baxter) and National GeneticsInstitute (NGI), a wholly-owned subsidiary of Laboratory Corporation ofAmerica, filed a complaint in the U.S. District Court for the Eastern Districtof North Carolina alleging that we infringed U.S. Patents Nos. 5,780,222,6,063,563, and 6,566,052. They subsequently withdrew and re-filed the case in November2008. The patents deal primarily with a method of screening large numbers ofbiological samples utilizing various pooling and matrix array strategies, andthe complaint alleges that the patents are owned by Baxter and exclusivelylicensed to NGI. In November 2008, we filed our answer to their complaint,asserting anti-trust and other counterclaims, and filed a request forre-examination of the patents with the Patent and Trademark Office (PTO), whichwas subsequently granted. We filed a motion to stay litigation pending the PTOproceedings. The motion was unopposed and subsequently granted on January 30,2009. On July 7 and July 9, 2009, the PTO mailed Notices of Intent to IssueReexamination Certificates without amending the claims of the patents indispute, but has not yet done so. Neither party has yet filed motions to resumethe litigation. We believe that the allegations of infringement are withoutmerit and that the patents are invalid as applied to our processes. We intendto vigorously defend against the complaint and pursue our counterclaims.

 

InAugust 2008, we notified Plasma Centers of America, LLC (PCA) that they were inbreach of the Amended and Restated Plasma Sale/Purchase Agreement. Weterminated the agreement in September 2008. In November 2008, we filed suit infederal court in Raleigh, North Carolina, against the G&M Crandall LimitedFamily Partnership and its individual partners as guarantors of obligations ofPCA. A mediation held on January 8, 2009 with the objective of a globalresolution of all claims among and between the various parties ended in animpasse. We were served in January 2009 in a parallel action by PCA, allegingbreach of contract by TPR. The two cases are proceeding in parallel with trialin the state court action set for May 24, 2010.

 

InJuly 2009, we voluntarily contacted the U.S. Department of Justice (DOJ) toadvise them that we were conducting an internal investigation into potentialviolations of the Foreign Corrupt Practices Act. The investigation initiallyfocused on sales to certain Eastern European and Middle Eastern countries, butour investigation is also reviewing sales procedures in other countries asdetermined appropriate. The DOJ has not indicated what action it may take, ifany, against us or any individual, or the extent to which it may conduct itsown investigation.

 

InNovember 2009, the company received a letter from the United States Attorney’sOffice for the Eastern District of Pennsylvania (“USAO”). The USAO requested ameeting to review the company’s compliance with the terms of the PharmaceuticalPricing Agreement (“PPA”) under the Public Health Service program.Specifically, the USAO asked for information related to the sale of our IGIVproduct, Gamunex, under that program.  Inorder to have federal financial participation apply to their products under theMedicaid program and to obtain Medicare Part B coverage, manufacturers arerequired to enter into a PPA. The PPA obligates manufacturers to charge coveredentities the Public Health Service price for drugs intended for outpatient use.The Public Health Service price is based on the Medicaid rebate amount. Thecompany believes that it has complied with the terms of the PPA and federallaw.  If the USAO determines that thecompany’s practices are inconsistent with the terms of the PPA, the USAO hasstated that it may file a civil action against the company under the Anti-fraudInjunction Act and seek a court order directing the company to comply with the PPAor, potentially, proceed under some other legal theory.   Thecompany could also be subject to fines, damages, penalties, appointment of amonitor, or enhancement of existing compliance and training programs as aresult of government action. The Company is cooperating with the investigationand intends to respond to information requests from the USAO.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

OnDecember 15, 2009, Talecris Holdings LLC, at the time our majority shareholder,exercised its rights under our Bylaws and appointed Dean Jonathan Mitchell tofill a newly created vacancy on our board of directors. This matter did notinvolve or require submission to a vote of our shareholders.

 

59

----

Table of Contents

 

Noother matters were submitted to a vote of our shareholders during the fourthfiscal quarter ended December 31, 2009.

 

60

----

Table of Contents

 

**PART II**

 

**ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**MarketInformation**

 

Ourcommon stock, par value $0.01, has been listed on The NASDAQ Global SelectMarket under the symbol “TLCR” since October 1, 2009.  Prior to that time, there was no publicmarket for our common stock.  The initialpublic offering price of our common stock on October 1, 2009 was $19.00 pershare.  The following table sets forththe range of the high and low market prices of our common stock for the periodbeginning on October 1, 2009 through December 31, 2009, as reported by TheNASDAQ Global Select Market:

 
| **2009**        | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| Fourth  Quarter |       | $        | 23.44      |    | $          | 18.01 |   |
|                 |            |          |            |         |            |  |  |

 

**Stockholders**

 

Therewere approximately 100 holders of record of our common stock as of the close ofbusiness on February 10, 2010.  Thenumber of holders of record is based upon the actual number of holdersregistered at such date and does not include holders of shares in “streetnames” or persons, partnerships, associates, corporations, or other entitiesidentified in security position listings maintained by depositories.  Talecris Holdings, LLC held approximately49.9% of our outstanding common stock as of February 10, 2010.

 

**RegistrationRights**

 

TalecrisHoldings, LLC, the holder of 61,175,236 shares of our common stock, has theright to require us to register these shares under the Securities Act underspecified circumstances.

 

*Demand and Form S-3 Registration Rights*.  Beginning April 6, 2010, Talecris HoldingsLLC, subject to specified limitations, may require that we register all or partof its shares of our common stock for sale under the Securities Act on anunlimited number of occasions. In addition, Talecris Holdings, LLC may fromtime to time make demand for registrations on Form S-3, a short formregistration statement, when we are eligible to use this form.

 

*Incidental Registration Rights*.  If we register any of our common stock,either for our own account or for the account of other securityholders,Talecris Holdings, LLC is entitled to notice of the registration and to includeits shares of common stock in the registration.

 

*Limitations and Expenses*.  Other than in a demand registration, withspecified exceptions, Talecris Holdings, LLC’s right to include shares in aregistration is subject to the right of the underwriters to limit the number ofshares included in the offering. All fees, costs and expenses of any demandregistrations and any registrations on Form S-3 will be paid by us, and allselling expenses, including underwriting discounts and commissions, will bepaid by the holders of the securities being registered.

 

Theabove-described registration rights were granted to Talecris Holdings, LLC inconnection with our formation transaction and carve-out from Bayer. TalecrisHoldings, LLC is owned by (i) Cerberus-Plasma Holdings LLC, the managing memberof which is Cerberus Partners, L.P., and (ii) limited partnerships affiliatedwith Ampersand Ventures. Substantially all rights of management and control ofTalecris Holdings, LLC are held by Cerberus-Plasma Holdings LLC.

 

**SharesEligible for Future Sale**

 

Future sales ofsubstantial amounts of common stock, including shares issued upon exercise ofoutstanding options or in the public market, or the anticipation of thosesales, could adversely affect market prices prevailing from time to time andcould impair our ability to raise capital through sales of our equitysecurities.

 

As of February 10,2010, we had outstanding 122,552,847 shares of common stock.  Of these shares, 61,175,236 shares held byTalecris Holdings, LLC and 1,689,420 shares held by our directors and employeeswill become eligible for resale when the lock-up agreements expire on March 29,2010.  On April 1, 2010, it isexpected that there will be 2,416,676 additional shares available for sale as aresult of the vesting of restricted stock grants and the expiration of lock-upagreements.

 

After theexpiration of the lock-up period, these restricted securities may be sold inthe public market only if registered or if they qualify for an exemption fromregistration under Rule 144 or 701 under the Securities Act, whichexemptions are summarized below. Talecris Holdings, LLC has the right to require us to file one or moreregistration statements with the SEC to register the resale of the shares itholds.

 

61

----

Table of Contents

 

*Rule 144*.  In general, a person who hasbeneficially owned shares of our common stock for at least six months,including the holding period of any prior owner other than one of ouraffiliates, would be entitled to sell those shares under Rule 144. Forsellers who are our affiliates, sales within any three-month period the numberof shares may not exceed the greater of:

 

·      1% of the number of shares of our common stock thenoutstanding, which equaled approximately 1,225,529  shares as of February 10,2010, and

 

·      the average weekly trading volume in our common stockon The Nasdaq Global Select Market during the four calendar weeks preceding thedate of filing of a Notice of Proposed Sale of Securities Pursuant to Rule 144with respect to the sale.

 

Sales byaffiliates under Rule 144 are also subject to manner of sale provisionsand notice requirements and to the availability of current public informationabout us.

 

A person may sellshares of common stock acquired from us without regard to manner of sale, theavailability of public information about us or volume limitations, if:

 

·      the person is not our affiliate and has not been ouraffiliate at any time during the three months preceding the sale; and

 

·      the person has beneficially owned the shares proposedto be sold for at least six months, including the holding period of any priorowner other than our affiliates.

 

We cannot estimatethe number of shares of common stock that our existing stockholders will electto sell under Rule 144.

 

*Rule 701*.  In general, under Rule 701of the Securities Act, any of our employees, consultants or advisors whopurchased shares from us in connection with a qualified compensatory stock planor other written agreement is eligible to resell those shares 90 days after theeffective date of our initial public offering in reliance on Rule 144, butwithout compliance with certain restrictions, including the holding period,contained in Rule 144.

 

*Lock-upAgreements*. We, all of our directors and executive officers and Talecris Holdings, LLC haveagreed that, subject to certain exceptions, without the prior written consentof Morgan Stanley & Co. Incorporated and Goldman, Sachs &Co., we and they will not, during the period ending March 29, 2010,subject to exceptions specified in the lock-up agreements, offer, sell,contract to sell or otherwise dispose of, directly or indirectly, or hedge ourcommon stock or securities convertible into or exchangeable for or exercisablefor our common stock, sell any option or contract to purchase, purchase anyoption or contract to sell, grant any option, right or warrant to purchase,lend or otherwise dispose of, directly or indirectly, any shares of our commonstock or any securities convertible into or exercisable for our common stock.Further, we and each such person have agreed that, during this period, theywill not make any demand for, or exercise any right with respect to, theregistration of our common stock or warrants or other rights to purchase thecommon stock.

 

*RegistrationRights*.  Theholders of an aggregate of 61,175,236 shares of our common stock have the rightto require us to register these shares under the Securities Act under specifiedcircumstances. After registration pursuant to these rights, these shares willbecome freely tradable without restriction under the Securities Act.

 

*StockOptions*.  Asof February 10, 2010, we had outstanding options to purchase 11,749,865shares of common stock, of which options to purchase 8,332,265 options werevested. We filed a registration statement on Form S-8 under the SecuritiesAct to register all of the shares of common stock subject to outstandingoptions and options and other awards issuable pursuant to our 2005 Stock Optionand Incentive Plan, and our 2009 Long-Term Incentive Plan.  Accordingly,shares of our common stock registered under those plans are available for salein the open market, subject to Rule 144 limitations applicable toaffiliates, and subject to any vesting restrictions and lock-up agreementsapplicable to these shares.  On April 1,2010, it is expected that there will be 2,819,887 additional shares subject tostock options available for exercise.

 

**Dividends**

 

Wedeclared a $73.2 million dividend to our stockholders on December 30, 2005 anda $760.0 million dividend to our stockholders on December 6, 2006.  We currently do not anticipate paying cashdividends in the foreseeable future. Instead, we anticipate that all of our earnings, if any, in theforeseeable future will be used for working capital and to finance the growthand

 

62

----

Table of Contents

 

developmentof our business.  Any futuredetermination relating to dividend policy will be made at the discretion of ourboard of directors and will depend on a number of factors, including ouroutstanding indebtedness, earnings, capital requirements, financial conditionand future prospects, applicable Delaware law, which provides that dividendsare only payable out of surplus or net profit for the then current andimmediately preceding fiscal years, and other factors that our board ofdirectors may deem relevant.

 

OurRevolving Credit Facility, as amended, permits the payment of cash dividends toholders of our common stock commencing with the first fiscal quarter of 2010,so long as (i) the Leverage Ratio determined as of the end of the immediatelypreceding fiscal quarter for the then most recently completed four fiscalquarters, is equal to or less than 2.00 to 1.00 and (ii) the minimum pro formaavailability as of the date of such dividend (after giving effect to such cashdividend, the funding of all Revolving Loans, and the issuance of all Lettersof Credit to be funded or issued as of such date) is not less than $48.75million; provided that, the aggregate amount of Restricted Payments shall notexceed 50% of Net Income during the period from October 1, 2009 to the end ofthe most recently ended fiscal quarter as of the date of the RestrictedPayment.

 

Theindenture governing our 7.75% Notes permits us to make “Restricted Payments”,including the payment of dividends to holders of our common stock, only if (A) (i)there is no default or event of default under the indenture (and no default orevent of default would occur as a result of the payment of dividends), (ii) wewould be able to incur an additional dollar of indebtedness under the FixedCharge Coverage Ratio test in the indenture, and (iii) the amount of suchdividends along with all other Restricted Payments would not exceed our thenexisting Restricted Payment basket, or (B) we have availability under anotherspecified basket to make a payment of dividends.

 

**RecentSales of Unregistered Securities**

 

OnOctober 21, 2009, we issued and sold $600.0 million aggregate principal amountof 7.75% Senior Unsecured Notes, due November 15, 2016 in a private placementconducted pursuant to Rule 144A and Regulation S under the Securities Act of1933.  The 7.75% Notes are guaranteed bycertain of our existing subsidiaries and will be guaranteed by certain of ourfuture subsidiaries and were sold pursuant to a Purchase Agreement, dated October16, 2009.

 

The7.75% Notes were issued under and are governed by an indenture dated October 21,2009 between us, The Bank of New York Mellon Trust Company, N.A., as trustee,and the guarantors.

 

The7.75% Notes were issued at a price equal to 99.321% of par.  We received net proceeds of approximately$583.9 million, after deducting discounts of $4.1 million and commissions of$12.0 million.  On October 21, 2009, weused the net proceeds from the offering to repay $491.0 million under our Firstand Second Lien Term Loans administered by Morgan Stanley Funding, Inc., whichwere thereby retired, and a portion of borrowings under our Revolving CreditFacility totaling $55.6 million.  Inaddition, we used $28.7 million of the net proceeds to us to settle andterminate certain interest rate swap contracts with a notional amount of $390.0million and $8.6 million to pay accrued interest associated with the First andSecond Lien Term Loans.  Interest on the 7.75%Notes will accrue at the rate of 7.75% per annum and will be payablesemi-annually in arrears on May 15 and November 15 of each year, commencing on May15, 2010. The 7.75% Notes will mature on November 15, 2016.

 

**IssuerPurchases of Equity Securities**

 

Duringthe fourth fiscal quarter ended December 31, 2009, we did not repurchase any ofour outstanding common stock.

 

**PerformanceGraph**

 

Wehave presented below the cumulative total return to our stockholders during theperiod from October 1, 2009, the date of our initial public offering of commonstock, through December 31, 2009 in comparison to the cumulative return on theNASDAQ Composite Index and a peer group of companies during that sameperiod.  Our peer group consisted ofseventeen companies which are: Abbott Laboratories, Alcon Inc, Allergan Inc,Amgen Inc, Baxter International Inc, Bristol Myers Squibb Company, CovidienPLC, Edwards Lifesciences Corp., ELI Lilly & Company, Glaxosmithkline PLC,Hospira Inc, King Pharmaceuticals Inc, Medtronic Inc, Merck & Company Inc,Pfizer Inc, Sanofi-Aventis and Takeda Pharmaceutical Company. The resultsassume that $100 was invested on October 1, 2009 in our common stock, in thepeer group, and in the index (including reinvestment of dividends). Thecomparisons are based on historical data and are not indicative of, norintended to forecast, the future performance of our common stock. The performance graph set forth below shallnot be deemed incorporated by reference into any filing by us under theSecurities Act of 1933 or the Securities Exchange Act of 1934 except to theextent that we specifically incorporate such information by reference, andshall not otherwise be deemed filed under such Acts.

 

63

----

Table of Contents

 

**COMPARISONOF CUMULATIVE TOTAL RETURN**

 

AmongTalecris Biotherapeutics Holdings Corp, The NASDAQ Composite Index

Anda Peer Group

 

 

64

----

Table of Contents

 

**ITEM 6.  SELECTED FINANCIAL DATA**

 

Thefollowing is a summary of our historical consolidated financial data and thecombined financial data for Bayer Plasma, our business predecessor, for theperiods ended and at the dates indicated below. You are encouraged to read this information together with our auditedconsolidated financial statements and the related footnotes and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this Annual Report.

 

Thehistorical consolidated financial data for the years ended December 31, 2009,2008, and 2007 and as of December 31, 2009 and 2008 has been derived from our auditedconsolidated financial statements, which are included elsewhere in this AnnualReport.  The historical consolidatedfinancial data for the year ended December 31, 2006 and for the period from ourinception through December 31, 2005 and as of December 31, 2007, 2006, and 2005has been derived from our audited consolidated financial statements, which arenot included in this Annual Report.  Thehistorical combined financial data of our Predecessor for the three monthsended March 31, 2005 and as of March 31, 2005 has been derived from ourPredecessor’s audited historical combined financial statements, which are notincluded in this Annual Report.

 

Thehistorical combined financial statements of Bayer Plasma are presented on acarve-out basis from the historical financial statements of Bayer AG and itsaffiliates.  As Predecessor, weparticipated in Bayer’s centralized cash management system and our net fundingrequirements were met by Bayer.  We werenot allocated interest costs from Bayer for use of these funds.  The Predecessor’s combined results ofoperations include all net revenue and costs directly attributable to ouroperations as Bayer Plasma, including all costs for supporting functions andservices used by us at shared sites and performed by centralized Bayerorganizations, presented on a carve-out basis, prior to our March 31, 2005formation transaction.  In Predecessorperiods, the expenses for these services were charged to us based on adetermination of the services provided primarily using activity-basedallocation methods based primarily on revenue, headcount, or squarefootage.  In Predecessor periods, Bayeralso provided certain manufacturing services to us for the production ofcertain products at established transfer prices, which have been included incost of goods sold.

 

Webelieve that the comparability of our financial results between the periodspresented in the table below is significantly impacted by the following items,many of which are more fully described in “Management’s Discussion and Analysisof Financial Condition and Results of Operations— Matters AffectingComparability.”

 

·      Financial impact related to our October 2009 IPO andrefinancing transactions, including the repayment and termination of our Firstand Second Lien Term Loans; the issuance of our 7.75% Notes, the write-off ofpreviously deferred debt issuance costs, and charges related to the settlementand termination of our interest rate swap contracts;

 

·      Costs and non-operating income associated with ourterminated merger agreement with CSL;

 

·      Costs associated with our internal investigationinto potential violations of the Foreign Corrupt Practices Act (FCPA);

 

·      Costs associated with the development and verticalintegration of our plasma collection center platform;

 

·      Inventory impairment provisions, and subsequentrecoveries, related to a plasma collection center cGMP issue;

 

·      Inventory impairment provisions, and subsequentrecoveries, related to a customer dispute settlement regarding intermediatematerial;

 

·      Costs associated with share-based compensationawards and special recognition bonuses;

 

·      Costs associated with transition-related activitiesto establish an independent company apart from Bayer;

 

·      Non-operating income and costs related to alitigation settlement with Baxter;

 

·      Tax benefit due to the release of our deferred taxasset valuation allowance; and

 

·      The recognition of unallocated negative goodwillresulting from our formation transaction.

 

65

----

Table of Contents

 
| ** **                                                              | ** ** | **Predecessor**                                         | ** ** | **Successor**         | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **Three  Months**                                       | ** ** | **Nine Months**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Ended**                                               | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **March 31,**                                      | ** ** | **December 31,** | ** ** | **Years  Ended December 31,** | ** ** |
| ** **                                                              | ** ** | **2005**                                                | ** ** | **2005**              | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                                                              | ** ** | **(in thousands,  except share and per share amounts)** | ** ** |
| **Income  Statement Data:**                                             |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Net revenue:                                                            |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Product                                                                 |       | $                                                       | 245,500    |                  | $          | 654,939 |   | $ | 1,114,489 |   | $ | 1,196,686 |   | $ | 1,334,550 |   | $ | 1,507,754 |   |
| Other                                                                   |       | —                                                  |       | 13,039                |       | 14,230 |   | 21,823 |   | 39,742 |   | 25,455 |   |
| **Total**                                                               |       | 245,500                                                 |       | 667,978               |       | 1,128,719 |   | 1,218,509 |   | 1,374,292 |   | 1,533,209 |   |
| Cost of goods sold                                                      |       | 209,700                                                 |       | 561,111               |       | 684,750 |   | 788,152 |   | 882,157 |   | 901,077 |   |
| **Gross  profit**                                                       |       | 35,800                                                  |       | 106,867               |       | 443,969 |   | 430,357 |   | 492,135 |   | 632,132 |   |
| **Operating  expenses:**                                                |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| SG&A                                                                |       | 27,500                                                  |       | 89,205                |       | 241,448 |   | 189,387 |   | 227,524 |   | 289,929 |   |
| R&D                                                                 |       | 14,800                                                  |       | 37,149                |       | 66,801 |   | 61,336 |   | 66,006 |   | 71,223 |   |
| **Total**                                                               |       | 42,300                                                  |       | 126,354               |       | 308,249 |   | 250,723 |   | 293,530 |   | 361,152 |   |
| **(Loss)  income from operations**                                      |       | (6,500                                                  | )          | (19,487               | )          | 135,720 |   | 179,634 |   | 198,605 |   | 270,980 |   |
| **Other  non-operating (expense) income:**                              |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                   |       | —                                                  |       | (21,224               | )          | (40,867 | ) | (110,236 | ) | (96,640 | ) | (74,491 | ) |
| Merger termination fee                                                  |       | —                                                  |       | —                |       | — |   | — |   | — |   | 75,000 |   |
| Equity in earnings of  affiliate                                        |       | —                                                  |       | 197                   |       | 684 |   | 436 |   | 426 |   | 441 |   |
| Loss on extinguishment  of debt                                         |       | —                                                  |       | —                |       | (8,924 | ) | — |   | — |   | (43,033 | ) |
| Litigation settlement                                                   |       | —                                                  |       | —                |       | — |   | 12,937 |   | — |   | — |   |
| **(Loss)  income before income taxes****and extraordinary  items**      |       | (6,500                                                  | )          | (40,514               | )          | 86,613 |   | 82,771 |   | 102,391 |   | 228,897 |   |
| (Provision) benefit for  income taxes                                   |       | (5,100                                                  | )          | (2,251                | )          | (2,222 | ) | 40,794 |   | (36,594 | ) | (75,008 | ) |
| **(Loss)  income before extraordinary items**                           |       | (11,600                                                 | )          | (42,765               | )          | 84,391 |   | 123,565 |   | 65,797 |   | 153,889 |   |
| **Extraordinary  items:**                                               |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Gain (loss) from  unallocated negative goodwill                         |       | —                                                  |       | 252,303               |       | (306 | ) | — |   | — |   | — |   |
| Gain from settlement of  contingent consideration due Bayer             |       | —                                                  |       | 13,200                |       | 3,300 |   | — |   | — |   | — |   |
| **Net  (loss) income**                                                  |       | $                                                       | (11,600    | )                     | $          | 222,738 |   | $ | 87,385 |   | $ | 123,565 |   | $ | 65,797 |   | $ | 153,889 |   |
|                                                                    |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **(Loss)  income before extraordinary items****per common share:**      |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                   |       | $                                                       | (1.45      | )                     | $          | (15.09 | ) | $ | (119.83 | ) | $ | 65.58 |   | $ | 39.01 |   | $ | 4.56 |   |
| Diluted                                                                 |       | $                                                       | (1.45      | )                     | $          | (15.09 | ) | $ | (119.83 | ) | $ | 1.36 |   | $ | 0.71 |   | $ | 1.50 |   |
|                                                                    |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Cash  dividends declared per common share:**                          |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                   |       | —                                                  |       | $                     | 8.37       |   | $ | 132.82 |   | — |   | — |   | — |   |
| Diluted                                                                 |       | —                                                  |       | $                     | 8.37       |   | $ | 8.61 |   | — |   | — |   | — |   |
|                                                                    |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Weighted  average common shares outstanding:**                        |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                   |       | 8,000,000                                               |       | 8,000,000             |       | 5,679,456 |   | 1,685,784 |   | 1,310,448 |   | 31,166,613 |   |
| Diluted                                                                 |       | 8,000,000                                               |       | 8,000,000             |       | 5,679,456 |   | 91,065,600 |   | 92,761,800 |   | 102,514,363 |   |
|                                                                    |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data (at period end):**                                |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                              |       | —                                                  |       | $                     | 10,887     |   | $ | 11,042 |   | $ | 73,467 |   | $ | 16,979 |   | $ | 65,239 |   |
| Total assets                                                            |       | $                                                       | 1,040,800  |                  | $          | 705,249 |   | $ | 903,474 |   | $ | 1,142,322 |   | $ | 1,307,399 |   | $ | 1,445,005 |   |
| Long-term debt and  capital lease obligations                           |       | —                                                  |       | $                     | 250,366    |   | $ | 1,102,920 |   | $ | 1,129,692 |   | $ | 1,194,205 |   | $ | 605,267 |   |
| Redeemable preferred  stock                                             |       | —                                                  |       | $                     | 20,631     |   | $ | 110,535 |   | $ | 110,535 |   | $ | 110,535 |   |   | — |   |
| Total parent’s net  investment/stockholders’ equity (deficit) |       | $                                                       | 943,600    |                  | $          | 152,835 |   | $ | (528,980 | ) | $ | (390,757 | ) | $ | (316,725 | ) | $ | 582,154 |   |
|                                                                    |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Other  Financial Data and Ratios (unaudited):**                       |       |                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Liters of plasma  fractionated                                          |       | 905                                                     |       | 2,493                 |       | 2,983 |   | 2,650 |   | 3,240 |   | 3,569 |   |
| Gross margin                                                            |       | 14.6                                                    | %          | 16.0                  | %          | 39.3 | % | 35.3 | % | 35.8 | % | 41.2 | % |
| Operating margin                                                        |       | (2.6                                                    | )%         | (2.9                  | )%         | 12.0 | % | 14.7 | % | 14.5 | % | 17.7 | % |

 

66

----

Tableof Contents

 

**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

You are encouraged to read the following discussionand analysis of our financial condition and results of operations together withour audited consolidated financial statements and related footnotes included atthe end of this Annual Report.  Thisdiscussion and analysis contains forward-looking statements that involve risksand uncertainties.  See “Risk Factors”included elsewhere in this Annual Report for a discussion of some of theimportant factors that could cause actual results to differ materially fromthose described or implied by the forward-looking statements contained in thefollowing discussion and analysis.  See “SpecialNote Regarding Forward-Looking Statements” included elsewhere in this AnnualReport.

 

All tabular disclosures of dollar amounts arepresented in thousands.  Percentages andamounts presented herein may not calculate or sum precisely due to rounding.

 

A seven-for-one share dividend on our common stock waspaid on September 10, 2009.  Allshare and per-share amounts have been retroactively adjusted for all periods toreflect the share dividend.

 

**BUSINESS OVERVIEW**

 

We are abiopharmaceutical company that develops, produces, markets, and distributesprotein-based therapies that extend and enhance the lives of people sufferingfrom chronic and acute, often life-threatening, conditions, such as primaryimmune deficiencies, CIDP, alpha-1 antitrypsin deficiency, bleeding disorders,and severe trauma.  Our primary productshave orphan drug designation to serve populations with rare, chronic diseases.  We are one of the largest producers andmarketers in our industry.  Our productsare derived from human plasma, the liquid component of blood, which is sourcedfrom our plasma collection centers, or purchased from third parties, located inthe United States.  Plasma contains manytherapeutic proteins, which we extract through a process known as fractionationat our Clayton, North Carolina and/or Melville, New York facilities.  The fractionated intermediates are thenpurified, formulated into a final bulk, and aseptically filled into finalcontainers for distribution.  We alsosell the fractionated intermediate materials. Our manufacturing facilities currently have the capacity to fractionateapproximately 4.2 million liters of human plasma per year. We processedapproximately 3.6 million liters of plasma in 2009, which represents autilization rate of approximately 85% of our fractionation capacity. Weanticipate that we will reach our fractionation capacity in the near termdepending upon the demand for our products, the availability of source plasmaand the impact of variability in yield among other factors. We plan to utilizeavailable fractionation capacity in the near term, which will result inincreased inventory levels in order to maintain pace with projected growth inproduct demand. Purification, filling, and finishing capacities are dependenton fraction mix. We operate in an industry that has experienced volume demandgrowth for plasma-derived therapies, both in the United States and worldwide,for more than twenty years, as well as industry consolidation.  We believe worldwide unit volume demand forplasma-derived products, including IGIV, will grow over the long-term at acompound annual rate of approximately 6% to 8%.

 

We have devotedsignificant resources on the development of our plasma collection centerplatform, which has included organic growth, the acquisition of plasmacollection centers from IBR, and third-party plasma center developmentagreements, primarily with IBR, under which we provided financing for thedevelopment of plasma collection centers that are dedicated to our plasmacollection.  As of December 31,2009, our integrated plasma collection center platform consisted of 69operating centers, of which 64 were licensed and 5 were unlicensed.  These centers collected approximately 62% ofour plasma during the year ended December 31, 2009.  Our plan is for our plasma collection centernetwork, once it fully matures, to provide greater than 90% of our currentplasma requirements. We will need to significantly increase the production inour internal plasma collection center platform over the next few years tooffset the anticipated decrease in plasma supplied by third parties and plannedincreases in our fractionation. CSL Plasma, Inc, a subsidiary of CSL Limited(CSL) which is one of our major competitors, is currently our largest thirdparty plasma supplier. Our minimum purchase commitments under that supplyagreement decline from 550,000 liters in 2010 to 200,000 liters in 2013, thefinal year of the agreement. We have the ability to obtain additional annualvolumes above the minimum purchase commitments under the terms of theagreement, which provides us additional flexibility as we increase internalproduction. The successful development and operation of our plasma collectioncenter network depends on a number of factors, including our ability to obtainand maintain center licensure by the U.S. FDA and foreign regulatoryauthorities, which is required in order to release collected plasma into ourmanufacturing process.

 

We have historicallyexperienced higher costs of production as a result of higher costs of rawmaterials, particularly plasma, due to limited third-party supply and thedevelopment and remediation of our internal plasma collection platform.  The development of Talecris Plasma Resources, Inc.(TPR) has also resulted in excess period costs charged directly to cost ofgoods sold.  These excess period costsreflect the under-absorption that results from lower plasma collections atnewly opened centers as they scale operations and the larger TPR infrastructurenecessary to support the development of our plasma collection platform.  We have reduced and plan to continue toreduce both the collection cost per liter and the amount of excess period costscharged directly to cost of goods sold as TPR matures.  Decreasing collection costs of our raw plasmaand the planned reduction of excess period costs combined with leveraging ourmanufacturing facilities as a result of higher volumes have contributed andwill continue, over the long term, to 

 

67

----

Tableof Contents

 

contribute to improving gross margin. Our cost of goods sold reflects $44.0 million, $98.5 million, and $70.1million for the years ended December 31, 2009, 2008, and 2007,respectively, related to excess period costs associated with TPR.

 

Our U.S. sales force iscomprised of three specialty teams focused on Immunology/Neurology for thepromotion of Gamunex for use in PI, ITP and CIDP; Pulmonary for the promotionof Prolastin and Prolastin-C with an emphasis on patient identification; andHematology/Specialty which promotes Koate, Thrombate III and our hyperimmuneproducts. In addition to this direct sales force, we also have a managedmarkets sales team that manages relationships and contracting efforts with GPO’s,distributors, home healthcare and specialty pharmacy providers and privatecommercial payors. In addition to our U.S. operations, we have sales andmarketing operations located in Germany, Canada as well as a team dedicated tothe development of other international markets. We believe that we are well positioned in the IGIV market given thefeatures and benefits of Gamunex including that it is a sugar-free, 10% liquidthat is produced with a patented caprylate process. As a result of eliminatingour plasma supply constraints, the attributes of Gamunex and its approval forCIDP have resulted in significant increases in our share of sales. Our uniqueProlastin direct to patient distribution model in the U.S. provides a highdegree of patient loyalty and compliance. Internationally, Prolastin is theonly A1PI product licensed in Canada and is the only A1PI product that hascompleted the European Mutual Recognition Process, which has resulted inlicensure in 15 countries and we are currently established in six of thesemarkets. These factors underpin our success in sustaining a 76% share of salesof the world wide A1PI market for 2007 according to MRB.

 

As a result of our pastand ongoing investment in research and development (R&D), we believe thatwe are positioned to continue as a leader in the plasma-derived therapiesindustry.  We have a strong commitment toscience and technology with a track record of accomplishments and pipelineopportunities.  We focus our R&Defforts in three key areas: continued enhancement of our process technologies(including pathogen safety), life cycle management for our existing products(including new indications), and the development of new products.

 

The successfuldevelopment of our plasma collection platform, as well as our plasma supplyagreement with CSL, have provided increasing levels of plasma liters which hasyielded additional volume of plasma-derived therapies as well as operationalefficiencies.  Although in the near term,we plan to continue to increase the volume of liters fractionated and theproduction of our plasma-derived therapies, particularly Gamunex IGIV, we willcontinue to encounter manufacturing capacity constraints for plasma-derivedFactor VIII and albumin.  Consequently,as we increase production of Gamunex IGIV, we expect to be less efficient inthe utilization of each incremental liter fractionated, which will negativelyimpact gross margin.  In response to ourcapacity constraints, we expect to increase our capital spending to a currentlyestimated $750 million to $800 million over the next five years on a cumulativebasis.  Additional information regardingthe nature of our currently planned capital projects is included in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.”

 

**2009 HIGHLIGHTS**

 

Our 2009 financial andbusiness highlights are included below.

 

***Financial Highlights***

 

·                  Total net revenue increased 11.6% for the year ended December 31,2009 to $1.533 billion as compared to $1.374 billion for the year ended December 31,2008.

 

·                  Gross margin improved 540 basis points to 41.2% forthe year ended December 31, 2009 as compared to 35.8% for the year ended December 31,2008.

 

·                  Operating margin improved 320 basis points to 17.7%for the year ended December 31, 2009 as compared to 14.5% for the yearended December 31, 2008.

 

·                  Net income, inclusive of the $48.8 million after-taxincome from the CSL merger termination fee and the $26.3     million after-tax charges incurred as aresult of our refinancing transactions, increased 133.9% for the year ended December 31,2009 to $153.9 million as compared to $65.8 million for the year ended December 31,2008.

 

·                  Diluted earnings per share, inclusive of the CSLmerger termination fee and the charges related to our refinancing transactions,were $1.50 for the year ended December 31, 2009 as compared to $0.71 forthe year ended December 31, 2008.

 

·                  Operating cash flows, inclusive of the CSL mergertermination fee and the charges related to our refinancing transactions, were$234.2 million for the year ended December 31, 2009, reflecting animprovement of $201.1 million over 2008.

 

68

----

Tableof Contents

 

Our U.S. GAAP financialresults for the year ended December 31, 2009 include the impact of the CSLmerger termination fee and charges related to our refinancingtransactions.  These items impact ourU.S. GAAP financial results for the year ended December 31, 2009 asfollows:

 

 
| ** **                                              | ** ** | ** **  | ** ** | **Income  Tax** | ** ** | ** **      | ** ** | **Diluted  Earnings** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **Pre-Tax** | ** ** | **Expense**     | ** ** | ** **      | ** ** | **Per**               | ** ** |
| ** **                                              | ** ** | **Amount**  | ** ** | **(Benefit)**   | ** ** | **Net  Income** | ** ** | **Common  Share**     | ** ** |
| U.S. GAAP                                               |       | $           | 228,897    |            | $          | 75,008          |       | $                     | 153,889    |   | $ | 1.50 |   |
| Less specific items:                                    |       |        |       |            |       |            |       |                  |       |
| Merger termination fee                                  |       | (75,000     | )          | 26,250          |       | (48,750         | )          |                  | (0.48      | ) |
| Write off of deferred debt issuance costs               |       | 12,141      |       | (4,711          | )          | 7,430           |       |                  | 0.07       |   |
| Loss on extinguishment of  interest rate swap contracts |       | 30,892      |       | (11,986         | )          | 18,906          |       |                  | 0.19       |   |
| Excluding specific items                                |       | $           | 196,930    |            | $          | 84,561          |       | $                     | 131,475    |   | $ | 1.28 |   |

 

We believe that ameaningful analysis of our financial results for the year ended December 31,2009 is enhanced by the use of non-GAAP net income and diluted earnings pershare. The section titled “Non-GAAP Financial Measure” includes additionalinformation regarding the use of non-GAAP financial measures and theirlimitations.

 

***Initial Public Offering and Refinancing Highlights***

 

·                  On October 6, 2009, we completed our initialpublic offering (IPO) of 56,000,000 shares of our common stock at an offeringprice of $19.00 per share for an aggregate offering of $1.064 billion.  We received net proceeds of $519.7 millionfrom the issuance of 28,947,368 new shares of common stock. These proceeds wereused to repay principal under our then existing First and Second Lien TermLoans.  We did not receive any proceedsfrom the selling stockholders’ sale of 27,052,632 shares of common stock in theoffering.

 

·                  On October 15, 2009, we amended certainprovisions under our Revolving Credit Facility, including increasing ourcapital expenditure baskets so that we will be permitted to make capitalexpenditures of up to $225 million in each of 2010 and 2011. Additionally, theamendment provided that the capital expenditure covenant is not applicable aslong as our leverage ratio is less than or equal to 2.00 to 1.00.  The amendment also provides that we willmaintain minimum availability of $48.75 million.

 

·                  In October 2009, our corporate family creditratings were increased to BB (Stable Outlook) by Standard and Poor’s and to Ba3(Stable Outlook) by Moody’s Investor Services.

 

·                  On October 21, 2009, we completed the issuance of$600.0 million, 7.75% Senior Unsecured Notes, due November 15, 2016 at aprice of 99.321% of par, in a private placement to certain qualifiedinstitutional buyers.  We used the netproceeds to us of $583.9 million to repay principal and interest amounts of$499.6 million under our First and Second Lien Term Loans, which weresubsequently terminated, $55.6 million to repay principal under our RevolvingCredit Facility, and $28.7 million to settle and terminate certain interestrate swap contracts with a notional amount of $390.0 million.  We also expensed the remaining balance of$12.1 million in deferred financing charges related to the First and SecondLien Term Loans. Subsequently, we settled and terminated our remaining interestrate swap contract with a notional amount of $50.0 million for $6.1 million.

 

·                  As of December 31, 2009, Talecris Holdings, LLCheld approximately 50.1% of our outstanding common stock.  Talecris Holdings, LLC is owned by (i) Cerberus-PlasmaHoldings LLC, the managing member of which is Cerberus Partners, L.P., and (ii) limitedpartnerships affiliated with Ampersand Ventures.  Substantially all rights of management andcontrol of Talecris Holdings, LLC are held by Cerberus-Plasma HoldingsLLC.  Subsequent to December 31,2009, the ownership of our outstanding common stock by Talecris Holdings, LLCwas diluted below 50%.

 

***Other Business Highlights***

 

·                  InJune 2009, we and CSL agreed to terminate the definitive merger agreemententered into on August 12, 2008, under which CSL agreed to acquire us forcash consideration of $3.1 billion, less net debt, as defined.  The closing of the transaction was subject tothe receipt of certain regulatory approvals as well as other customaryconditions.  The U.S. Federal TradeCommission filed an administrative complaint before the Commission challengingthe merger and a complaint in Federal district court seeking to enjoin themerger during the administrative process. CSL paid us a merger termination fee of $75.0 million (after tax amountof $48.8 million), which is included as other non-operating income in 

 

69

----

Tableof Contents

 

our consolidated income statement for the yearended December 31, 2009.  The U.S.Federal Trade Commission’s complaints were subsequently dismissed.

 

·                  In June 2009, the Paul-Ehrlich Institute approvedthe inclusion of chronic inflammatory demyelinating polyneuropathy (CIDP) as anew indication for our Gamunex IGIV product. According to European Union regulations, this approval has been agreedupon by all of the Concerned Member States through a Mutual RecognitionProcedure (MRP), resulting in approval of the CIDP indication in 17 Europeancountries (16 through the MRP process and 1 (Switzerland) through a NationalLicense).  We began CIDP marketingactivities in two European countries in 2009 and we expect to launch marketingactivities in an additional three European countries in 2010.

 

·                  In June 2009, we were granted orphan drugdesignation by the U.S. Food and Drug Administration (FDA) for the developmentof Plasmin (Human) to treat acute peripheral arterial occlusion (aPAO).  We are currently investigating Plasmin in a PhaseI clinical trial designed to assess its ability to treat aPAO, a condition inwhich arterial blood flow to the extremities, usually the legs, is blocked by aclot. We are currently in our seventh and last dosing cohort in Phase I andhave begun to design a Phase II trial. Our goal is to commence this trialduring 2010. In October 2009, we received approval from the Paul EhrlichInstitute to proceed with a proof of concept trial for Plasmin to treatischemic stroke in Germany, adding to our approval in Australia, Canada,France, Spain and the United Kingdom.

 

·                  In October 2009, we received U.S. FDA approvalfor our next generation A1PI product, Prolastin-C.  A post-approval clinical trial was requiredas a condition for approval.  We alsosubmitted a supplemental New Drug Submission (sNDS) to Health Canada for theapproval of Prolastin-C A1PI in March 2009 and Prolastin-C A1PI wasapproved for use in Canada in February 2010.  Presently, additional clinical trials arebeing required by European authorities as a precursor to Prolastin-C A1PIapproval in Europe.  We are currently inthe process of launching Prolastin-C A1PI in the U.S. and Canada. Prolastin-CA1PI is a new concentrated version of our Prolastin A1PI product, which hasimproved yields and higher concentration. As a result, the infusion time for patients will be significantlyreduced.  The manufacturing process forProlastin-C A1PI incorporates technological advances such as nanofiltration, avirus exclusion technology, and cation exchange chromatography, an additionalpurification step.   The manufacturingtechnological advances contributed to a yield improvement of approximately40%.  Commercial production ofProlastin-C A1PI at our Clayton manufacturing facilities began in 2009 insupport of the 2010 launch.

 

·                  During the fourth quarter of 2009, we completed theacquisition of the remaining two plasma collection centers under our center developmentagreement with International BioResources, L.L.C. and affiliated entities(IBR), completing a significant milestone in our plasma platform development,which began in 2006.

 

·                  In February 2010, we were granted orphan drugdesignation by the U.S. FDA for the development of an aerosol formulation ofA1PI to treat congenital alpha 1- antitrypsin (AAT) deficiency.  AAT deficiency is a chronic, hereditarycondition that increases the risk of certain diseases, particularlyemphysema.  Currently, there are noapproved, inhaled treatments available for the treatment of AAT.  We received a similar orphan drug designationfor the aerosolized form of A1PI from the European Commission in June of2008.

 

**BUSINESS STRATEGY**

 

Our business strategy is summarized as follows:

 

***Achieve Cost Efficiencies in Our Plasma Collection Platform***

 

In 2006, we made thestrategic decision to vertically integrate our plasma supply chain in order toenhance the predictability, sustainability, and profitability of our plasmasupply.  Our rapid vertical integrationof our plasma supply was accomplished through the development of an extensiveinfrastructure to manage the multiple work streams necessary to accomplish thedevelopment of our current plasma collection platform. The infrastructurenecessary to integrate the centers we acquired from IBR in November 2006and to open new centers which formed our sixty-nine center system includedthird party consultants as well as additional management. Given that itgenerally takes three to four years to mature a plasma center, many of ourcenters are immature. We have eliminated the third party consultants used todevelop the platform and reduced the management necessary to drive the platformdevelopment resulting in a significant reduction in cost. Additionally, as weincrease the utilization of the platform, we achieve economies of scale thatresult in lower cost per liter. These factors will lead to improving cost perliter of plasma collected and the elimination of unabsorbed TPR infrastructureand start-up costs charged directly to cost of goods sold. Consequently, weexpect that the improvement in our plasma collection costs will provide anear-term gross margin improvement opportunity.

 

70

----

Tableof Contents

 

***Improve Operating Leverage through Increased Recovery of PlasmaProteins***

 

We seek to improve ourprofitability by capitalizing on the operating leverage in our business model.A significant portion of our cost structure, other than raw materials, isrelatively fixed and therefore incremental volume contributes significantadditional profit. Our capital expenditure plan is designed, in part, tofacilitate the production of an increasing volume of existing and new productsfrom each liter of plasma. We currently have purification capacity constraintsrelated to the production of albumin and Koate, our plasma-derived Factor VIIIproduct. We also expect to be less efficient in the utilization of eachincremental liter of plasma fractionated as we increase Gamunex production,which will result in gross margin erosion. Additionally, we anticipate that wewill reach our fractionation capacity in the near future. Consequently, we haveembarked on a capital expenditure plan which we currently estimate will be inthe range of $750 million to $800 million through 2014. Key elements of thisplan include a new fractionation facility currently estimated to range from$280 million to $300 million, based on conceptual engineering, to expand ourfractionation capacity from 4.2 million liters to 6.0 million liters. This 43%capacity expansion will allow us to keep pace with expected demand growth forplasma-derived products and will provide a balance with our Gamunexpurification capacity. We also plan to expand albumin and Koate purificationcapacities. We are targeting 2015 for commercial production from our newfractionation facility, with additional albumin and Koate purification capacitiesavailable in the next five to six years. This capacity expansion will allow usto improve the utilization of the proteins in each liter of plasma which shouldresult in additional margin improvement opportunities once completed.

 

***Enhance Growth through New Plasma-Derived and Recombinant Proteins***

 

We continue to pursuegrowth through our internal development capabilities and in-licensing of newtechnologies and products.  Increases in our research and developmentspending will be driven by our emphasis on new plasma-derived molecules as wellas the development of our recombinant capabilities in addition to our lifecycle management activities, particularly as they relate to A1PI. We believethat our plasma-derived and recombinant Plasmin therapies hold particularpromise. Plasmin is a natural protein that dissolves blood clots for which weare pursuing two versions.  We are developing a plasma-derived molecule,which is in a Phase I clinical trial for aPAO and a commercial process toproduce a recombinant form to treat ischemic stroke. Additionally, we aredeveloping recombinant versions of Factor VIII and A1PI through the use ofhuman cell lines. If successful, the development of these therapies couldsignificantly improve our revenue and profitability. In addition, our externalbusiness development will focus on proteins where we have synergies or corecompetencies in research, manufacturing and/or marketing.

 

***Broaden Geographic Reach***

 

During 2009,approximately 80% of our net revenue was generated in North America; whereasNorth America represented only approximately 40% of global plasma product salesin 2007, according to MRB.  Although ourbusiness is concentrated in North America, we see significant opportunities tobroaden our geographic reach in Europe as well as the rest of the world. Interms of A1PI, there are a number of European countries with registries ofidentified A1PI patients whose healthcare systems currently do not provide forreimbursement for the use of A1PI therapy. We hope to obtain reimbursement forthese patients as we engage with the respective governmental healthcareorganizations, patient advocacy groups and supporting physicians andscientists. We also believe that the approval for the CIDP indication in 17European countries will facilitate Gamunex market expansion. Additionally, webelieve that the demand for plasma-derived therapies, particularly IGIV, FactorVIII and albumin are increasing internationally with improving socio-economicconditions and medical education regarding the benefits of plasma-derivedtherapies. Until our facilities are expanded as described above, significantgrowth in our international distribution will be limited and our focus will beon developing channels and relationships.

 

**PRINCIPAL PRODUCTS**

 

The majority of our salesare concentrated in the therapeutic areas of: Immunology/Neurology, primarilythrough our intravenous immune globulin (IGIV) product for the treatment ofprimary immune deficiency and autoimmune diseases, as well as CIDP, andPulmonology, through our alpha-1 proteinase inhibitor (A1PI) product for thetreatment of alpha-1 antitrypsin deficiency-related emphysema.  These therapeutic areas are served by ourproducts, Gamunex IGIV (Gamunex or Gamunex IGIV) and Prolastin A1PI (Prolastinor Prolastin A1PI) and our recently approved next generation A1PI product,Prolastin-C.  Sales of Gamunex andProlastin together comprised 74.7%, 72.3%, and 75.8% of our net revenue for theyears ended December 31, 2009, 2008, and 2007, respectively.  We have contracted commitments from ourcustomers for a substantial portion of our U.S. IGIV volume over the next threeyears.  We are also the primary supplierof Canadian IGIV under our contracts with the Canadian Blood Services (CBS) andHema Quebec.  We also have a line ofhyperimmune therapies that provide treatment for tetanus, rabies, hepatitis B,hepatitis A, and Rh factor control during pregnancy and at birth.  In addition, we provide plasma-derivedtherapies for critical care/hemostasis including the treatment of hemophilia,an anti-coagulation factor, as well as albumin to expand blood volume.  Although we sell our products worldwide, themajority of our sales were concentrated in the United States and Canada for theperiods presented.  Information regardingour largest two products is included below. Additional information regarding our product portfolio is included in “Business—Products.”  Additional information regarding recentregulatory activities with respect to our products and product candidates isincluded in “Management’s Discussion and Analysis of Financial Condition andResults of Operations—2009 Highlights—Other Business Highlights.”

 

71

----

Tableof Contents

 

***Gamunex IGIV***

 

In 2003, we became thefirst producer to commercialize a high concentration 10%caprylate/chromatography purified liquid version of IGIV through our Gamunexproduct.  We use a patented caprylatepurification process in the production of Gamunex, which results in higheryields of the fragile IgG proteins compared to harsher purificationprocesses.  The caprylate processmaintains the integrity of the IgG protein by allowing it to remain in solutionduring processing, maximizing the biologic integrity and purity.  Gamunex is a ready-to-use, sugar-free 10%liquid, which simplifies infusions by eliminating the need for time-consumingreconstitution processes necessary with lyophilized products.  Gamunex IGIV is the only IGIV productapproved for CIDP in the U.S., Canada, and 17 countries in the EuropeanUnion.  As such, Gamunex is the only IGIVapproved for any indication in neurology in North America.  Further, the U.S. FDA granted Gamunex IGIVorphan drug status, which provides marketing exclusivity for the CIDPindication in the U.S. until September of 2015.  We expect a number of competitors to launch10% liquid IGIV products for other indications in the near term.

 

We believe it is ourcomprehensive set of features, together with our history as the first producerof a ready-to-use liquid IGIV product in North America and our reputation forquality and innovation, that has resulted in a high level of brand recognitionamong prescribing physicians and the patient community and has contributed tous maintaining a leading position in sales of IGIV in the industry.  We have contracted commitments from ourcustomers for a substantial portion of our U.S. IGIV volume over the next threeyears.  We are also the primary supplierof Canadian IGIV under our five year contracts with CBS and Hema Quebec, whichbecame effective April 1, 2008.  Weanticipate annual volume declines in Canada due to CBS’ objective to havemultiple sources of supply.  We expect tooffset the volume decline with increased sales in Europe as well as in otherinternational markets. We have also filed a supplemental Biologics LicenseApplication with the FDA for a subcutaneous version of Gamunex which we expectto receive approval in 2010.

 

***Prolastin A1PI***

 

Our Prolastin A1PI wasthe first A1PI product licensed and, consequently, has benefited from afirst-mover advantage in the industry. Prolastin A1PI was the only A1PI licensed product until 2003, when twocompetitors launched competing products in the U.S.  Our Prolastin A1PI product continues tomaintain the leading share of sales in North America and Europe as a result ofits first-mover advantage, as well as strong relationships with the primarypatient advocacy groups and our unique direct-to-patient distribution andservice model, Prolastin Direct, which provides easy enrollment, home infusion,access to insurance experts, and patient-centered health management. OurProlastin Direct program with its emphasis on patient-centered healthmanagement has resulted in very high patient loyalty and patient compliancerates. New A1PI patient identification, as well as reimbursement approval inEurope, are important elements in growing our Prolastin A1PI franchise. Asdiscussed above, we expect to launch our next generation A1PI product,Prolastin-C in the U.S. and Canada in the first half of 2010. We received FDAapproval for our next generation A1PI product, Prolastin-C in October 2009and received Health Canada approval in February 2010.  Additional clinical trials are being requiredby the European authorities as a precursor to Prolastin-C A1PI approval inEurope.

 

**CUSTOMER CONCENTRATIONS**

 

For the year ended December 31,2009, our top three customers accounted for approximately 36% of our netrevenue.  Similarly, our accountsreceivable have also been concentrated with a small number of customers.  In the event that any of these customers wereto suffer an adverse downturn in their business or a downturn in their supply needs,our business could be materially adversely affected.  Additional information regarding customerconcentrations is included in “Risk Factors—Risks Related to Our Business—Asubstantial portion of our revenue is derived from a small number of customers,and the loss of one or more of these customers could have a material adverseeffect on us.”

 

**RESEARCH AND DEVELOPMENT**

 

Our R&D expensesinclude the costs directly attributable to the conduct of research anddevelopment programs for new products and extensions or improvements ofexisting products and the related manufacturing processes.  Such costs include salaries and relatedemployee benefit costs, payroll taxes, materials (including the materialrequired for clinical trials), supplies, depreciation on and maintenance ofR&D equipment, services provided by outside contractors for clinicaldevelopment and clinical trials, regulatory services, and fees.  R&D also includes the allocable portionof facility costs such as rent, depreciation, utilities, insurance, and generalsupport services.  All costs associatedwith R&D activities are expensed as incurred.  As of December 31, 2009, we hadapproximately 300 scientists and support staff engaged in research anddevelopment activities.

 

We continue to invest inR&D to provide future sources of revenue through the development of newproducts, as well as through additional uses for existing products.  We have a strong commitment to science andtechnology with a track record of accomplishments and pipeline opportunities.  We focus our R&D efforts in three keyareas: continued enhancement of our process 

 

72

----

Tableof Contents

 

technologies (including pathogen safety), life cycle management for ourexisting products (including new indications), and the development of newproducts.  We expect overall R&Dspending to increase in subsequent periods due to life cycle management, newproduct projects, and licensure of technology or products.

 

The following tablesummarizes our significant R&D projects and expenses for the periodspresented:

 
| ** **                           | ** ** | **Years  Ended December 31,** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ***Life Cycle  Management***         |       |                               |       |   |   |   |   |
| Gamunex IGIV CIDP                    |       | $                                  | 200        |   | $ | 600 |   | $ | 1,100 |   |
| Prolastin-C A1PI                     |       | $                                  | 2,200      |   | $ | 3,900 |   | $ | 6,500 |   |
| Prolastin Alpha-1 Aerosol            |       | $                                  | 8,900      |   | $ | 6,100 |   | $ | 5,700 |   |
| Gamunex subcutaneous administration  |       | $                                  | 1,400      |   | $ | 3,300 |   | $ | 5,700 |   |
|                                 |       |                               |       |   |   |   |   |
| ***New Product  Candidates***        |       |                               |       |   |   |   |   |
| Plasmin and recombinant Plasmin      |       | $                                  | 25,500     |   | $ | 18,500 |   | $ | 13,200 |   |
| Other recombinant product candidates |       | $                                  | 4,700      |   | $ | 4,000 |   | $ | — |   |

 

Additional informationregarding the status of our life cycle management activities and new productcandidates is included in “Business—Research and Development.”

 

The risks anduncertainties associated with failing to complete development on schedule andthe consequences to operations, financial position, and liquidity if a projectis not completed timely are not expected to be material in the near term.  We may reallocate our spending betweenproduct life cycle management and new product development as opportunities areassessed.  We are unable to estimate thenature, timing, or costs to complete, if ever, of our projects due to thenumerous risks and uncertainties associated with developing therapeutic proteinproducts.  These risks and uncertaintiesare described below as well as in the “Risk Factors” section of this AnnualReport.

 

Before obtainingregulatory approval for the sale of our product candidates, we must conductextensive preclinical testing to demonstrate the safety of our productcandidates in animals and clinical trials to demonstrate the safety andefficacy of our product candidates in humans. Similar trials are required prior to marketing existing products for newindicated uses.  Preclinical and clinicaltesting is expensive, difficult to design and implement, can take many years tocomplete and are uncertain as to the outcome. A failure of one or more of our clinical trials can occur in any stageof testing.  We may experience eventsduring, or as a result of, preclinical testing and the clinical trial processthat could delay or prevent our ability to receive regulatory approval orcommercialization of our product candidates or cause higher than expectedexpenses, many of which are beyond our control. There are many factors that could delay or prevent regulatory approvalor commercialization of our product candidates. We have included these risk factors elsewhere in this Annual Report inthe section titled, “Risk Factors—Risks Related to Our Business—We may not beable to commercialize products in development.”

 

Our product developmentcosts will also increase if we experience delays in testing or approvals.  We do not know whether any preclinical testsor clinical trials will begin as planned, will need to be restructured, or willbe completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten thepatent protection period during which we may have the exclusive right tocommercialize our product candidates or allow our competitors to bring productsto market before we do and impair our ability to commercialize our products orproduct candidates.

 

Even if clinical trialsare successful, we may still be unable to commercialize the product due todifficulties in obtaining regulatory approval for the process or problems inscaling to commercial production. Additionally, if produced, the product may not achieve the level ofacceptance by physicians, patients, healthcare payors, and others in themedical community to be profitable.  Thedegree of acceptance of our product candidates, if approved for commercialsale, will depend on a number of factors, some of which are beyond ourcontrol.  Additionally, even onceapproved, we may need to conduct post-marketing clinical trials, the failure ofwhich may result in loss of acceptance.

 

**BASIS OF PRESENTATION**

 

Our consolidatedfinancial statements include the accounts of Talecris Biotherapeutics HoldingsCorp. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have beeneliminated upon consolidation.  Theeffects of business acquisitions have been included in our consolidatedfinancial statements from their respective date of acquisition.

 

73

----

Tableof Contents

 

The comparability of ourfinancial results is impacted by significant events and transactions during theperiods presented as described in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Matters Affecting Comparability.”

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

Thepreparation of consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America (U.S. GAAP)requires us to make estimates and judgments in certain circumstances thataffect the reported amounts of assets, liabilities, revenue and expenses, andthe related disclosures of contingent assets and liabilities.  A detailed description of our significantaccounting policies is included in the footnotes to our audited consolidatedfinancial statements included elsewhere in this Annual Report.

 

Webelieve that certain of our accounting policies are critical because they arethe most important to the preparation of our consolidated financialstatements.  These policies require ourmost subjective and complex judgments, often requiring the use of estimatesabout the effects of matters that are inherently uncertain.  We apply estimation methodologiesconsistently from year to year.  Otherthan changes required due to the issuance of new accounting guidance, therehave been no significant changes in our application of our critical accountingpolicies during 2009.  We periodicallyreview our critical accounting policies and estimates with the audit committeeof our board of directors.  The followingis a summary of accounting policies that we consider critical to ourconsolidated financial statements.

 

***Revenue Recognitionand Gross-to-Net Revenue Adjustments***

 

We recognize revenue when earned, which isgenerally at the time of delivery to the customer.  Recognition of revenue also requiresreasonable assurance of collection of sales proceeds, a fixed and determinableprice, persuasive evidence that an arrangement exists, and completion of allother performance obligations.   Therecognition of revenue is deferred if there are significant post-deliveryobligations, such as customer acceptance.

 

Allowances against revenues for estimateddiscounts, rebates, administrative fees, chargebacks, shelf-stock adjustments,and other items are established by us concurrently with the recognition ofrevenue.  The standard terms and conditionsunder which products are shipped to our customers generally do not allow aright of return.  In the rare instancesin which we grant a right of return, revenue is reduced at the time of sale toreflect expected returns and deferred until all conditions of revenuerecognition are met.

 

We have supply agreements with our majordistributors, which require them to purchase minimum quantities of ourproducts.  We regularly review the supplylevels of our products on hand at major distributors, primarily by analyzinginventory reports supplied by these distributors, available data regarding thesell-through of our products, our internal data, and other availableinformation.  When we believe distributorinventory levels have increased relative to underlying demand, we evaluate theneed for sales return allowances. Factors that influence the allowance include historical sales returnactivity, levels of inventory in the distribution network, inventory turnover,demand history, demand projections, estimated product shelf-life, pricing, andcompetition.  Sales returns have not beensignificant during the periods presented.

 

We have agreed to reimburse certain of ourinternational distributors for their selling, general, and administrativeexpenses (SG&A) under the terms of our distribution agreements.  We have reflected these charges as a reductionof net revenue.

 

Revenue from milestone payments for which we haveno continuing performance obligations is recognized upon achievement of therelated milestone.  When we havecontinuing performance obligations, the milestone payments are deferred andrecognized as revenue over the term of the arrangement as we complete ourperformance obligations.

 

We evaluate revenue fromagreements that have multiple elements to determine whether the components ofthe arrangement represent separate units of accounting.  In transactions that contain multipleelements, we recognize revenue as each product is delivered or service isprovided to the customer.  We allocatethe total arrangement consideration to each element based on its relative fairvalue, based on the price for the product or service when it is soldseparately.

 

Gross product sales are subject to a variety ofdeductions that are generally estimated and recorded in the same period thatthe revenues are recognized, and primarily represent rebates to governmentagencies, chargebacks to wholesalers and distributors, and customer prompt paydiscounts.  These gross-to-net revenueadjustments are described below.

 

We offer rebates to some classes of trade, which weaccount for by establishing an accrual at the time the sale is recorded in anamount equal to our estimate of rebates attributable to each sale.  We determine our estimate of the rebatesprimarily based on historical experience and current contract arrangements.  We consider the sales performance of productssubject to rebates and the levels of inventory in the distribution channel andadjust the accrual periodically to reflect actual experience.  For the portion of these 

 

74

----

Tableof Contents

 

rebates that issettled as part of the product sale, there is no lag in the recognition of therebate.  The portion which is accruedupon sale is settled upon resale by our distributors.  Due to the limited classes of trade thatparticipate in rebate programs and our visibility of inventories in thechannel, adjustments for actual experience have not been material.

 

We participate in stategovernment-managed Medicaid programs. We account for Medicaid rebates byestablishing an accrual at the time the sale is recorded in an amount equal toour estimate of the Medicaid rebate claims attributable to such sale. Wedetermine our estimate of the Medicaid rebates accrual primarily based onhistorical experience regarding Medicaid rebates, legal interpretations of theapplicable laws related to the Medicaid program and any new informationregarding changes in the Medicaid programs’ regulations and guidelines thatwould impact the amount of the rebates. We consider outstanding Medicaidclaims, Medicaid payments, and levels of inventory in the distribution channeland adjust the accrual periodically to reflect actual experience. While theserebate payments to the states generally occur on a one to two quarter lag, anyadjustments for actual experience has not been material as Medicaid rebates onour product sales under the state Medicaid programs represents only one half ofone percent of gross product revenues. The increase in the 2009 provision forrebates and other was primarily due to GPO fees, Medicaid rebates, and thepotential Canadian pricing adjustment, among others.

 

As of December 31,2009, our allowance for managed health care and Medicaid rebates and otheritems was $26.4 million. A hypothetical 10% change in payments made formanaged health care and Medicaid rebates for the year ended December 31,2009 would not have a material impact to our consolidated results ofoperations.

 

We enter into agreements withcertain customers to establish contract pricing for our products, which theseentities purchase from the authorized wholesaler or distributor (collectively,wholesalers) of their choice. Consequently, when our products are purchasedfrom wholesalers by these entities at the contract price which is less than theprice charged by us to the wholesaler, we provide the wholesaler with a creditreferred to as a chargeback. We record the chargeback accrual at the time ofthe sale. The allowance for chargebacks is based on our estimate of thewholesaler inventory levels, and the expected sell-through of our products bythe wholesalers at the contract price based on historical chargeback experienceand other factors. We periodically monitor the factors that influence ourprovision for chargebacks, and make adjustments when we believe that actualchargebacks may differ from established allowances. These adjustments occur ina relatively short period of time. As these chargebacks are typically settledwithin 30 to 45 days of the sale, adjustments for actual experience havenot been material. The increase in the provision for chargebacks in 2009compared to 2008 was due largely to increased sales related to governmentcontracts.

 

As of December 31,2009, our allowance for chargebacks was $4.3 million. A hypothetical 10%change in credits issued for chargebacks for year ended December 31, 2009would not have a material impact to our consolidated results of operations.

 

Our sales terms generallyprovide for up to a 2% prompt pay discount on domestic and international sales.We believe that our sales allowance accruals are reasonably determinable andare based on the information available at the time to arrive at our bestestimate of the accruals at the time of the sale. Actual sales allowancesincurred are dependent upon future events. We periodically monitor the factorsthat influence sales allowances and make adjustments to these provisions whenwe believe that the actual sales allowances may differ from prior estimates. Ifconditions in future periods change, revisions to previous estimates may berequired, potentially in significant amounts. As these prompt pay discounts aretypically settled within 30 to 45 days of the sale, adjustments for actualexperience have not been material.

 

As of December 31,2009, our allowance for cash discounts was $1.3 million. A hypothetical 10%change in credits issued for cash discounts for the year ended December 31,2009 would not have a material impact to our consolidated results of operations.

 

Shelf-stock adjustmentsare credits issued to customers to reflect decreases in the selling prices ofproducts. Agreements to provide this form of price protection are customary inour industry and are intended to reduce a customer’s inventory cost to betterreflect current prices. Shelf-stock adjustments are based upon the amount ofproduct that customers have remaining in their inventories at the time of aprice reduction. The extent of any price reduction would be discretionary. Anyamounts recorded for estimated price adjustments would be based upon thespecific terms with customers, estimated declines in price, and estimates ofinventory held by the customer. We have not experienced material shelf-stockadjustments during the periods presented as a result of the demand forplasma-derived products outpacing the supply due to our constraints in ourindustry.  Recently, product supply anddemand have become more balanced.  Wecould experience material shelf-stock adjustments in the future in the eventthat the supply-demand dynamic become unbalanced and resulted in pricedeclines.

 

We utilize informationfrom external sources to estimate our significant gross-to-net revenueadjustments. Our estimates of inventory at wholesalers and distributors arebased on written and oral information obtained from certain wholesalers anddistributors with respect to their inventory levels and sell-through tocustomers. The inventory information received from wholesalers and distributorsis a product of their record-keeping process. Our estimates are subject toinherent limitations of estimates that rely on third-party information, ascertain third-party information was itself in the form of estimates, andreflect other limitations, including 

 

75

----

Tableof Contents

 

lags between the date as of which the third-party information isgenerated and the date on which we receive third-party information. We believe,based on our experience, that the information obtained from external sourcesprovides a reasonable basis for our estimate.

 

The following tablesummarizes our gross-to-net revenue adjustments expressed in dollars andpercentages:

 
| ** **              | ** ** | **Years  Ended December 31,** | ** ** |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross product revenue   |       | $                                  | 1,593,995  |   | $ | 1,389,542 |   | $ | 1,251,879 |   |
| Chargebacks             |       | (24,380                            | )          | (13,927 | ) | (13,268 | ) |
| Cash discounts          |       | (18,710                            | )          | (15,147 | ) | (12,918 | ) |
| Rebates and other       |       | (42,397                            | )          | (24,008 | ) | (26,719 | ) |
| SG&A reimbursements |       | (754                               | )          | (1,910 | ) | (2,288 | ) |
| Product net revenue     |       | $                                  | 1,507,754  |   | $ | 1,334,550 |   | $ | 1,196,686 |   |

 
| ** **              | ** ** | **Years  Ended December 31,** | ** ** |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross product revenue   |       | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Chargebacks             |       | (1.5                               | )%         | (1.0 | )% | (1.1 | )% |
| Cash discounts          |       | (1.2                               | )%         | (1.1 | )% | (1.0 | )% |
| Rebates and other       |       | (2.7                               | )%         | (1.7 | )% | (2.1 | )% |
| SG&A reimbursements |       | —                             |       | (0.1 | )% | (0.2 | )% |
| Product net revenue     |       | 94.6                               | %          | 96.1 | % | 95.6 | % |

 

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

 
| ** **                        | ** ** | ** **      | ** ** | **Cash**      | ** ** | **Rebates  and** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **                        | ** ** | **Chargebacks** | ** ** | **Discounts** | ** ** | **Other**        | ** ** | **Total**  | ** ** |
| Balance at December 31, 2006 |       | $               | 1,871      |          | $          | 970              |       | $          | 6,931      |   | $ | 9,772 |   |
| Provision                         |       | 13,268          |       | 12,918        |       | 26,719           |       | 52,905     |       |
| Credits issued                    |       | (12,451         | )          | (12,814       | )          | (22,218          | )          | (47,483    | )          |
| Balance at December 31, 2007 |       | 2,688           |       | 1,074         |       | 11,432           |       | 15,194     |       |
| Provision                         |       | 13,927          |       | 15,147        |       | 24,008           |       | 53,082     |       |
| Credits issued                    |       | (12,752         | )          | (14,727       | )          | (23,029          | )          | (50,508    | )          |
| Balance at December 31, 2008 |       | 3,863           |       | 1,494         |       | 12,411           |       | 17,768     |       |
| Provision                         |       | 24,380          |       | 18,710        |       | 42,397           |       | 85,487     |       |
| Credits issued                    |       | (23,981         | )          | (18,930       | )          | (28,381          | )          | (71,292    | )          |
| Balance at December 31, 2009 |       | $               | 4,262      |          | $          | 1,274            |       | $          | 26,427     |   | $ | 31,963 |   |

 

***Concentrations of Credit Risk***

 

Our accounts receivable,net, includes amounts due from pharmaceutical wholesalers and distributors,buying groups, hospitals, physicians’ offices, patients, and others.  The following table summarizes ourconcentrations with customers that represented more than 10% of our accountsreceivable, net:

 
| ** ** | ** ** | **December 31,** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Customer A |       | 14.6                  | %          | 15.0 | % |
| Customer B |       | <10                | %          | 14.0 | % |

 

The following tablesummarizes our concentrations with customers that represented more than 10% ofour total net revenue:

 
| ** ** | ** ** | **Years  Ended December 31,** | ** ** |
|------------|------------|------------------------------------|------------|
| ** ** | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Customer A |       | 14.4                               | %          | 12.8 | % | 18.2 | % |
| Customer B |       | 12.3                               | %          | 12.0 | % | 14.9 | % |
| Customer C |       | <10                             | %          | 10.6 | % | 10.5 | % |

 

76

----

Tableof Contents

 

***Income Taxes***

 

We calculate a provision for, or benefit from,income taxes using the asset and liability method, under which deferred taxassets and liabilities are recorded based on the difference between thefinancial statement and tax bases of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected toreverse.  A reduction in the carryingamounts of deferred tax assets by a valuation allowance is required, if, basedon the available evidence, it is more likely than not that the assets will notbe realized.  Accordingly, weperiodically assess the need to establish valuation allowances for deferred taxassets based on the more-likely-than-not realization threshold criterion.  In assessing the need for a valuationallowance, we consider all available evidence, both positive and negative,including historical levels of income, expectations and risks associated with futuretaxable income, and ongoing prudent and feasible tax planning strategies.

 

We establish reserves for uncertain income taxpositions, based on the technical support for the positions, our past auditexperience with similar situations, and potential interest and penaltiesrelated to the matters.  Our recordedreserves represent our best estimate of the amount, if any, that we willultimately be required to pay to settle such matters.  The resolution of our uncertain income taxpositions is dependent on uncontrollable factors such as law changes, new caselaw and the willingness of the income tax authorities to settle, including thetiming thereof and other factors. Although we do not anticipate significant changes to our uncertainincome tax positions in the next twelve months, items outside of our controlcould cause our uncertain income tax positions to change in the future, whichwould be recorded within (provision) benefit for income taxes in ourconsolidated income statements.  Interestand penalties related to unrecognized tax benefits are recognized as acomponent of our income tax provision.

 

***Share-BasedCompensation***

 

We have granted stock options, restricted shareawards, unrestricted share awards, and restricted stock units (RSU’s) of ourcommon stock to certain employees, officers, and members of our board ofdirectors pursuant to our share-based compensation plans.  We value share-based compensation at thegrant date using a fair value model and recognize this value as expense overthe employees’ requisite service period, typically the period over which theshare-based compensation vests.  Weclassify share-based compensation costs consistent with each grantee’ssalary.  We record corporate income taxbenefits realized upon exercise or vesting of an award in excess of thatpreviously recognized in earnings as additional paid-in capital.

 

The fair value of our common stock on the grantdate is a significant factor in determining the fair value of share-basedcompensation awards and the ultimate non-cash compensation cost that we will berequired to record over the vesting period. Given the absence of a trading market for our common stock on grantdates prior to October 1, 2009, our board of directors, or specialdividend committee or compensation committee designated by our board ofdirectors is estimated the fair value of our common stock contemporaneouslywith each grant using numerous objective and subjective factors.  These factors included: (i) our stage ofdevelopment, our efforts to become independent from Bayer, and revenue growth; (ii) thetiming of the anticipated launch of new products and new indications; (iii) businessconditions and business challenges at the time; (iv) available marketdata, including observable market transactions, and valuations for comparablecompanies; (v) the illiquid nature of our stock options and stock grants;and (vi) the likelihood of achieving a liquidity event for the shares ofcommon stock underlying the options, such as an initial public offering or saleof our company, given prevailing market conditions at the grant date. In makingthe assessment of common stock fair value on each award date, our board ofdirectors or designated committee of our board of directors considered theguidance in American Institute of Certified Public Accountants TechnicalPractice Aid, “Valuation of Privately-Held Company Equity Securities Issued asCompensation.”  The valuations werecompleted utilizing the market and/or an income approach and then theenterprise value was allocated using the “Probability-Weighted Expected ReturnMethod,” which provides  differentprobability weights of various likely scenarios (distressed; remain private;private sale; IPO), and develops valuations by determining the present value ofthe future expected common stock value under each of these scenarios.  For option awards granted on October 1,2009, the fair value of our common stock was determined to be the IPO price pershare of $19.00.  For option awardsgranted subsequent to our IPO, we consider the fair value of our common stockto be the closing share price as reported by The NASDAQ Global Select Market onthe grant date.

 

We estimate the fair value of stock options at thegrant date using a Black-Scholes option pricing model, which requires the useof a number of assumptions related to the risk-free interest rate, average lifeof options (expected term), expected volatility, and dividend yield.  There was no trading market for our commonstock or stock options on grant dates prior to October 1, 2009, and thereis limited trading history for our common stock subsequent to October 1,2009.  Therefore, our application of theBlack-Scholes pricing model incorporates historical volatility measures ofsimilar public companies.  A forfeiturerate based on historical attrition rates of award holders is used in estimatingthe granted awards not expected to vest. If actual forfeitures differ from the expected rate, we may be requiredto make additional adjustments to compensation expense in future periods.  Our valuation utilized a dividend yield ofzero.  We believe that the valuationtechnique and the approach utilized to develop the underlying assumptions areappropriate in calculating the fair values of our stock options on their grantdates.  Estimates of the values of thesegrants are not intended to predict actual future events or the value ultimatelyrealized by employees who receive such awards.

 

77

----

Tableof Contents

 

The stock options that we have granted and willgrant in the future typically have service-based and performance-basedcomponents.  Restricted stock andrestricted stock unit awards have typically been service-based only.  Service-based awards vest annually in equalamounts over the vesting period.  Theperformance-based component of the stock options vests annually upon the achievementof corporate performance objectives which are established by our board ofdirectors.  We make assessments as towhether the performance conditions related to the performance-based stockoptions will be achieved.  We recordcompensation cost for awards with performance conditions based on the probableoutcome of the performance conditions.

 

The Black-Scholes option pricing model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable, characteristics that are notpresent in our option grants.  If themodel permitted consideration of the unique characteristics of employee stockoptions, the resulting estimate of the fair value of the stock options could bedifferent.  In addition, if we had madedifferent assumptions and estimates than those described above, the amount ofour recognized and to be recognized stock-based compensation expense, netincome, and earnings per share amounts could have been materially different.

 

Additional information regarding the assumptionsused in our accounting for share-based compensation awards is included in thefootnotes to our audited consolidated financial statements included elsewherein this Annual Report.

 

***AccountsReceivable, net***

 

Accounts receivable, net,consists of amounts owed to us by our customers on credit sales with termsgenerally ranging from 30 to 120 days from the date of invoice and arepresented net of an allowance for doubtful accounts receivable on ourconsolidated balance sheets.

 

We maintain an allowancefor doubtful accounts receivable for estimated losses resulting from ourinability to collect from customers.  Inextending credit, we assess our customers’ creditworthiness by, among otherfactors, evaluating the customers’ financial condition, credit history, and theamount involved, both initially and on an ongoing basis.  Collateral is generally not required.  In evaluating the adequacy of our allowancefor doubtful accounts receivable, we primarily analyze accounts receivablebalances, the percentage of accounts receivable by aging category, and historicalbad debts.  We also consider, among otherthings, customer concentrations and changes in customer payment terms orpayment patterns.

 

If the financialconditions of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments or our ability to collect, an increase to theallowance may be required. Also, should actual collections of accountsreceivable be different than our estimates included in determining theallowance, the allowance would be adjusted through charges or credits toSG&A in our consolidated income statement in the period in which suchchanges in collection become known. If conditions change in future periods,additional allowances or reversals may be required. Such allowances orreversals could be significant. While our credit losses have historically beenwithin our expectations and the allowance established, we may not continue toexperience the same credit loss rates that we have in the past. At December 31,2009, our allowance for doubtful accounts receivable was $3.5 million.

 

***Inventories***

 

Inventories consist of raw material,work-in-process, and finished goods held for sale and are stated at the lowerof cost or market, which approximates actual costs determined on a first-in,first-out basis and market being determined as the lower of replacement cost orestimated net realizable value.  Weestablish inventory reserves through inventory impairment provision charges tocost of goods sold when conditions indicate that the selling price could beless than cost.  These inventoryimpairment provisions establish a lower cost basis for the inventory.

 

Our raw materials, particularly plasma, aresusceptible to damage and contamination and may contain human pathogens, any ofwhich would render the plasma unsuitable as raw material for furthermanufacturing.  For instance, improperstorage of plasma by us or third-party suppliers may require us to destroy someof our raw material.  If the damaged orcontaminated plasma is not identified and discarded prior to the release of theplasma to our manufacturing process, it may be necessary to discardintermediate or finished products that are made from that plasma, resulting ina charge to cost of goods sold.  In theevent that we determine that the plasma was not collected in accordance withour standard operating procedures (SOP) or in a current Good ManufacturingPractices (cGMP) compliant fashion or that the collection center is unable toobtain FDA licensure, we may be unable to use and may ultimately destroy plasmacollected from that center, which would be recorded as a charge to cost ofgoods sold during the period the plasma is determined to be unrealizable.  From time to time, we have experiencedsignificant impairment charges to cost of goods sold related to raw plasma thatwas collected or stored in a manner not consistent with our SOP or cGMP, suchas the $23.3 million charge we recorded during the first half of 2008 asdiscussed further in the section titled, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Matters Affecting Comparability—PlasmaCenter cGMP issue.”

 

78

----

Tableof Contents

 

The manufacture of our plasma-derived products isan extremely complex process of fractionation, purification, filling, andfinishing.  Although we attempt tomaintain high standards for product testing, manufacturing, process controls,and quality assurance, our products can become non-releasable, or otherwisefail to meet our stringent specifications through a failure of one or more ofthese processes.  Extensive testing is performed throughoutthe manufacturing process to ensure the safety and effectiveness of our products.We may, however, detect instances in which an unreleased product was producedwithout adherence to our SOP or cGMP. Such an event of non-compliance wouldlikely result in our determination that the product should not be released andtherefore would be destroyed, resulting in a charge to cost of goods sold.While we expect to write off small amounts of work-in-process inventory in theordinary course of business, unanticipated events may lead to write-offs andother costs materially in excess of our expectations. Such write-offs and othercosts could cause material fluctuations in our profitability.

 

Once we have manufacturedour plasma-derived products, they must be handled carefully and kept atappropriate temperatures. Our failure, or the failure of third parties thatsupply, ship, or distribute our products, to properly care for our products mayrequire those products be destroyed, resulting in a charge to cost of goodssold. Our finished goods are also subject to physical deterioration, obsolescence,reductions in estimated future demand, and reductions in selling prices. Wegenerally record an inventory impairment provision for finished goods inventorysix months prior to its expiry date when we do not reasonably expect to sellthe product prior to expiration.

 

We capitalize the cost ofunlicensed plasma when, based on our judgment, future economic benefit isprobable. While unlicensed plasma cannot be sold to third parties or used inour manufacturing processes to make finished product until all regulatoryapprovals have been obtained, we have determined that it is probable that ourplasma inventories are realizable. As part of the FDA licensing process forplasma collection centers, we are initially permitted to collect plasmautilizing the procedures and Quality Systems implemented and approved under ourexisting Biologics License Application (BLA) until such time as the FDAinspectors have conducted a pre-license inspection of the site and approved thesite for inclusion in the BLA. At the conclusion of this process, we arepermitted to sell or utilize previously collected plasma in the manufacturingof final product. We believe that our cumulative knowledge of the industry,standard industry practices, experience working with the FDA, establishedQuality Systems, and consistency with achieving licensure support ourcapitalization of unlicensed plasma. Total unlicensed plasma and relatedtesting costs included in our raw material inventories was $7.6 million atDecember 31, 2009.

 

***Impairment Reviews***

 

We evaluate the recoverability of recorded goodwilland other indefinite-lived intangible asset amounts annually as of December 31or when events or changes in circumstances indicate that evidence of potentialimpairment exists, using a fair value based test.  This test requires us to make estimates offactors that include, but are not limited to, projected future operatingresults and business plans, economic projections, anticipated future cashflows, comparable marketplace data from a consistent industry group, and thecost of capital.  Any applicableimpairment loss is the amount, if any, by which the implied fair value is lessthan the carrying value.

 

We review the carryingamounts of other long-lived assets for potential impairment whenever events orchanges in circumstances indicate that the carrying amount of the asset may notbe recoverable.  We periodically evaluatewhether events or changes in circumstances have occurred that may warrantrevision of the estimated useful lives of our long-lived assets or whether theremaining carrying amount of long-lived assets should be evaluated for possibleimpairment.  An example of such a changein circumstances includes a significant adverse change in the extent or mannerin which an asset is being used.

 

***Recent AccountingPronouncements Applicable to Our Company***

 

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

 

In August 2009, theFASB released new accounting guidance concerning measuring liabilities at fairvalue.  The new guidance providesclarification that in circumstances in which a quoted price in an active marketfor the identical liability is not available, a reporting entity is required tomeasure fair value using certain valuation techniques.  Additionally, it clarifies that a 

 

79

----

Tableof Contents

 

reporting entity is not required to adjust the fair value of aliability for the existence of a restriction that prevents the transfer of theliability.  This new guidance iseffective for the first reporting period after its issuance, however earlierapplication is permitted.  We do notanticipate that the adoption of this guidance will have a material impact onour consolidated financial statements or related disclosures.

 

In May 2009, theFASB issued authoritative guidance for subsequent events, which is effectivefor interim and annual financial statements ending after June 15,2009.  The guidance establishes generalstandards of accounting for and disclosure of subsequent events that occurafter the balance sheet date.  Entitiesare also required to disclose the date through which subsequent events havebeen evaluated and the basis of that date. We have evaluated subsequent events up through February 23, 2010,the date that we filed our audited consolidated financial statements with theU.S. Securities and Exchange Commission.

 

On January 30, 2009,the SEC released the final rules requiring all registered companies to useeXtensible Business Reporting Language (XBRL) when submitting financialstatements to the SEC.  The new rules initiallywill require interactive data reporting only by domestic and foreign largeaccelerated filers that prepare their financial statements in accordance withU.S. GAAP and have a worldwide public common equity float above $5.0 billionfor their first quarterly period ending after June 15, 2009 and allreporting periods thereafter.  We expectto be required to file using XBRL beginning with our quarterly reporting periodending March 31, 2011.

 

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

 

In March 2008, theFASB revised authoritative guidance for disclosures about derivative financialinstruments and hedging activities.  Thisguidance requires disclosures about derivatives and hedging activitiesincluding enhanced disclosure about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted and (c) how derivative instruments and related hedgeditems affect financial position, financial performance, and cash flows.  This guidance is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  The adoption of this guidance didnot materially impact our financial statement disclosures.

 

In December 2007,the FASB issued authoritative guidance, which establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling equity investments when a subsidiary isdeconsolidated. The guidance also establishes reporting requirements thatprovide sufficient disclosures that clearly identify and distinguish betweenthe interests of the parent and the interest of the noncontrolling owners. Theauthoritative guidance is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008. Theadoption of this guidance did not have a material impact on our consolidatedfinancial statements based on our current ownership interests.

 

**MATTERSAFFECTING COMPARABILITY**

 

We believe that the comparability of our financialresults between the periods presented is significantly impacted by thefollowing items:

 

***Financial Impact of IPO and Refinancing Transactions***

 

The following table summarizes the changes to ourindebtedness during 2009, including the impact from the application of the netproceeds to us of $519.7 million from our IPO and the net proceeds to us of$583.9 million from our refinancing transactions:

 
| ** **                | ** ** | **December 31,** | ** ** | **2009  Net**  | ** ** | **October 6,  2009** | ** ** | **October 21,  2009** | ** ** | ** **    | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|----------------|------------|---------------------------|------------|----------------------------|------------|---------------|------------|-----------------------|------------|
| ** **                | ** ** | **2008**              | ** ** | **Repayments** | ** ** | **IPO**                   | ** ** | **Refinancing**            | ** ** | **Accretion** | ** ** | **2009**              | ** ** |
| Revolving Credit Facility |       | $                     | 179,941    |           | $          | (124,348                  | )          | $                          | —     |          | $          | (55,593               | )          | $ | — |   | $ | — |   |
| First Lien Term Loan      |       | 686,000               |       | (5,250         | )          | (389,812                  | )          | (290,938                   | )          | —        |       | —                |       |
| Second Lien Term Loan     |       | 330,000               |       | —         |       | (129,937                  | )          | (200,063                   | )          | —        |       | —                |       |
| 7.75% Notes               |       | —                |       | —         |       | —                    |       | 600,000                    |       | —        |       | 600,000               |       |
| Discount on 7.75% Notes   |       | —                |       | —         |       | —                    |       | (4,074                     | )          | 120           |       | (3,954                | )          |
| Total indebtedness        |       | $                     | 1,195,941  |           | $          | (129,598                  | )          | $                          | (519,749   | )             | $          | 49,332                |       | $ | 120 |   | $ | 596,046 |   |

 

80

----

Tableof Contents

 

In addition to the debt principal repayments in thepreceding table, we used $28.7 million of the net proceeds to us from theissuance of the 7.75% Notes to settle and terminate certain interest rate swapcontracts with a notional amount of $390.0 million and $8.6 million to payaccrued interest associated with our then outstanding First and Second LienTerm Loans.  In addition to the $4.1million of discounts on the 7.75% Notes disclosed in the table above,approximately $12.0 million of commissions were deducted from the grossissuance proceeds.  Subsequently, wesettled and terminated our remaining interest rate swap contract with anotional amount of $50.0 million for $6.1 million.  As a result of the changes to our debtstructure, we anticipate that our weighted average interest rate will beapproximately 8% during the next twelve months without considering potentialnew interest rate swaps.  We incurredother costs related to our IPO of $3.9 million, of which $1.3 million isincluded within SG&A in our consolidated income statement for the yearended December 31, 2009 and $2.6 million is included as a reduction ofadditional paid-in capital on our December 31, 2009 consolidated balancesheet.

 

As a result of the IPOand refinancing transactions, we recognized a charge during the fourth quarterof 2009 of $12.1 million to write-off previously deferred debt issuance costsrelated to our First and Second Lien Term Loans and $30.9 million related tocosts associated with the settlement and termination of our interest rate swapcontracts.  These charges, which totaled$43.0 million, are recorded within total other non-operating expense, net, inour consolidated income statement for the year ended December 31,2009.  We capitalized $14.9 million ofdebt issuance costs associated with the issuance of the 7.75% Notes and theRevolving Credit Facility amendment.

 

The following tablesummarizes changes in deferred debt issuance costs during the year ended December 31,2009:

 
| ** **                         | ** ** | **December 31,  2008** | ** ** | **Charges** | ** ** | **Newly  Capitalized  Debt Issuance  Costs** | ** ** | **Amortization** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------|------------|------------------------|------------|-------------|------------|----------------------------------------------|------------|------------------|------------|------------------------|------------|
| Revolving Credit Facility          |       | $                      | 3,014      |        | $          | —                                       |       | $                | 1,545      |                   | $          | (1,041 | ) | $ | 3,518 |   |
| First Lien Term Loan               |       | 9,629                  |       | (8,054      | )          | —                                       |       | (1,575           | )          | —                 |       |
| Second Lien Term Loan              |       | 4,744                  |       | (4,087      | )          | —                                       |       | (657             | )          | —                 |       |
| 7.75% Notes                        |       | —                 |       | —      |       | 13,334                                       |       | (392             | )          | 12,942                 |       |
| Total deferred debt issuance costs |       | $                      | 17,387     |        | $          | (12,141                                      | )          | $                | 14,879     |                   | $          | (3,665 | ) | $ | 16,460 |   |

 

***Definitive MergerAgreement with CSL Limited (CSL)***

 

On August 12, 2008, we entered into adefinitive merger agreement with CSL, under which CSL agreed to acquire us forcash consideration of $3.1 billion, less net debt, as defined.  The closing of the transaction was subject tothe receipt of certain regulatory approvals as well as other customaryconditions.  The U.S. Federal TradeCommission filed an administrative complaint before the Commission challengingthe merger and a complaint in Federal district court seeking to enjoin themerger during the administrative process. On June 8, 2009, the merger parties agreed to terminate thedefinitive merger agreement.  CSL paid usa merger termination fee of $75.0 million (after tax amount of $48.8 million),which is included as other non-operating income in our consolidated incomestatement for the year ended December 31, 2009.  The U.S. Federal Trade Commission’scomplaints were subsequently dismissed.

 

In consideration of the definitive merger agreementwith CSL, our board of directors approved a retention program in August 2008for an amount up to $20.0 million.  Werecorded retention expense of $8.2 million and $5.1 million, excluding fringebenefits, during the years ended December 31, 2009 and 2008,respectively.  We classified the cost ofthis retention program consistent with each recipient’s salary.  We made payments of approximately $13.3million under this retention program during 2009.  No further payments are due.

 

We incurred legal and other costs associated withthe regulatory review process of $6.0 million and $8.3 million during the yearsended December 31, 2009 and 2008, respectively, which are included inSG&A in our consolidated income statements.

 

***Foreign CorruptPractices Act (FCPA)***

 

We are conducting an internal investigation intopotential violations of the FCPA that we became aware of during the conduct ofan unrelated review.  The FCPAinvestigation is being conducted by outside counsel under the direction of aspecial committee of our board of directors. During the year ended December 31, 2009, we incurred $8.0 millionof legal costs associated with our internal investigation into this matter,which are recorded in SG&A in our consolidated income statement.  Additional information regarding ourinvestigation into potential violations of the FCPA is included in Note 13 toour audited consolidated financial statements, “Commitments and Contingencies,”and in the “Risk Factors” section of this Annual Report.

 

81

----

Tableof Contents

 

As of December 31, 2009, we have $2.4 millionof accounts receivable outstanding with customers related to this matter, whichwe fully reserved during 2009.

 

***Unabsorbed TPRInfrastructure and Start-Up Costs***

 

Our cost of goods sold includes $44.0 million,$98.5 million, and $70.1 million for the years ended December 31, 2009,2008, and 2007, respectively, related to unabsorbed TPR infrastructure andstart-up costs associated with the development of our plasma collection centerplatform.  Until our plasma collectioncenters reach normal operating capacity, we charge unabsorbed overhead costs directlyto cost of goods sold.  The reduction ofunabsorbed TPR infrastructure and start-up costs during 2009 resulted fromhigher plasma volumes collected at our plasma collection centers and improvedcenter labor efficiencies as well as lower support costs.  We anticipate that we will continue toexperience improving levels of unabsorbed TPR infrastructure and start-up costswith the maturation of our plasma collection center platform.

 

***Plasma Center cGMPIssue***

 

During the first and second quarters of 2008, weincurred charges to cost of goods sold of $16.3 million and $7.0 million,respectively, due to deviations from our SOP and cGMP at one of our plasmacollection centers.  Our preliminaryinvestigations concluded that the deviations from our SOP and cGMP resulted inimpairments to the related raw material and work-in-process inventories as weconcluded there was no probable future economic benefit related to the impactedinventories.  Subsequently, due tofurther investigations and new facts and circumstances, we determined thatcertain impacted inventories were saleable. We record recoveries directly to cost of goods sold after the impactedmaterial is converted into final products and sold to third parties.  During the years ended December 31, 2009and 2008, we recorded recoveries of $1.9 million and $17.5 million,respectively.  For the year ended December 31,2008, recoveries totaled $17.5 million, resulting in a net provision of $5.8million for 2008.   We do not expect torecognize significant further recoveries of the impacted inventories.

 

***Customer Settlement***

 

We settled a dispute with a customer in September 2007regarding intermediate material manufactured by us, which is used by thiscustomer in their manufacturing process. We recorded a charge to cost of goods sold of $7.9 million during theyear ended December 31, 2007 for inventory impairment related to thismaterial, which we recovered in its entirety during 2008 as the relatedmaterial was determined to be saleable, converted into final product, and soldto other customers.  During 2008, werecorded an additional inventory impairment provision of $2.6 million relatedto this dispute for products held in Europe, for which we recovered $0.8million and $1.8 million during 2009 and 2008, respectively, as the impactedmaterial was determined to be saleable, converted into final product, and soldto other customers.  As a result of thiscustomer settlement, we increased production of contracted PPF powder andexperienced a change in product sales mix from albumin to contracted PPF powderduring 2008.

 

***Share-Based Compensation Awards***

 

We have granted options,restricted share awards, unrestricted share awards, and RSU’s of our commonstock to certain officers, employees, and members of our board of directorspursuant to our stock-based compensation plans.

 

The following tablesummarizes our share-based compensation expense:

 
| ** **               | ** ** | **Years  Ended December 31,** | ** ** |
|--------------------------|------------|------------------------------------|------------|
| **Stock  options**       | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| SG&A                 |       | $                                  | 31,348     |   | $ | 24,237 |   | $ | 12,103 |   |
| R&D                  |       | 1,710                              |       | 1,826 |   | 860 |   |
| Total operating expenses |       | 33,058                             |       | 26,063 |   | 12,963 |   |
| Cost of goods sold       |       | 3,439                              |       | 1,829 |   | 948 |   |
| Total expense            |       | $                                  | 36,497     |   | $ | 27,892 |   | $ | 13,911 |   |

 

82

----

Tableof Contents

 
| ** **                                  | ** ** | **Years  Ended December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|
| **Restricted  Share Awards and RSU’s** | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| SG&A                                    |       | $                                  | 9,620      |   | $ | 9,543 |   | $ | 6,509 |   |
| R&D                                     |       | 593                                |       | 535 |   | 536 |   |
| Total operating expenses                    |       | 10,213                             |       | 10,078 |   | 7,045 |   |
| Cost of goods sold                          |       | 836                                |       | 737 |   | 285 |   |
| Total expense                               |       | $                                  | 11,049     |   | $ | 10,815 |   | $ | 7,330 |   |

 

In addition toincremental share-based compensation expense associated with stock-basedcompensation awards granted during the periods presented, the following itemshave impacted the comparability of our share-based compensation expense:

 

·                  During the third quarter of 2009, we entered into anamended and restated employment agreement with our Chairman and Chief ExecutiveOfficer which included accelerating the vesting of options to purchase1,008,000 shares of our common stock at an exercise price of $21.25 per commonshare to August 19, 2009.  Theacceleration of these options resulted in the recognition of a non-cash chargeof $11.8 million of compensation expense during 2009.  Options to purchase these shares werepreviously scheduled to vest in April of 2010 (504,000 options) and April of2011 (504,000 options).

 

·                  During the second quarter of 2008, the compensationcommittee of our board of directors amended the exercise price of 570,400 stockoptions outstanding to certain employees from $21.25 per share to $11.00 pershare and also amended the exercise price of 17,152 stock options outstandingto certain members of our board of directors from $21.25 per share to $11.00per share.  The stock options that werere-priced were granted during 2007.

 

·                  During the first quarter of 2008, our board ofdirectors revised the 2008 corporate objectives related to theperformance-based component of stock options scheduled to vest on April 1,2009.  In addition, during the secondquarter of 2008, we began recognizing compensation cost related to theperformance-based component of stock options schedule to vest on April 1,2010 based on our probability assessment of achieving the related performanceobjectives.

 

·                  During the third quarter of 2007, the compensationcommittee of our board of directors approved an amendment to our then existing2005 Stock Option and Incentive Plan in which the percentage of options vestingbased on performance targets was changed from 65% to 35% and the percentage ofoptions vesting based on service was changed from 35% to 65% for optionsscheduled to vest on April 1 of 2009 and 2010.

 

·                  During the third quarter of 2007, the compensationcommittee of our board of directors approved the 2008 and 2009 corporateobjectives related to the performance-based component of stock optionsscheduled to vest on April 1 of 2009 and 2010.  The objectives related to theperformance-based component of the stock options scheduled to vest on April 1,2009 were subsequently modified during the first quarter of 2008 as indicatedabove.

 

·                  During the first quarter of 2007, the compensationcommittee of our board of directors approved the 2007 corporate objectivesrelated to the performance-based component of the stock options scheduled tovest on April 1, 2008.

 

In connection with ourIPO, we granted 597,713 stock options with an exercise price per share equal toour IPO price per share of $19.00.  Thesestock options will vest one-third on each of April 1 of 2011, 2012, and2013, subject to the option holder being employed on the vesting date.  The fair value of each option was determinedto be $9.57, resulting in aggregate future non-cash compensation expense ofapproximately $5.2 million, which we expect to recognize ratably through April of2013.  In connection with our IPO, wealso granted 483,100 RSU’s.  These RSU’swill vest one-third on each of April 1 of 2011, 2012, and 2013, subject tothe award holder being employed on the vesting date.  The aggregate grant date fair value of theRSU’s was approximately $8.4 million, which we expect to recognize ratablythrough April of 2013.

 

In connection with ourIPO, the compensation committee of our board of directors approved a grant ofperformance shares to be made in March or April of 2010. Performance shares are awards thatvest based on achievement of pre-established objective performance goals, whichare generally financial in nature. For performance awards, the board ofdirectors will establish a performance period and the performance targets foreach performance measure that must be achieved at the end of the performanceperiod for awards to vest. The number of shares provided upon the vesting ofthe performance awards varies based on actual performance in a year relative toa defined minimum and maximum adjusted EBITDA targets for that year. It iscurrently contemplated that the performance shares to be granted in March or April 2010will vest annually over a three-year performance period with the potential for0% to 125% payout, based on the achievement of annual adjusted EBITDA targets thatare established at the time of grant.

 

83

----

Tableof Contents

 

The following tablesummarizes the remaining unrecognized compensation cost related to ourshare-based compensation awards as of December 31, 2009 and the weightedaverage period over which non-cash compensation cost is expected to berecognized:

 
| ** **              | ** ** | ** **       | ** ** | **Weighted** | ** ** |
|-------------------------|------------|------------------|------------|--------------|------------|
| ** **              | ** ** | **Unrecognized** | ** ** | **Average**  | ** ** |
| ** **              | ** ** | **Compensation** | ** ** | **Period**   | ** ** |
| ** **              | ** ** | **Cost**         | ** ** | **(Years)**  | ** ** |
| Stock options           |       | $                | 9,878      |         | 1.75       |   |
| Restricted share awards |       | 6,977            |       | 0.66         |       |
| RSU’s              |       | 7,912            |       | 3.25         |       |
| Total                   |       | $                | 24,767     |         | 1.92       |   |

 

In addition to theunrecognized compensation cost included in the table above, at December 31,2009, $3.2 million of compensation cost was included in inventory on ourconsolidated balance sheet, which we expect to be recognized as non-cashcompensation expense in our consolidated income statement primarily during2010.  Additional information regardingour share-based compensation awards is included in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Critical AccountingPolicies— Share-Based Compensation” and in the footnotes to our auditedconsolidated financial statements included elsewhere in this Annual Report.

 

***Transition-RelatedActivities***

 

We incurred costs associated with the developmentof our internal capabilities to operate as a standalone company apart fromBayer, which we refer to as transition and other non-recurring costs, which wascompleted in 2007.  These costs relatedprimarily to consulting services associated with the development of an internalinfrastructure to assume international sales and marketing, customer service,contract administration and government price reporting, human resources,finance, information technology, regulatory, and compliance functions.  We incurred transition and non-recurringcosts of $15.3 million for the year ended December 31, 2007.

 

***LitigationSettlement***

 

We were a co-plaintiff along with Bayer Healthcare(Bayer) in patent litigation in the United States District Court for theDistrict of Delaware against Baxter International Inc. and Baxter Healthcare(collectively, Baxter).  In this case,filed in 2005, we, as exclusive licensee of Bayer’s U.S. Patent No. 6,686,191(the ‘191 patent), alleged that Baxter by its manufacture and importation ofits liquid IGIV product, Gammagard Liquid, had infringed the ‘191 patent.  We entered into a Settlement Agreement withBaxter on August 10, 2007.  Underthe terms of the settlement, (i) Baxter paid us $11.0 million, (ii) Baxterwill pay us for a period of four years from the settlement date an amountcomprising 1.2% of Baxter’s net sales in the United States of Gammagard Liquidand any other product sold by Baxter or an affiliate in the United States undera different brand name that is a liquid intravenous immunoglobulin under aseparate Sublicense Agreement, (iii) Baxter provided us with approximately2,000 kilograms of Fraction IV-I paste with specifications as per theSettlement Agreement (fair value of $1.8 million determined by reference tosimilar raw material purchases we have made in the past as well as currentmarket conditions), and (iv) we will grant Baxter certain sublicenserights in the ‘191 patent and its foreign counterparties.

 

We incurred legal fees related to this litigationof $5.7 million during the year ended December 31, 2007, which wererecorded within SG&A in our consolidated income statement.  During the year ended December 31, 2007,we recorded $12.9 million related to the settlement in other non-operatingincome in our consolidated income statement. During the years ended December 31, 2009, 2008, and 2007, werecorded $10.6 million, $8.7 million, and $1.7 million, respectively, of fees fromBaxter within other net revenue in our consolidated income statements.

 

***Income Taxes***

 

We record a valuation allowance to reduce ourdeferred tax assets to the amount that we believe is more likely than not to berealized.  In assessing the need for a valuationallowance, we consider all available evidence, both positive and negative,including historical levels of income, expectations and risks associated withfuture taxable income, and ongoing prudent and feasible tax planningstrategies.  As a result of our analysis,during the third quarter of 2007 we concluded that it was more likely than notthat our deferred tax assets would be realized. The release of the remaining valuation allowance related to our deferredtax assets resulted in a $48.2 million non-cash tax benefit during the yearended December 31, 2007.  During thefirst three quarters of 2007, we also realized a portion of our deferred taxassets equal to the amount of our current Federal income tax provision.

 

84

----

Tableof Contents

 

**RESULTS OFOPERATIONS**

 

We have included information regarding our resultsof operations in the following table. The subsequent discussion and analysis provides information whichmanagement believes is relevant to an assessment and understanding of ourconsolidated results of operations.  Youare encouraged to read the following discussion and analysis of our financialcondition and results of operations together with our audited consolidatedfinancial statements and related footnotes included elsewhere in this AnnualReport.  Additional information regardingsignificant matters affecting comparability of our results of operations isincluded in the section titled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Matters Affecting Comparability.”

 
| ** **                            | ** ** | **Years  Ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenue:                          |       |                               |       |   |   |   |   |
| Product                               |       | $                                  | 1,507,754  |   | $ | 1,334,550 |   | $ | 1,196,686 |   |
| Other                                 |       | 25,455                             |       | 39,742 |   | 21,823 |   |
| Total                                 |       | 1,533,209                          |       | 1,374,292 |   | 1,218,509 |   |
| Cost of goods sold                    |       | 901,077                            |       | 882,157 |   | 788,152 |   |
| Gross profit                          |       | 632,132                            |       | 492,135 |   | 430,357 |   |
| Operating expenses:                   |       |                               |       |   |   |   |   |
| SG&A                              |       | 289,929                            |       | 227,524 |   | 189,387 |   |
| R&D                               |       | 71,223                             |       | 66,006 |   | 61,336 |   |
| Total                                 |       | 361,152                            |       | 293,530 |   | 250,723 |   |
| Income from operations                |       | 270,980                            |       | 198,605 |   | 179,634 |   |
| Other non-operating (expense) income: |       |                               |       |   |   |   |   |
| Interest expense, net                 |       | (74,491                            | )          | (96,640 | ) | (110,236 | ) |
| Merger termination fee                |       | 75,000                             |       | — |   | — |   |
| Loss on extinguishment of debt        |       | (43,033                            | )          | — |   | — |   |
| Equity in earnings of affiliate       |       | 441                                |       | 426 |   | 436 |   |
| Litigation settlement                 |       | —                             |       | — |   | 12,937 |   |
| Total                                 |       | (42,083                            | )          | (96,214 | ) | (96,863 | ) |
| Income before income taxes            |       | 228,897                            |       | 102,391 |   | 82,771 |   |
| (Provision) benefit for income taxes  |       | (75,008                            | )          | (36,594 | ) | 40,794 |   |
| Net income                            |       | $                                  | 153,889    |   | $ | 65,797 |   | $ | 123,565 |   |
|                                  |       |                               |       |   |   |   |   |
| Earnings per common share:            |       |                               |       |   |   |   |   |
| Basic                                 |       | $                                  | 4.56       |   | $ | 39.01 |   | $ | 65.58 |   |
| Diluted                               |       | $                                  | 1.50       |   | $ | 0.71 |   | $ | 1.36 |   |
|                                  |       |                               |       |   |   |   |   |
| Financial measures:                   |       |                               |       |   |   |   |   |
| Gross margin                          |       | 41.2                               | %          | 35.8 | % | 35.3 | % |
| Operating margin                      |       | 17.7                               | %          | 14.5 | % | 14.7 | % |
| Effective income tax rate             |       | 32.8                               | %          | 35.7 | % | (49.3 | )% |

 

***Primary Revenue andExpense Components***

 

The following is adescription of the primary components of our revenue and expenses:

 

·                  **Product net revenue—**Ourproduct net revenue is presented net of allowances for estimated discounts,rebates, administrative fees, chargebacks, and sales allowances.  Our product net revenue is also presented netof SG&A reimbursements to certain international distributors.

 

·                  **Other net revenue—**Our othernet revenue primarily consists of royalties under our collaborative agreements,fees related to our settlement with Baxter, milestone revenues, and revenueassociated with other third party contract services agreements at our Melville,New York, facility.

 

·                  **Cost of goods sold—**Our costof goods sold includes material costs for the products we sell, which primarilyconsists of plasma and other costs associated with the manufacturing process,such as personnel costs, utilities, consumables, and overhead.  In addition, our cost of goods sold includespackaging costs and distribution expenses. The most significant component of our cost of goods sold is plasma,which is the common raw material for our primary products, and representsapproximately half of our cost of goods sold for the periods presented.  Due to our long manufacturing cycle times,which range from 100 days to in excess of 400 days, the cost of plasma is notexpensed through cost of goods sold 

 

85

----

Table of Contents

 

until a significant period of time subsequent to itsacquisition.  Specialty plasmas, due totheir nature, can often have cycle times in excess of one year.

 

·                  **Gross profit—**Our grossprofit is impacted by the volume, pricing, and mix of product net revenue,including the geographic location of sales, as well as the related cost ofgoods sold.  Our profitability issignificantly impacted by the efficiency of our utilization of plasmaincluding, but not limited to, the production yields we obtain, the productreject rates that we experience, and the product through-put that we achieve.

 

·                  **SG&A—**OurSG&A consists primarily of salaries and related employee benefit costs forpersonnel in executive, sales and marketing, finance, legal, informationtechnology, human resources, and other administrative functions, as well asfees for professional services, facilities costs, and other general andadministrative costs.

 

·                  **R&D—**OurR&D includes the costs directly attributable to the conduct of research anddevelopment programs for new products and life cycle management.  Such costs include salaries and relatedemployee benefit costs; materials (including the material required for clinicaltrials); supplies; depreciation on and maintenance of R&D equipment;various services provided by outside contractors related to clinicaldevelopment, trials and regulatory services; and the allocable portion offacility costs such as rent, depreciation, utilities, insurance and generalsupport services.  R&D expenses areinfluenced by the number and timing of in-process projects and the nature ofexpenses associated with these projects.

 

·                  **Interest expense, net—**Ourinterest expense, net, consists of interest expense incurred on outstandingdebt and derivative financial instruments and amortization of debt issuancecosts and debt discount, offset by interest income and capitalized interestassociated with the construction of plant and equipment.  The amount of interest expense, net, that weincur is predominately driven by our outstanding debt levels, derivativefinancial instruments, and associated interest rates.

 

·                  **Income tax (provision) benefit—**Our income tax (provision) benefit includes United States Federal, state,local, and foreign income taxes, and is based on reported pre-tax income.

 

***Year Ended December 31,2009 as Compared to Year Ended December 31, 2008***

 

The following table contains information regardingour results of operations for the year ended December 31, 2009 as comparedto the year ended December 31, 2008:

 

86

----

Tableof Contents

 
| ** **                            | ** ** | **Years  Ended December 31,** | ** ** | **Change** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2009**                           | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
| Net revenue:                          |       |                               |       |       |       |   |   |   |   |
| Product                               |       | $                                  | 1,507,754  |       | $          | 1,334,550 |   | $ | 173,204 |   | 13.0 | % |
| Other                                 |       | 25,455                             |       | 39,742     |       | (14,287 | ) | (35.9 | )% |
| Total                                 |       | 1,533,209                          |       | 1,374,292  |       | 158,917 |   | 11.6 | % |
| Cost of goods sold                    |       | 901,077                            |       | 882,157    |       | (18,920 | ) | (2.1 | )% |
| Gross profit                          |       | 632,132                            |       | 492,135    |       | 139,997 |   | 28.4 | % |
| Operating expenses:                   |       |                               |       |       |       |   |   |   |   |
| SG&A                              |       | 289,929                            |       | 227,524    |       | (62,405 | ) | (27.4 | )% |
| R&D                               |       | 71,223                             |       | 66,006     |       | (5,217 | ) | (7.9 | )% |
| Total                                 |       | 361,152                            |       | 293,530    |       | (67,622 | ) | (23.0 | )% |
| Income from operations                |       | 270,980                            |       | 198,605    |       | 72,375 |   | 36.4 | % |
| Other non-operating (expense) income: |       |                               |       |       |       |   |   |   |   |
| Interest expense, net                 |       | (74,491                            | )          | (96,640    | )          | 22,149 |   | 22.9 | % |
| Merger termination fee                |       | 75,000                             |       | —     |       | 75,000 |   | nm |   |
| Loss on extinguishment of debt        |       | (43,033                            | )          | —     |       | (43,033 | ) | nm |   |
| Equity in earnings of affiliate       |       | 441                                |       | 426        |       | 15 |   | 3.5 | % |
| Total                                 |       | (42,083                            | )          | (96,214    | )          | 54,131 |   | 56.3 | % |
| Income before income taxes            |       | 228,897                            |       | 102,391    |       | 126,506 |   | 123.6 | % |
| Provision for income taxes            |       | (75,008                            | )          | (36,594    | )          | (38,414 | ) | (105.0 | )% |
| Net income                            |       | $                                  | 153,889    |       | $          | 65,797 |   | $ | 88,092 |   | 133.9 | % |
|                                  |       |                               |       |       |       |   |   |   |   |
| Earnings per common share:            |       |                               |       |       |       |   |   |   |   |
| Basic                                 |       | $                                  | 4.56       |       | $          | 39.01 |   | $ | (34.45 | ) | (88.3 | )% |
| Diluted                               |       | $                                  | 1.50       |       | $          | 0.71 |   | $ | 0.79 |   | 111.3 | % |
|                                  |       |                               |       |       |       |   |   |   |   |
| Financial measures:                   |       |                               |       |       |       |   |   |   |   |
| Gross profit margin                   |       | 41.2                               | %          | 35.8       | %          |   |   |   |   |
| Operating margin                      |       | 17.7                               | %          | 14.5       | %          |   |   |   |   |
| Effective income tax rate             |       | 32.8                               | %          | 35.7       | %          |   |   |   |   |

 

----

nm- not meaningful

 

**NetRevenue**

 

The following tablecontains information regarding our net revenue:

 
| ** **                          | ** ** | **Years  Ended December 31,** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2009**                           | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
| Product net revenue:                |       |                               |       |       |       |   |   |   |   |
| Gamunex IGIV                        |       | $                                  | 826,376    |       | $          | 677,737 |   | $ | 148,639 |   | 21.9 | % |
| Prolastin A1PI                      |       | 319,080                            |       | 316,495    |       | 2,585 |   | 0.8 | % |
| Fraction V (Albumin and Plasmanate) |       | 84,770                             |       | 61,075     |       | 23,695 |   | 38.8 | % |
| Other                               |       | 277,528                            |       | 279,243    |       | (1,715 | ) | (0.6 | )% |
| Total product net revenue           |       | 1,507,754                          |       | 1,334,550  |       | 173,204 |   | 13.0 | % |
| Other net revenue                   |       | 25,455                             |       | 39,742     |       | (14,287 | ) | (35.9 | )% |
| Total net revenue                   |       | $                                  | 1,533,209  |       | $          | 1,374,292 |   | $ | 158,917 |   | 11.6 | % |
|                                |       |                               |       |       |       |   |   |   |   |
| United States                       |       | $                                  | 1,011,468  |       | $          | 906,376 |   | $ | 105,092 |   | 11.6 | % |
| International                       |       | 521,741                            |       | 467,916    |       | 53,825 |   | 11.5 | % |
| Total net revenue                   |       | $                                  | 1,533,209  |       | $          | 1,374,292 |   | $ | 158,917 |   | 11.6 | % |

 

Our product net revenue was $1,507.8 million and$1,334.6 million for the years ended December 31, 2009 and 2008,respectively, representing an increase of $173.2 million, or 13.0%. Theincrease consisted of higher volumes of $126.8 million and improved pricing of$46.4 million, net of the effects of unfavorable foreign exchange of $8.0million.

 

Our other net revenue, which consists of royaltiesand licensing fees, milestones, and revenues related to contracted servicesperformed for third parties at our Melville facility, decreased $14.3million.  Our other net revenue for theyear ended December 31, 2008 included the recognition of $1.9 million ofpreviously deferred revenue as a result of the termination of a licensedtechnology 

 

87

----

Tableof Contents

 

agreement with anunaffiliated third party and $2.6 million of a previously deferred upfrontlicensing fee as a result of the completion of a portion of our performanceobligations under a licensed technology agreement with an unaffiliated thirdparty.  Our other net revenue for theyear ended December 31, 2009 was negatively impacted by lower royaltiesand licensing fees of $0.7 million and lower Melville contracted servicesrevenue of $7.3 million, as compared to 2008.

 

The $148.6 million increase in our Gamunex productnet revenue consisted of higher volumes of $117.0 million and improved pricingof $31.6 million, net of the effects of unfavorable foreign exchange of $1.7million.  We experienced higher Gamunexvolumes of $121.4 million in the U.S., Europe, and other international regions,which were partially offset by lower volumes of $4.4 million in Canada.  We experienced improved Gamunex pricing of$37.5 million in the U.S. and Canada, which was partially offset by lowerpricing of $5.9 million in Europe and other international regions, including$1.7 million of unfavorable foreign exchange.

 

In 2009, we experienced asignificant increase in demand for Gamunex, driven primarily by supplyavailability, growth in our GPO and Specialty Pharmacy/Homecare business in theU.S., and geographic expansion.  As a result of the success of our plasmacollection platform, as well as our plasma supply contract with CSL, we beganto alleviate our plasma supply constraints in the second half of 2008, bringingsignificant additional IGIV volumes to the market, to meet the pent up demandfor Gamunex.  We believe that this pent up demand has largely beensatisfied, and consequently, we would not expect to experience the same high levelof accelerated IGIV volume growth that we experienced in second half of 2008and full year 2009, which will affect our comparative growth in sales andmargins in future periods.  We expect that our volume growth rate willmoderate substantially and effectively grow with market at a long-term compoundannual rate of approximately 6% to 8%, matching our Gamunex and fractionationcapacities.  The supply of IGIV inventory increased throughout thedistribution channel as supply became available from the previous low levels.

 

The $2.6 million increase in our Prolastin productnet revenue consisted of higher volumes of $3.7 million, partially offset bylower pricing of $1.1 million. Our Prolastin net revenue for the year ended December 31,2009 was negatively impacted by unfavorable foreign exchange of $6.1 millionwhich offset price increases of $5.5 million in Europe. In 2009, we alsoexperienced pricing adjustments of $3.4 million in Canada related to a pricingdispute. Prolastin volumes are largely a function of our ability to identifyand enroll new patients as compared to the number of patients lost due toattrition and competition.  Our abilityto grow our European volumes will also depend upon our ability to obtain appropriatereimbursement on a country by country basis. We anticipate the launch of ournext generation A1PI product, Prolastin-C, in the U.S. and Canada in the firsthalf of 2010.  We received FDA approval for our nextgeneration A1PI product, Prolastin-C, in October 2009 and received HealthCanada approval in February 2010.  Additionalclinical trials are being required by the European authorities as a precursorto Prolastin-C A1PI approval in Europe.

 

Our Fraction V product category consists of albuminand Plasmanate, with albumin representing the majority of sales in thecategory.  The $23.7 million increase inour Fraction V product net revenue consisted of higher volumes of $19.5 millionand improved pricing of $4.2 million. The increase in Fraction V volume was primarily driven by sales in the U.S.and other international regions (excluding Canada and Europe).  The increase in Fraction V pricing wasprimarily driven by favorable pricing in other international regions (excludingCanada and Europe). Fraction V volumes during the year ended December 31,2008 were negatively impacted by a change in production mix to contracted PPFpowder from Fraction V as a result of the settlement of a customer dispute,which occurred during 2007.  This changein production mix resulted in lower quantities of Fraction V available for saleduring the year ended December 31, 2008.

 

Our other product net revenue consists primarily ofrevenue related to the Canadian blood system, where in addition to commercialsales of Gamunex, we have contract manufacturing contracts with the twonational Canadian blood system operators, CBS and Hema Quebec, as well as salesof Koate DVI Factor VIII (human), hyperimmunes, intermediate products,Thrombate III (human) and contracted PPF powder.

 

Our other product net revenue was favorablyimpacted by improved sales of $8.6 million related to intermediate products,such as cryoprecipitate, and increased sales of Koate DVI Factor VIII (human)of $6.2 million as a result of higher volumes in the U.S. and improved pricingin the U.S. and other international regions (excluding Canada and Europe).  Our other product net revenue was negativelyimpacted by lower contracted PPF powder sales of $14.3 million during the yearended December 31, 2009 as compared to the prior year.  During 2008, we experienced higher contractedPPF powder sales as a result of the settlement of a customer dispute aspreviously discussed. During the year ended December 31, 2009, we recordeda sales adjustment of $3.2 million related to our terminated Bayer Europeandistribution agreement, which we recorded as a reduction of other net productrevenue.

 

We increased prices for several of our products inmost of our geographic regions during 2009 as a result of higher costs andgenerally increasing demand.  Our productnet revenue was negatively impacted by $8.0 million, or 0.6%, as a result ofunfavorable foreign exchange rate fluctuations in relation to the U.S. dollarduring the year ended December 31, 2009 as compared to the prior year.

 

88

----

Tableof Contents

 

As a result of our internal investigation relatedto potential FCPA violations, we suspended shipments to affected countrieswhile we put additional safeguards in place. We also terminated several consultants and suspended relations with orterminated some distributors in countries under investigation as circumstanceswarranted.  These actions resulted in adecline in revenue from these countries during 2009.  We resumed shipments to several countriesduring the fourth quarter of 2009 and intend to resume shipments with newsafeguards or reallocate product to other countries during 2010.

 

**Cost ofGoods Sold and Gross Profit**

 

Our gross profit was $632.1 million and $492.1million for the years ended December 31, 2009 and December 31, 2008,respectively, representing gross margin of 41.2% and 35.8%, respectively.  In general, our gross margin and cost ofgoods sold are impacted by the volume and pricing of our finished products, ourraw material costs, production mix, yield, and cycle times, as well as ourproduction capacities and normal production shut-downs, and the timing andamount of release of finished product. The net impact of these items resulted in higher gross margin during theyear ended December 31, 2009 as compared to the prior year.

 

Our cost of goods sold was $901.1 million, or 58.8%of net revenue, for the year ended December 31, 2009, as compared to$882.2 million, or 64.2% of net revenue, for the year ended December 31,2008.  The decrease in our cost of goodssold as a percentage of net revenue during 2009 was primarily attributable tolower TPR unabsorbed infrastructure and start-up costs of $54.5 million andlower inventory impairment provisions of $5.0 million.  The beneficial effects of the foregoing wereoffset by higher costs of production and costs associated with an increase inproduction volumes, which aggregated $78.4 million.  Due to the relatively fixed nature of ourfactory overhead and certain other production costs, we experienced operatingleverage as production increased during 2009.

 

Our cost of goods soldfor the year ended December 31, 2009 includes higher costs of productionof $14.7 million, including foreign exchange, and higher costs associated withan increase in volumes of $52.8 million. The impact of foreign exchange in our cost of production for the yearended December 31, 2009 is not material. During 2009, we incurred non-capitalizableproject and start-up costs of $36.9 million, an increase of $10.9 million, ascompared to the prior year, related to capital projects. The largestcomponent of our cost of goods sold is the cost of source plasma, whichrepresented greater than 50% of our cost of goods sold in 2009 and 2008. Theoverall cost of source plasma is impacted by the fully-loaded collection costper liter, including donor fees, labor, soft goods, facility costs, testing andunabsorbed TPR infrastructure and start-up costs, the cost of plasma purchasedfrom third-parties and variability in protein yields, among other factors. Ourinternal cost per liter of plasma, including unabsorbed TPR infrastructure andstart-up costs, declined by 21.4% during the year ended December 31, 2009,primarily driven by lower unabsorbed infrastructure and start-up costs. Ouracquisition cost of plasma per liter of third party plasma increased slightlyby 0.30% during the year ended December 31, 2009 as compared to the yearended December 31, 2008. We fractionated approximately 3.6 million litersof plasma during 2009, of which approximately 62% came from plasma collectioncenters we own and approximately 38% came from third-party plasma supplycontracts.  Due to our long manufacturingcycle times, which range from 100 days to in excess of 400 days, thecost of plasma is not expensed through cost of goods sold until a significantperiod of time subsequent to its acquisition.

 

Unabsorbed TPR infrastructure and start-up costsamounted to $44.0 million and $98.5 million for the years ended December 31,2009 and 2008, respectively, representing approximately 2.9% and 7.2%,respectively, of our net revenue.  Ourcost of goods sold during 2009 benefited from lower unabsorbed TPRinfrastructure and start-up costs, which resulted from higher plasma volumescollected at our plasma collection centers and improved labor efficiencies aswell as lower consulting and management support costs.  Unabsorbed TPR infrastructure and start-upcosts during the year ended December 31, 2008 were negatively impacted bycosts associated with remediation efforts at certain plasma collection centers.

 

Our inventory impairment provisions, net ofrecoveries, decreased $5.0 million during the year ended December 31, 2009as compared to the prior year.  During theyear ended December 31, 2008, we recorded a net provision of $5.8 milliondue to the plasma center cGMP issue described in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Matters Affecting Comparability—PlasmaCenter cGMP issue.”  During the yearended December 31, 2009, we recorded recoveries of $1.9 million related tothis issue.  During the years ended December 31,2009 and 2008, we recorded net recoveries of $0.8 million and $7.1 millionrelated to a 2007 customer settlement as described in “Management’s Discussionand Analysis of Financial Condition and Results of Operations—Matters AffectingComparability—Customer Settlement.” During the year ended December 31, 2008, we recorded an impairmentcharge of $3.6 million primarily within cost of goods sold related to capitallease assets and leasehold improvements at certain of our plasma collectioncenters which were closed or were under development and we no longer plan toopen.  During the year ended December 31,2008, we also recorded a loss of $3.4 million within cost of goods sold relatedto two lease commitments associated with properties that we no longer plan tooperate as plasma collection centers. During the year ended December 31, 2009, we experienced a delay inthe restart of our manufacturing facility located in Melville, New York,following a scheduled maintenance shut-down, which resulted in an inventoryimpairment provision of $3.4 million.  Inaddition, during 2009, we recorded provisions of $4.2 million related toshort-dated finished goods inventories. During the year ended December 31, 2009, we experienced lowerwork-in-process inventory impairment provisions of $6.9 million as compared tothe prior year.

 

89

----

Tableof Contents

 

We expect unabsorbed TPRinfrastructure and start-up costs to decrease substantially in 2010, primarilydue to increased collections as well as cost reductions. This benefit will bepartially offset by increased cost of goods sold due to yield variability, lessefficient utilization of each incremental liter of plasma fractionated as weincrease Gamunex production, and uncapitalizable costs associated with ourcapital projects, particularly the construction of our new fractionationfacility.

 

**OperatingExpenses**

 

Our SG&A was $289.9 million and $227.5 millionfor the years ended December 31, 2009 and 2008, respectively, representingan increase of $62.4 million, or 27.4%. As a percentage of net revenue, SG&A was 18.9% and 16.6% for theyears ended December 31, 2009 and 2008, respectively.  Our share-based compensation expense recordedin SG&A increased $7.2 million during 2009 as compared to the prior year, drivenprimarily by the acceleration of the vesting of certain of our Chairman andChief Executive Officer’s stock options. Our SG&A included legal expenses of $6.0 million and $8.3 millionand retention expenses, excluding fringe benefits, of $5.0 million and $3.0million related to our terminated merger agreement with CSL for the years endedDecember 31, 2009 and 2008 respectively. Our SG&A for the year ended December 31, 2009 was negativelyimpacted by $8.0 million of legal costs associated with our internalinvestigation into potential violations of the FCPA. We experienced higher sales and marketingexpenses during 2009 as a result of costs associated with our Gamunex CIDPindication, Prolastin patient identification, as well as support for other products.  We also experienced higher charitabledonations of $14.9 million during the year ended December 31, 2009 ascompared to the prior year.  Ourprovision for uncollectible receivables and advances was $2.1 million higherduring 2008 as compared to 2009 as a result of non-cash charges related tooutstanding notes receivable and other advances made to one of our plasmasuppliers due to uncertainty regarding collection.  In order to grow revenues through leveragingour Gamunex brand and our CIDP indication, as well as our focus on A1PI patientidentification, we began a significant expansion in the size of our U.S. salesforce in the third quarter of 2009.  Weare also increasing our sales and marketing organization in Europe as well asin other international regions. We expect the sales force expansion to resultin an annual increase in SG&A of approximately $10.0 million.  Additionally, we expect that our share-basedcompensation expense will decline subsequent to the first quarter of 2010 whensubstantially all grants and awards under our 2005 Stock Option and IncentivePlan, our 2006 Restricted Stock Plan and our Special Recognition Bonus Plan arefully vested. Additional information regarding certain items impacting thecomparability of our results of operations is included in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Matters Affecting Comparability.”

 

Our R&D was $71.2million and $66.0 million for the years ended December 31, 2009 and 2008,respectively, representing an increase of $5.2 million, or 7.9%.  As a percentage of net revenue, R&D was4.6% and 4.8% for the years ended December 31, 2009 and 2008,respectively.  R&D expenses areinfluenced by the timing of in-process projects and the nature and extent ofexpenses associated with these projects. The increase in R&D year over year is primarily attributable toincreased spending during 2009 related to our Plasmin and recombinant Plasminnew product candidates, partially offset by lower spending attributable to ourProlastin-C A1PI and Gamunex subcutaneous administration life cycle managementprojects.  Additional informationregarding our R&D projects is included in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Research andDevelopment” and “Business—Research and Development.”  We anticipate that R&D will increase insubsequent periods primarily as a result of increased Plasmin clinical trialsrelated to aPAO and ischemic stroke as well as increased spending related toour development of recombinant A1PI and Factor VIII.

 

**TotalOther Non-Operating Expense, net**

 

Our other non-operatingexpense, net, includes interest expense related to our indebtedness, whichamounted to $56.9 million and $85.7 million for the years ended December 31,2009 and 2008, respectively.  Theweighted average annualized interest rates on our outstanding indebtedness,excluding amortization of deferred debt issuance costs and debt discount, were3.4% and 7.2% for the years ended December 31, 2009 and 2008,respectively.  The benefit of the lowercost of borrowings during 2009 was partially mitigated by higher interestexpense of $3.9 million related to our interest rate swaps as compared to 2008,as a result of falling three-month LIBOR as compared to our fixed interest rateswaps.  The interest rate swap contractswere settled and terminated as discussed below.

 

As a result of our IPOand refinancing transactions, we recognized a charge during 2009 of $12.1million to write-off previously deferred debt issuance costs related to ourFirst and Second Lien Term Loans and $30.9 million related to costs associatedwith the settlement and termination of our interest rate swap contracts.  Additional information regarding our IPO andrefinancing transactions is included in “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Matters AffectingComparability—Financial Impact of IPO and Refinancing Transactions.”

 

Our total othernon-operating expense, net, for the year ended December 31, 2009 alsoincludes $75.0 million of non-operating income related to the mergertermination fee as discussed in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Matters AffectingComparability—Definitive Merger Agreement with CSL Limited (CSL).”

 

90

----

Tableof Contents

 

**Provisionfor Income Taxes**

 

Our income tax provisionwas $75.0 million and $36.6 million for the years ended December 31, 2009and 2008, respectively, resulting in effective income tax rates of 32.8% and35.7%, respectively.  Our effectiveincome tax rates differed from the U.S. statutory Federal income tax rate of35% during each period due to the items discussed in the following paragraphs.

 

For the year ended December 31,2009, our effective income tax rate is lower than the U.S. statutory Federalincome tax rate primarily due to credits for Federal Research and Experimentationand Orphan Drug clinical testing expenditures and the deduction of previouslycapitalized transaction costs related to the terminated merger agreement withCSL.

 

For the year ended December 31,2008, our effective income tax rate is higher than the U.S. statutory Federalincome tax rate primarily because the benefit of the credits for FederalResearch and Experimentation and Orphan Drug clinical testing expendituresaggregating $4.1 million offset by the effect of capitalizing transaction costsrelated to the CSL merger agreement, which was terminated in 2009.

 

At December 31,2009, our gross unrecognized tax benefits were approximately $12.2 million, ofwhich approximately $8.8 million would reduce our effective income tax rate ifrecognized.

 

We have not provided forU.S. Federal income and foreign withholding taxes on our non-U.S. subsidiaries’cumulative undistributed earnings of approximately $9.7 million as of December 31,2009 as such earnings are intended to be reinvested outside of the U.S. indefinitely.  It is not practicable to estimate the amountof tax that might be payable if some or all of such earnings were to beremitted, and foreign tax credits would be available to reduce or eliminate theresulting U.S. income tax liability.

 

**Net Income**

 

Our net income was $153.9million and $65.8 million for the years ended December 31, 2009 and 2008,respectively.  Our net income for theyear ended December 31, 2009 reflects the impact of the CSL mergertermination fee of $48.8 million, net of $26.2 million income tax effect, aswell as the refinancing charges of $26.3 million, net of $16.7 million incometax effect.  The significant factors andevents contributing to the change in our net income are discussed above.

 

***Year Ended December 31,2008 as Compared to Year Ended December 31, 2007***

 

The following table contains information regardingour results of operations for the year ended December 31, 2008 as comparedto the year ended December 31, 2007:

 

91

----

Tableof Contents

 
| ** **                            | ** ** | **Years  Ended December 31,** | ** ** | **Change** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2008**                           | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| Net revenue:                          |       |                               |       |       |       |   |   |   |   |
| Product                               |       | $                                  | 1,334,550  |       | $          | 1,196,686 |   | $ | 137,864 |   | 11.5 | % |
| Other                                 |       | 39,742                             |       | 21,823     |       | 17,919 |   | 82.1 | % |
| Total                                 |       | 1,374,292                          |       | 1,218,509  |       | 155,783 |   | 12.8 | % |
| Cost of goods sold                    |       | 882,157                            |       | 788,152    |       | (94,005 | ) | (11.9 | )% |
| Gross profit                          |       | 492,135                            |       | 430,357    |       | 61,778 |   | 14.4 | % |
| Operating expenses:                   |       |                               |       |       |       |   |   |   |   |
| SG&A                              |       | 227,524                            |       | 189,387    |       | (38,137 | ) | (20.1 | )% |
| R&D                               |       | 66,006                             |       | 61,336     |       | (4,670 | ) | (7.6 | )% |
| Total                                 |       | 293,530                            |       | 250,723    |       | (42,807 | ) | (17.1 | )% |
| Income from operations                |       | 198,605                            |       | 179,634    |       | 18,971 |   | 10.6 | % |
| Other non-operating (expense) income: |       |                               |       |       |       |   |   |   |   |
| Interest expense, net                 |       | (96,640                            | )          | (110,236   | )          | 13,596 |   | (12.3 | )% |
| Equity in earnings of affiliate       |       | 426                                |       | 436        |       | (10 | ) | (2.3 | )% |
| Litigation settlement                 |       | —                             |       | 12,937     |       | (12,937 | ) | (100.0 | )% |
| Total                                 |       | (96,214                            | )          | (96,863    | )          | 649 |   | (0.7 | )% |
| Income before income taxes            |       | 102,391                            |       | 82,771     |       | 19,620 |   | 23.7 | % |
| (Provision) benefit for income taxes  |       | (36,594                            | )          | 40,794     |       | (77,388 | ) | (189.7 | )% |
| Net income                            |       | $                                  | 65,797     |       | $          | 123,565 |   | $ | (57,768 | ) | (46.8 | )% |
|                                  |       |                               |       |       |       |   |   |   |   |
| Earnings per common share:            |       |                               |       |       |       |   |   |   |   |
| Basic                                 |       | $                                  | 39.01      |       | $          | 65.58 |   | $ | (26.57 | ) | (40.5 | )% |
| Diluted                               |       | $                                  | 0.71       |       | $          | 1.36 |   | $ | (0.65 | ) | (47.8 | )% |
|                                  |       |                               |       |       |       |   |   |   |   |
| Financial measures:                   |       |                               |       |       |       |   |   |   |   |
| Gross margin                          |       | 35.8                               | %          | 35.3       | %          |   |   |   |   |
| Operating margin                      |       | 14.5                               | %          | 14.7       | %          |   |   |   |   |
| Effective tax rate                    |       | 35.7                               | %          | (49.3      | )%         |   |   |   |   |

 

**NetRevenue**

 

The following tablecontains information regarding our net revenue:

 
| ** **                          | ** ** | **Years  Ended December 31,** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2008**                           | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| Product net revenue:                |       |                               |       |       |       |   |   |   |   |
| Gamunex IGIV                        |       | $                                  | 677,737    |       | $          | 646,779 |   | $ | 30,958 |   | 4.8 | % |
| Prolastin A1PI                      |       | 316,495                            |       | 276,538    |       | 39,957 |   | 14.4 | % |
| Fraction V (Albumin and Plasmanate) |       | 61,075                             |       | 68,780     |       | (7,705 | ) | (11.2 | )% |
| Other                               |       | 279,243                            |       | 204,589    |       | 74,654 |   | 36.5 | % |
| Total product net revenue           |       | 1,334,550                          |       | 1,196,686  |       | 137,864 |   | 11.5 | % |
| Other net revenue                   |       | 39,742                             |       | 21,823     |       | 17,919 |   | 82.1 | % |
| Total net revenue                   |       | $                                  | 1,374,292  |       | $          | 1,218,509 |   | $ | 155,783 |   | 12.8 | % |
|                                |       |                               |       |       |       |   |   |   |   |
| United States                       |       | $                                  | 906,376    |       | $          | 817,276 |   | $ | 89,100 |   | 10.9 | % |
| International                       |       | 467,916                            |       | 401,233    |       | 66,683 |   | 16.6 | % |
| Total net revenue                   |       | $                                  | 1,374,292  |       | $          | 1,218,509 |   | $ | 155,783 |   | 12.8 | % |

 

Our product net revenuewas $1,334.6 million for the year ended December 31, 2008 as comparedto $1,196.7 million for the year ended December 31, 2007,representing an increase of $137.9 million, or 11.5%. The increaseconsisted of improved pricing of $122.3 million, including foreignexchange benefit of $9.7 million, as well as volume increases of$15.6 million. Our other net revenue increased $17.9 millionprimarily due to increased royalties and licensing fees under collaborativeagreements, milestones, and other third party contract servicing agreements atour Melville, New York facility.

 

The $31.0 millionincrease in our Gamunex product net revenue consisted of improved pricing of$55.0 million, including foreign exchange benefit of $1.8 million,partially offset by volume decreases of $24.0 million. The higher Gamunexpricing primarily related to U.S. and Canadian sales. We experienced lowerGamunex volumes of $35.4 million and $7.7 million in the U.S. and 

 

92

----

Tableof Contents

 

Europe, respectively, which were partially offset byhigher Gamunex volumes of $13.0 million and $6.1 million in Canadaand other international regions, respectively. We continue to experience strongdemand for Gamunex globally. Our ability to meet this demand is dependent uponour ability to secure adequate quantities of plasma and our ability to releasefinished product into our distribution channels.

 

The $40.0 millionincrease in our Prolastin product net revenue consisted of improvedpricing of $19.0 million, including foreign exchange benefit of$7.6 million, and higher volumes of $21.0 million. The improvedProlastin pricing was largely in Europe and the U.S., which increased$10.5 million and $7.6 million, respectively. Prolastin volumesimproved $12.8 million and $8.2 million in the U.S. and Europe,respectively. Increases in Prolastin volumes are largely a function of ourability to identify and enroll new patients compared to the number of patientslost due to attrition and competition. Our European growth will also dependupon our ability to obtain appropriate reimbursement on a country by countrybasis.

 

Our Fraction V productcategory consists of albumin and Plasmanate, with albumin representing themajority of sales in the category.  The$7.7 million decrease in our Fraction V product net revenue consisted of volumedecreases of $17.0 million, partially offset by improved pricing of$9.3 million. The albumin pricing increase was predominantly driven bysales in the U.S., which contributed $7.7 million to the overall pricingimprovement. Albumin volumes were negatively impacted by a change in productionmix during 2008 to contracted PPF powder from albumin as a result of thesettlement of a customer dispute as discussed further in the section titled, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Matters Affecting Comparability—Customer Settlement.”  This change in production mix resulted inlower available quantities of albumin for sale during 2008.

 

Our other product netrevenue increased $74.6 million, or 36.5%, during the year ended December 31,2008 as compared to the prior year. Our other product net revenue consistsprimarily of revenue related to the Canadian blood system, where, in additionto commercial sales of Gamunex, we have contract manufacturing contracts withthe two national Canadian blood system operators, CBS and Hema Quebec, as wellas sales of Koate DVI Factor VIII (human), hyperimmunes, intermediateproducts, Thrombate III (human), and PPF powder, less SG&Areimbursements to certain international distributors.

 

Our other product netrevenue includes $26.3 million higher revenues during the year ended December 31,2008 as compared to the prior year as a result of higher volumes of contractedPPF powder in order to comply with contractual commitments associated with thesettlement of a customer dispute in 2007 as discussed previously. In addition,we experienced improved pricing and volume of $7.8 million and$14.9 million, respectively, related to intermediate products, such ascryoprecipitate. Our other product net revenue was also favorably impacted byincreased Koate DVI Factor VIII (human) of $6.5 million, resultingprimarily from improved pricing, and increased sales of Thrombate III (human)of $5.5 million. Finally, our other product net revenue benefited fromhigher hyperimmune pricing of $16.4 million, partially offset by lowerhyperimmune volumes of $7.0 million. The increase in hyperimmune pricingwas primarily generated in the U.S. where we increased pricing during thesecond quarter of 2008.

 

We increased prices forsubstantially all of our products in most of our geographic regions as a resultof higher costs and demand. Our product net revenue was positively impacted by$9.7 million, or 0.8%, as a result of favorable foreign exchange rate fluctuationsin relation to the U.S. dollar during the year ended December 31, 2008 ascompared to the prior year. Prices in Canada are determined by contracts with CBSand Hema Quebec. New five year contracts with increased pricing for contractfractionation services and our commercial products, including Gamunex,Plasbumin, and certain hyperimmune products took effect on April 1, 2008.Through the life of the Canadian contracts, prices escalate annually by inflation.

 

**Cost ofGoods Sold and Gross Profit**

 

Our gross profit was$492.1 million for the year ended December 31, 2008 as compared to$430.4 million for the year ended December 31, 2007, representinggross margin of 35.8% and 35.3%, respectively. Our gross profit is impacted bythe volume, pricing, and mix of our product net revenue as discussed above, aswell as the related cost of goods sold as discussed below. The net impact ofthese items resulted in slightly higher gross margins during the year ended December 31,2008 as compared to the year ended December 31, 2007.

 

Our cost of goods soldwas $882.2 million for the year ended December 31, 2008 as comparedto $788.2 million for the year ended December 31, 2007, representingan increase of $94.0 million, or 11.9%. The increase in our cost of goodssold was driven primarily by higher unabsorbed TPR infrastructure and start-upcosts of $28.4 million. Unabsorbed TPR infrastructure and start-up costsamounted to $98.5 million and $70.1 million for the years ended December 31,2008 and 2007, respectively, representing approximately 7.2% and 5.8%,respectively, of total net revenue. The higher unabsorbed TPR costs during 2008resulted from the continued expansion of our plasma collection center platformand the costs associated with our remediation efforts in certain centersacquired from IBR as well as certain new centers opened by us. Until our plasmacollection centers reach normal operating capacity, we charge unabsorbedoverhead costs directly to cost of goods sold.

 

93

----

Tableof Contents

 

Our cost of goods soldfor the year ended December 31, 2008 includes higher costs of productionof $52.3 million, including foreign exchange, and higher costs associatedwith an increase in volumes of $9.7 million.  The impact of foreign exchange in our cost ofproduction for the year ended December 31, 2008 is not material. During 2008, weincurred non-capitalizable project and start-up costs of $26.0 million,an increase of $4.7 million, as compared to the prior year, related to capitalprojects. Thelargest component of our cost of goods sold is the cost of source plasma whichrepresented in excess of 50% of our cost of goods sold in 2008 and 2007.  The overall cost of source plasma is impactedby the fully-loaded collection cost per liter of source plasma including donorfees, labor, soft goods, facility costs, testing and unabsorbed TPRinfrastructure and start-up costs, the cost of plasma purchased from third-partiesand variability in protein yields, among other factors. Our internal cost perliter of plasma, including unabsorbed TPR infrastructure and start-up costs,increased by 7.7% during the year ended December 31, 2008, primarilydriven by higher unabsorbed infrastructure and start-up costs. Ouracquisition cost of plasma per liter of third party plasma increased 10.7%during the year ended December 31, 2008 as compared to the year ended December 31,2007. Due to our long manufacturing cycle times, which range from 100 daysto in excess of 400 days, the cost of plasma is not expensed through costof goods sold until a significant period of time subsequent to its acquisition.

 

Our inventory impairmentprovisions, net, increased $2.0 million during the year ended December 31,2008 as compared to the prior year. Several of the more significant provisionsand recoveries impacting 2008 and 2007 are discussed further in the paragraphsthat follow, as well as in the section titled, “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Matters AffectingComparability.”

 

During the first andsecond quarters of 2008, we incurred charges to cost of goods sold of$16.3 million and $7.0 million, respectively, due to deviations fromour SOP’s and cGMP at one of our plasma collection centers. As a result offurther investigations and new facts and circumstances, we subsequentlydetermined that certain impacted materials were saleable. We recordedrecoveries of $17.5 million in 2008 directly to cost of goods sold as theimpacted material was converted to finished goods and sold to thirdparties.  We do not expect to recognizesignificant further recoveries of the impacted material.

 

We settled a dispute witha customer in September 2007 regarding intermediate material manufacturedby us, which is used by this customer in its manufacturing process. We recordeda charge to cost of good sold of $7.9 million during the year ended December 31,2007, which we recovered in its entirety during 2008 as the related materialswere determined to be saleable, converted into finished product, and sold toother customers. During the first half of 2008, we recorded an additionalinventory impairment provision of $2.6 million for products held in Europerelated to this dispute, for which we subsequently recovered $1.8 millionduring 2008 as the impacted material was determined to be saleable, convertedinto finished product, and sold to other customers.

 

Our inventory impairmentprovisions, net, for the year ended December 31, 2007 were favorablyimpacted by a $9.0 million recovery from Bayer related to a Gamunexproduction incident, which we recorded as a reduction of cost of goods soldduring the year ended December 31, 2007. Other production issues during theyear ended December 31, 2008 resulted in higher inventory impairmentprovisions of $3.0 million as compared to the year ended December 31,2007.

 

During the year ended December 31,2008, we recorded an impairment charge of $3.6 million primarily within costof goods sold related to capital lease assets and leasehold improvements atcertain of our plasma collection centers which were closed or were underdevelopment and we no longer plan to open. During the year ended December 31,2008, we also recorded a loss of $3.4 million within cost of goods soldrelated to two lease commitments associated with properties that we no longerplan to operate as plasma collection centers. During the year ended December 31,2007, we recorded an impairment charge within cost of goods sold related toequipment of $2.8 million as a result of the discontinuation of a project.

 

During November 2007,we shut down portions of our Clayton, North Carolina facility consistent withour cGMP operating practices for unplanned maintenance for approximately twoweeks. As a result of the unplanned plant maintenance, we recorded$10.0 million directly to cost of goods sold during the year ended December 31,2007, which would normally have been capitalized to inventories.

 

Additionally, our cost ofgoods sold for the year ended December 31, 2008 reflects higher costs ofproduction due to the higher cost of raw materials, production volumevariances, and manufacturing mix and product yield variances, among otheritems. Our cost of goods sold is impacted by our raw material costs, productionmix, cycle times, production capacities and normal production shut-downs, andthe release of finished product.

 

**Operating Expense**

 

Our SG&A was$227.5 million for the year ended December 31, 2008 as compared to$189.4 million for the year ended December 31, 2007, representing anincrease of $38.1 million, or 20.1%. As a percentage of net revenue,SG&A was 16.6% and 15.5% for the years ended December 31, 2008 and2007, respectively. Our SG&A increased period over period as a result ofhigher share-based compensation expense of $15.2 million, costs of$8.3 million associated with the regulatory review process of ourterminated merger with CSL, which are unlikely to recur, merger relatedretention expense (including fringe benefits) of $3.3 million, unfavorableforeign exchange impact of $6.7 million resulting from a strengtheningU.S. dollar as compared to the euro pertaining 

 

94

----

Tableof Contents

 

primarily to euro-denominated receivables, bad debtexpense of $4.2 million related to outstanding notes receivables andadvances to one of our plasma suppliers due to uncertainty regarding collection,and higher sales and marketing, information solutions, finance, humanresources, and business development expenses. These items were partially offsetby lower special recognition bonus expense of $1.5 million, the absence oflegal fees of $5.7 million associated with our litigation with Baxterwhich was settled in 2007, and the absence of $15.3 million of transitionand non-recurring expenses incurred in 2007 associated with the development ofour internal capabilities to operate as a standalone company apart from Bayer.Additional information regarding the significant aforementioned items impactingcomparability between the periods presented is included in the section titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—MattersAffecting Comparability.”

 

Our R&D was$66.0 million for the year ended December 31, 2008 as compared to$61.3 million for the year ended December 31, 2007, representing anincrease of $4.7 million, or 7.6%. As a percentage of net revenue, R&Dwas 4.8% and 5.0% for the years ended December 31, 2008 and 2007,respectively. Research and development expenses are influenced by the timing ofin-process projects and the nature of expenses associated with these projects.Our current research and development consists of a range of programs that aimto obtain new therapeutic indications for existing products, enhance productdelivery, improve concentration and safety, and increase product yields. OurR&D increased period over period primarily as a result of $4.0 millionin milestone payments made to Crucell under the terms of two exclusivecommercial license agreements entered into during 2008. Our R&D expense wasnegatively impacted by higher share-based compensation expense of$1.0 million and merger related retention expense (including fringebenefits) of $0.6 million during 2008 as compared to the prior year. Ourcurrent R&D activities continue to support Plasmin studies for aPAO andischemic stroke, Prolastin Alpha-1 aerosol studies, and the development ofGamunex for subcutaneous administration.

 

**TotalOther Non-Operating Expense, net**

 

The primary component ofour non-operating expense, net, is interest expense, net, which amounted to$97.0 million and $110.2 million for the years ended December 31,2008 and 2007, respectively. Our weighted average interest rates on our outstandingdebt were 7.2% and 9.9% for the years ended December 31, 2008 and 2007,respectively, which resulted in a lower cost of borrowing during the year endedDecember 31, 2008 as compared to the year ended December 31, 2007,despite higher average debt levels during 2008. The benefit of the lower costof borrowing during 2008 was partially mitigated by higher interest expenserelated to our interest rate swaps of $12.0 million as compared to 2007,as a result of falling three-month LIBOR rates as compared to our fixed swaprates. At December 31, 2008, our interest rate swaps and caps hedgedapproximately 56.4% of our total borrowings.

 

As discussed further inthe section titled, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations —Matters Affecting Comparability,” werecorded other income of $12.9 million during the year ended December 31,2007 related to a litigation settlement with Baxter.

 

**(Provision)Benefit for Income Taxes**

 

Our income tax provisionwas $36.6 million for the year ended December 31, 2008 as compared toan income tax benefit of $40.8 million for the year ended December 31,2007, resulting in effective income tax rates of 35.7% and (49.3)%,respectively. Our effective income tax rates were different than the U.S.statutory Federal income tax rate of 35% during each period due to the itemsdiscussed in the following paragraphs.

 

We recognized a taxbenefit of $4.1 million and $10.0 million related to research anddevelopment tax credits and $2.0 million and $2.2 million related toqualified production activities during the years ended December 31, 2008and 2007, respectively, and we recognized a tax benefit of $3.2 millionduring the year ended December 31, 2007 related to the final settlement ofBayer contingent consideration. These items were partially offset by stateincome taxes (net of Federal benefit) of $4.1 million and$3.2 million for the years ended December 31, 2008 and 2007,respectively.

 

We record a valuationallowance to reduce our deferred tax assets to the amount that we believe ismore likely than not to be realized. In assessing the need for a valuationallowance, we consider all available evidence, both positive and negative,including historical levels of income, expectations and risks associated withfuture taxable income, and ongoing prudent and feasible tax planningstrategies. As a result of our analysis of all available evidence, whichincluded ten consecutive quarters of cumulative pre-tax profits and ourexpectations that we can generate sustainable consolidated taxable income forthe foreseeable future, we concluded during the third quarter of 2007 that itwas more likely than not that our deferred tax assets would be realized, andconsequently, we released the remaining valuation allowance related to ourdeferred tax assets resulting in a $48.2 million non-cash tax benefit.During the year ended December 31, 2007, we also released a portion of ourvaluation allowance equal to the amount of the current Federal income taxprovision.

 

At December 31,2008, our gross unrecognized tax benefits were approximately$10.0 million, of which approximately $7.1 million would reduce oureffective income tax rate if recognized.

 

95

----

Tableof Contents

 

**Net Income**

 

Our net income was$65.8 million and $123.6 million for the years ended December 31,2008 and 2007, respectively. The significant factors and events contributing tothe change in our net income are discussed above.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

***CashFlow Analysis***

 

During the year ended December 31, 2009, we generated cash fromoperating activities of $234.2 million. We received net proceeds from our IPO and the issuance of our 7.75%Notes of $519.7 million and $583.9 million, respectively, which we used torepay outstanding amounts under our First and Second Lien Term Loans (whichwere terminated), repay outstanding amounts under our Revolving CreditFacility, and to settle and terminate certain interest rate swapcontracts.  Subsequently, we settled andterminated our remaining interest rate swap contract.  We invested $75.2 million and $30.4 millionin capital projects and the acquisition of twelve plasma collection centersfrom IBR, respectively.

 

The following table and subsequent discussion and analysis containinformation regarding our cash flows for the years ended December 31,2009, 2008, and 2007:

 
| ** **                                                                                   | ** ** | **Years  Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating  activities:**                                                                   |       |                               |       |   |   |   |   |
| Net income                                                                                   |       | $                                  | 153,889    |   | $ | 65,797 |   | $ | 123,565 |   |
| Non-cash items                                                                               |       | 92,375                             |       | 67,272 |   | (34,413 | ) |
| Changes in operating assets  and liabilities, excluding the effects of business acquisitions |       | (12,109                            | )          | (100,055 | ) | 37,979 |   |
| **Net cash provided  by operating activities**                                               |       | $                                  | 234,155    |   | $ | 33,014 |   | $ | 127,131 |   |
|                                                                                         |       |                               |       |   |   |   |   |
| **Investing  activities:**                                                                   |       |                               |       |   |   |   |   |
| Purchase of property,  plant, and equipment                                                  |       | $                                  | (75,163    | ) | $ | (86,212 | ) | $ | (65,833 | ) |
| Financing arrangements with  third party suppliers, net of repayments                        |       | 744                                |       | (16,335 | ) | (7,866 | ) |
| Business acquisitions, net  of cash acquired                                                 |       | (30,431                            | )          | (10,272 | ) | (17,456 | ) |
| Other                                                                                        |       | 232                                |       | 880 |   | 510 |   |
| **Net cash  used in investing activities**                                                   |       | $                                  | (104,618   | ) | $ | (111,939 | ) | $ | (90,645 | ) |
|                                                                                         |       |                               |       |   |   |   |   |
| **Financing  activities:**                                                                   |       |                               |       |   |   |   |   |
| (Repayment) borrowings  under Revolving Credit Facility                                      |       | $                                  | (179,941   | ) | $ | 66,904 |   | $ | 33,117 |   |
| Repayment of borrowings  under term loans                                                    |       | (1,016,000                         | )          | (7,000 | ) | (7,000 | ) |
| Repayment of capital lease  obligations                                                      |       | (574                               | )          | (1,192 | ) | (23 | ) |
| Proceeds from issuance of  7.75% Notes                                                       |       | 600,000                            |       | — |   | — |   |
| Discount on 7.75% Notes                                                                      |       | (4,074                             | )          | — |   | — |   |
| Financing transaction costs                                                                  |       | (14,879                            | )          | — |   | (217 | ) |
| Proceeds from initial  public offering, net of issuance costs                                |       | 519,749                            |       | — |   | — |   |
| Costs related to initial  public offering                                                    |       | (2,557                             | )          | — |   | — |   |
| Repurchases of common stock                                                                  |       | (4,183                             | )          | (36,118 | ) | — |   |
| Proceeds from exercises of  stock options                                                    |       | 7,581                              |       | — |   | — |   |
| Excess tax benefits from  share-based payment arrangements                                   |       | 13,406                             |       | — |   | — |   |
| **Net cash  (used in) provided by financing activities**                                     |       | $                                  | (81,472    | ) | $ | 22,594 |   | $ | 25,877 |   |

 

At December 31, 2009 and 2008, our cash and cash equivalents were$65.2 million and $17.0 million, respectively. We use our available cash balances to repay amounts outstanding underour Revolving Credit Facility.  Wedeposit any excess cash amounts into an overnight investment account.  At December 31, 2009, we had $323.0million of unused available borrowing capacity under our Revolving CreditFacility.

 

We have financed our operations through a combination of equity fundingand debt financing, and through internally generated funds.  Our borrowing facilities contain certaindefault provisions and financial covenants as described below.

 

96

----

Table ofContents

 

**CashFlows from Operating Activities**

 

During the year ended December 31, 2009, 2008, and 2007, our netincome was $153.9 million, $65.8 million, and $123.6 million,respectively.  Our net income for theyear ended December 31, 2009 benefited from the $75.0 million(approximately $48.8 million after tax) payment we received from CSL as aresult of the termination of the definitive merger agreement.  The benefit of the CSL merger termination feewas partially offset by charges totaling $43.0 million (approximately $26.3million after tax) as a result of the settlement and termination of ourinterest rate swap contracts and the write-off of deferred debt issuance costsassociated with our First and Second Lien Term Loans.  During the year ended December 31, 2007,we recognized a non-cash tax benefit of $48.2 million as a result of therelease of the remaining valuation allowance related to our deferred taxassets.  Additional information regardingour net income for the periods presented is included in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Results of Operations.”

 

Our non-cash operating items were $92.4 million, $67.3 million, and$(34.4) million for the years ended December 31, 2009, 2008, and 2007,respectively.  The following significantnon-cash items impacted the comparability of the net cash provided by ouroperating activities during the years presented.

 

·                  Our depreciation and amortization expense for theyears ended December 31, 2009, 2008, and 2007 was $28.9 million, $20.3million, and $10.7 million, respectively. The increase in depreciation and amortization expense during the yearspresented reflects our cumulative capital investments primarily related to ourmanufacturing facilities and TPR.

 

·                  Our share-based compensation expense for the yearsended December 31, 2009, 2008, and 2007 was $47.5 million, $38.7 million,and $21.2 million, respectively.  Theincrease in the share-based compensation expense during the years presentedreflects incremental expense associated with share awards granted of 1,136,036and 2,334,024 during the years ended December 31, 2009 and 2008,respectively.  In addition, during 2009,we accelerated the vesting of certain of our Chairman and Chief ExecutiveOfficer’s stock options, which resulted in a non-cash compensation charge of$11.8 million.

 

·                  During the year ended December 31, 2009, werecognized a non-cash charge of $12.1 million related to the write-off ofunamortized debt issuance costs associated with our First and Second Lien Term Loansas discussed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Matters Affecting Comparability—Financial Impact ofIPO and Refinancing Transactions.”

 

·                  During the year ended December 31, 2008, werecognized previously deferred revenue of $4.8 million as discussed in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Results of Operations.”  Nosignificant amounts were recognized during the years ended December 31,2009 and 2007.

 

·                  During the year ended December 31, 2009, ourdeferred tax assets decreased $15.4 million, of which $1.2 million is includedin operating activities and $14.2 million is included in non-cash financingactivities related to the reclassification of the unrealized losses associatedwith our interest rate swap contracts to earnings upon their settlement andtermination.  During the years ended December 31,2008 and 2007, our deferred tax assets increased $5.5 million and $79.7million, respectively.  The increase inour deferred tax assets during the year ended December 31, 2007 resultedprimarily from the non-cash tax benefit related to the release of our remainingvaluation allowance as discussed previously. Additional information regarding our net deferred tax assets is includedin the footnotes to our audited consolidated financial statements includedelsewhere in this Annual Report.

 

·                  During the year ended December 31, 2009, werecognized excess tax benefits related to share-based compensation of $13.4million.

 

Our operating assets (excluding the effects of business acquisitions),net, (increased) decreased $(12.1) million, $(100.1) million, and $38.0 millionfor the years ended December 31, 2009, 2008, and 2007, respectively, andwere driven by the following items.

 

·                  Our accounts receivable, net, decreased (increased)$8.6 million, $(26.9) million, and $(9.2) million for the years ended December 31,2009, 2008, and 2007, respectively. Accounts receivable, net, balances are influenced by the timing of netrevenue and customer collections.  Ourdays sales outstanding (DSO) were 32 days, 34 days, and 35 days, for the yearsended December 31, 2009, 2008, and 2007, respectively. Our internationalsales terms generally range from 30 to 120 days due to industry and nationalpractices outside of the U.S., which can impact our DSO results. We calculateDSO as our period end accounts receivable, net, divided by our prior threemonths’ net sales, multiplied by 90 days. Our calculation of DSO may not be consistent with similar calculationsperformed by other companies.

 

·                  Our inventories (increased) decreased $(57.5) million,$(92.9) million, and $26.8 million for the years ended December 31, 2009,2008, and 2007, respectively.  Ourinventories fluctuate based upon our plasma collections, production mix andcycle times, production capacities, normal production shut-downs, finishedproduct releases, targeted safety stock levels, and demand for ourproducts.  Our biological manufacturingprocesses result in relatively long inventory cycle times ranging from 100 daysto in excess of 400 days in addition to a required 60 day pre-productionholding period for plasma.  Specialtyplasma, due to its nature, can often have cycle times in excess of oneyear.  Consequently, we have significantinvestment in raw material and work-in-process inventories for extendedperiods, and correspondingly, lower levels of finished goods inventories onhand.  The increase in our inventoriesduring 2009 was primarily driven by Thrombate III inventory build inpreparation of manufacturing transfer from Bayer, increased plasma collectionsas compared to the prior year, and higher hyperimmune inventory levels.  During 2008 and 2007, we repurchasedinventories with a value of approximately $28.6 million and $81.9 million,respectively, from a Bayer affiliate in Germany, where we terminated ourdistribution agreement.  During November 2007,we experienced unplanned plant maintenance as discussed previously, whichresulted in lower inventory at December 31, 2007, thus impacting the 2008comparability.

 

97

----

Table ofContents

 

·                  Our prepaid expenses and other assets decreased(increased) $8.0 million, $(15.8) million, and $0.2 million for the years endedDecember 31, 2009, 2008, and 2007, respectively.  The decrease in our prepaid expenses andother assets during 2009 was primarily driven by a reclassification of $10.1million of prepaid plasma to raw material inventories as a result of plasmadeliveries from IBR upon center licensures, for which we subsequently acquiredthe centers.  This was partially offsetby higher corporate prepaid amounts, including insurance and various servicecontracts.  The increase in our prepaidexpenses and other assets during 2008 was primarily driven by a $9.7 millionincrease in prepaid plasma and a $7.8 million increase in prepaid income taxes,partially offset by lower corporate prepaid amounts.  Under the terms of our 2007 Supply Agreementwith IBR, we were required to prepay 90% for unlicensed plasma.  Upon center licensure, we remit the remaining10% to IBR and reclassify the prepaid amounts to raw material inventories.  The change in our prepaid expenses and otherassets during 2007 was not material.

 

·                  Our operating liabilities increased $28.8 million,$35.5 million, and $20.2 million for the years ended December 31, 2009,2008, and 2007, respectively.  Ourliabilities fluctuate as a result of our cash management strategies and varyingdue dates of accounts payable, accrued expenses, and other liabilities.  The increase in our liabilities in 2009 wasprimarily driven by higher accounts payable obligations of $16.1 million andhigher Medicaid, commercial rebates, and chargebacks of $14.2 million, partiallyoffset by lower interest payable and accrued goods and services.  The increase in our liabilities in 2008 wasprimarily driven by higher accounts payable obligations of $16.6 million,higher accrued payroll, bonuses, and benefits of $13.7 million, higherMedicaid, commercial rebates, and chargebacks of $2.2 million, and generallyhigher liabilities for accrued goods, services, and other items, partiallyoffset by lower taxes payable of $10.6 million. The increase in our liabilities in 2007 was primarily driven by higheraccounts payable obligations of $12.1 million, higher accrued payroll, bonuses,and benefits of $12.5 million, higher Medicaid, commercial rebates, andchargebacks of $5.5 million, higher interest payable of $11.8 million, highertaxes payable of $9.8 million, partially offset by lower payables to relatedparties of $27.3 million as a result of the termination of many of our thenexisting transition services and distribution agreements with Bayer, andgenerally lower accrued goods, services, and other items.

 

**CashFlows from Investing Activities**

 

Our capital expenditures were $75.2 million, $86.2 million, and $65.8million for the years ended December 31, 2009, 2008, and 2007,respectively.  Our capital expendituresreflect investments in our facilities to support a platform for future growthand efficiency improvements, including compliance enhancements, generalinfrastructure upgrades, capacity expansions, and new facilities.  Our capital expenditures also reflectinvestments in our TPR infrastructure to support our plasma collectionefforts.  Our capital expenditures forthe year ended December 31, 2009 reflect significantly lower spendingrelated to our TPR infrastructure as compared 2008 and 2007 as a result of thematuration of our plasma collection platform, as well as the completion ofseveral projects.  Our 2009 capitalexpenditures include higher spending related to reliability/complianceinitiatives, as well as the initial investments in our new fractionationstrategic program.  In addition,significant investment which occurred in 2008 continued into 2009 for the new ThrombateIII purification facility, which is now mechanically complete.  Two earlier investments, our Prolastin-C A1PIfacility and our Koate purification expansion Phase I project were approved bythe FDA during 2009.  Additionalinformation regarding our currently planned capital programs is included in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources—Sources of Credit, Access to Capitaland Cash Requirements, and Credit Ratings.”

 

Our cash flows used in investing activities also include various cashoutflows for the development of our plasma collection center platform,including the purchase price of plasma collection centers acquired from IBR andloans and advances made to third-party plasma suppliers, net of repayments, forthe development of plasma collection centers for which we had the option topurchase under certain conditions.  Wecompleted the acquisition of twelve plasma centers during 2009 as compared tothree centers in both 2008 and 2007. The IBR center acquisition program wascompleted as a result of our purchase of the remaining centers under thatagreement in 2009.

 

98

----

Table ofContents

 

**CashFlows from Financing Activities**

 

We completed our IPO on October 6, 2009, which resulted in netproceeds to us of $519.7 million after deducting underwriters’ discounts andcommissions.  We used the net proceeds tous from the IPO to repay $389.8 million and $129.9 million of principal underour First and Second Lien Term Loans, respectively.  We incurred legal and other costs related toour IPO of approximately $3.9 million, of which $2.6 million is included as areduction of additional paid-in capital. On October 21, 2009, we completeda $600.0 million private placement of our 7.75% Notes at an issue price of99.321% of par, which resulted in net proceeds to us of $583.9 million afterdeducting underwriters’ commissions and the discount.    We used a portion of the net proceeds to usfrom the issuance of the 7.75% Notes to repay $290.9 million and $200.1 millionunder our First and Second Lien Term Loans, respectively, and $55.6 million ofprincipal under our Revolving Credit Facility. We incurred total debt issuance costs related to the issuance of the7.75% Notes and the Revolving Credit Facility amendment of $14.9 million.  During the year ended December 31, 2009,we made contractual principal payments of $5.3 million under our First LienTerm Loan and during the years ended December 31, 2008 and 2007, we madecontractual principal payments of $7.0 million under our First Lien TermLoan.  Outstanding amounts under ourRevolving Credit Facility fluctuate based upon our business needs.

 

During the year ended December 31, 2009, we repurchased 251,108shares of our common stock from employees for $4.2 million to settle theirwithholding tax obligations.  During theyear ended December 31, 2009, we received proceeds from the exercise of2,394,762 stock options of $7.6 million. During the year ended December 31, 2008, we repurchased 2,146,232shares of our common stock from IBR for $33.5 million, plus accrued interest of$1.9 million, and 69,648 shares of our common stock from employees for $0.7million to settle their withholding tax obligations.  During the year ended December 31, 2009,we recognized excess tax benefits related to share-based compensation of $13.4million.

 

***Sourcesof Credit, Access to Capital and Cash Requirements, and Credit Ratings***

 

**Sourcesof Credit**

 

Our sources of credit as of December 31, 2009 are summarized inthe following table:

 
| ** **                | ** ** | ** **    | ** ** | **Reductions  in**    | ** ** | ** **                  | ** ** | ** **    | ** ** |
|---------------------------|------------|---------------|------------|-----------------------|------------|-----------------------------|------------|---------------|------------|
| ** **                | ** ** | ** **    | ** ** | **Available  Credit** | ** ** | ** **                  | ** ** | ** **    | ** ** |
| ** **                | ** ** | ** **    | ** ** | **Facility  for**     | ** ** | ** **                  | ** ** | ** **    | ** ** |
| ** **                | ** ** | **Maximum**   | ** ** | **Other**             | ** ** | **December 31,  2009** | ** ** |
| ** **                | ** ** | **Amounts**   | ** ** | **Financial**         | ** ** | **Amounts**                 | ** ** | **Amounts**   | ** ** |
| **Debt  Instrument**      | ** ** | **Available** | ** ** | **Instruments  (1)**  | ** ** | **Outstanding**             | ** ** | **Available** | ** ** |
| 7.75% Notes               |       | $             | 600,000    |                  | $          | —                      |       | $             | 600,000    |   | $ | — |   |
| Revolving Credit Facility |       | 325,000       |       | 2,040                 |       | —                      |       | 322,960       |       |
| Total sources of credit   |       | $             | 925,000    |                  | $          | 2,040                       |       | $             | 600,000    |   | $ | 322,960 |   |

 

----

(1)          Amounts represent letters of credit used as securityfor utilities, insurance, and third party warehousing.

 

***7.75%Unsecured Senior Notes, due November 15, 2016***

 

On October 21, 2009, we completed the issuance of $600.0 million,7.75% Senior Unsecured Notes, due November 15, 2016, at a price of 99.321%of par, in a private placement to certain qualified institutional buyers.  The 7.75% Notes yield 7.875% to maturity andpay interest semi-annually on May 15 and November 15 to holders ofrecord on the immediately preceding May 1 and November 1,respectively.  The 7.75% Notes areguaranteed on a senior unsecured basis by our existing and future domesticsubsidiaries.  Except as described below,we will not be entitled to redeem the 7.75% Notes at our option prior to November 12,2012.

 

We may redeem some or all of the 7.75% Notes, at our option, at anytime on or after November 12, 2012, at the redemption prices (expressed aspercentages of principal amount) set forth below plus accrued and unpaidinterest and additional interest, if any, on the 7.75% Notes redeemed, to theapplicable redemption date, if redeemed during the twelve-month period beginningon November 15 of the years indicated below:

 
| **Fiscal  Year**    | ** ** | **Percentage** | ** ** |
|---------------------|------------|----------------|------------|
| 2012                |       | 103.875        | %          |
| 2013                |       | 102.583        | %          |
| 2014                |       | 101.292        | %          |
| 2015 and thereafter |       | 100.000        | %          |

 

99

----

Table ofContents

 

In addition, atany time during each twelve-month period ending on November 15, 2010,2011, and 2012, we may redeem up to 10% of the originally issued principalamount of the 7.75% Notes at a redemption price of 103% of the principal amountof the 7.75% Notes redeemed plus accrued and unpaid interest and additionalinterest, if any, to the redemption date, subject to the rights of the holdersof the 7.75% Notes on the relevant record date to receive interest due on therelevant interest payment date.

 

At any time, or from time to time, on or prior to November 15,2012, we may, at our option, redeem up to 35% of the aggregate principal amountof the 7.75% Notes issued under the indenture with the net cash proceeds to usof certain equity offerings at a redemption price equal to 107.75% of theprincipal amount of the 7.75% Notes plus accrued and unpaid interest andadditional interest, if any, to the applicable redemption date, provided thatat least 65% of the aggregate principal amount of the 7.75% Notes originallyissued remains outstanding immediately after such redemption and the redemptionoccurs within 90 days of the date of the closing of such equity offering.

 

Under the Make-Whole redemption feature, we may redeem 100% of theprincipal plus a premium as defined under the indenture (computed using adiscount rate equal to the U.S. Treasury rate as of such redemption date plus0.50%), plus accrued and unpaid interest and additional interest, if any, priorto November 15, 2012, with respect to some or all of the 7.75% Notes,subject to the rights of the holders on the relevant record date to receiveinterest due on the relevant interest payment date.

 

We are not required to make mandatory redemption or sinking fundpayments with respect to the 7.75% Notes.

 

Upon a change of control, the 7.75% Notes are puttable at 101% ofprincipal plus accrued and unpaid interest and additional interest, if any.

 

We may incur additional indebtedness and our subsidiary guarantors mayalso incur additional indebtedness if our Fixed Charge Coverage Ratio for ourmost recently ended four full fiscal quarters immediately preceding the date onwhich such additional indebtedness is incurred would have been at least 2.00 to1.00, determined on a pro forma basis.

 

The indenture contains certain covenants limiting, subject toexceptions, carve-outs and qualifications, our ability and our restrictedsubsidiaries to: (i) sell assets; (ii) pay distributions on, redeemor repurchase its capital stock or redeem or repurchase its subordinated debt; (iii) makecertain investments; (iv) incur or guarantee additional indebtedness orissue preferred stock; (v) create or incur certain liens; (vi) enterinto agreements that restrict distributions or other payments from ourrestricted subsidiaries to us; (vii) engage in certain sale and leasebacktransactions; (viii) engage in certain transactions with affiliates; (ix) transferor dispose of the capital stock of the restricted subsidiary to persons otherthan us or our restricted subsidiaries; and (x) create unrestrictedsubsidiaries.  The indenture alsocontains certain customary events of default.

 

In connection with the sale of the 7.75% Notes, we and our subsidiariesthat guaranteed the 7.75% Notes entered into an exchange and registrationrights agreement with the initial purchasers of the 7.75% Notes on October 21,2009, pursuant to which we are obligated, by April 19, 2010, to file withSecurities and Exchange Commission under the Securities Act of 1933, asamended, a registration statement with respect to an offer to exchange the7.75% Notes (and guarantees) for substantially identical new notes (andguarantees) of ours.  If we are not ableto effect this exchange offer, we have agreed to file a shelf registrationstatement relating to re-sales of the 7.75% Notes. We will be obligated to paydamages consisting of additional interest on the 7.75% Notes if, within theperiods specified in the Registration Rights Agreement, we do not file theexchange offer registration statement or the shelf registration statement or wedo not comply with certain other obligations under the Registration RightsAgreement.

 

***RevolvingCredit Facility***

 

We have a $325.0 million asset-based credit agreement administered by WachoviaBank, N.A., an affiliate of Wells Fargo Securities, which was amended on October 15,2009 as described below.  We use ouravailable cash balances to repay amounts outstanding under this RevolvingCredit Facility.  We deposit any excesscash amounts into an overnight investment account.  Outstanding principal under this facility isdue and payable on the maturity date of December 6, 2011.

 

Borrowings under this facility bear interest at a rate based uponeither ABR or LIBOR, at our option, plus applicable margins based uponborrowing availability.  The ABRrepresents the greater of the Federal Funds Effective Rate plus 0.50% or thePrime Rate.  Interest accrues on theRevolving Credit Facility at the ABR plus 0.25-0.75% or LIBOR plus1.50-2.00%.  For the years ended December 31,2009, 2008, and 2007, the weighted average interest rates of our RevolvingCredit Facility were 2.79%, 4.79%, and 7.90%, respectively.  At December 31, 2008, the interest rateson the ABR and LIBOR borrowings were 3.75% and 2.82%, respectively.  No amounts were outstanding under theRevolving Credit Facility at December 31, 2009.

 

The Revolving Credit Facility is secured by a Pledge and SecurityAgreement dated December 6, 2006 under which substantially all of ourpersonal property, including manufacturing equipment, accounts receivable,inventory, and stock are pledged 

 

100

----

Table ofContents

 

as security, eachas defined within the agreement.

 

The Revolving Credit Facility contains default provisions, and,pursuant to the October 15, 2009 amendment described below, imposesrestrictions on annual capital expenditures if our leverage ratio is 2.00 to1.00 or less, and contains a financial covenant which requires us to maintain afixed charge coverage ratio of at least 1.10 to 1.00 if our borrowingavailability based on eligible collateral is less than $48.75 million.  The Revolving Credit Facility defines certainterms in calculating covenant ratios, including adjusted EBITDA andIndebtedness.

 

The borrowing base under our Revolving Credit Facility is based on ouraccounts receivable and inventory, and is calculated as (i) 85% of oureligible accounts receivable plus (ii) the lesser of (a) 65% of oureligible inventory (valued on a first-in-first-out basis), (b) 85% of thenet orderly liquidation value of our eligible inventory as determined by arecent appraisal, and (c) $300 million. Only up to $100 million may be advanced to us based on the value of ourwork-in-process inventory (with “filled-not-packed” and “packed-not-released”inventory being considered finished goods inventory).  From time to time, the collateral agent underthe Revolving Credit Facility may modify our eligibility standards, establishor adjust reserves, or reduce one or more of the other elements used incomputing the borrowing base.

 

On October 15, 2009, we entered into an amendment to the RevolvingCredit Facility dated as of October 12, 2009.  The Revolving Credit Facility, as amended,permitted the 7.75% Notes, described above, to be issued as long as the Firstand Second Lien Term Loan Credit Agreements were terminated in connection withthe offering of the 7.75% Notes.  Theamendment also (i) increases the covenant baskets for permittedacquisitions to $250 million, (ii) permits the payment of cash dividendscommencing with the first fiscal quarter of 2010 if certain conditions are met,and (iii) increases our capital expenditure baskets so that we will bepermitted to make capital expenditures of up to $225 million in each of 2010and 2011.  Moreover, pursuant to theamendments, we are not subject to any limitation on our capital expenditures inany fiscal year if our leverage ratio, as defined, as of the end of the fiscalyear most recently ended was less than or equal to 2.00 to 1.00.  Minimum availability tests under theRevolving Credit Facility were also increased from $32.5 million to $48.75million in connection with the amendment.

 

Our Revolving Credit Facility, as amended, permits the payment of cashdividends to holders of our common stock commencing with the first fiscalquarter of 2010, so long as (i) the Leverage Ratio determined as of theend of the immediately preceding fiscal quarter for the then most recentlycompleted four fiscal quarters, is equal to or less than 2.00 to 1.00 and (ii) theminimum pro forma Availability as of the date of such dividend (after givingeffect to such cash dividend, the funding of all Revolving Loans, and theissuance of all Letters of Credit to be funded or issued as of such date) isnot less than $48.75 million; provided that, the aggregate amount of RestrictedPayments shall not exceed 50% of Net Income during the period from October 1,2009 to the end of the most recently ended fiscal quarter as of the date of theRestricted Payment.

 

***First and Second Lien Term Loans***

 

Our First and Second Lien Term Loans were repaid in full and terminatedas a result of the application of the net proceeds to us from our October 6,2009 IPO and the issuance of our 7.75% Notes on October 21, 2009.  The weighted average annualized interestrates on the First Lien Term Loan were 4.66%, 6.60%, and 9.07% for the yearsended December 31, 2009, 2008, and 2007, respectively, and the weightedaverage annualized interest rates on the Second Lien Term Loan were 7.68%,9.63%, and 12.13% for the years ended December 31, 2009, 2008, and 2007,respectively.  At December 31, 2008,the interest rate on the First and Second Lien Term Loans were 5.64% and 8.64%,respectively.

 

***Interest Rate Swaps and Caps***

 

We used $28.7 million of the net proceeds to us from the issuance ofour 7.75% Notes to settle and terminate certain interest rate swap contractswith a notional amount of $390.0 million. Subsequently, we settled and terminated our remaining interest rate swapcontract with a notional amount of $50.0 million for $6.1 million.  As a result of the settlement and terminationof these interest rate swap contracts, we recognized a charge of $30.9 million(approximately $18.9 million after tax) during the year ended December 31,2009 within total other non-operating expense, net, in our consolidated incomestatement.  At December 31, 2008,$23.3 million, net of taxes, was recorded in accumulated other comprehensiveloss, related to our interest rate swap contracts.  As a result of their settlement andtermination, we reclassified $23.3 million out of accumulated othercomprehensive loss to loss on extinguishment of debt within total othernon-operating expense, net, in our consolidated income statement for the yearended December 31, 2009.

 

At December 31, 2008, we had five variable-to-fixed interest rateswap contracts with an aggregate notional amount of $500.0 million and twointerest rate cap contracts with an aggregate notional principal amount of$175.0 million outstanding, respectively. At December 31, 2008, the fair value of our interest ratederivatives was $37.5 million, which was recorded primarily in other long-termliabilities on our consolidated balance sheet. Fair value was calculated using Level 2 inputs, which included forwardLIBOR curves and credit default swap data. At December 31, 2009, we hadtwo interest rate cap contracts with a notional principal amount of $175.0million outstanding for which the cap rate of 6.00% was significantly higherthan prevailing market interest rates; therefore, the fair market value waszero.

101

----

Table of Contents

 

***Access to Capital and Cash Requirements***

 

At December 31, 2009, our cash and cash equivalents totaled $65.2million.  We use our available cashbalances to repay amounts outstanding under our Revolving Credit Facility.  We deposit any excess cash amounts into anovernight investment account.  At December 31,2009, no amounts were outstanding under our Revolving Credit Facility and wehad unused available borrowing capacity of $323.0 million.

 

We expect our cash flows from operations combined with our cashbalances and availability of our Revolving Credit Facility to providesufficient liquidity to fund our current obligations, projected working capitalrequirements, and capital expenditures for at least the next twelvemonths.  As of the date of this AnnualReport, we believe that we are currently in compliance with all covenants orother requirements set forth in our credit facilities.

 

Our working capital, which is driven primarily by our accountsreceivable turnover and inventory production times, including plantturnarounds, can vary significantly period to period.  Our capital requirements will depend on manyfactors, including our rate of sales growth, acceptance of our products, costsof securing access to adequate manufacturing capacities, maintaining cGMPcompliant facilities, the timing and extent of research and developmentactivities, and changes in operating expenses, including costs of productionand sourcing of plasma, all of which are subject to uncertainty.  We anticipate that our cash needs will besignificant and that we may need to increase our borrowings under our creditfacilities in order to fund our operations and strategic initiatives.  We anticipate that our working capital willincrease in order to grow our business. In particular, we expect to increase inventories to optimizefractionation capacity.

 

Although we believe that our capital spending for the years ended December 31,2009 and 2008 is more indicative of our annual capital spending, we anticipatesignificantly higher capital spending over the next five years.  We expect that our capital spending over thenext five years to be in the range of $750 million to $800 million on acumulative basis, substantially higher than it has been in the past.  Given the nature of our planned capitalprojects, we anticipate our capital spending to range from $180 million to $190million in 2010 and to increase to a peak of $240 million to $260 million in 2011.  Most of the anticipated capital spending willbe necessary to support our future volume growth, particularly with theanticipation that we will reach our fractionation capacity in the near term,launch new product introductions and complete strategic initiatives.  Incremental capital spending will continue tobe required to ensure ongoing maintenance and compliance of our facilities.

 

The amount and timing of future capital spending is dependent upon anumber of factors, including market conditions, regulatory requirements, andthe extent and timing of particular projects, among other things. The designand construction of a new, higher-capacity fractionation facility, which wecurrently estimate will range from $280 million to $300 million in cost, basedon conceptual engineering, and anticipate will be operational by 2015;construction of new purification facilities for Plasmin, Koate, and albumin areestimated to cost approximately $160 million; and projects to support continuednew product development, among others. Our planned capital program also includes projects to increase ourfractionation capacities.  To the extentwe discontinue a capital project, we would write-off a portion or allpreviously capitalized amounts through a charge to our consolidated incomestatement. As a result of our anticipated capacity constraints, we plan tobuild our Gamunex inventories, which will increase our working capitalrequirements.  The first phase of ourFactor VIII purification expansion project, as well as reliabilityimprovements, has been completed.  Inaddition, we have completed construction of our new Thrombate III purificationfacility as well as our new Prolastin-C A1PI purification facility.  Capital expenditures for these facilitieswere approximately $30 million and $26 million, respectively, through December 31,2009.

 

On an ongoing basis, we expect to evaluate means to moderate ourcapital spending, including implementing projects in phases, exploringgovernment subsidies, exploring strategic partnerships, and the like.  We may need to incur future debt or issueadditional equity if our cash flows and capital resources are insufficient tofinance these various activities, particularly in light of the scheduledmaturity of our Revolving Credit Facility in December 2011.  Additional funds may not be available onterms favorable to us, or at all.

 

***CreditRatings***

 

Our credit ratings at December 31, 2009 were as follows:

 
| ** **              | ** ** | ** **       | ** ** | **Standard &** | ** ** |
|-------------------------|------------|------------------|------------|-------------------------|------------|
| ** **              | ** ** | **Moody’s** | ** ** | **Poor’s**         | ** ** |
| Outlook:                |       |             |       |                    |       |
| 7.75% Notes             |       | B1               |       | BB                      |       |
| Corporate Family Rating |       | Ba3              |       | BB                      |       |

 

102

----

Table ofContents

 

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

 

**CONTRACTUALOBLIGATIONS**

 

The following table summarizes our significant contractual obligationsas of December 31, 2009:

 
| ** **                  | ** ** | **Payments  Due by Period** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | ** **                  | ** ** | **Less  than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More  than** | ** ** |
| ** **                  | ** ** | **Total**                   | ** ** | **1  Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **5  Years** | ** ** |
| Long-term debt (1)          |       | $                           | 600,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Interest payments (2)       |       | 328,600                     |       | 49,600 |   | 139,500 |   | 93,000 |   | 46,500 |   |
| Capital lease obligations   |       | 15,157                      |       | 1,740 |   | 5,356 |   | 3,455 |   | 4,606 |   |
| Operating lease obligations |       | 50,486                      |       | 16,727 |   | 24,759 |   | 5,351 |   | 3,649 |   |
| Purchase commitments (3)    |       | 719,530                     |       | 202,307 |   | 350,307 |   | 108,542 |   | 58,374 |   |
| Total                       |       | $                           | 1,713,773  |   | $ | 270,374 |   | $ | 519,922 |   | $ | 210,348 |   | $ | 713,129 |   |

 

----

(1)              Long-term debt in the table above consists ofoutstanding amounts under our 7.75% Notes. We also have a $325.0 million Revolving Credit Facility, maturing on December 6,2011, for which no amounts were outstanding at December 31, 2009.  The 7.75% Notes are redeemable or puttableprior to their scheduled maturity of November 15, 2016 under certaincircumstances as described further in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources.”

 

(2)              Interest payments related to long-term debt in thetable above consists of interest amounts under our 7.75% Notes.  We also have a $325.0 million variable rateRevolving Credit Facility, for which no amounts were outstanding at December 31,2009.

 

(3)              Includes material agreements to purchase goods andservices that are enforceable and legally binding.

 

In addition to the contractual obligations disclosed in the tableabove, we have other contractual obligations for which the timing and extent offuture payments are not known.  We havedescribed these potential obligations in the following paragraphs.

 

We have employment agreements and offer letters with certain of ouremployees which require payments generally ranging from 100% to 200% of theemployee’s annual compensation if employment is terminated not for cause by us,or by the employee, for good reason, as defined.  Certain of these arrangements also includeprovisions for payments of bonuses under our annual incentive plan and thevesting of equity awards, as well as other customary payments, such as accruedpersonal days, bonuses, continuing benefits, and outplacement services.   Unless such termination is for cause, ifsuch termination occurs within a specified period following a change in controlof the Company, as therein defined, the agreements generally require us to vestall of the employees’ stock-based compensation.

 

We have two exclusive commercial license agreements for advancedprotein production technology with Crucell. In consideration of the licenses that Crucell has granted us, we paidupfront license fees of $4.0 million during 2008 and additional milestones of$0.5 million during 2009 and could be required to pay up to $48.0 million ofadditional development milestones as certain activities are completed.  Under the terms of both agreements, we mayterminate either agreement by giving Crucell 90 days prior written notice andpayment of all outstanding amounts owed to Crucell.  If products developed under these agreementsare sold, we would be required to pay royalties to Crucell ranging from 3% to5% of net sales from recombinant Factor VIII and from 3.5% to 6% of net salesfrom recombinant A1PI.  We currentlyanticipate paying milestones of $1.5 million and $2.0 million during 2010 and2011, respectively, under these agreements.

 

At December 31, 2009, $11.1 million of unrecognized tax benefitshave been recorded as liabilities for uncertain income tax positions.  The ultimate resolution of our uncertainincome tax positions is dependent on uncontrollable factors such as lawchanges, new case law, and the willingness of the income tax authorities tosettle, including the timing thereof, and other factors.  Although we do not anticipate significantchanges to our uncertain income tax positions in the next twelve months, itemsoutside of our control could cause our uncertain income tax positions to changein the future.

 

During 2010, we estimate our capital spending to range from $180million to $190 million based upon our current plan.  Actual 

 

103

----

Table ofContents

 

spending will varybased upon changes to the timing and scope of planned projects, includingproject deferral or acceleration, as well as new opportunities.  Additional information regarding our plannedcapital projects is included in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations——Liquidity and Capital Resources.”  At December 31, 2009, we havecommitments for capital spending to be made in 2010 totaling $31.6 million.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

As of December 31, 2009, we do not have any off-balance sheetarrangements that are material or reasonably likely to be material to ourconsolidated financial position or results of operations.

 

**NON-GAAPFINANCIAL MEASURE**

 

We believe that a meaningful analysis of our historical operatingperformance is enhanced by the use of adjusted EBITDA.  Adjusted EBITDA is a financial measure thatis not defined by U.S. GAAP.  A non-GAAPfinancial measure is a numerical measure of a company’s financial performance that(i) excludes amounts, or is subject to adjustments that have the effect ofexcluding amounts, that are included in a comparable measure calculated andpresented in accordance with U.S. GAAP in the statement of operations, such asnet income, or the statement of cash flows, such as operating cash flow; or (ii) includesamounts, or is subject to adjustments that have the effect of includingamounts, that are excluded from the comparable measure so calculated andpresented.  Adjusted EBITDA should not beconsidered a substitute for any performance measure determined in accordancewith U.S. GAAP.  We do not rely solely onadjusted EBITDA as a performance measure and also consider our U.S. GAAPresults.  Because adjusted EBITDA is notcalculated in the same manner by all companies, it may not be comparable tosimilarly titled measures used by other companies.  To properly and prudently evaluate ourbusiness, we encourage you to also review our U.S. GAAP consolidated financialstatements included elsewhere in this Annual Report, and not to rely on anysingle financial measure to evaluate our business.  Adjusted EBITDA has material limitations asan analytical tool and you should not consider this measure in isolation, or asa substitute for analysis of our results as reported under U.S. GAAP.

 

Adjusted EBITDA is used by our management, our lenders, and thecompensation committee of our board of directors as follows:

 

·                  Our management uses adjusted EBITDA as one of ourprimary financial performance measures in the day-to-day oversight of ourbusiness to, among other things, allocate financial and human resources acrossour organization, determine appropriate levels of capital investment andresearch and development spending, determine staffing needs and develop hiringplans, manage our plants’ production plans, and assess appropriate levels ofsales and marketing initiatives.  Ourmanagement uses adjusted EBITDA in its decision making because thissupplemental operating performance measure facilitates internal comparisons tohistorical operating results and external comparisons to competitors’historical operating results by eliminating various income and expense itemswhich are either not part of operating income or may vary significantly whencomparing our results among the periods presented to our competitors or othercompanies.

 

·                  The compensation committee uses adjusted EBITDA as afinancial performance objective because it is one of our primary financialperformance measures used in the day-to-day oversight of our business to, amongother things, allocate financial and human resources across our organization,determine appropriate levels of capital investment and research and developmentspending, determine staffing needs and develop hiring plans, manage our plants’production plans, and assess appropriate levels of sales and marketinginitiatives. In 2009 and prior years, the compensation committee used unleveredfree cash flow because it measures management’s effectiveness in managing cashand the related impact on interest expense. In order to motivate topperformance by our executives, we establish a target level for each of thevarious performance criteria that is high enough that there is no certainty itis achievable. The target level for any performance criterion changes from yearto year. These target performance levels reflect challenges with respect tovarious factors such as sales volume and pricing, cost control, working capitalmanagement, plasma platform objectives, R&D objectives and sales andmarketing objectives, among others. Our compensation committee has discretionto adjust the actual results related to the performance targets positively ornegatively for items which, in the opinion of the compensation committee, werenot reasonably within management’s control. The compensation committee alsoevaluates the manner in which actual results were achieved to determine ifunusual actions or risks were taken that would impact or manipulate theresults.

 

·                  Our lenders use adjusted EBITDA to determinecompliance with the Leverage Ratio financial covenant under our RevolvingCredit Facility, which is calculated as debt less cash divided by the lasttwelve months’ adjusted EBITDA.  Theterms of our Revolving Credit Facility remove restrictions on our annualcapital expenditures if our Leverage Ratio is greater than 2.00 to 1.00.  Our 7.75% Notes use a similar measurereferred to as Consolidated Cash Flow to determine compliance with the FixedCharge Coverage Ratio, which allows for the incurrence of indebtedness andissuance of 

 

104

----

Table ofContents

 

qualified and preferred stock if at least 2.00 to1.00.

 

Certain items that we eliminate in calculating adjusted EBITDA havebeen, and we expect will continue to be, significant to our business. Forexample:

 

·                  Interest expense is a necessary element of our costsand is largely a function of our capital structure and reflects our debtlevels;

 

·                  Depreciation and amortization primarily result fromthe allocation of resources relative to investment decisions by our managementand board of directors;

 

·                  Income tax expense results from our performance andapplying statutory tax rates in the jurisdictions in which we operate coupledwith the application of income tax accounting guidance and tax planningstrategies;

 

·                  Non-cash compensation expense is expected to be arecurring component of our costs, although we expect that we will not grantshare-based compensation in the same magnitude in the future;

 

·                  Expenses related to our special recognition bonusesare significant, and although we do not expect to grant bonuses in thismagnitude in the future, bonuses will continue to be a key component ofcompensation to retain and attract employees; and

 

·                  Expenses related to debt extinguishment represent anecessary element of our costs to the extent that we restructure our debt.

 

Although we currently believe other items such as management fees,transition and unusual or non-recurring expenses, and retention bonuses willnot recur in the future in the same magnitude that they have occurred in thepast, we may incur similar charges in the future.  Other items, such as impairment charges, arenot predictable, and therefore, we could incur similar charges in the future.

 

In the following table, we have presented a reconciliation of EBITDAand adjusted EBITDA, as defined in our Revolving Credit Facility, and ConsolidatedCash Flow as defined in our 7.75% Notes, to the most comparable U.S. GAAPmeasure, net income:

 
| ** **                                                     | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                     |       | $                                 | 153,889    |   | $ | 65,797 |   | $ | 123,565 |   |
| Interest expense, net (a)                                      |       | 74,491                            |       | 97,040 |   | 110,236 |   |
| Income tax provision (benefit) (b)                             |       | 75,008                            |       | 36,594 |   | (40,794 | ) |
| Depreciation and amortization (c)                              |       | 28,936                            |       | 20,269 |   | 10,749 |   |
| **EBITDA**                                                     |       | 332,324                           |       | 219,700 |   | 203,756 |   |
| Transition and other non-recurring expenses (d)                |       | —                            |       | — |   | 15,251 |   |
| Management fees (e)                                            |       | 5,715                             |       | 6,871 |   | 6,097 |   |
| Non-cash share-based compensation expense (f)                  |       | 47,546                            |       | 38,707 |   | 21,241 |   |
| Special recognition bonus expense (g)                          |       | 6,310                             |       | 6,622 |   | 8,167 |   |
| Loss on extinguishment of debt (h)                             |       | 43,033                            |       | — |   | — |   |
| Equity in earnings of affiliate (i)                            |       | (441                              | )          | (426 | ) | (436 | ) |
| Loss (gain) on disposal of property, plant, and  equipment (j) |       | 1,196                             |       | 48 |   | (94 | ) |
| Asset impairment charges, net of recoveries (k)                |       | 1,180                             |       | 10,096 |   | 2,789 |   |
| Retention bonus awards (l)                                     |       | 9,136                             |       | 5,593 |   | — |   |
| Other (m)                                                      |       | 1,284                             |       | 605 |   | — |   |
| **Adjusted EBITDA as defined per  Revolving Credit Facility**  |       | 447,283                           |       | 287,816 |   | 256,771 |   |
| Merger termination fee (n)                                     |       | (75,000                           | )          | — |   | — |   |
| **Consolidated Cash Flow as defined  per 7.75% Notes**         |       | $                                 | 372,283    |   | $ | 287,816 |   | $ | 256,771 |   |

 

105

----

Table ofContents

 

----

(a)          Represents interest expense associated with our debtstructure.  Through the third quarter of2009, our debt structure consisted of facilities totaling $1.355 billion,including our $700 million First Lien Term Loan, $330 million Second Lien TermLoan, and $325 million Revolving Credit Facility, as well as our interest ratecap and swap contracts.  As a result ofour IPO and refinancing transactions during October 2009, we reduced ourcredit facilities to $925 million, consisting of our $600 million 7.75% Notesand $325 million revolving credit facility. We also settled and terminated our interest rate swap contracts.

 

(b)         Represents our income tax provision (benefit) aspresented in our consolidated income statements.

 

(c)          Represents depreciation and amortization expenseassociated with our property, plant, and equipment, and all other intangibleassets.

 

(d)         Represents the expense associated with the developmentof our internal capabilities to operate as a standalone company apart fromBayer, consisting primarily of consulting services associated with developingour corporate infrastructure.

 

(e)          Represents the advisory fees paid to Talecris Holdings,LLC, under the Management Agreement, as amended.  This agreement was terminated in connectionwith our IPO.

 

(f)            Represents our non-cash share-based compensationexpense associated with stock options, restricted stock, and RSU’s.

 

(g)         Represents compensation expense associated withspecial recognition bonus awards granted to certain of our employees and seniorexecutives.  These awards were granted toreward past performance and were provided to these individuals in recognitionof the extraordinary value realized by us and our stockholders due to theefforts of such individuals since inception of our operating activities on April 1,2005.  While the awards included deferreddistributions for employee retention, we do not anticipate granting similar awardsin the future.

 

(h)         Represents charges to write-off previously capitalizedfinancing charges associated with our First and Second Lien Term Loans as aresult of their repayment and termination as well as costs associated with thesettlement and termination of our interest rate swap contracts.

 

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

 

(j)             Represents net losses (gains) on disposals of ourproperty, plant, and equipment, which we believe are not part of our coreoperations.

 

(k)          For the year ended December 31, 2009, the amountrepresents $3.1 million of charges related primarily to capital lease assetsand leasehold improvements, offset by recoveries of $1.9 million related to our2008 plasma center cGMP issue.  For theyear ended December 31, 2008, the amount represents an inventoryimpairment charge, net of recoveries of $5.8 million due to our plasma centercGMP issue, an impairment charge of $3.6 million related primarily to capitallease assets and leasehold improvements, and other long-lived asset impairmentcharges of $0.7 million.  During the yearended December 31, 2007, the amount represents asset impairment charges of$2.8 million associated with the discontinuation of a capital project.

 

(l)             Represents merger related retention expenses,including fringe benefits, related to our terminated merger agreement with CSL.

 

(m)       For the year ended December 31, 2009, the amountrepresents $1.3 million of costs related to our October 6, 2009 IPO.  For the year ended December 31, 2008,represents $0.9 million of costs related to the initial public offering thatwas discontinued during 2008, partially offset by insurance recoveries of $0.3million.

 

(n)         For the year ended December 31, 2009, the amountincludes a $75.0 million merger termination fee that we received from CSL inconnection with the termination of our definitive merger agreement.

 

In addition to the adjustments we make in computing adjusted EBITDA aspermitted under the terms of our Revolving Credit Facility and ConsolidatedCash Flow under the terms of our 7.75% Notes, our management and compensationcommittee also consider the impact of other items in evaluating our operatingperformance.  Certain of these items,which impact the comparability of our historical financial results, areincluded in the section titled, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Matters Affecting Comparability.”

 

106

----

Tableof Contents

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We operate on a global basis, and are exposed to therisk that our earnings and cash flows could be adversely impacted byfluctuations in interest rates, foreign exchange, and commodity prices.  The overall objective of our financial riskmanagement program is to minimize the impact of these risks through operationalmeans and by using various financial instruments.  These practices may change as economicconditions change.

 

**INTEREST RATE RISK**

 

At December 31, 2009, our long-term debtconsisted of our 7.75% Notes ($600.0 million outstanding), which bears a fixedinterest rate, and our $325.0 million Revolving Credit Facility, which bearsinterest at a rate based upon either ABR or LIBOR, at our option, plusapplicable margins based upon borrowing availability.  We were not exposed to adverse movements inABR or LIBOR related to our Revolving Credit Facility at December 31,2009, as no amounts were drawn. Assuming a fully drawn Revolving CreditFacility and a 100 basis point increase in applicable interest rates, ourinterest expense, net, would increase by $3.25 million on an annual basis.

 

At December 31, 2009, we had cash and cashequivalents of $65.2 million.  We use ouravailable cash balances to repay amounts outstanding under our Revolving CreditFacility.  We deposit any excess amountsinto an overnight investment account, which earns minimal interest. Because ourcash and cash equivalents are short-term in duration, we believe that ourexposure to interest rate risk is not significant and a 100 basis pointmovement in market interest rates would not have a significant impact on thecarrying value of our cash and cash equivalents.  We actively monitor changes in interestrates.

 

**FOREIGN CURRENCY RISK**

 

We operate internationally and enter into transactionsdenominated in foreign currencies.  Assuch, our financial results are subject to the variability that arises fromexchange rate movements in relation to the U.S. dollar.  Our foreign currency exposures are primarilylimited to the impact that fluctuations in the euro and the Canadian dollarhave on our revenues and the remeasurement of our euro-denominated accountsreceivable.  We translate the financialstatements of international subsidiaries to their U.S. dollar equivalents atend-of-period currency exchange rates for assets and liabilities and at averagecurrency exchange rates for revenue and expenses. We record these translationadjustments as a component of other comprehensive income (loss) withinstockholders’ equity (deficit).  Werecognize transaction gains and losses arising from fluctuations in currencyexchange rates on transactions denominated in currencies other than thefunctional currency as incurred in our consolidated income statements.  We incurred transaction gains, net, of $1.9million for the year ended December 31, 2009, primarily related to theremeasurement of euro denominated accounts receivable.

 

Since we operate internationally and approximately 34%of our net revenue for the year ended December 31, 2009 was generatedoutside of the United States, foreign currency exchange rate fluctuations couldsignificantly impact our financial position, results of operations, cash flows,and competitive position.  Our productnet revenue was negatively impacted by $8.0 million, or 0.6%, as a result offoreign currency exchange rate fluctuations in relation to the U.S. dollarduring the year ended December 31, 2009.

 

For the purpose of specific risk analysis, we used asensitivity analysis to measure the potential impact to our consolidatedfinancial statements for a hypothetical 10% strengthening of the U.S. dollarcompared with the Canadian dollar and euro for the year ended December 31,2009.  Assuming a 10% strengthening ofthe U.S. dollar, our product net revenue would have been negatively impacted byapproximately $14.8 million, or 1.0%. There would have been minimal impact to transaction gains resulting fromthe remeasurement of euro-denominated accounts receivable during the year endedDecember 31, 2009.  To date, we havenot hedged our exposure to changes in foreign currency exchange rates.  Consequently, we could incur unanticipatedgains and losses as result of changes in foreign exchange rates.

 

**COMMODITY RISK**

 

In order to enhance the predictability,sustainability, and profitability of our plasma supply, we have devotedsignificant resources on the internal development of our plasma collectioncenter platform, which has included organic growth, the acquisition ofadditional plasma collection centers from IBR, and strategic alliances withthird parties under which we have provided financing for the development ofplasma collection centers that are dedicated to our plasma collection.  Plasma is the key raw material used in theproduction of our products, which has historically accounted for more than halfof our cost of goods sold.  At December 31,2009, our plasma collection center platform consisted of 69 operating centers,of which 64 were licensed and 5 were unlicensed.  These centers collected approximately 62% ofour plasma during the year ended December 31, 2009 and our plan is for ourplasma collection center network to provide greater than 90% of our currentplasma requirements once it fully matures.

 

107

----

Tableof Contents

 

For the purpose of specific risk analysis, we used asensitivity analysis to measure the potential impact to our consolidatedfinancial statements for a hypothetical 10% increase in the cost of plasma usedto produce the products sold during the year ended December 31, 2009.  Assuming this 10% increase in the cost ofplasma, our cost of goods sold would have increased by $44.4 million and ourgross margin would have been negatively impacted by 290 basis points for theyear ended December 31, 2009.  Thissensitivity analysis assumes that we would not be able to pass the hypotheticalcost increase to our customers in the form of pricing increases.

 

We procure plasma from our plasma collection centersand from third parties, all located within the United States.  In periods of rising demand for plasma, wemay experience increased costs and/or limited supply.  These conditions can potentially result inour inability to acquire key production materials on a timely basis, or at all,which could impact our ability to produce products and satisfy incoming salesorders on a timely basis resulting in the breach of distribution contracts, orotherwise harm our business prospects, financial condition, results ofoperations, and cash flows.  In addition,increased costs of materials or the inability to source materials could resultin higher costs of production resulting in compressed gross margin, loss ofcustomers, a negative effect on our reputation as a reliable supplier ofplasma-derived therapies, or a substantial delay in our production growthplans.

 

As indicated previously, we have embarked on a capitalexpenditure plan that is currently estimated to be in the range of $750 millionto $800 million on a cumulative basis through 2014 to address our fractionationcapacity constraints.  As such, weanticipate that we will be subject to market risk from fluctuating prices ofcertain purchased commodities, such as stainless steel.  While these materials will come from multiplesources, commodities are subject to market price fluctuation.  We will purchase these commodities based uponmarket prices established with various suppliers as part of the purchasingprocess.  To the extent that commodityprices increase and we do not have firm pricing commitments, or if thesuppliers are not able to honor such prices, we may experience unplanned costsin order to continue with our capital programs. We currently do not anticipate hedging our exposures to market risksassociated with our commodities.

 

108

----

Tableof Contents

 

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Index to Consolidated Financial Statements andFinancial Statement Schedule**

** **
| ** **                                                      | ** ** | **Page** |
|-----------------------------------------------------------------|------------|----------|
|                                                            |       |     |
| Report of Independent Registered Public Accounting  Firm        |       | 110      |
|                                                            |       |     |
| Consolidated Financial Statements:                              |       |     |
|                                                            |       |     |
| Consolidated  Balance Sheets                                    |       | 111      |
|                                                            |       |     |
| Consolidated  Income Statements                                 |       | 112      |
|                                                            |       |     |
| Consolidated  Statements of Cash Flows                          |       | 113      |
|                                                            |       |     |
| Consolidated Statements of Stockholders’ Equity  (Deficit) |       | 114      |
|                                                            |       |     |
| Notes to Consolidated Financial Statements                      |       | 115      |
|                                                            |       |     |
| Financial Statement Schedule:                                   |       |     |
|                                                            |       |     |
| Schedule II-  Valuation and Qualifying Accounts                 |       | 153      |

 

109

----

Table ofContents

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To theStockholders and Board of Directors of

Talecris BiotherapeuticsHoldings Corp:

 

In our opinion, the accompanying consolidated balance sheets andrelated statements of income, of cash flows, and of stockholders’ equity(deficit) present fairly, in all material respects, the financial position ofTalecris Biotherapeutics Holdings Corp. and its subsidiaries at December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2009 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in our opinion,the financial statement schedule listed in the accompanying index presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
|                            |   |
| PricewaterhouseCoopers  LLP     |   |
| Raleigh, North  Carolina        |   |
|                            |   |
| February 23,  2010         |   |

 

110

----

Table ofContents

 

**Talecris Biotherapeutics Holdings Corp.**

**ConsolidatedBalance Sheets**

(in thousands, except share and per share amounts)

 
| ** **                                                                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Assets**                                                                                                                                                     |       |                  |       |   |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Current assets:                                                                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                      |       | $                     | 65,239     |   | $ | 16,979 |   |
| Accounts receivable, net of  allowances of $3,461 and $2,020, respectively                                                                                     |       | 136,978               |       | 148,417 |   |
| Inventories                                                                                                                                                    |       | 644,054               |       | 581,720 |   |
| Deferred income taxes                                                                                                                                          |       | 88,652                |       | 76,587 |   |
| Prepaid expenses and other                                                                                                                                     |       | 31,466                |       | 43,552 |   |
| Total current assets                                                                                                                                           |       | 966,389               |       | 867,255 |   |
| Property, plant, and  equipment, net                                                                                                                           |       | 267,199               |       | 213,251 |   |
| Investment in affiliate                                                                                                                                        |       | 1,935                 |       | 1,719 |   |
| Intangible assets, net                                                                                                                                         |       | 10,880                |       | 7,204 |   |
| Goodwill                                                                                                                                                       |       | 172,860               |       | 135,800 |   |
| Deferred income taxes                                                                                                                                          |       | 5,848                 |       | 33,353 |   |
| Other                                                                                                                                                          |       | 19,894                |       | 48,817 |   |
| Total assets                                                                                                                                                   |       | $                     | 1,445,005  |   | $ | 1,307,399 |   |
| ** **                                                                                                                                                     |       |                  |       |   |   |
| **Liabilities,  Obligations Under Common Stock Put/Call Option, Redeemable Preferred Stock,  and Stockholders’ Equity (Deficit)**                         |       |                  |       |   |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Current liabilities:                                                                                                                                           |       |                  |       |   |   |
| Accounts payable                                                                                                                                               |       | $                     | 71,046     |   | $ | 54,903 |   |
| Accrued expenses and other  liabilities                                                                                                                        |       | 170,533               |       | 167,377 |   |
| Current portion of  long-term debt and capital lease obligations                                                                                               |       | 740                   |       | 7,341 |   |
| Total current liabilities                                                                                                                                      |       | 242,319               |       | 229,621 |   |
| Long-term debt and capital  lease obligations                                                                                                                  |       | 605,267               |       | 1,194,205 |   |
| Other                                                                                                                                                          |       | 15,265                |       | 60,344 |   |
| Total liabilities                                                                                                                                              |       | 862,851               |       | 1,484,170 |   |
| Commitments and  contingencies                                                                                                                                 |       |                  |       |   |   |
| Obligations under common  stock put/call option                                                                                                                |       | —                |       | 29,419 |   |
| Redeemable series A and B  preferred stock; $0.01 par value, 40,000,010 shares authorized; 0 shares and  1,192,310 shares issued and outstanding, respectively |       | —                |       | 110,535 |   |
| Stockholders’ equity  (deficit):                                                                                                                          |       |                  |       |   |   |
| Common stock, $0.01 par  value; 400,000,000 shares authorized; 122,173,274 shares and 2,856,288 shares  issued and outstanding, respectively                   |       | 1,212                 |       | — |   |
| Additional paid-in capital                                                                                                                                     |       | 767,032               |       | 47,017 |   |
| Accumulated deficit                                                                                                                                            |       | (186,446              | )          | (340,335 | ) |
| Accumulated other  comprehensive income (loss), net of tax                                                                                                     |       | 356                   |       | (23,407 | ) |
| Total stockholders’ equity  (deficit)                                                                                                                     |       | 582,154               |       | (316,725 | ) |
| Total liabilities,  obligations under common stock put/call option, redeemable preferred stock,  and stockholders’ equity (deficit)                       |       | $                     | 1,445,005  |   | $ | 1,307,399 |   |

 

The accompanyingNotes to Consolidated Financial Statements are an integral part of theseconsolidated financial statements.

 

111

----

Table ofContents

 

**Talecris Biotherapeutics Holdings Corp.**

**ConsolidatedIncome Statements**

(in thousands, except per share amounts)

 
| ** **                                                                                | ** ** | **Years  Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net  revenue:**                                                                         |       |                               |       |   |   |   |   |
| Product                                                                                   |       | $                                  | 1,507,754  |   | $ | 1,334,550 |   | $ | 1,196,686 |   |
| Other                                                                                     |       | 25,455                             |       | 39,742 |   | 21,823 |   |
| Total                                                                                     |       | 1,533,209                          |       | 1,374,292 |   | 1,218,509 |   |
| Cost of goods sold                                                                        |       | 901,077                            |       | 882,157 |   | 788,152 |   |
| **Gross  profit**                                                                         |       | 632,132                            |       | 492,135 |   | 430,357 |   |
| Operating expenses:                                                                       |       |                               |       |   |   |   |   |
| Selling, general, and  administrative                                                     |       | 289,929                            |       | 227,524 |   | 189,387 |   |
| Research and development                                                                  |       | 71,223                             |       | 66,006 |   | 61,336 |   |
| Total                                                                                     |       | 361,152                            |       | 293,530 |   | 250,723 |   |
| **Income  from operations**                                                               |       | 270,980                            |       | 198,605 |   | 179,634 |   |
| Other non-operating  (expense) income                                                     |       |                               |       |   |   |   |   |
| Interest expense, net                                                                     |       | (74,491                            | )          | (96,640 | ) | (110,236 | ) |
| Merger termination fee                                                                    |       | 75,000                             |       | — |   | — |   |
| Loss on extinguishment of  debt                                                           |       | (43,033                            | )          | — |   | — |   |
| Litigation settlement                                                                     |       | —                             |       | — |   | 12,937 |   |
| Equity in earnings of  affiliate                                                          |       | 441                                |       | 426 |   | 436 |   |
| Total                                                                                     |       | (42,083                            | )          | (96,214 | ) | (96,863 | ) |
| Income before income taxes                                                                |       | 228,897                            |       | 102,391 |   | 82,771 |   |
| (Provision) benefit for  income taxes                                                     |       | (75,008                            | )          | (36,594 | ) | 40,794 |   |
| **Net income**                                                                            |       | 153,889                            |       | 65,797 |   | 123,565 |   |
| Less dividends to preferred  stockholders and other non-common stockholders’ charges |       | (11,744                            | )          | (14,672 | ) | (13,014 | ) |
| **Net income  available to common stockholders**                                          |       | $                                  | 142,145    |   | $ | 51,125 |   | $ | 110,551 |   |
|                                                                                      |       |                               |       |   |   |   |   |
| **Net income  per common share**                                                          |       |                               |       |   |   |   |   |
| Basic                                                                                     |       | $                                  | 4.56       |   | $ | 39.01 |   | $ | 65.58 |   |
|                                                                                      |       |                               |       |   |   |   |   |
| Diluted                                                                                   |       | $                                  | 1.50       |   | $ | 0.71 |   | $ | 1.36 |   |

 

The accompanyingNotes to Consolidated Financial Statements are an integral part of theseconsolidated financial statements.

 

112

----

Table ofContents

 

**Talecris Biotherapeutics Holdings Corp.**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Cash flows  from operating activities:**                                         |       |                              |       |   |   |   |   |
| Net income                                                                         |       | $                                 | 153,889    |   | $ | 65,797 |   | $ | 123,565 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 28,936                            |       | 20,269 |   | 10,749 |   |
| Amortization of deferred  loan fees and debt discount                              |       | 3,785                             |       | 3,764 |   | 3,767 |   |
| Share-based compensation  expense                                                  |       | 47,546                            |       | 38,707 |   | 21,241 |   |
| Amortization of deferred  compensation                                             |       | 5,714                             |       | 5,922 |   | 6,753 |   |
| Write-off of unamortized  debt issuance costs                                      |       | 12,141                            |       | — |   | — |   |
| Asset impairment                                                                   |       | 3,061                             |       | 4,282 |   | 2,789 |   |
| Provision for doubtful  receivables and advances                                   |       | 2,858                             |       | 4,978 |   | 525 |   |
| Recognition of previously  deferred revenue                                        |       | (230                              | )          | (4,784 | ) | — |   |
| Equity in earnings of  affiliate                                                   |       | (441                              | )          | (426 | ) | (436 | ) |
| Loss (gain) on disposal of  property, plant, and equipment                         |       | 1,196                             |       | 48 |   | (94 | ) |
| Decrease (increase) in  deferred tax assets                                        |       | 1,215                             |       | (5,488 | ) | (79,707 | ) |
| Excess tax benefits from  share-based payment arrangements                         |       | (13,406                           | )          | — |   | — |   |
| Changes in assets and  liabilities, excluding the effects of business acquisitions |       | (12,109                           | )          | (100,055 | ) | 37,979 |   |
| Net cash provided by  operating activities                                         |       | 234,155                           |       | 33,014 |   | 127,131 |   |
|                                                                               |       |                              |       |   |   |   |   |
| **Cash flows  from investing activities:**                                         |       |                              |       |   |   |   |   |
| Purchase of property,  plant, and equipment                                        |       | (75,163                           | )          | (86,212 | ) | (65,833 | ) |
| Business acquisitions, net  of cash acquired                                       |       | (30,431                           | )          | (10,272 | ) | (17,456 | ) |
| Financing arrangements with  third party suppliers, net of repayments              |       | 744                               |       | (16,335 | ) | (7,866 | ) |
| Net proceeds from disposals  of property, plant, and equipment                     |       | 7                                 |       | 880 |   | 322 |   |
| Dividends from affiliate                                                           |       | 225                               |       | — |   | 188 |   |
| Net cash used in investing  activities                                             |       | (104,618                          | )          | (111,939 | ) | (90,645 | ) |
|                                                                               |       |                              |       |   |   |   |   |
| **Cash flows  from financing activities:**                                         |       |                              |       |   |   |   |   |
| Borrowings under Revolving  Credit Facility                                        |       | 1,201,749                         |       | 1,430,092 |   | 1,237,453 |   |
| Repayment of borrowings  under Revolving Credit Facility                           |       | (1,381,690                        | )          | (1,363,188 | ) | (1,204,336 | ) |
| Repayment of borrowings  under term loans                                          |       | (1,016,000                        | )          | (7,000 | ) | (7,000 | ) |
| Repayment of capital lease  obligations                                            |       | (574                              | )          | (1,192 | ) | (23 | ) |
| Proceeds from issuance of  7.75% Notes                                             |       | 600,000                           |       | — |   | — |   |
| Discount on 7.75% Notes                                                            |       | (4,074                            | )          | — |   | — |   |
| Financing transaction costs                                                        |       | (14,879                           | )          | — |   | (217 | ) |
| Proceeds from initial  public offering, net of issuance costs                      |       | 519,749                           |       | — |   | — |   |
| Costs related to initial  public offering                                          |       | (2,557                            | )          | — |   | — |   |
| Repurchases of common stock                                                        |       | (4,183                            | )          | (36,118 | ) | — |   |
| Proceeds from exercises of  stock options                                          |       | 7,581                             |       | — |   | — |   |
| Excess tax benefits from  share-based payment arrangements                         |       | 13,406                            |       | — |   | — |   |
| Net cash (used in) provided  by financing activities                               |       | (81,472                           | )          | 22,594 |   | 25,877 |   |
| Effect of exchange rate  changes on cash and cash equivalents                      |       | 195                               |       | (157 | ) | 62 |   |
| **Net  increase (decrease) in cash and cash equivalents**                          |       | 48,260                            |       | (56,488 | ) | 62,425 |   |
| **Cash and  cash equivalents at beginning of year**                                |       | 16,979                            |       | 73,467 |   | 11,042 |   |
| **Cash and  cash equivalents at end of year**                                      |       | $                                 | 65,239     |   | $ | 16,979 |   | $ | 73,467 |   |

 

The accompanyingNotes to Consolidated Financial Statements are an integral part of theseconsolidated financial statements.

 

113

----

Table ofContents

 

**Talecris Biotherapeutics Holdings Corp.**

**ConsolidatedStatements of Stockholders’ Equity (Deficit)**

(in thousands, except share amounts)

 
| ** **                                                                                                   | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**    | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|-----------------|------------|-------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                                   | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **      | ** ** | ** **        | ** ** | **Other**          | ** ** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Treasury**   | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **         | ** ** |
| ** **                                                                                                   | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Stock**       | ** ** | **Deficit**       | ** ** | **(Loss)  Income** | ** ** | **Total**  | ** ** |
| Balance at December 31, 2006                                                                            |       | 2,426,792         |       | $           | —     |           | $          | —          |       | $                 | —     |               | $          | (529,000   | )          | $ | 20 |   | $ | (528,980 | ) |
| Net income                                                                                                   |       | —            |       | —      |       | —         |       | —          |       | 123,565           |       | —             |       | 123,565    |       |
| Other comprehensive loss                                                                                     |       | —            |       | —      |       | —         |       | —          |       | —            |       | (11,655            | )          | (11,655    | )          |
| Comprehensive income                                                                                         |       | —            |       | —      |       | —         |       | —          |       | —            |       | —             |       | 111,910    |       |
| Share-based compensation cost                                                                                |       | —            |       | —      |       | 14,464         |       | —          |       | —            |       | —             |       | 14,464     |       |
| Issuance of common stock to IBR                                                                              |       | 2,146,232         |       | —      |       | —         |       | —          |       | —            |       | —             |       | —     |       |
| Issuance of restricted stock                                                                                 |       | 762,400           |       | —      |       | —         |       | —          |       | —            |       | —             |       | —     |       |
| Forfeitures of restricted stock                                                                              |       | (18,192           | )          | —      |       | —         |       | —          |       | —            |       | —             |       | —     |       |
| Adoption of new income tax accounting guidance                                                               |       | —            |       | —      |       | —         |       | —          |       | (697              | )          | —             |       | (697       | )          |
| Fair value of common stock issued to IBR in excess of  put value                                             |       | —            |       | —      |       | 12,106         |       | —          |       | —            |       | —             |       | 12,106     |       |
| Interest accretion on IBR put option                                                                         |       | —            |       | —      |       | (1,614         | )          | —          |       | —            |       | —             |       | (1,614     | )          |
| Fair value adjustment on common stock with put/call  feature                                                 |       | —            |       | —      |       | 2,054          |       | —          |       | —            |       | —             |       | 2,054      |       |
| Balance at December 31, 2007                                                                            |       | 5,317,232         |       | —      |       | 27,010         |       | —          |       | (406,132          | )          | (11,635            | )          | (390,757   | )          |
| Net income                                                                                                   |       | —            |       | —      |       | —         |       | —          |       | 65,797            |       | —             |       | 65,797     |       |
| Other comprehensive loss                                                                                     |       | —            |       | —      |       | —         |       | —          |       | —            |       | (11,772            | )          | (11,772    | )          |
| Comprehensive income                                                                                         |       | —            |       | —      |       | —         |       | —          |       | —            |       | —             |       | 54,025     |       |
| Share-based compensation cost                                                                                |       | —            |       | —      |       | 29,258         |       | —          |       | —            |       | —             |       | 29,258     |       |
| Issuance of restricted stock                                                                                 |       | 42,720            |       | —      |       | —         |       | —          |       | —            |       | —             |       | —     |       |
| Forfeitures of restricted stock                                                                              |       | (287,784          | )          | —      |       | —         |       | —          |       | —            |       | —             |       | —     |       |
| Repurchases of common stock                                                                                  |       | (2,215,880        | )          | 3           |       | 36,115         |       | (36,118         | )          | —            |       | —             |       | —     |       |
| Retirement of common stock                                                                                   |       | —            |       | (3          | )          | (36,115        | )          | 36,118          |       | —            |       | —             |       | —     |       |
| Fair value adjustment on common stock with put/call  feature                                                 |       | —            |       | —      |       | (8,942         | )          | —          |       | —            |       | —             |       | (8,942     | )          |
| Interest accretion on IBR put option                                                                         |       | —            |       | —      |       | (309           | )          | —          |       | —            |       | —             |       | (309       | )          |
| Balance at December 31, 2008                                                                            |       | 2,856,288         |       | —      |       | 47,017         |       | —          |       | (340,335          | )          | (23,407            | )          | (316,725   | )          |
| Net income                                                                                                   |       | —            |       | —      |       | —         |       | —          |       | 153,889           |       | —             |       | 153,889    |       |
| Other comprehensive income                                                                                   |       | —            |       | —      |       | —         |       | —          |       | —            |       | 476                |       | 476        |       |
| Reclassification of unrealized loss on derivatives to  earnings                                              |       | —            |       | —      |       | —         |       | —          |       | —            |       | 23,287             |       | 23,287     |       |
| Comprehensive income                                                                                         |       | —            |       | —      |       | —         |       | —          |       | —            |       | —             |       | 177,652    |       |
| Share-based compensation cost                                                                                |       | —            |       | —      |       | 39,206         |       | —          |       | —            |       | —             |       | 39,206     |       |
| Issuance of restricted stock                                                                                 |       | 14,464            |       | —      |       | —         |       | —          |       | —            |       | —             |       | —     |       |
| Forfeitures of restricted stock                                                                              |       | (16,368           | )          | —      |       | —         |       | —          |       | —            |       | —             |       | —     |       |
| Repurchases of common stock                                                                                  |       | (251,108          | )          | —      |       | 4,132          |       | (4,183          | )          | —            |       | —             |       | (51        | )          |
| Retirement of common stock                                                                                   |       | —            |       | —      |       | (4,183         | )          | 4,183           |       | —            |       | —             |       | —     |       |
| Series A and B preferred stock dividends  declared                                                      |       | —            |       | —      |       | (45,250        | )          | —          |       | —            |       | —             |       | (45,250    | )          |
| Conversion of Series A and B preferred stock to  common stock                                           |       | 88,227,868        |       | 882         |       | 154,903        |       | —          |       | —            |       | —             |       | 155,785    |       |
| Initial public offering                                                                                      |       | 28,947,368        |       | 289         |       | 519,460        |       | —          |       | —            |       | —             |       | 519,749    |       |
| Costs related to initial public offering                                                                     |       | —            |       | —      |       | (2,557         | )          | —          |       | —            |       | —             |       | (2,557     | )          |
| Fair value adjustment on common stock with put/call  feature                                                 |       | —            |       | —      |       | (6,585         | )          | —          |       | —            |       | —             |       | (6,585     | )          |
| Reclassificaiton of mezzanine equity to permanent  equity upon cancellation of common stock put/call feature |       | —            |       | 17          |       | 39,926         |       | —          |       | —            |       | —             |       | 39,943     |       |
| Stock option exercises                                                                                       |       | 2,394,762         |       | 24          |       | 7,557          |       | —          |       | —            |       | —             |       | 7,581      |       |
| Excess tax benefit from share-based compensation                                                             |       | —            |       | —      |       | 13,406         |       | —          |       | —            |       | —             |       | 13,406     |       |
| Balance at December 31, 2009                                                                            |       | 122,173,274       |       | $           | 1,212      |           | $          | 767,032         |       | $                 | —     |               | $          | (186,446   | )          | $ | 356 |   | $ | 582,154 |   |

 

The accompanying Notes to Consolidated FinancialStatements are an integral part of these consolidated financial statements.

 

114

----

Table of Contents

 

**Talecris Biotherapeutics HoldingsCorp.**

**Notes to Consolidated FinancialStatements**

 

**1.****             ****Descriptionof Business**

 

We are abiopharmaceutical company that researches, develops, manufactures, markets, andsells protein-based therapies that extend and enhance the lives of individualswho suffer from chronic and acute, often life-threatening, conditions, such asprimary immune deficiencies, chronic inflammatory demyelinating polyneuropathy(CIDP), alpha-1 antitrypsin deficiency, bleeding disorders, infectiousdiseases, and severe trauma.  Our primaryproducts have orphan drug designation to serve populations with rare, chronicdiseases. Our products are derived from human plasma, the liquid component ofblood, which is sourced from our plasma collection centers or purchased fromthird parties, located in the United States. Plasma contains many therapeuticproteins, which we extract through the process of fractionation at our Clayton,North Carolina and/or Melville, New York facilities. The fractionatedintermediates are then purified, formulated into a final bulk, and asepticallyfilled into final containers for distribution. We also sell the fractionated intermediate materials.

 

The majority of our salesare concentrated in two key therapeutic areas of the plasma business:Immunology/Neurology, through our intravenous immune globulin (IGIV) productfor the treatment of primary immune deficiency and autoimmune diseases, as wellas CIDP, and Pulmonology, through our alpha-1 proteinase inhibitor (A1PI)product for the treatment of alpha-1 antitrypsin deficiency-relatedemphysema.  These therapeutic areas areserved by our products, Gamunex IGIV (Gamunex), Prolastin A1PI (Prolastin) andour recently approved next generation A1PI product, Prolastin-C,respectively.  Sales of Gamunex andProlastin together comprised 74.7%, 72.3%, and 75.8% of our net revenue for theyears ended December 31, 2009, 2008, and 2007, respectively.  We also have a line of hyperimmune therapiesthat provides treatment for tetanus, rabies, hepatitis B, hepatitis A, and Rhfactor control during pregnancy and at birth. In addition, we provide plasma-derived therapies for criticalcare/hemostasis, including the treatment of hemophilia, an anti-coagulationfactor (Thrombate III), as well as albumin to expand blood volume.  Although we sell our products worldwide, themajority of our sales are concentrated in the United States and Canada.

 

We are headquartered inResearch Triangle Park, North Carolina and our primary manufacturing facilitiesare a short distance away in Clayton, North Carolina.  Our Clayton site is one of the world’slargest plasma protein processing facilities whose operations include fractionation,purification, filling, and finishing.  Wehave an integrated plasma collection center platform, which as of December 31,2009, consisted of 69 operating centers, of which 64 were licensed and 5 wereunlicensed.  In addition to the UnitedStates, we have operations in Germany and Canada to support our internationalsales and marketing activities.

 

On October 6, 2009, wecompleted our initial public offering (IPO), which resulted in net primaryproceeds to us of $519.7 million.  Inaddition, during October 2009, we amended our Revolving Credit Facility andcompleted the issuance of $600.0 million, 7.75% Unsecured Senior Notes, due November15, 2016 (7.75% Notes), at a price of 99.321% of par, in a private placement tocertain qualified institutional buyers. The issuance of the 7.75% Notes resulted in net proceeds to us of $583.9million.  Additional informationregarding our IPO and refinancing transactions are included in Note 3, “InitialPublic Offering and Use of Proceeds” and Note 11, “Long-Term Debt and CapitalLease Obligations,” respectively.

 

As of December 31, 2009,Talecris Holdings, LLC held approximately 50.1% of our outstanding commonstock.  Talecris Holdings, LLC is ownedby (i) Cerberus-Plasma Holdings LLC, the managing member of which is CerberusPartners, L.P., and (ii) limited partnerships affiliated with AmpersandVentures.  Substantially all rights ofmanagement and control of Talecris Holdings, LLC are held by Cerberus-PlasmaHoldings LLC.  Subsequent to December 31,2009, the ownership of our outstanding common stock by Talecris Holdings, LLCwas diluted below 50%.

 

**2.****             ****Summaryof Significant Accounting Policies**

 

Throughout ourconsolidated financial statements, references to “Talecris BiotherapeuticsHoldings Corp.,” “Talecris,” “the Company,” “we,” “us,” and “our” arereferences to Talecris Biotherapeutics Holdings Corp. and its wholly-ownedsubsidiaries.

 

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

 

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

 

115

----

Tableof Contents

 

***Principles of Consolidation***

 

The accompanyingconsolidated financial statements include the accounts of TalecrisBiotherapeutics Holdings Corp. and its wholly-owned subsidiaries.  All significant intercompany transactions andbalances have been eliminated upon consolidation.

 

***Use of Estimates***

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples (U.S. GAAP) requires us to make estimates and judgments in certaincircumstances that affect the reported amounts of assets, liabilities, revenuesand expenses, and the related disclosures of contingent assets and liabilities.The most significant judgments we have made include, but are not limited to,estimates used in determining values of inventories, allowances for doubtfulaccounts and notes receivable, long-lived and indefinite-lived assets,litigation accruals and related settlements, losses under contractualobligations, leasehold impairments, deferred income taxes, income taxprovisions, accruals for uncertain income tax positions, self-insuranceaccruals, share-based payment transactions, derivative instruments, and otheroperating allowances and accruals. We also use significant judgments inapplying purchase accounting to business acquisitions.

 

We periodically evaluateestimates used in the preparation of the financial statements forreasonableness, including estimates provided by third parties. Appropriateadjustments to the estimates are made prospectively, as necessary, based onsuch periodic evaluations. We base our estimates on, among other things,currently available information, market conditions, and industry and historicalexperience, which collectively form the basis of making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Although we believe that our assumptions are reasonable underthe circumstances, actual future results could differ materially. In addition,if we had used different estimates and assumptions, our financial position andresults of operations could have differed materially from that which ispresented.

 

***Cash and Cash Equivalents***

 

All highly liquid investmentswith original maturities of three months or less when purchased are consideredcash equivalents and are carried at cost due to the short period of time tomaturity.

 

***Accounts Receivable, net***

 

Accounts receivable, net,consists of amounts owed to us by our customers on credit sales with termsgenerally ranging from 30 to 120 days from date of invoice and are presentednet of an allowance for doubtful accounts receivable on our consolidatedbalance sheets.

 

We maintain an allowancefor doubtful accounts receivable for estimated losses resulting from ourinability to collect from customers. In extending credit, we assess ourcustomers’ creditworthiness by, among other factors, evaluating our customers’financial condition, credit history, and the amount involved, both initiallyand on an ongoing basis. Collateral is generally not required. In evaluatingthe adequacy of our allowance for doubtful accounts receivable, we primarilyanalyze accounts receivable balances, the percentage of accounts receivable by agingcategory, and historical bad debts. We also consider, among other things,customer concentrations and changes in customer payment terms or paymentpatterns.

 

If the financialconditions of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments or our ability to collect, an increase to theallowance may be required. Also, should actual collections of accountsreceivable be different than our estimates included in determining theallowance, the allowance would be adjusted through charges or credits toselling, general, and administrative expenses (SG&A) in our consolidatedincome statements in the period in which such changes in collection becomeknown.  If conditions were to change infuture periods, additional allowances or reversals may be required. Suchallowances or reversals could be significant.

 

***Concentrations of Credit Risk***

 

Our accounts receivable,net, includes amounts due from pharmaceutical wholesalers and distributors,buying groups, hospitals, physicians’ offices, patients, and others.  The following table summarizes ourconcentrations with customers that represented more than 10% of our accountsreceivable, net:

 
| ** ** | ** ** | **December  31,** | ** ** |
|------------|------------|-------------------|------------|
| ** ** | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Customer A |       | 14.6              | %          | 15.0 | % |
| Customer B |       | <10            | %          | 14.0 | % |

 

116

----

Table of Contents

 

The following tablesummarizes our concentrations with customers that represented more than 10% ofour total net revenue:

 
| ** ** | ** ** | **Years  Ended December 31,** | ** ** |
|------------|------------|-------------------------------|------------|
| ** ** | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Customer A |       | 14.4                          | %          | 12.8 | % | 18.2 | % |
| Customer B |       | 12.3                          | %          | 12.0 | % | 14.9 | % |
| Customer C |       | <10                        | %          | 10.6 | % | 10.5 | % |

 

***Inventories***

 

Inventories consist of raw materials, work-in-process, and finishedgoods held for sale and are stated at the lower of cost or market, whichapproximates actual costs determined on the first-in, first-out method. Inevaluating whether inventory is stated at the lower of cost or market, weconsider such factors as the amount of inventory on hand and in thedistribution channel, the estimated time required to sell such inventory,remaining shelf life, and current and expected market conditions, includinglevels of competition. As appropriate, provisions are recorded to reduceinventories to their net realizable value. We record provisions for work-in-process inventory when we believe theinventory does not meet all criteria to permit release to the market.  Provisions are recorded for finished goodsthat do not have sufficient remaining shelf lives.  We record recoveries directly to cost ofgoods sold after the impacted material is determined to be usable and is soldto third parties.

 

***Pre-ApprovalPlasma Inventories***

 

We capitalize the cost of unlicensed plasma into raw material inventories,when, based on our judgment, future economic benefit is probable.  While unlicensed plasma cannot be sold tothird parties or used in our manufacturing processes to make finished productuntil all regulatory approvals have been obtained, we have determined that itis probable that our unlicensed plasma inventories are realizable.  As part of the U.S. Food and DrugAdministration (FDA) licensing process for plasma collection centers, we areinitially permitted to collect plasma utilizing the procedures and qualitysystems implemented and approved under our existing Biologics LicenseApplication (BLA) until such time as the FDA inspectors have conducted apre-license inspection of the site and approved the site for inclusion in theBLA.  At the conclusion of this process,we are permitted to sell or utilize previously collected plasma inmanufacturing of final product.  Webelieve that our cumulative knowledge of the industry, standard industrypractices, experience working with the FDA, established quality systems, andconsistency in achieving licensure support our capitalization of unlicensedplasma inventory.

 

Our accounting for unlicensed plasma requires us to make judgmentsregarding the ultimate net realizable value of the inventory.  This assessment is based upon an analysis ofvarious factors, including the remaining shelf life of the inventory, currentand expected market conditions, amount of inventory on hand, and our ability toobtain the requisite regulatory approvals. As a result of periodic assessments, we could be required to expensepreviously capitalized inventory through cost of goods sold upon an unfavorablechange in such judgments.

 

***Property, Plant, and Equipment, net***

 

Property, plant, andequipment are recorded at cost, less accumulated depreciation and amortization.Internal engineering costs directly related to asset additions are capitalized.Major renewals and betterments are capitalized. All feasibility studies andmaintenance and repair costs are expensed as incurred. Certain interest costsincurred by us during the construction period, based on our weighted averageborrowing rates of debt, are capitalized and included in the cost of therelated asset.

 

We generally depreciateand amortize property, plant, and equipment using the straight-line method overthe useful lives presented in the following table:

 
| **Asset Type**                 | ** ** | **Useful Life (Years)**                                                             | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| Buildings                      |       | 10 to 45                                                                            |       |
| Building improvements          |       | 10 to 20                                                                            |       |
| Machinery and equipment        |       | 3 to 20                                                                             |       |
| Furniture and fixtures         |       | 5 to 10                                                                             |       |
| Computer hardware and software |       | 3 to 7                                                                              |       |
| Leasehold improvements         |       | the estimated useful life of the improvement or, if shorter, the life  of the lease |       |

 

We lease various property and equipment.  Leased property and equipment that meetcertain criterion are capitalized and the present values of the related leasepayments are recorded as liabilities. Capital lease payments are allocated between a reduction of the 

 

117

----

Table of Contents

 

lease obligation and interest expense using the interest rate implicitin the lease.  All other leases areaccounted for as operating leases and the related payments are expensed ratablyover the rental period.  Amortization ofassets under capital leases is computed using the straight-line method over theshorter of the remaining lease term or the estimated useful life.

 

***Business Acquisitions***

 

Results of business acquisitions are included in ourresults of operations as of the respective acquisition dates.  The purchase price of each acquisition isallocated to the net assets acquired based on estimates of their fair values atthe date of the acquisition.  Anypurchase price in excess of the fair value of these net assets is recorded asgoodwill.   The accounting for businessacquisitions requires us to make estimates and assumptions related to theestimated fair values of the net assets acquired.  Significant judgments are used during thisprocess, particularly with respect to intangible assets.  Generally, definite-lived intangible assetsare amortized over their estimated useful lives.  Goodwill and other indefinite-livedintangible assets are not amortized, but are annually assessed forimpairment.  Therefore, the purchase priceallocation to intangible assets and goodwill could have a significant impact onfuture operating results.

 

***Identifiable Intangible Assets***

 

Identifiable intangible assets are recorded at cost,or when acquired as part of a business acquisition, at estimated fairvalue.  Definite-lived intangible assetsare amortized over their useful lives. Indefinite-lived intangible assets, such as regulatory licenses, are notamortized, but are annually assessed for impairment.

 

***Impairment Reviews***

 

We evaluate the recoverability of recorded goodwilland other indefinite-lived intangible asset amounts annually as of December 31or when events or changes in circumstances indicate that evidence of potentialimpairment exists, using a fair value based test.  This test requires us to make estimates offactors that include, but are not limited to, projected future operatingresults and business plans, economic projections, anticipated future cashflows, comparable marketplace data from a consistent industry group, and the costof capital.  Any applicable impairmentloss is the amount, if any, by which the implied fair value is less than thecarrying value.

 

We review the carrying amounts of other long-livedassets for potential impairment whenever events or changes in circumstancesindicate that the carrying amount of the asset may not be recoverable.  We periodically evaluate whether events orchanges in circumstances have occurred that may warrant revision of theestimated useful lives of our long-lived assets or whether the remainingcarrying amount of long-lived assets should be evaluated for possibleimpairment.  An example of such a changein circumstances includes a significant adverse change in the extent or mannerin which an asset is being used.

 

***Notes Receivable, net***

 

Notes receivable, net, consists of amounts owed to usby certain plasma suppliers, including accrued interest.  We evaluate our notes receivable forcollectibility when events or changes in circumstances indicate that theamounts owed to us may not be collectible. We record an impairment charge, based on current information and events,when it is probable that we will be unable to collect principal and interestamounts owed to us under the contractual terms of the loan agreement.  Once a note receivable is determined to beimpaired, we discontinue interest accruals. Measuring impairment of a loan requires the use of management’sjudgments and estimates, and the eventual outcomes may differ from thoseestimates.  If conditions were to changein future periods, additional allowances or reversals may be required.  Such allowances or reversals could besignificant.  At December 31, 2009 and2008, our notes receivable, net, amounted to $1.7 million and $21.7 million,respectively, and were included in other long-term assets on our consolidatedbalance sheets.

 

***Debt Issuance Costs and Debt Discount***

 

We capitalize costs associated with the issuance ofour debt and amortize these costs to interest expense, net, over the term ofthe related debt agreement using an effective yield amortization method, orsimilar method.  Unamortized debtissuance costs are written off within total other non-operating expense, net,in our consolidated income statements when indebtedness under the relatedcredit facility is repaid or restructured prior to maturity.

 

We record debt discounts as a reduction of the faceamount of the related debt.  Debtdiscounts are amortized to interest expense, net, over the term of the relateddebt agreement using an effective yield amortization method, or similar method.

 

118

----

Table of Contents

 

***Financial Instruments with Characteristics of Debt and Equity***

 

Accounting standards requirethat we classify a financial instrument as a liability when that financialinstrument embodies an obligation on our part. A freestanding financial instrument that, at inception, embodies anobligation to repurchase our equity shares, or is indexed to such anobligation, and requires or may require us to settle the obligation bytransferring assets, is classified as a liability.

 

Our Redeemable Series Aand B Senior Convertible Preferred Stock (Series A and B preferred stock) haddeemed liquidation requirements which could have potentially resulted in cashpayments to the holders thereof which were beyond our control.  During 2009, the Series A and B preferredstock and related unpaid dividends were converted into common stock at theelection of the holder in connection with our IPO.  The unrestricted and restricted common stockthat we issued to employees and members of our board of directors containedvarious embedded put/call features that could have potentially resulted in cashpayments to the holders thereof, which were beyond our control.  As such, at December 31, 2008, we classifiedour obligations under these financial instruments outside of permanent equityon our consolidated balance sheet within obligations under common stockput/call option or redeemable preferred stock. Both our redemption rights and the participants’ put rights related tothe common stock were terminated in connection with the closing of ourIPO.  As a result, we reclassified thefair value of vested common stock to permanent equity in the fourth quarter of2009.

 

***Revenue Recognition and Gross-to-Net Revenue Adjustments***

 

We recognize revenue whenearned, which is generally at the time of delivery to the customer.  Recognition of revenue also requiresreasonable assurance of collection of sales proceeds, a fixed and determinableprice, persuasive evidence that an arrangement exists, and completion of allother performance obligations.  Therecognition of revenue is deferred if there are significant post-deliveryobligations, such as customer acceptance.

 

Allowances againstrevenue for estimated discounts, rebates, administrative fees, chargebacks, andshelf-stock adjustments are established by us concurrently with the recognitionof revenue.  The standard terms and conditionsunder which products are shipped to our customers generally do not allow aright of return.  In the rare instancesin which we grant a right of return, revenue is reduced at the time of sale toreflect expected returns and deferred until all conditions of revenuerecognition are met.

 

We have supply agreements with our majordistributors, which require them to purchase minimum quantities of ourproducts.  We regularly review the supplylevels of our products on hand at major distributors, primarily by analyzinginventory reports supplied by these distributors, available data regarding thesell-through of our products, our internal data, and other availableinformation.  When we believe distributorinventory levels have increased relative to underlying demand, we evaluate theneed for sales return allowances. Factors that influence the allowance include historical sales returnactivity, levels of inventory in the distribution network, inventory turnover,demand history, demand projections, estimated product shelf-life, pricing, andcompetition.  Sales returns have not beenmaterial during the periods presented.

 

We have agreed toreimburse certain of our international distributors for their selling, general,and administrative expenses (SG&A) under the terms of our distributionagreements.  We have reflected thesecharges as a reduction of net revenue.

 

Revenue from milestonepayments for which we have no continuing performance obligations is recognizedupon achievement of the related milestone. When we have continuing performance obligations, the milestone paymentsare deferred and recognized as revenue over the term of the arrangement as wecomplete our performance obligations.

 

We evaluate revenue fromagreements that have multiple elements to determine whether the components ofthe arrangement represent separate units of accounting.  In transactions that contain multipleelements, we recognize revenue as each product is delivered or service isprovided to the customer.  We allocatethe total arrangement consideration to each element based on its relative fairvalue, based on the price for the product or service when it is soldseparately.

 

Gross product sales aresubject to a variety of deductions that are generally estimated and recorded inthe same period that the revenue is recognized, and primarily represent rebatesto government agencies, chargebacks to wholesalers and distributors, andcustomer prompt payment discounts.  Thesegross-to-net revenue adjustments are described below.

 

We offer rebates to certain classes of trade, whichwe account for by establishing an accrual at the time the sale is recorded inan amount equal to our estimate of rebates attributable to each sale.  We determine our estimate of the rebates primarilybased on historical experience and current contract arrangements.  We consider the sales performance of productssubject to rebates and the levels of inventory in the distribution channel andadjust the accrual periodically to reflect actual experience.  For the portion of these rebates that issettled as part of the product sale, there is no lag in the recognition of therebate.  The portion which is accruedupon sale is settled upon resale by our distributors.  Due to the limited classes of trade thatparticipate in rebate programs and our visibility of inventories in thechannel, adjustments for actual experience have not been material.

 

119

----

Tableof Contents

 

We participate in stategovernment-managed Medicaid programs. We account for Medicaid rebates byestablishing an accrual at the time the sale is recorded in an amount equal toour estimate of the Medicaid rebate claims attributable to such sale. Wedetermine our estimate of the Medicaid rebates accrual primarily based onhistorical experience regarding Medicaid rebates, legal interpretations of theapplicable laws related to the Medicaid program and any new informationregarding changes in the Medicaid programs’ regulations and guidelines thatwould impact the amount of the rebates. We consider outstanding Medicaidclaims, Medicaid payments, and levels of inventory in the distribution channeland adjust the accrual periodically to reflect actual experience.  Adjustments for actual experience have notbeen material.

 

Sales allowances areestablished based upon consideration of a variety of factors, including, butnot limited to, our sales terms which generally provide for up to a 2% promptpay discount on domestic and international sales, contractual agreements withcustomers, estimates of the amount of product in the pipeline, and prescribingpatterns.  We believe that our salesallowance accruals are reasonably determinable and are based on the informationavailable at the time to arrive at our best estimate of the accruals.  Actual sales allowances incurred aredependent upon future events.  Weperiodically monitor the factors that influence sales allowances and makeadjustments to these provisions when we believe that the actual salesallowances may differ from prior estimates. If conditions in future periods change, revisions to previous estimatesmay be required, potentially in significant amounts.

 

Our estimates fordiscounts, customer and government rebates, and administrative fees are bytheir nature more predictable and less subjective.  Estimates for chargebacks are more subjectiveand, consequently, may be more variable. We enter into agreements with certain customers to establish contractpricing for our products, which these entities purchase from the wholesaler ordistributor (collectively, wholesalers) of their choice.  Consequently, when our products are purchasedfrom wholesalers by these entities at the contract price which is less than theprice charged by us to the wholesaler, we provide the wholesaler with a creditreferred to as a chargeback.  Theallowance for chargebacks is based on our estimate of the wholesaler inventorylevels, and the expected sell-through of our products by the wholesalers at thecontract price based on historical chargeback experience and otherfactors.  Our estimates of inventorylevels at the wholesalers are subject to inherent limitations, as our estimatesrely on third party data, and their data may itself rely on estimates, and besubject to other limitations.  Weperiodically monitor the factors that influence our provision for chargebacks,and make adjustments when we believe that actual chargebacks may differ fromestablished allowances.  Theseadjustments occur in a relatively short period of time.

 

Shelf-stock adjustmentsare credits issued to our customers to reflect decreases in the selling pricesof our products.  These types of creditsare customary in our industry and are intended to reduce a customer’s inventorycost to better reflect current market prices. Shelf-stock adjustments are based upon the amount of product that ourcustomers have remaining in their inventories at the time of the pricereduction.  Decreases in our sellingprices are discretionary decisions made by us to reflect marketconditions.  Amounts recorded forestimated price adjustments are based upon specified terms with customers,estimated declines in market prices, and estimates of inventory held bycustomers.  Our estimates of inventorylevels at the customer are subject to inherent limitations, as our estimatesmay rely on third party data, and their data may itself rely on estimates, andbe subject to other limitations.  Weregularly monitor these factors and evaluate our reserves for shelf-stockadjustments.  We have not experiencedsignificant shelf-stock adjustments during the periods presented.

 

***Shipping and Handling***

 

Shipping and handlingcosts incurred for inventory purchases are included in cost of goods sold inour consolidated income statements. Shipping and handling costs incurred to warehouse, pick, pack, andprepare inventory for delivery to customers are included in SG&A in ourconsolidated income statements.  Shippingand handling costs included in SG&A amounted to $3.6 million, $3.5 million,and $3.4 million for the years ended December 31, 2009, 2008, and 2007,respectively.

 

***Advertising Costs***

 

The costs of advertisingare expensed as incurred within SG&A in our consolidated incomestatements.  Our advertising costs consistprimarily of product samples, print media, online advertising, and promotionalmaterial.  We incurred advertising coststotaling $10.2 million, $10.5 million, and $9.3 million for the years ended December31, 2009, 2008, and 2007, respectively.

 

***Research and Development Expenses***

 

Research and development(R&D) expenses include the costs directly attributable to the conduct ofresearch and development programs for new products and extensions orimprovements of existing products and the related manufacturing processes.  Such costs include salaries and relatedemployee benefit costs, payroll taxes, materials (including the materialrequired for clinical trials), supplies, depreciation on and maintenance ofR&D equipment, services provided by outside contractors for clinicaldevelopment and clinical trials, regulatory services, and fees.  R&D also includes the allocable portionof facility costs such as rent, depreciation, utilities, insurance, and generalsupport services.  All costs associatedwith R&D are expensed as incurred.

 

120

----

Tableof Contents

 

***Share-Based Compensation***

 

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

 

The fair value of our common stock on the grantdate is a significant factor in determining the fair value of share-basedcompensation awards and the ultimate non-cash compensation cost that we will berequired to record over the vesting period. Given the absence of a trading market for our common stock on grantdates prior to October 1, 2009, our board of directors, or special dividendcommittee or compensation committee designated by our board of directors,estimated the fair value of our common stock contemporaneously with each grantusing numerous objective and subjective factors.  These factors included: (i) our stage ofdevelopment, our efforts to become independent from Bayer, and revenue growth; (ii)the timing of the anticipated launch of new products and new indications; (iii)business conditions and business challenges at the time; (iv) available marketdata, including observable market transactions, and valuations for comparablecompanies; (v) the illiquid nature of our stock options and stock grants; and (vi)the likelihood of achieving a liquidity event for the shares of common stockunderlying the options, such as an initial public offering or sale of ourcompany, given prevailing market conditions at the grant date. In making theassessment of common stock fair value on each award date, our board ofdirectors or designated committee of our board of directors considered theguidance in American Institute of Certified Public Accountants TechnicalPractice Aid, “Valuation of Privately-Held Company Equity Securities Issued asCompensation.”  The valuations werecompleted utilizing the market and/or an income approach and then theenterprise value was allocated using the “Probability-Weighted Expected ReturnMethod,” which provides different probability weights of various likelyscenarios (distressed; remain private; private sale; IPO), and developsvaluations by determining the present value of the future expected common stockvalue under each of these scenarios.  Foroption awards granted on October 1, 2009, the fair value of our common stockwas determined to be the IPO price per share of $19.00.  For option awards granted subsequent to ourIPO, we consider the fair value of our common stock to be the closing shareprice as reported by The NASDAQ Global Select Market on the grant date.

 

We estimate the fairvalue of stock options at the grant date using the Black-Scholes pricing model,which requires the use of a number of assumptions related to the risk-freeinterest rate, average life of options (expected term), expected volatility,and dividend yield.  A forfeiture ratebased on historical attrition rates of award holders is used in estimating thegranted awards not expected to vest.  Ifactual forfeitures differ from the expected rate, we may be required to makeadditional adjustments to compensation expense in future periods.  The Black-Scholes option pricing model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable, characteristics that are notpresent in our option grants.  If themodel permitted consideration of the unique characteristics of employee stockoptions, the resulting estimate of the fair value of the stock options, andresulting compensation expense, could be different.

 

The stock options that we granted to employeestypically have had service-based and performance-based components.  Stock option grants, restricted stock andrestricted stock unit (RSU) awards to non-employee directors are service-basedonly.  Service-based awards vest annuallyin equal amounts over the vesting period. The performance-based component of the stock options vests annually uponthe achievement of corporate performance objectives which are established byour board of directors.  We makeassessments as to whether the performance conditions related to theperformance-based stock options will be achieved.  We record compensation cost for awards withperformance conditions based on the probable outcome of the performanceconditions.

 

***Litigation Accruals***

 

We record an accrual forour exposures to our various litigation matters as a charge to our consolidatedincome statements when it becomes probable and can be reasonablyestimated.  The exposure to legal mattersis evaluated and estimated, if possible, following consultation with legal counsel.  Such estimates are based on currentlyavailable information and, given the subjective nature and complexitiesinherent in making these estimates, the ultimate outcome of our legal mattersmay be significantly different than the amounts estimated.  Additional information regarding our possiblelitigation exposures is included in Note 13, “Commitments and Contingencies.”

 

***Environmental Costs***

 

We record liabilitieswhen our environmental assessments indicate that remediation efforts areprobable, and the costs can be reasonably estimated.  We recognize a current period expense for theliability when clean-up efforts do not benefit future periods.  We capitalize costs that benefit more thanone accounting period.  Estimates, whenapplicable, of our liabilities are based on currently available facts, existingtechnology, and presently enacted laws and regulations taking intoconsideration the likely effects of inflation and other societal and economicfactors, and include estimates of associated legal costs.  The amounts also consider prior experience inremediating contaminated sites, other companies’ clean-up experience, and datareleased by the Environmental Protection Agency

 

121

----

Table of Contents

 

(EPA) or other organizations. The estimates are subject to revision in future periods based on actualcosts or new circumstances.  We evaluaterecoveries from insurance coverage or government sponsored programs separatelyfrom our liability, and when recovery is assured, we record and report an assetseparately from the associated liability. At December 31, 2009 and 2008, no environmental related assets orliabilities are reflected on our consolidated balance sheets as no amounts areprobable or estimable.

 

***Other Contingencies***

 

We recognize liabilitiesfor other contingencies when we have an exposure, that, when analyzed,indicates it is both probable that an asset has been impaired or a liabilityincurred, and the amount of impairment or loss can be reasonablyestimated.  Funds spent to remedy thesecontingencies are charged against the accrued liability, if one exists, orexpensed, if no liability was previously established.  When a range of probable loss can beestimated, we accrue the most likely amount within the range of probablelosses.

 

***Self-Insurance Programs***

 

We maintain self-insuredretentions and deductibles for some of our insurance programs and limit ourexposure to claims by maintaining stop-loss and/or aggregate liability coverageunder which the insurer is the primary obligor to the insured. The estimate ofour claims liability is subject to inherent limitations as it relies on ourjudgment of the likely ultimate costs that will be incurred to settle reportedclaims and unreported claims for incidents incurred but not reported as of thebalance sheet date. When estimating our liability for such claims, we considera number of factors, including, but not limited to, self-insured retentions,deductibles, claim experience, demographic factors, severity factors, andmaximum claims exposure. If actual claims exceed these estimates, additionalcharges may be required.

 

***Income Taxes***

 

We calculate a provision for, or benefit from,income taxes using the asset and liability method, under which deferred taxassets and liabilities are recorded based on the difference between thefinancial statement and tax bases of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected to reverse.  A reduction in the carrying amounts ofdeferred tax assets by a valuation allowance is required, if, based on theavailable evidence, it is more likely than not that the assets will not berealized.  Accordingly, we periodicallyassess the need to establish valuation allowances for deferred tax assets basedon the more-likely-than-not realization threshold criterion.  In assessing the need for a valuationallowance, we consider all available evidence, both positive and negative,including historical levels of income, expectations and risks associated withfuture taxable income, and ongoing prudent and feasible tax planningstrategies.

 

We establish reserves for uncertain income taxpositions, based on the technical support for the positions, our past auditexperience with similar situations, and potential interest and penaltiesrelated to the matters.  Our recordedreserves represent our best estimate of the amount, if any, that we willultimately be required to pay to settle such matters.  The resolution of our uncertain income taxpositions is dependent on uncontrollable factors such as law changes, new caselaw and the willingness of the income tax authorities to settle, including thetiming thereof and other factors. Although we do not anticipate significant changes to our uncertainincome tax positions in the next twelve months, items outside of our controlcould cause our uncertain income tax positions to change in the future, whichwould be recorded within (provision) benefit for income taxes in ourconsolidated income statements. Interest and penalties related to unrecognizedtax benefits are recognized as a component of our income tax provision.

 

***Interest Costs***

 

We capitalize a portionof the interest costs we incur during the construction of long-lived assets,primarily plant and equipment, as an additional cost of the related asset.  The amount of interest capitalized isdetermined by applying our weighted average borrowing rate to the relatedcapital spending during the construction period.  We incurred interest costs related to ourdebt and interest rate swap contracts of $72.8 million, $97.2 million, and$110.2 million for the years ended December 31, 2009, 2008, and 2007,respectively, of which $2.0 million, $2.3 million, and $2.0 million, respectively,were capitalized related to the construction of property and equipment.

 

***Derivative Financial Instruments***

 

All derivative financialinstruments are recorded on our consolidated balance sheets as assets orliabilities and measured at fair value, which considers the instrument’s term,notional amount, discount rate, credit risk, and other factors.  For derivatives designated as hedges of thefair value of assets or liabilities, the changes in fair values of both thederivatives and the hedged items are recorded in current earnings.  For derivatives designated as cash flowhedges, the effective portion of the changes in fair value of the derivativesare recorded in other comprehensive income (loss) and subsequently recognizedin earnings when the hedged items impact income.  Changes in the fair value of derivatives notdesignated as hedges and the ineffective portion of cash flow hedges arerecorded in current earnings.  Whendetermining the fair value of our derivative financial instruments, we analyzethe instruments from a

 

122

----

Tableof Contents

 

market participant’s perspective to determine a hypothetical exit priceto the counterparty.  At December 31,2009, our derivative financial instruments consisted of two interest rate capcontracts.  At December 31, 2008, ourderivative financial instruments consisted of five variable-to-fixed interestrate swap contracts and two interest rate cap contracts.

 

***Fair Value of Financial Instruments***

 

Effective November 1,2008, we adopted new fair value accounting guidance for financial assets andliabilities, which defines fair value, establishes a framework for measuringfair value in accordance with U.S. GAAP, and expands disclosures about fairvalue measurements.  The guidance doesnot require any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy to classify the sourceof the information.  The guidancespecifies a hierarchy of valuation techniques based on whether the inputs tothose valuation techniques are observable or unobservable.  Observable inputs reflect market dataobtained from independent sources, while unobservable inputs reflect our marketassumptions.  These two types of inputscreate the following fair value hierarchy:

 

*Level 1-*Quotedprices in active markets for identical assets or liabilities.

 

*Level 2-*Observableinputs other than Level 1 prices such as quoted prices for similar assets orliabilities; quoted prices in markets with insufficient volume or infrequenttransactions (less active markets); or model-derived valuations in which allsignificant inputs are observable or can be derived principally from orcorroborated by observable market data for substantially the full term of theassets or liabilities.

 

*Level 3-*Unobservable inputs to the valuation methodology that are significant to themeasurement of fair value of assets or liabilities.

 

At December 31, 2009, wehad two interest rate cap contracts with a notional principal amount of $175.0million outstanding for which the cap rate of 6.00% was significantly higherthan prevailing market interest rates; therefore, the fair market value waszero.  At December 31, 2008, the fairvalue of our interest rate swaps was calculated using Level 2 inputs, whichincluded forward LIBOR curves and credit default swap data.

 

At December 31, 2009, theestimated fair value of our 7.75% Notes was $607.9 million.  We calculated the fair value by reference toopen bid/ask quotations of our 7.75% Notes at December 31, 2009.  We had no amounts outstanding under ourvariable rate Revolving Credit Facility at December 31, 2009.  At December 31, 2009, we have notesreceivable outstanding, which bear interest at market rates, and consequently,the recorded amounts approximate fair value. The recorded amounts of all other financial instruments, which consistof cash and cash equivalents, accounts receivable, net, accounts payable,accrued expenses other liabilities, approximate fair value due to the shortduration of the instruments.

 

***Comprehensive Income***

 

Comprehensive income isdefined as the change in equity resulting from recognized transactions andother events and circumstances from non-owner sources.  Comprehensive income includes net income ascurrently reported under U.S. GAAP and other comprehensive income (loss).  Other comprehensive income (loss) considersthe effect of additional economic events that are not required to be recordedin determining net income, but rather are reported as a separate component ofstockholders’ equity (deficit).

 

The following tableincludes information regarding our other comprehensive income (loss):

 

123

----

Tableof Contents

 
| ** **                                                      | ** ** | **Gross  Amount** | ** ** | **Tax  Effect** | ** ** | **Net  Amount** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|
| ***Year ended  December 31, 2009***                             |       |              |       |            |       |            |       |
| Foreign currency translation adjustments                        |       | $                 | 232        |            | $          | —          |       | $ | 232 |   |
| Additional minimum pension liability                            |       | 244               |       | —          |       | 244             |       |
| Reclassification of unrealized loss on derivatives  to earnings |       | 37,513            |       | (14,226         | )          | 23,287          |       |
| Other comprehensive income                                      |       | $                 | 37,989     |            | $          | (14,226         | )          | $ | 23,763 |   |
|                                                            |       |              |       |            |       |            |       |
| ***Year ended  December 31, 2008***                             |       |              |       |            |       |            |       |
| Foreign currency translation adjustments                        |       | $                 | (216       | )               | $          | —          |       | $ | (216 | ) |
| Net unrealized loss on derivative financial  instruments        |       | (18,477           | )          | 6,973           |       | (11,504         | )          |
| Additional minimum pension liability                            |       | (52               | )          | —          |       | (52             | )          |
| Other comprehensive loss                                        |       | $                 | (18,745    | )               | $          | 6,973           |       | $ | (11,772 | ) |
|                                                            |       |              |       |            |       |            |       |
| ***Year ended  December 31, 2007***                             |       |              |       |            |       |            |       |
| Foreign currency translation adjustments                        |       | $                 | 128        |            | $          | —          |       | $ | 128 |   |
| Net unrealized loss on derivative financial  instruments        |       | (19,036           | )          | 7,253           |       | (11,783         | )          |
| Other comprehensive loss                                        |       | $                 | (18,908    | )               | $          | 7,253           |       | $ | (11,655 | ) |

 

The followingtable includes information regarding our accumulated other comprehensive income(loss):

 
| ** **                                               | ** ** | **December  31,** | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|
| ** **                                               | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Foreign currency translation adjustments                 |       | $                 | 164        |   | $ | (68 | ) |
| Net unrealized loss on derivative financial  instruments |       | —            |       | (23,287 | ) |
| Additional minimum pension liability                     |       | 192               |       | (52 | ) |
| Accumulated other comprehensive income (loss)            |       | $                 | 356        |   | $ | (23,407 | ) |

 

During the year ended December31, 2009, we settled and terminated our interest rate swap contracts, whichresulted in a loss of $30.9 million.  Ouraccumulated other comprehensive loss at December 31, 2008 included $23.3million, net of taxes, related to unrealized losses associated with ourinterest rate swap contracts.  As aresult of their settlement and termination, we reclassified $23.3 million outof accumulated other comprehensive loss to loss on extinguishment of debtwithin total other non-operating expense, net, in our consolidated incomestatement for the year ended December 31, 2009.

 

***Foreign Currency Translation***

 

For our internationaloperations, local currencies have been determined to be the functionalcurrencies. We translate the financial statements of international subsidiariesto their U.S. dollar equivalents at end-of-period currency exchange rates forassets and liabilities and at average currency exchange rates for revenues andexpenses.  We record these translationadjustments as a component of other comprehensive income (loss) withinstockholders’ equity (deficit).  Werecognize transaction gains and losses arising from fluctuations in currencyexchange rates on transactions denominated in currencies other than thefunctional currency as incurred within SG&A in our consolidated incomestatements.  We incurred foreign currencytransaction gains (losses) of $1.9 million, $(1.0) million, and $5.7 millionfor the years ended December 31, 2009, 2008, and 2007, respectively.

 

***Business Segments***

 

We operate our plasma-derivedprotein therapeutics business as a single reportable business segment since alloperating activities are directed from our North Carolina headquarters and allof our products result from a common manufacturing process based on a singlefeedstock.

 

***Earnings per Share***

 

We calculate basicearnings per share based upon the weighted average number of common sharesoutstanding.  We calculate dilutedearnings per share based upon the weighted average number of common sharesoutstanding plus the dilutive effect of common share equivalents calculatedusing the treasury stock method.

 

***Recent Accounting Pronouncements***

 

In October 2009, theFinancial Accounting Standards Board (FASB) issued new accounting guidanceregarding multiple-deliverable revenue arrangements.  The new guidance addresses the accounting formultiple-deliverable arrangements to enable 

 

124

----

Tableof Contents

 

vendors to account for products or services (deliverables) separatelyrather than as a combined unit. This guidance establishes a hierarchy fordetermining the selling price of a deliverable, which is based on: (a) vendor-specificobjective evidence; (b) third-party evidence; or (c) estimates. This guidancealso eliminates the residual method of allocation and requires that arrangementconsideration be allocated at the inception of the arrangement to alldeliverables using the relative selling price method. In addition, thisguidance significantly expands required disclosures related to a vendor’smultiple-deliverable revenue arrangements. The guidance is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010 and early adoption ispermitted. A company may elect, but will not be required, to adopt the guidanceretrospectively for all prior periods. We do not anticipate that the adoptionof this guidance will have a material impact on our consolidated financialstatements or related disclosures.

 

In August 2009, the FASBreleased new accounting guidance concerning measuring liabilities at fairvalue.  The new guidance providesclarification that in circumstances in which a quoted price in an active marketfor the identical liability is not available, a reporting entity is required tomeasure fair value using certain valuation techniques.  Additionally, it clarifies that a reportingentity is not required to adjust the fair value of a liability for theexistence of a restriction that prevents the transfer of the liability.  This new guidance is effective for the firstreporting period after its issuance; however, earlier application ispermitted.  We do not anticipate that theadoption of this guidance will have a material impact on our consolidatedfinancial statements or related disclosures.

 

In May 2009, the FASBissued authoritative guidance for subsequent events, which is effective forinterim and annual financial statements ending after June 15, 2009.  The guidance establishes general standards ofaccounting for and disclosure of subsequent events that occur after the balancesheet date.  Entities are also requiredto disclose the date through which subsequent events have been evaluated andthe basis of that date.  We haveevaluated subsequent events up through February 23, 2010, the date that wefiled our audited consolidated financial statements with the U.S. Securitiesand Exchange Commission.

 

In April 2009, the FASBissued new accounting guidance concerning application issues on initialrecognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a businesscombination. The guidance is effective for assets or liabilities arising fromcontingencies in business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December15, 2008. The adoption of this accounting guidance did not have a materialimpact on our consolidated financial statements, although the future impact ofthis guidance will be largely dependent on the size and nature of businesscombinations completed after the effective date.

 

On January 30, 2009, theSEC released the final rules requiring all registered companies to useeXtensible Business Reporting Language (XBRL) when submitting financialstatements to the SEC.  The new rules initiallywill require interactive data reporting only by domestic and foreign largeaccelerated filers that prepare their financial statements in accordance withU.S. GAAP and have a worldwide public common equity float above $5.0 billionfor their first quarterly period ending after June 15, 2009 and all reportingperiods thereafter.  We expect to berequired to file using XBRL beginning with our quarterly reporting periodending March 31, 2011.

 

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

 

In March 2008, the FASBrevised authoritative guidance for disclosures about derivative financialinstruments and hedging activities.  Thisguidance requires disclosures about derivatives and hedging activitiesincluding enhanced disclosure about (a) how and why an entity uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted and (c) how derivative instruments and related hedged items affectfinancial position, financial performance, and cash flows.  This guidance is effective for financialstatements issued for fiscal years and interim periods beginning after November15, 2008.  The adoption of this guidancedid not materially impact our financial statement disclosures.

 

In December 2007, theFASB revised the authoritative guidance for business combinations, whichestablishes principles and requirements for how the acquirer in a businesscombination (i) recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree, (ii) recognizes and measures the goodwill acquired inthe business combination or a gain from a bargain purchase and (iii) determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination.  The guidance is effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008.  The adoption of this guidance did not have amaterial impact on our consolidated financial statements, 

 

125

----

Tableof Contents

 

although the future impact of this guidance will be largely dependenton the size and nature of business combinations completed after the effectivedate.

 

In December 2007, theFASB issued authoritative guidance, which establishes accounting and reportingstandards for ownership interests in subsidiaries held by parties other thanthe parent, the amount of consolidated net income attributable to the parentand to the noncontrolling equity investments when a subsidiary isdeconsolidated. The guidance also establishes reporting requirements thatprovide sufficient disclosures that clearly identify and distinguish betweenthe interests of the parent and the interest of the noncontrolling owners. Theauthoritative guidance is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008. Theadoption of this guidance did not have a material impact on our consolidatedfinancial statements based on our current ownership interests.

 

**3.****             ****InitialPublic Offering and Use of Proceeds**

 

On October 6, 2009, wecompleted our IPO of 56,000,000 shares of our common stock, par value $0.01 pershare, at an offering price of $19.00 per share.  Our IPO included 28,947,368 shares newlyissued and sold by us and 27,052,632 shares sold by the selling stockholder, TalecrisHoldings, LLC, including 6,000,000 shares sold by the selling stockholderpursuant to the underwriters’ option to purchase additional shares.  After deducting the payment of underwriters’discounts and commissions, the net primary proceeds to us from the sale ofshares in our IPO were approximately $519.7 million, which we used to repay$389.8 million and $129.9 million of principal under our First and Second LienTerm Loans, respectively.  We did notreceive any proceeds from the sale of shares by the selling stockholder.  In addition to the $30.3 million ofunderwriters’ discounts and commissions deducted from the offering proceeds, weincurred other offering costs of $3.9 million, of which $1.3 million isincluded in SG&A in our consolidated income statement for the year ended December31, 2009 and $2.6 million is included as a reduction of additional paid-incapital on our December 31, 2009 consolidated balance sheet.  At December 31, 2009, approximately $0.2million of accrued offering expenses were payable to underwriters.

 

**4.****             ****DefinitiveMerger Agreement with CSL Limited (CSL)**

 

On August 12, 2008, weentered into a definitive merger agreement with CSL, under which CSL agreed toacquire us for cash consideration of $3.1 billion, less net debt, as defined.  The closing of the transaction was subject tothe receipt of certain regulatory approvals as well as other customaryconditions.  The U.S. Federal TradeCommission filed an administrative complaint before the Commission challengingthe merger and a complaint in Federal district court seeking to enjoin themerger during the administrative process. On June 8, 2009, the merger parties agreed to terminate the definitivemerger agreement.  CSL paid us a mergertermination fee of $75.0 million, which is included as other non-operatingincome in our consolidated income statement for the year ended December 31,2009.  The U.S. Federal Trade Commission’scomplaints were subsequently dismissed.

 

In consideration of thedefinitive merger agreement with CSL, our board of directors approved aretention program in August 2008 for an amount up to $20.0 million.  We recorded retention expense of $8.2 millionand $5.1 million, excluding fringe benefits, during the years ended December 31,2009 and 2008, respectively.  Weclassified the cost of this retention program consistent with each recipient’ssalary.  We made payments ofapproximately $13.3 million under this retention program during 2009.  No further payments are due.

 

**5.****             ****BusinessAcquisitions**

 

In November 2006, weacquired certain assets and assumed certain liabilities from InternationalBioResources, L.L.C. and affiliated entities (IBR) pursuant to an AssetPurchase Agreement (APA).  On June 9,2007, the APA was amended to provide for the acceleration of all milestone andother amounts owed to IBR under the contingent consideration provision of theAPA, and as a result, we issued 2,146,232 shares of our common stock to IBR in June2007, of which 544,568 shares were immediately delivered to IBR and 1,601,664 shareswere placed in escrow to secure against breaches and warranties under theAPA.  The shares placed in escrow weresubsequently released to IBR during 2008 either through subsequent amendmentsto the APA or as the breaches and warranties provision lapsed.

 

The total fair value ofthe accelerated consideration of our common stock was determined to be $45.6million, based upon the then fair value per share of our common stock asdetermined by our board of directors, of which $8.6 million was considered tobe an inducement for IBR to enter into the June 9, 2007 Purchase and Sale ofAssets Agreement (June 2007 Agreement) and the June 9, 2007 Plasma SupplyAgreement, and $37.0 million was considered to be additional purchase price,and recorded as goodwill.

 

The $8.6 millioninducement was initially recorded as an other long-term asset on ourconsolidated balance sheet and was allocable to the purchase price of plasmacollection centers acquired from IBR under the June 2007 Agreement.  At December 31, 

 

126

----

Tableof Contents

 

2008, $6.0 million related to the inducement remained in otherlong-term assets on our consolidated balance sheet.  As of December 31, 2009, the entireinducement has been allocated to the purchase price of plasma collectioncenters acquired during 2009 under the June 2007 Agreement.

 

IBR had the right to putthe shares of our common stock back to us for cash ($15.61 per common share)under certain circumstances prior to June 30, 2008.  IBR was entitled to interest at a rate of 8%per annum from the issuance date of the shares through December 31, 2007, andas a result we accreted our obligation to a maximum put value of $35.1million.  The difference between the putvalue and the fair value of the common stock on June 9, 2007 of $12.1 millionwas recorded as additional paid-in capital during the year ended December 31,2007.

 

In January 2008, IBRexercised their put right, as amended, for 1,185,232 common shares, which werepurchased in February 2008.  In March 2008,IBR exercised their put right, as amended, for the remaining 961,000 commonshares, which we repurchased in April 2008. The repurchased shares were retired and the embedded put feature wascancelled.

 

The following tablesummarizes our purchase accounting for plasma collection centers acquired fromIBR under the June 2007 Agreement.  Theplasma collection centers were acquired to support our plasma supply verticalintegration strategy.  The plasmacollection centers’ results of operations have been included in ourconsolidated financial statements from their respective date of acquisition.

 
| ** **                                                 | ** ** | **Years  Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Payments at closing                                        |       | $                             | 5,181      |   | $ | 2,147 |   | $ | 16,211 |   |
| Notes receivable and other advances                        |       | 44,540                        |       | 10,430 |   | — |   |
| Performance incentive payments                             |       | 837                           |       | 843 |   | — |   |
| Allocable portion of accelerated contingent  consideration |       | 6,020                         |       | 2,580 |   | — |   |
| Transaction costs                                          |       | —                        |       | 56 |   | 475 |   |
| Total purchase price                                       |       | $                             | 56,578     |   | $ | 16,056 |   | $ | 16,686 |   |
|                                                       |       |                          |       |   |   |   |   |
| Cash and cash equivalents                                  |       | $                             | 62         |   | $ | 21 |   | $ | 55 |   |
| Inventory                                                  |       | 5,416                         |       | 1,778 |   | 2,209 |   |
| Other current assets                                       |       | 183                           |       | — |   | — |   |
| Property, plant, and equipment                             |       | 10,181                        |       | 1,814 |   | 1,095 |   |
| Intangible assets- regulatory licenses                     |       | 3,860                         |       | 840 |   | 280 |   |
| Goodwill                                                   |       | 37,060                        |       | 11,643 |   | 13,089 |   |
| Total assets acquired                                      |       | 56,762                        |       | 16,096 |   | 16,728 |   |
| Current liabilities assumed                                |       | (184                          | )          | (40 | ) | (42 | ) |
| Total purchase price                                       |       | $                             | 56,578     |   | $ | 16,056 |   | $ | 16,686 |   |
|                                                       |       |                          |       |   |   |   |   |
| Number of plasma collection centers acquired               |       | 12                            |       | 3 |   | 3 |   |

 

The purchase price for the plasma collection centersacquired from IBR during 2009 and 2008 consists of various loans and advancesmade to IBR and performance incentive payments for achieving certain milestonesrelated to the timing of plasma collection center openings.  The purchase price also includes theallocable portion of accelerated contingent consideration due to IBR asdiscussed above.  We have no further financingcommitments to IBR under the terms of our June 2007 Agreement.

 

**6.****             ****Goodwilland Intangible Assets**

 

Changes to the carrying amount of goodwill for theyears ended December 31, 2009 and 2008 were as follows:

 
| Balance at December 31, 2007                       |   | $       | 124,157 |   |
|----------------------------------------------------|--------|---------|---------|--------|
| Acquisitions of plasma collection centers from IBR |   | 11,643  |    |
| Balance at December 31, 2008                       |   | 135,800 |    |
| Acquisitions of plasma collection centers from IBR |   | 37,060  |    |
| Balance at December 31, 2009                       |   | $       | 172,860 |   |

 

Additional information regarding our business acquisitions is includedin Note 5, “Business Acquisitions.”

 

We assess goodwill for impairment annually as of December 31, or morefrequently if events and circumstances indicate that impairment may haveoccurred.  The impairment test requiresus to allocate goodwill to our reporting units and estimate the fair value 

 

127

----

Table ofContents

 

of the reportingunit that contained goodwill.  If thecarrying value of a reporting unit exceeds its fair value, the goodwill of thatreporting unit is potentially impaired and we proceed to step two of theimpairment analysis.  In step two of theanalysis, we would record an impairment loss determined by the excess of thecarrying amount of the reporting unit’s goodwill over its implied fair value.

 

We have assessed goodwill at the reporting unit level.  We allocated our Company’s enterprise valueto our reporting units based upon their relative contributions to one of ourprincipal operating performance measures, adjusted EBITDA.  We determined that the allocated fair valueof the reporting unit exceeded its carrying value, and as a result, noadjustment to our recorded goodwill was required at December 31, 2009.

 

At December 31, 2009, we had $10.9 million of intangible assets recordedon our consolidated balance sheet, all of which were indefinite-livedregulatory licenses associated with our plasma collection centers.  At December 31, 2008, we had $7.2 million ofintangible assets recorded on our consolidated balance sheet, of which $7.0million were indefinite-lived regulatory licenses associated with our plasmacollection centers.  We incurred minimalintangible asset amortization expense for the periods presented.  We performed our annual impairment testing ofindefinite-lived intangible assets as of December 31, 2009, which resulted inno impairment of the recorded amounts.

 

**7.****             ****Collaborativeand Other Agreements**

 

***Distribution Services and Supply Agreements with Bayer***

 

We entered into a number of international distribution services andsupply agreements with Bayer in conjunction with our 2005 formationalactivities under which Bayer affiliates provided supply and distributionservices to us for various periods of time in a number of geographic regionsoutside of the United States.  We havesince terminated these agreements with Bayer as we have developed internalcapabilities, or in certain cases, contracted with unaffiliated third parties,to assume these functions.  During theyears ended December 31, 2008 and 2007, we repurchased inventories with a valueof approximately $28.6 million and $81.9 million, respectively, from a Bayeraffiliate in Germany, where we terminated our distribution agreement.

 

***Supply and Service Agreement***

 

We have a Supply and Service Agreement, as amended, through 2012 toprovide albumin to an unaffiliated third party, which is used in conjunctionwith a proprietary product manufactured by them.  We earn a commission on sales of the thirdparty’s product at a fixed rate which depends on the territory where theproduct is sold, as defined in the agreement. We also provide regulatory support as required.  We earned commissions of $5.5 million, $8.6million, and $7.4 million under this agreement for the years ended December 31,2009, 2008, and 2007, respectively, which have been recorded in other netrevenue in our consolidated income statements.

 

***Licensed Technology***

 

We licensed certain technology related to the formulation of one of ourproducts to an unaffiliated third party. As consideration for the technology transfer, we received an upfrontlicensing fee of $4.0 million during 2007, of which 33% is refundable undercertain conditions.  We recognized $2.6million of the licensing fee during 2008 as a result of the completion of aportion of our performance obligations, which we recorded within other netrevenue in our consolidated income statement. The remaining portion has been deferred on our consolidated balancesheets at December 31, 2009 and 2008.  Wewill recognize the remaining portion of the deferred licensing fee once ourremaining performance obligations have been completed.  Under the terms of this agreement, we willalso receive royalty payments from this third party, which escalates withvolume.

 

***Litigation Settlement***

 

We were a co-plaintiff along with Bayer Healthcare (Bayer) in patentlitigation in the United States District Court for the District of Delawareagainst Baxter International Inc. and Baxter Healthcare (collectively,Baxter).  In this case, filed in 2005,we, as exclusive licensee of Bayer’s U.S. Patent No. 6,686,191 (the ‘191patent), alleged that Baxter by its manufacture and importation of its liquidIGIV product, Gammagard Liquid, had infringed the ‘191 patent.  We entered into a Settlement Agreement withBaxter on August 10, 2007.  Under theterms of the settlement, (i) Baxter paid us $11.0 million, (ii) Baxter will payus for a period of four years from the settlement date an amount comprising1.2% of Baxter’s net sales in the United States of Gammagard Liquid and anyother product sold by Baxter or an affiliate in the United States under adifferent brand name that is a liquid intravenous immunoglobulin 

 

128

----

Table ofContents

 

under a separateSublicense Agreement, (iii) Baxter provided us with approximately 2,000kilograms of Fraction IV-I paste with specifications as per the SettlementAgreement (fair value of $1.8 million determined by reference to similar rawmaterial purchases we have made in the past as well as current marketconditions), and (iv) we will grant Baxter certain sublicense rights in the ‘191patent and its foreign counterparties.

 

We incurred legal fees related to this litigation of $5.7 millionduring the year ended December 31, 2007, which were recorded within SG&A inour consolidated income statement. During the year ended December 31, 2007, we recorded $12.9 millionrelated to the settlement in other non-operating income in our consolidatedincome statement.  During the years endedDecember 31, 2009, 2008, and 2007, we recorded $10.6 million, $8.7 million, and$1.7 million, respectively, of fees from Baxter within other net revenue in ourconsolidated income statements.

 

**8.****             ****Inventoriesand Cost of Goods Sold**

 

Inventories consisted ofthe following:

 
| ** **        | ** ** | **December  31,** | ** ** |
|-------------------|------------|-------------------|------------|
| ** **        | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Raw material      |       | $                 | 171,866    |   | $ | 155,055 |   |
| Work-in-process   |       | 312,178           |       | 306,950 |   |
| Finished goods    |       | 160,010           |       | 119,715 |   |
| Total inventories |       | $                 | 644,054    |   | $ | 581,720 |   |

 

Our raw materialinventories include unlicensed plasma and related testing costs of $7.6 millionand $8.2 million at December 31, 2009 and 2008, respectively, which we believeare realizable.

 

***Unabsorbed Talecris Plasma Resources, Inc. (TPR) Infrastructure andStart-Up Costs***

 

Our cost of goods sold includes $44.0 million,$98.5 million, and $70.1 million for the years ended December 31, 2009, 2008,and 2007, respectively, related to unabsorbed TPR infrastructure and start-upcosts associated with the development of our plasma collection centerplatform.  Until our plasma collectioncenters reach normal operating capacity, we charge unabsorbed overhead costsdirectly to cost of goods sold.

 

***Plasma Center current Good Manufacturing Practices (cGMP) Issue***

 

During the first and second quarters of 2008, weincurred charges to cost of goods sold of $16.3 million and $7.0 million,respectively, due to deviations from our standard operating procedures and cGMPat one of our plasma collection centers. Our preliminary investigations concluded that the deviations from ourstandard operating procedures and cGMP resulted in impairments to the relatedraw material and work-in-process inventories as we concluded there was noprobable future economic benefit related to the impacted inventories.  Subsequently, due to further investigationsand new facts and circumstances, we determined that certain impactedinventories were saleable.  We recordrecoveries directly to cost of goods sold after the impacted material isconverted into final products and sold to third parties.  During the years ended December 31, 2009 and2008, we recorded recoveries of $1.9 million and $17.5 million,respectively.  For the year ended December31, 2008, recoveries totaled $17.5 million, resulting in a net provision of$5.8 million for 2008.   We do not expectto recognize significant further recoveries of the impacted inventories.

 

***Customer Settlement***

 

We settled a dispute with a customer in September 2007regarding intermediate material manufactured by us, which is used by thiscustomer in their manufacturing process. We recorded a charge to cost of goods sold of $7.9 million during theyear ended December 31, 2007 for inventory impairment related to this material,which we recovered in its entirety during 2008 as the related material wasdetermined to be saleable, converted into final product, and sold to othercustomers.  During 2008, we recorded anadditional inventory provision of $2.6 million related to this dispute forproducts held in Europe, for which we recovered $0.8 million and $1.8 millionduring 2009 and 2008, respectively, as the impacted material was determined tobe saleable, converted into final product, and sold to other customers.

 

***Unplanned Plant Maintenance***

 

During November 2007, weshut down portions of our Clayton, North Carolina facility for approximatelytwo weeks consistent with our cGMP operating practices for unplanned plantmaintenance.  As a result of theunplanned maintenance, we recorded a charge to cost of goods sold of $10.0million during the year ended December 31, 2007, primarily related tounabsorbed 

 

129

----

Tableof Contents

 

production costs, which would have otherwise been capitalized toinventories.  There was no impact to thecarrying value of inventories.

 

***Gamunex IGIV Production Incident***

 

In March 2005, prior toour formation as Talecris, a production incident occurred at our Clayton, NorthCarolina facility, which resulted in a write-off of Gamunex IGIV that hadelevated levels of IgM antibodies. During March 2007, we reached an agreement with Bayer under which werecovered $9.0 million related to this production incident, which we recordedas a reduction of cost of goods sold during the year ended December 31, 2007.

 

**9.****             ****Property,Plant, and Equipment, net**

 

Property, plant, andequipment, net, consisted of the following:

 
| ** **                                      | ** ** | **December  31,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Land                                            |       | $                 | 4,136      |   | $ | 4,136 |   |
| Buildings and improvements                      |       | 68,417            |       | 47,764 |   |
| Machinery and equipment                         |       | 102,887           |       | 67,446 |   |
| Furniture and fixtures                          |       | 5,492             |       | 4,996 |   |
| Computer hardware and software                  |       | 54,761            |       | 42,762 |   |
| Capital leases of buildings                     |       | 8,374             |       | 6,639 |   |
|                                            |       | 244,067           |       | 173,743 |   |
| Less: accumulated depreciation and amortization |       | (62,463           | )          | (36,308 | ) |
|                                            |       | 181,604           |       | 137,435 |   |
| Construction in progress                        |       | 85,595            |       | 75,816 |   |
| Total property, plant, and equipment, net       |       | $                 | 267,199    |   | $ | 213,251 |   |

 

Depreciation expense was$28.8 million, $20.1 million, and $10.5 million for the years ended December 31,2009, 2008, and 2007, respectively.

 

During 2009 and 2008, werecorded impairment charges of $3.1 million and $3.6 million, respectively,primarily within cost of goods sold in our consolidated income statementsrelated primarily to capital lease assets and leasehold improvements at certainof our plasma collection centers which were closed or were under developmentand we no longer plan to open.

 

During 2007, we recordedan impairment charge related to equipment of $2.8 million as a result of thediscontinuation of a capital project, which is included in cost of goods soldin our consolidated income statement.

 

**10.****      ****Investmentin Affiliate**

 

At December 31, 2009, wehad a 30% interest in the Class 1 common stock of Centric Health Resources, Inc.(Centric).  Our investment in Centric isaccounted for using the equity method of accounting based on our assessmentthat our interest allows us to exercise significant influence, but not control.  Under the equity method, our investment,originally recorded at cost, is adjusted to recognize our share of net earningsor losses of Centric as they occur.  Ourrecognition of losses is limited to the extent of our investment in, advancesto, and commitments for the investment.

 

Centric provides servicesin the management of our Prolastin and Gamunex Direct programs.  In this capacity, Centric provideswarehousing, order fulfillment, distribution, home infusion, and customerrelationship services for us primarily related to our U.S. sales ofProlastin.  Centric maintains inventoryon our behalf which they utilize to fill customer orders.  Centric also provides services to us incollecting accounts receivable for sales made under the Prolastin and GamunexDirect programs.  We provide Centric afee for each unit of product provided to patients which escalates withvolume.  The total fees for such servicesfor the years ended December 31, 2009, 2008, and 2007 were $20.3 million, $17.5million, and $14.5 million, respectively. The majority of these fees are recorded within cost of goods sold in ourconsolidated income statements.   Thevalue of the finished goods inventories that Centric held on our behalf was$7.1 million and $8.9 million at December 31, 2009 and 2008, respectively.

 

**11.****      ****Long-Term Debt and Capital LeaseObligations**

 

We were obligated underthe following debt instruments:

 

130

----

Tableof Contents

 
| ** **                                                               | ** ** | **December  31,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                               | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Revolving Credit Facility                                                |       | $                 | —     |   | $ | 179,941 |   |
| 7.75% Notes                                                              |       | 600,000           |       | — |   |
| Discount on 7.75% Notes                                                  |       | (3,954            | )          | — |   |
| First Lien Term Loan                                                     |       | —            |       | 686,000 |   |
| Second Lien Term Loan                                                    |       | —            |       | 330,000 |   |
| Capital lease obligations                                                |       | 9,961             |       | 5,605 |   |
| Total debt and capital  lease obligations                                |       | 606,007           |       | 1,201,546 |   |
| Less: current maturities                                                 |       | (740              | )          | (7,341 | ) |
| Long-term debt and capital  lease obligations, net of current maturities |       | $                 | 605,267    |   | $ | 1,194,205 |   |

 

***Financial Impact of IPO and Refinancing Transactions***

 

The following tablesummarizes the changes to our indebtedness during 2009, including the impactfrom the application of the net proceeds to us of $519.7 million from our IPOdiscussed in Note 3, “Initial Public Offering and Use of Proceeds,” and the netproceeds to us of $583.9 million from the refinancing transactions discussedbelow:

 
| ** **                | ** ** | **December  31,** | ** ** | **2009  Net**  | ** ** | **October  6, 2009** | ** ** | **October  21, 2009** | ** ** | ** **       | ** ** | **December  31,** | ** ** |
|---------------------------|------------|-------------------|------------|----------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|
| ** **                | ** ** | **2008**          | ** ** | **Repayments** | ** ** | **IPO**              | ** ** | **Refinancing**       | ** ** | **Amortization** | ** ** | **2009**          | ** ** |
| Revolving Credit Facility |       | $                 | 179,941    |           | $          | (124,348             | )          | $                     | —     |             | $          | (55,593           | )          | $ | — |   | $ | — |   |
| First Lien Term Loan      |       | 686,000           |       | (5,250         | )          | (389,812             | )          | (290,938              | )          | —           |       | —            |       |
| Second Lien Term Loan     |       | 330,000           |       | —         |       | (129,937             | )          | (200,063              | )          | —           |       | —            |       |
| 7.75% Notes               |       | —            |       | —         |       | —               |       | 600,000               |       | —           |       | 600,000           |       |
| Discount on 7.75% Notes   |       | —            |       | —         |       | —               |       | (4,074                | )          | 120              |       | (3,954            | )          |
| Total indebtedness        |       | $                 | 1,195,941  |           | $          | (129,598             | )          | $                     | (519,749   | )                | $          | 49,332            |       | $ | 120 |   | $ | 596,046 |   |

 

In addition to the debtprincipal repayments in the preceding table, we used $28.7 million of the netproceeds to us from the issuance of the 7.75% Notes to settle and terminatecertain interest rate swap contracts with a notional amount of $390.0 millionand $8.6 million to pay accrued interest associated with our then outstandingFirst and Second Lien Term Loans.  Inaddition to the $4.1 million of discounts on the 7.75% Notes disclosed in thetable above, approximately $12.0 million of commissions were deducted from thegross issuance proceeds.  Subsequently,we settled and terminated our remaining interest rate swap contract with a notionalamount of $50.0 million for $6.1 million.

 

As a result of the IPOand refinancing transactions, we recognized a charge during the fourth quarterof 2009 of $12.1 million to write-off previously deferred debt issuance costsrelated to our First and Second Lien Term Loans and $30.9 million related tocosts associated with the settlement and termination of our interest rate swapcontracts.  These charges, which totaled$43.0 million, are recorded within other non-operating expense, net, in ourconsolidated income statement for the year ended December 31, 2009.  We capitalized $14.9 million of debt issuancecosts associated with the issuance of the 7.75% Notes and the Revolving CreditFacility amendment.  We incurred othercosts related to our IPO of $3.9 million, of which $1.3 million is includedwithin SG&A in our consolidated income statement for the year ended December31, 2009 and $2.6 million is included as a reduction of additional paid-incapital on our December 31, 2009 consolidated balance sheet.  The following table summarizes changes indeferred debt issuance costs during the year ended December 31, 2009:

 
| ** **                          | ** ** | ** **        | ** ** | ** **  | ** ** | **Newly**          | ** ** | ** **       | ** ** | ** **        | ** ** |
|-------------------------------------|------------|-------------------|------------|-------------|------------|--------------------|------------|------------------|------------|-------------------|------------|
| ** **                          | ** ** | ** **        | ** ** | ** **  | ** ** | **Capitalized**    | ** ** | ** **       | ** ** | ** **        | ** ** |
| ** **                          | ** ** | **December  31,** | ** ** | ** **  | ** ** | **Debt  Issuance** | ** ** | ** **       | ** ** | **December  31,** | ** ** |
| ** **                          | ** ** | **2008**          | ** ** | **Charges** | ** ** | **Costs**          | ** ** | **Amortization** | ** ** | **2009**          | ** ** |
| Revolving Credit Facility           |       | $                 | 3,014      |        | $          | —             |       | $                | 1,545      |              | $          | (1,041 | ) | $ | 3,518 |   |
| First Lien Term Loan                |       | 9,629             |       | (8,054      | )          | —             |       | (1,575           | )          | —            |       |
| Second Lien Term Loan               |       | 4,744             |       | (4,087      | )          | —             |       | (657             | )          | —            |       |
| 7.75% Notes                         |       | —            |       | —      |       | 13,334             |       | (392             | )          | 12,942            |       |
| Total deferred debt  issuance costs |       | $                 | 17,387     |        | $          | (12,141            | )          | $                | 14,879     |              | $          | (3,665 | ) | $ | 16,460 |   |

 

Deferred debt issuancecosts are recorded within other long-term assets on our consolidated balancesheets and are amortized to interest expense, net, in our consolidated incomestatements on a straight-line basis, which approximates the effective yieldamortization method, over the term of the related credit facility.

 

131

----

Tableof Contents

 

***7.75% Unsecured Senior Notes, due November 15, 2016***

 

On October 21, 2009, wecompleted the issuance of $600.0 million, 7.75% Senior Notes, due November 15,2016, at a price of 99.321% of par, in a private placement to certain qualifiedinstitutional buyers.  The 7.75% Notesyield 7.875% to maturity and pay interest semi-annually on May 15 and November 15to holders of record on the immediately preceding May 1 and November 1,respectively.  The 7.75% Notes areguaranteed on a senior unsecured basis by our existing and future domesticsubsidiaries. Except as described below, we will not be entitled to redeem the7.75% Notes at our option prior to November 12, 2012.

 

We may redeem some or allof the 7.75% Notes, at our option, at any time on or after November 12, 2012,at the redemption prices (expressed as percentages of principal amount) setforth below plus accrued and unpaid interest and additional interest, if any,on the 7.75% Notes redeemed, to the applicable redemption date, if redeemedduring the twelve-month period beginning on November 15 of the years indicatedbelow:

 
| **Fiscal  Year**    | ** ** | **Percentage** | ** ** |
|---------------------|------------|----------------|------------|
| 2012                |       | 103.875        | %          |
| 2013                |       | 102.583        | %          |
| 2014                |       | 101.292        | %          |
| 2015 and thereafter |       | 100.000        | %          |

 

In addition, at any timeduring each twelve-month period ending on November 15, 2010, 2011, and 2012, wemay redeem up to 10% of the originally issued principal amount of the 7.75%Notes at a redemption price of 103% of the principal amount of the 7.75% Notesredeemed plus accrued and unpaid interest and additional interest, if any, tothe redemption date, subject to the rights of the holders of the 7.75% Notes onthe relevant record date to receive interest due on the relevant interestpayment date.

 

At any time, or from timeto time, on or prior to November 15, 2012, we may, at our option, redeem up to35% of the aggregate principal amount of the 7.75% Notes issued under theindenture with the net cash proceeds to us of certain equity offerings at aredemption price equal to 107.75% of the principal amount of the 7.75% Notesplus accrued and unpaid interest and additional interest, if any, to theapplicable redemption date, provided that at least 65% of the aggregateprincipal amount of the 7.75% Notes originally issued remains outstandingimmediately after such redemption and the redemption occurs within 90 days ofthe date of the closing of such equity offering.

 

Under the Make-Wholeredemption feature, we may redeem 100% of the principal plus a premium asdefined under the indenture (computed using a discount rate equal to the U.S.Treasury rate as of such redemption date plus 0.50%), plus accrued and unpaidinterest and additional interest, if any, prior to November 15, 2012, withrespect to some or all of the 7.75% Notes, subject to the rights of the holderson the relevant record date to receive interest due on the relevant interestpayment date.

 

We are not required tomake mandatory redemption or sinking fund payments with respect to the 7.75%Notes.

 

Upon a change of control,the 7.75% Notes are puttable at 101% of principal plus accrued and unpaidinterest and additional interest, if any.

 

We may incur additionalindebtedness and our subsidiary guarantors may also incur additionalindebtedness if our Fixed Charge Coverage Ratio for our most recently endedfour full fiscal quarters immediately preceding the date on which suchadditional indebtedness is incurred would have been at least 2.00 to 1.00,determined on a pro forma basis.

 

The indenture containscertain covenants limiting, subject to exceptions, carve-outs andqualifications, our ability and our restricted subsidiaries’ ability to: (i) sellassets; (ii) pay distributions on, redeem or repurchase its capital stock orredeem or repurchase its subordinated debt; (iii) make certain investments; (iv)incur or guarantee additional indebtedness or issue preferred stock; (v) createor incur certain liens; (vi) enter into agreements that restrict distributionsor other payments from our restricted subsidiaries to us; (vii) engage incertain sale and leaseback transactions; (viii) engage in certain transactions withaffiliates; (ix) transfer or dispose of the capital stock of the restrictedsubsidiary to persons other than us or our restricted subsidiaries; and (x) createunrestricted subsidiaries.  The indenturealso contains certain customary events of default.

 

In connection with thesale of the 7.75% Notes, we and our subsidiaries that guaranteed the 7.75%Notes entered into an exchange and registration rights agreement with theinitial purchasers of the 7.75% Notes on October 21, 2009, pursuant to which weare obligated, by April 19, 2010, to file with Securities and ExchangeCommission under the Securities Act of 1933, as amended, a registrationstatement with respect to an offer to exchange the 7.75% Notes (and guarantees)for substantially identical new notes (and guarantees) of ours.  If we are not able to effect this exchangeoffer, we have agreed to file a shelf registration statement relating tore-sales of the 7.75% Notes. We will be obligated to pay damages consisting ofadditional interest on the 7.75% Notes if, within the periods specified in theRegistration Rights Agreement, we do not file the exchange offer registrationstatement or the shelf registration statement or we do not comply with certainother obligations under the Registration Rights Agreement.

 

132

----

Tableof Contents

 

***Revolving Credit Facility***

 

We have a $325.0 millionasset-based credit agreement administered by Wachovia Bank, N.A., an affiliateof Wells Fargo Securities, which was amended on October 15, 2009 as describedbelow.  We use our available cashbalances to repay amounts outstanding under our Revolving Credit Facility.  We deposit any excess amounts into anovernight investment account. Outstanding principal under this facility is due and payable on thematurity date of December 6, 2011.  At December31, 2009, $2.0 million was being utilized for letters of credit and $323.0million was unused and available.  Theletters of credit were used as security for utilities, insurance, and thirdparty warehousing.

 

Borrowings under thisfacility bear interest at a rate based upon either the ABR or LIBOR, at ouroption, plus applicable margins based upon borrowing availability.  The ABR represents the greater of the FederalFunds Effective Rate plus 0.50% or the Prime Rate.  Interest accrues on the Revolving CreditFacility at the ABR plus 0.25-0.75% or LIBOR plus 1.50-2.00%.  For the years ended December 31, 2009, 2008,and 2007, the weighted average interest rates of our Revolving Credit Facilitywere 2.79%, 4.79%, and 7.90%, respectively. At December 31, 2008, the interest rates on the ABR and LIBOR borrowingswere 3.75% and 2.82%, respectively.  Noamounts were outstanding under the Revolving Credit Facility at December 31, 2009.

 

The Revolving CreditFacility is secured by a Pledge and Security Agreement dated December 6, 2006under which substantially all of our personal property, including real estate,manufacturing equipment, accounts receivable, inventory, and stock are pledgedas security, each as defined within the agreement.

 

The Revolving CreditFacility contains default provisions, and, pursuant to the October 15, 2009amendment described below, imposes restrictions on annual capital expendituresif our leverage ratio is 2.00 to 1.00 or less, and contains a financialcovenant which requires us to maintain a fixed charge coverage ratio of atleast 1.10 to 1.00 if our borrowing availability based on eligible collateralis less than $48.75 million.  TheRevolving Credit Facility defines certain terms in calculating covenant ratios,including adjusted EBITDA and Indebtedness.

 

The borrowing base underour Revolving Credit Facility is based on our accounts receivable andinventory, and is calculated as (i) 85% of our eligible accounts receivableplus (ii) the lesser of (a) 65% of our eligible inventory (valued on afirst-in-first-out basis), (b) 85% of the net orderly liquidation value of oureligible inventory as determined by a recent appraisal, and (c) $300million.  Only up to $100 million may beadvanced to us based on the value of our work-in-process inventory (with “filled-not-packed”and “packed-not-released” inventory being considered finished goodsinventory).  From time to time, thecollateral agent under the Revolving Credit Facility may modify our eligibilitystandards, establish or adjust reserves, or reduce one or more of the otherelements used in computing the borrowing base.

 

On October 15, 2009, weentered into an amendment to the Revolving Credit Facility dated as of October 12,2009.  The Revolving Credit Facility, asamended, permitted the 7.75% Notes, described above, to be issued as long asthe First and Second Lien Term Loan Credit Agreements were terminated inconnection with the offering of the 7.75% Notes.  The amendment also (i) increases the covenantbaskets for permitted acquisitions to $250 million, (ii) permits the payment ofcash dividends commencing with the first fiscal quarter of 2010 if certainconditions are met as described below, and (iii) increases our capitalexpenditure baskets so that we will be permitted to make capital expendituresof up to $225 million in each of 2010 and 2011. Moreover, pursuant to the amendments, we are not subject to any limitationon our capital expenditures in any fiscal year if our leverage ratio, asdefined, as of the end of the fiscal year most recently ended was less than orequal to 2.00 to 1.00.  Minimumavailability tests under the Revolving Credit Facility were also increased from$32.5 million to $48.75 million in connection with the amendment.

 

Our Revolving CreditFacility, as amended, permits the payment of cash dividends to holders of ourcommon stock commencing with the first fiscal quarter of 2010, so long as (i) theLeverage Ratio determined as of the end of the immediately preceding fiscalquarter for the then most recently completed four fiscal quarters, is equal toor less than 2.00 to 1.00 and (ii) the minimum pro forma Availability as of thedate of such dividend (after giving effect to such cash dividend, the fundingof all Revolving Loans, and the issuance of all Letters of Credit to be fundedor issued as of such date) is not less than $48.75 million; provided that, theaggregate amount of Restricted Payments shall not exceed 50% of Net Incomeduring the period from October 1, 2009 to the end of the most recently endedfiscal quarter as of the date of the Restricted Payment.

 

***First and Second Lien Term Loans***

 

Our First and Second LienTerm Loans were repaid in full and terminated as a result of the application ofthe net proceeds to us from our October 6, 2009 IPO and the issuance of our7.75% Notes on October 21, 2009.  Theweighted average annualized interest rates on the First Lien Term Loan were4.66%, 6.60%, and 9.07% for the years ended December 31, 2009, 2008, and 2007,respectively, and the weighted average annualized interest rates on the SecondLien Term Loan were 7.68%, 9.63%, and 12.13% for the years ended December 31,2009, 2008, and 2007, respectively.  At December31, 2008, the interest rates on the First and Second Lien Term Loans were 5.64%and 8.64%, respectively.

 

133

----

Tableof Contents

 

***Interest Rate Swaps and Caps***

 

We used $28.7 million ofthe net proceeds to us from the issuance of our 7.75% Notes to settle andterminate certain interest rate swap contracts with a notional amount of $390.0million.  Subsequently, we settled andterminated our remaining interest rate swap contract with a notional amount of$50.0 million for $6.1 million.  As aresult of the settlement and termination of these interest rate swap contracts,we recognized a charge of $30.9 million (approximately $18.9 million after tax)during the year ended December 31, 2009 within total other non-operatingexpense, net, in our consolidated income statement.  At December 31, 2008, approximately $23.3million, net of taxes, was recorded in accumulated other comprehensive loss,related to our interest rate swap contracts. As a result of their settlement and termination, we reclassified $23.3million out of accumulated other comprehensive loss to loss on extinguishmentof debt within total other non-operating expense, net, in our consolidatedincome statement for the year ended December 31, 2009.

 

At December 31, 2008, wehad five variable-to-fixed interest rate swap contracts with an aggregatenotional amount of $500.0 million and two interest rate cap contracts with anaggregate notional principal amount of $175.0 million outstanding,respectively.  At December 31, 2008, thefair value of our interest rate derivatives was $37.5 million, which wasrecorded primarily in other long-term liabilities on our consolidated balancesheet.  Fair value was calculated usingLevel 2 inputs, which included forward LIBOR curves and credit default swapdata.  At December 31, 2009, we had twointerest rate cap contracts with a notional principal amount of $175.0 millionoutstanding for which the cap rate of 6.00% was significantly higher thanprevailing market interest rates; therefore, the fair market value was zero.

 

***Additional Information Regarding Our Financial Covenants***

 

The lenders under ourRevolving Credit Facility use adjusted EBITDA as the basis of calculation ofour compliance with our Leverage Ratio (Total Debt divided by the last twelvemonths’ adjusted EBITDA) and Interest Coverage Ratio (last twelve months’ adjustedEBITDA divided by Cash Interest Expense). Both the Leverage Ratio and the Interest Coverage Ratio are measures ourlenders use to monitor our performance and ability to generate positive cashflows.

 

Adjusted EBITDA isdefined in our Revolving Credit Facility as net income plus net interestexpense, depreciation and amortization, income taxes, and otheradjustments.  Other adjustments include,but are not limited to, the following to the extent that they are included innet income:

 

·                  Write-offs,write-downs, asset revaluations and other non-cash charges, losses, andexpenses, including non-cash equity compensation expense;

 

·                  Impairments ofintangibles and goodwill;

 

·                  Extraordinarygains and losses;

 

·                  Fees paidpursuant to our Management Agreement, as amended, with Talecris Holdings, LLC,which was terminated in connection with our IPO;

 

·                  Fees andexpenses incurred in connection with transactions and permitted acquisitionsand investments;

 

·                  Extraordinary,unusual, or non-recurring charges and expenses including transition,restructuring, and “carve-out” expenses;

 

·                  Legal, accounting,consulting, and other expenses relating to the potential or actual issuance ofequity interests, including an initial public offering of common stock;

 

·                  Costs associatedwith our Special Recognition Bonuses; and

 

·                  Other items.

 

**12.****      ****Income Taxes**

 

Components of ourprovision (benefit) for income taxes are as follows:

 

134

----

Tableof Contents

 
| ** **                           | ** ** | **Years  Ended December 31,** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current provision:                   |       |                          |       |   |   |   |   |
| Federal                              |       | $                             | 68,960     |   | $ | 28,639 |   | $ | 24,394 |   |
| State and local                      |       | 3,421                         |       | 4,590 |   | 5,438 |   |
| Foreign                              |       | 1,348                         |       | 1,776 |   | 1,919 |   |
| Total current provision              |       | 73,729                        |       | 35,005 |   | 31,751 |   |
| Deferred provision (benefit):        |       |                          |       |   |   |   |   |
| Federal                              |       | 69                            |       | 7 |   | (14,464 | ) |
| State and local                      |       | 1,210                         |       | 1,582 |   | (2,327 | ) |
| Total deferred provision (benefit)   |       | 1,279                         |       | 1,589 |   | (16,791 | ) |
| Change in valuation allowance        |       | —                        |       | — |   | (55,754 | ) |
| Provision (benefit) for income taxes |       | $                             | 75,008     |   | $ | 36,594 |   | $ | (40,794 | ) |

 

A reconciliation ofexpected income tax expense (benefit) at the U.S. Federal rate of 35% to actualincome tax expense is as follows:

 
| ** **                                                             | ** ** | **Years  Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Amount computed at statutory rate                                      |       | $                             | 80,114     |   | $ | 35,837 |   | $ | 28,969 |   |
| State income taxes (net of Federal benefit)                            |       | 4,291                         |       | 4,059 |   | 3,201 |   |
| Research and development credits                                       |       | (7,732                        | )          | (4,052 | ) | (10,034 | ) |
| State tax credits (net of Federal benefit)                             |       | (871                          | )          | (600 | ) | (1,895 | ) |
| Federal benefit of tax deductions for qualified  production activities |       | (2,764                        | )          | (2,037 | ) | (2,166 | ) |
| Capitalized transaction costs                                          |       | (2,352                        | )          | 584 |   | 2,087 |   |
| Nondeductible meals and entertainment expenses                         |       | 504                           |       | 425 |   | 520 |   |
| Bayer settlement                                                       |       | —                        |       | — |   | (3,150 | ) |
| Other                                                                  |       | 3,818                         |       | 2,378 |   | (2,572 | ) |
| Change in valuation allowance                                          |       | —                        |       | — |   | (55,754 | ) |
| Provision (benefit) for income taxes                                   |       | $                             | 75,008     |   | $ | 36,594 |   | $ | (40,794 | ) |

 

We calculate a provisionfor, or benefit from, income taxes using the asset and liability method.  Deferred tax assets and liabilities arerecognized for future consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax creditcarry-forwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  The major components of our deferred taxassets and liabilities are as follows:

 

135

----

Tableof Contents

 
| ** **                                 | ** ** | **December  31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Current:                                   |       |              |       |   |   |
| Deferred income tax assets:                |       |              |       |   |   |
| Allowances on accounts receivable          |       | $                 | 11,020     |   | $ | 6,825 |   |
| Inventories                                |       | 23,928            |       | 25,023 |   |
| Revenue recognition                        |       | 7,857             |       | 6,148 |   |
| Stock-based compensation                   |       | 30,952            |       | 20,085 |   |
| Deferred bonuses                           |       | 4,617             |       | 9,980 |   |
| Accrued expenses                           |       | 4,568             |       | 4,683 |   |
| State tax credit carry-forward             |       | 3,195             |       | 2,991 |   |
| Other                                      |       | 3,543             |       | 1,782 |   |
| Total deferred income tax assets           |       | 89,680            |       | 77,517 |   |
| Deferred income tax liabilities:           |       |              |       |   |   |
| Other liabilities                          |       | (1,028            | )          | (930 | ) |
| Total deferred income tax liabilities      |       | (1,028            | )          | (930 | ) |
| Net current deferred income tax assets     |       | $                 | 88,652     |   | $ | 76,587 |   |
|                                       |       |              |       |   |   |
| Non-current:                               |       |              |       |   |   |
| Deferred income tax assets:                |       |              |       |   |   |
| Property, plant, and equipment             |       | $                 | 14,170     |   | $ | 23,615 |   |
| Interest rate swaps and caps               |       | —            |       | 14,225 |   |
| Other                                      |       | 252               |       | — |   |
| Total deferred income tax assets           |       | 14,422            |       | 37,840 |   |
| Deferred income tax liabilities:           |       |              |       |   |   |
| Intangibles                                |       | (8,574            | )          | (3,973 | ) |
| Other                                      |       | —            |       | (514 | ) |
| Total deferred income tax liabilities      |       | (8,574            | )          | (4,487 | ) |
| Net non-current deferred income tax assets |       | $                 | 5,848      |   | $ | 33,353 |   |
|                                       |       |              |       |   |   |
| Net deferred income tax assets             |       | $                 | 94,500     |   | $ | 109,940 |   |

 

We record a valuationallowance to reduce our deferred tax assets to the amount that we believe ismore likely than not to be realized.  Inassessing the need for a valuation allowance, we consider all availableevidence, both positive and negative, including historical levels of income,expectations and risks associated with future taxable income, and ongoingprudent and feasible tax planning strategies. As a result of our analysis of all available evidence, which includedten consecutive quarters of cumulative pre-tax profits and our expectationsthat we can generate sustainable consolidated taxable income for theforeseeable future, we concluded that it was more likely than not that our deferredtax assets would be realized, and consequently, we released the remainingvaluation allowance related to our deferred tax assets during the third quarterof 2007.  The release of the valuationallowance related to our deferred tax assets resulted in a $48.2 millionnon-cash tax benefit during the year ended December 31, 2007.  During the first three quarters of 2007, wealso realized a portion of our deferred tax assets equal to the amount of ourcurrent Federal income tax provision.

 

We have not provided forU.S. Federal income and foreign withholding taxes on our non-U.S. subsidiaries’cumulative undistributed earnings of approximately $9.7 million as of December 31,2009 as such earnings are intended to be reinvested outside of the U.S.indefinitely.  It is not practicable toestimate the amount of tax that might be payable if some or all of suchearnings were to be remitted, and foreign tax credits would be available toreduce or eliminate the resulting U.S. income tax liability.

 

At December 31, 2009, wehad state tax credit carryforwards of $4.9 million that will start expiring in2013.  Our ability to offset futuretaxable income with tax credit carryforwards may be limited in certaincircumstances, including changes in ownership.

 

We adopted new income taxaccounting guidance on January 1, 2007, which prescribes a two-step process forthe financial statement measurement and recognition of a tax position taken orexpected to be taken in a tax return. The first step involves the determination of whether it is more likelythan not (greater than 50% likelihood) that a tax position will be sustainedupon examination, based upon the technical merits of the position.  The second step requires that any taxposition that meets the more likely than not recognition threshold be measuredand recognized in the financial statements at the largest amount of the benefitthat is greater than 50% likely of being realized upon ultimatesettlement.  The new accounting guidance alsoprovides guidance on the accounting for related interest and penalties,financial statement classification, and disclosure.  The adoption of this accounting guidanceresulted in a decrease to retained earnings of approximately $0.7 million.

 

The following tablesummarizes activity related to our gross unrecognized tax positions:

 

136

----

Tableof Contents

 
| Unrecognized tax benefits at January 1, 2007           |   | $      | 6,893  |   |
|--------------------------------------------------------|--------|--------|--------|--------|
| Additions for tax positions taken in the current  year |   | 2,959  |   |
| Reductions for tax positions taken in a prior year     |   | (2,967 | )      |
| Unrecognized tax benefits at December 31, 2007         |   | 6,885  |   |
| Additions for tax positions taken in the current  year |   | 3,626  |   |
| Reductions for tax positions taken in a prior year     |   | (521   | )      |
| Unrecognized tax benefits at December 31, 2008         |   | 9,990  |   |
| Additions for tax positions taken in the current  year |   | 3,899  |   |
| Reductions for tax positions taken in a prior year     |   | (1,642 | )      |
| Unrecognized tax benefits at December 31, 2009         |   | $      | 12,247 |   |

 

As of December 31, 2009,our total gross unrecognized tax benefits were approximately $12.2 million, ofwhich approximately $8.8 million would reduce our effective income tax rate ifrecognized.  Interest and penaltiesrelated to unrecognized tax benefits are included in income tax expense.  No material interest or penalties wereincurred during the years presented.

 

The Internal RevenueService (IRS) recently completed the fieldwork related to the audit of our2005, 2006, and 2007 Federal income tax returns.  The Joint Committee on Taxation returned the2005, 2006 and 2007 Federal income tax audit to the IRS field agent foradditional review. The case will be resubmitted to the Joint Committee on Taxationand is likely to be finalized following their review.  We do not believe that the outcome of thisexamination will have a material adverse impact on our consolidated financialcondition or results of operations. However, it is reasonably possible that within the next twelve months,we will resolve with the IRS some or all of the matters presently underconsideration in the examination for 2005, 2006, and 2007, primarily consistingof research and experimental credits and orphan drug credits, which mayincrease or decrease the unrecognized tax benefits for all open tax years.  Settlement could increase earnings in anamount ranging from $0 to $4.7 million based on current estimates.  Audit outcomes and the timing of auditsettlements are subject to significant uncertainty.

 

We have analyzed ourfiling positions for all open years in all significant Federal, state, andforeign jurisdictions where we are required to file income tax returns.  The periods subject to examination by themajor tax jurisdictions where we conduct business are tax periods 2005 through2009.

 

**13.****      ****Commitmentsand Contingencies**

 

***Leases***

 

We lease officebuildings, plasma collection centers, refrigerated storage, furniture,machinery, computer equipment, and miscellaneous equipment under leasingagreements.  The majority of our leasesare operating leases.  In addition torent, certain of our leases require us to pay directly for taxes, insurance,maintenance, and other operating expenses. Future minimum lease payments required under our capital leases andnon-cancellable operating leases as of December 31, 2009 are as follows:

 
| ** **                                         | ** ** | ** **  | ** ** | **Non-cancellable** | ** ** |
|----------------------------------------------------|------------|-------------|------------|---------------------|------------|
| ** **                                         | ** ** | **Capital** | ** ** | **Operating**       | ** ** |
| ** **                                         | ** ** | **Leases**  | ** ** | **Leases**          | ** ** |
| 2010                                               |       | $           | 1,740      |                | $          | 16,727 |   |
| 2011                                               |       | 1,762       |       | 12,401              |       |
| 2012                                               |       | 1,784       |       | 7,857               |       |
| 2013                                               |       | 1,810       |       | 4,501               |       |
| 2014                                               |       | 1,778       |       | 3,212               |       |
| Thereafter                                         |       | 6,283       |       | 5,788               |       |
| Total future minimum lease payments                |       | 15,157      |       | $                   | 50,486     |   |
| Less: amounts representing interest                |       | (5,196      | )          |                |       |
| Present value of net minimum lease payments        |       | 9,961       |       |                |       |
| Less: current portion of capital lease obligations |       | (740        | )          |                |       |
| Total                                              |       | $           | 9,221      |                |       |   |

 

In the preceding table,the future minimum annual rentals payable under non-cancellable leasesdenominated in foreign currencies have been calculated based upon the December 31,2009 foreign currency exchange rates. Rental cost was approximately $16.6 million, $14.8 million, and $13.0million for the years ended December 31, 2009, 2008, and 2007, respectively.

 

137

----

Tableof Contents

 

***Employment Agreements***

 

We have employmentagreements and offer letters with certain of our employees which requirepayments generally ranging from 100% to 200% of the employee’s annualcompensation if employment is terminated not for cause by us, or by theemployee, for good reason, as defined. Certain of these arrangements also include provisions for payments ofbonuses under our annual incentive plan and the vesting of restricted stockand/or stock options, as well as other customary payments, such as accruedpersonal days, bonuses, continuing benefits, and outplacement services.  Unless such termination is for cause, if suchtermination occurs within a specified period following a change in control ofthe Company, as therein defined, the agreements generally require us to vestall of the employees’ stock-based compensation.

 

***Customer Commitments***

 

We have supply agreementswith some of our customers which require us to provide certain minimumquantities of our products for various periods. At December 31, 2009, we currently anticipate being able to fill thesesupply agreements in the foreseeable future and we do not consider ourpotential exposure for unfilled customer orders to be material.

 

***Litigation***

 

We are involved invarious legal and regulatory proceedings that arise in the ordinary course ofbusiness.  We record accruals for suchcontingencies to the extent that we conclude that their occurrence is bothprobable and estimable.  We consider manyfactors in making these assessments, including the professional judgment ofexperienced members of management and our legal counsel.  We have estimated the likelihood ofsettlement, unfavorable outcomes and the amounts of such potential losses.  In our opinion, the ultimate outcome of theseproceedings and claims is not anticipated to have a material adverse effect onour consolidated financial position, results of operations, or cash flows.  However, the ultimate outcome of litigationis unpredictable and actual results could be materially different from ourestimates.  We record anticipatedrecoveries under applicable insurance contracts when we are assured ofrecovery.

 

***National Genetics Institute/Baxter Healthcare Corporation Litigation***

 

In May 2008, BaxterHealthcare Corporation (Baxter) and National Genetics Institute (NGI), a wholly-ownedsubsidiary of Laboratory Corporation of America, filed a complaint in the U.S.District Court for the Eastern District of North Carolina, alleging that weinfringed U.S. Patent Nos. 5,780,222, 6,063,563, and 6,566,052. They subsequentlywithdrew and re-filed the case in November 2008. The patents deal primarilywith a method of screening large numbers of biological samples utilizingvarious pooling and matrix array strategies, and the complaint alleges that thepatents are owned by Baxter and exclusively licensed to NGI. In November 2008,we filed our answer to their complaint, asserting anti-trust and othercounterclaims, and filed a request for re-examination of the patents with thePatent and Trademark Office (PTO), which was subsequently granted. We filed amotion to stay litigation pending the PTO proceedings. The motion was unopposedand subsequently granted on January 30, 2009. On July 7 and July 9, 2009, thePTO mailed Notices of Intent to Issue Reexamination Certificates withoutamending the claims of the patents in dispute. Neither party has yet filedmotions to resume the litigation. We believe the allegations of infringementare without merit and that the patents are invalid as applied to our processes.We intend to vigorously defend against the complaint and pursue ourcounterclaims.

 

***Plasma Centers of America, LLC and G&M Crandall Limited FamilyPartnership***

 

We had a three yearAmended and Restated Plasma Sale/Purchase Agreement with Plasma Centers ofAmerica, LLC (PCA) under which we were required to purchase annual minimumquantities of plasma from plasma collection centers approved by us, includingthe prepayment of 90% for unlicensed plasma. We were also committed to finance the development of up to eight plasmacollection centers, which were to be used to source plasma for us.  Under the terms of the agreement, we had theobligation to purchase such centers under certain conditions for a sumdetermined 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 weadvanced payment of $1.0 million for unlicensed plasma.

 

In August 2008, wenotified PCA that they were in breach of the Amended and Restated PlasmaSale/Purchase Agreement.  We terminatedthe agreement in September 2008. In November 2008, TPR filed suit in federalcourt in Raleigh against the G&M Crandall Limited Family Partnership andits individual partners as guarantors of obligations of PCA. A mediation heldon January 8, 2009 with the objective of a global resolution of all claimsamong and between the various parties ended in an impasse. We were served in January2009 in a parallel state action by PCA, alleging breach of contract by TPR. Thetwo cases are proceeding in parallel with trial in the state court set for May 24,2010.   During the year ended December 31,2008, we recorded provisions of $4.2 million related to the notes receivableand advances within SG&A, due to uncertainty regarding collection.

 

138

----

Tableof Contents

 

***Foreign Corrupt Practices Act***

 

We are conducting aninternal investigation into potential violations of the Foreign CorruptPractices Act (FCPA) that we became aware of during the conduct of an unrelatedreview.  The FCPA investigation is beingconducted by outside counsel under the direction of a special committee of ourboard of directors.  The investigationinitially focused on sales to certain Eastern European and Middle Easterncountries, but our investigation is also reviewing sales practices in othercountries as determined appropriate.

 

In July 2009, wevoluntarily contacted the U.S. Department of Justice (DOJ) to advise them ofthe investigation and to offer our cooperation in any investigation that theywant to conduct or they want us to conduct. The DOJ has not indicated whataction it may take, if any, against us or any individual, or the extent towhich it may conduct its own investigation. The DOJ or other federal agenciesmay 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 andtraining programs. Other countries in which we do business may initiate theirown investigations and impose similar penalties. As a result of thisinvestigation, we have suspended shipments to some of these countries while weput additional safeguards in place. In some cases, safeguards involvedterminating consultants and suspending relations with or terminatingdistributors in countries under investigation as circumstances warranted. Theseactions unfavorably affected revenue from these countries in 2009. We haveresumed sales in countries where we have appropriate safeguards in place andare reallocating product to other countries as necessary.  To the extent that we conclude, or the DOJconcludes, that we cannot implement adequate safeguards or otherwise need tochange our business practices, distributors, or consultants in affectedcountries or other countries, this may result in a permanent loss of businessfrom those countries. These sanctions or the loss of business could have amaterial adverse effect on us or our results of operations. Based on theinformation obtained to date, we have not determined that any potentialliability that may result is probable or can be reasonably estimated.Therefore, we have not made any accrual in our consolidated financialstatements as of December 31, 2009.

 

As of December 31, 2009,we have $2.4 million of accounts receivable outstanding with customers relatedto this matter, which we fully reserved during 2009.

 

***Pharmaceutical Pricing Agreement under the Public Health ServiceProgram***

 

In November 2009,we received a letter from the United States Attorney’s Office for the EasternDistrict of Pennsylvania (“USAO”). The USAO requested a meeting to review ourcompliance with the terms of the Pharmaceutical Pricing Agreement (“PPA”) underthe Public Health Service program. Specifically, the USAO asked for informationrelated to the sale of our IGIV product, Gamunex, under that program.  In order to have federal financialparticipation apply to their products under the Medicaid program and to obtainMedicare Part B coverage, manufacturers are required to enter into a PPA. ThePPA obligates manufacturers to charge covered entities the Public HealthService price for drugs intended for outpatient use. The Public Health Serviceprice is based on the Medicaid rebate amount. We believe that we have compliedwith the terms of the PPA and federal law.  If the USAO determines that our practices areinconsistent with the terms of the PPA, the USAO has stated that it may file acivil action against us under the Anti-fraud Injunction Act and seek a courtorder directing the company to comply with the PPA or, potentially, proceedunder some other legal theory.   We could also be subject to fines, damages,penalties, appointment of a monitor, or enhancement of existing compliance andtraining programs as a result of government action. We are cooperating with theinvestigation and intend to respond to information requests from the USAO.

 

***Exclusive License Agreements with Crucell N.V. (Crucell)***

 

During September 2008,we entered into an exclusive commercial license agreement with Crucell forrecombinant technology.  In considerationof the license that Crucell granted us, we paid an upfront license fee of $2.5million, which we recorded in R&D in our consolidated income statementduring the year ended December 31, 2008. We could be required to pay up to $29.5 million of additionaldevelopment milestones as certain activities are completed.  Upon commercialization of the product, we arerequired to pay a royalty at a tiered rate, ranging between 3.5% and 6%, basedon the related net sales of the product.

 

During December 2008,we entered into another exclusive commercial license agreement with Crucell forrecombinant technology.  In considerationof the license that Crucell granted us, we paid an upfront license fee of $1.5million, which we recorded in R&D in our consolidated income statement forthe year ended December 31, 2008.  Duringthe year ended December 31, 2009, we paid $0.5 million to Crucell, which isincluded in R&D in our consolidated income statement.  We could be required to pay up to $18.5million of additional development milestones as certain activities arecompleted.  Upon commercialization of theproduct, we are required to pay a royalty at a tiered rate, ranging between 3%and 5%, based on the related net sales of the product.

 

Under the terms ofboth exclusive license agreements with Crucell, we may terminate eitheragreement by giving Crucell 90 days prior written notice and payment of alloutstanding amounts owed to Crucell.

 

139

----

Table of Contents

 

***Purchase Commitments***

 

We have purchaseagreements that require us to purchase minimum annual quantities of plasma,other raw materials, and associated subcontracted manufacturing services.  At December 31, 2009, our purchasecommitments, generally subject to annual price negotiations, are as follows:

 
| 2010       |   | $       | 202,307 |   |
|------------|--------|---------|---------|--------|
| 2011       |   | 162,615 |    |
| 2012       |   | 101,385 |    |
| 2013       |   | 86,307  |    |
| 2014       |   | 52,947  |    |
| Thereafter |   | 113,969 |    |
| Total      |   | $       | 719,530 |   |

 

An inability ofany of our suppliers to satisfy their obligations in a timely manner couldcause a disruption in our plasma supply, which could materially adverselyaffect our business.

 

At December 31,2009, we have commitments for capital spending to be made in 2010 totaling$31.6 million.

 

***Environmental Matters***

 

Our operations aresubject to extensive and evolving federal, state, and local environmental lawsand regulations.  Compliance with suchlaws and regulations can be costly. Additionally, governmental authorities may enforce the laws andregulations with a variety of civil and criminal enforcement measures,including monetary penalties and remediation requirements.  It is possible that new information or futuredevelopments could require us to reassess our potential exposure related toenvironmental matters.  We may incursignificant costs and liabilities in order to comply with existingenvironmental laws and regulations.  Itis also possible that other developments, such as increasingly strictenvironmental laws and regulations and claims for damages to property,employees, other persons, and the environment resulting from current or pastoperations, could result in substantial costs and liabilities in the future asthis information becomes available, or other relevant developments occur.  We establish accrued liabilities or adjustpreviously accrued amounts accordingly. While there are still uncertainties relating to the ultimate costs wemay incur, based upon our evaluation and experience to date, we believe thatcompliance with all applicable laws and regulations will not have a materialadverse impact on our financial position, operating results, or cashflows.  At December 31, 2009 and 2008, noamounts have been accrued as we are not currently aware of any probableliabilities.

 

***Other***

 

All pharmaceuticalcompanies, including us, are subject to periodic inspections by the FDA andother regulatory authorities of manufacturing and plasma collection facilities,procedures, and processes.  If in thecourse of an inspection, the FDA or other regulatory authority notes conditionsthey believe are objectionable with respect to cGMP or other applicableregulations, we must implement effective corrective actions or face regulatoryor enforcement sanctions.

 

**14.****      ****RelatedParty Transactions**

 

We considerCerberus and Ampersand to be related parties during the periods presented.  As of December 31, 2009, Talecris Holdings,LLC held approximately 50.1% of our outstanding common stock.  Talecris Holdings, LLC is owned by (i) Cerberus-PlasmaHoldings LLC, the managing member of which is Cerberus Partners, L.P., and (ii)limited partnerships affiliated with Ampersand Ventures.  Substantially all rights of management andcontrol of Talecris Holdings, LLC are held by Cerberus-Plasma HoldingsLLC.  Subsequent to December 31, 2009,the ownership of our outstanding common stock by Talecris Holdings, LLC wasdiluted below 50%.

 

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

 

We have an equityinvestment in Centric as further discussed in Note 10, “Investment inAffiliate;” therefore, we consider Centric to be a related party during theperiods presented.

 

140

----

Table of Contents

 

The followingtable summarizes our related party transactions for the years ended December 31,2009, 2008, and 2007 and our related party accounts payable balances at December31, 2009 and 2008:

 
| **Related  Party**  | ** **   | **Activity/  Transaction**               | ** ** | **Expenses** | ** ** |
|---------------------|--------------|------------------------------------------|------------|--------------|------------|
|                |         |                                     |       |         |       |
|                | *** *** | ***Year Ended December 31, 2009***       |       |         |       |
| Centric             |         | Product  distribution and other services |       | $            | 20,306     |   |
| Cerberus/ Ampersand |         | Management  fees                         |       | $            | 5,715      |   |
| Cerberus            |         | Operational  support                     |       | $            | 608        |   |
|                |         |                                     |       |         |       |
|                | *** *** | ***Year Ended December 31, 2008***       |       |         |       |
| Centric             |         | Product  distribution and other services |       | $            | 17,508     |   |
| Cerberus/ Ampersand |         | Management  fees                         |       | $            | 6,871      |   |
| Cerberus            |         | Operational  support                     |       | $            | 4,184      |   |
|                |         |                                     |       |         |       |
|                | *** *** | ***Year Ended December 31, 2007***       |       |         |       |
| Centric             |         | Product  distribution and other services |       | $            | 14,509     |   |
| Cerberus/ Ampersand |         | Management  fees                         |       | $            | 6,097      |   |
| Cerberus            |         | Operational  support                     |       | $            | 867        |   |

 
| ** **          | ** ** | ** **                               | ** ** | **Payable**       | ** ** |
|---------------------|------------|------------------------------------------|------------|-------------------|------------|
| ** **          | ** ** | ** **                               | ** ** | **December  31,** | ** ** |
| **Related  Party**  | ** ** | **Activity/  Transaction**               | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Centric             |       | Product  distribution and other services |       | $                 | 5,537      |   | $ | 3,690 |   |
| Cerberus/ Ampersand |       | Management  fees                         |       | $                 | —     |   | $ | 2,007 |   |
| Cerberus            |       | Operational  support                     |       | $                 | 349        |   | $ | 708 |   |

 

**15.****      ****EquityTransactions**

 

On October 6,2009, we completed our IPO of 56,000,000 shares of our common stock, par value$0.01 per share.  Additional informationregarding our IPO is included in Note 3, “Initial Public Offering and Use ofProceeds.”

 

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

 

On September 30,2009, 1,000,000 shares of our Series A preferred stock and 192,310 shares ofour Series B preferred stock were converted into an aggregate of 85,846,320shares of our common stock in connection with our IPO.  In addition, on September 30, 2009, 2,381,548shares of our common stock were issued to settle $45.3 million of accrueddividends upon the conversion of our Series A and B preferred stock.   Additional information regarding our Series Aand B preferred stock is included in Note 16, “Redeemable Series A and B SeniorConvertible Preferred Stock.”

 

During the yearended December 31, 2008, we repurchased 2,146,232 shares of our common stockfrom IBR for $35.4 million at a put value of $15.61 per share plus accruedcharges.  The shares were issued to IBRduring the year ended December 31, 2007 as a result of the acceleration of thecontingent consideration provision of our November 2006 Asset PurchaseAgreement, as amended.  Additionalinformation regarding the shares repurchased from IBR is included in Note 5 “BusinessAcquisitions.”

 

During the yearended December 31, 2008, our board of directors approved the retirement of2,212,640 shares of our common stock held in treasury, and approved that sharesof our common stock repurchased in the future would be immediately retired bythe Company.

 

Informationregarding employee share-based compensation is included in Note 17, “Share-BasedCompensation.”

 

**16.****      ****RedeemableSeries A and B Senior Convertible Preferred Stock**

 

On September 30,2009, 1,000,000 shares of our Series A preferred stock and 192,310 shares ofour Series B preferred stock were converted into an aggregate of 85,846,320shares of our common stock in connection with our IPO.  In addition, on September 30, 2009, 2,381,548shares of our common stock were issued to settle $45.3 million of accrueddividends upon the conversion of our Series A and B preferred stock.  The fair value of the as-converted commonstock was $1.676 billion on the conversion date based upon our IPO price percommon share of $19.00.

 

141

----

Table of Contents

 

At December 31,2008, 1,000,000 shares of our Series A preferred stock and 192,310 shares ofour Series B preferred stock were issued and outstanding, both of whichentitled the holders to cumulative dividends at a rate of 10% per annum,compounded quarterly, based on the liquidation preference of $100.00 pershare.  Each share of Series A and Bpreferred stock was convertible at the election of the holder into 72 shares ofour common stock.  Holders of the Series Aand B preferred stock were entitled to ten votes per share of the as-convertedcommon stock.  At December 31, 2008,undeclared dividends related to the Series A and B preferred stock totaled$33.5 million.  The fair value of the SeriesA and B preferred stock was $1.427 billion at December 31, 2008, excludingunpaid undeclared dividends.

 

**17.****      ****Share-BasedCompensation**

 

In connection withour IPO, we ceased further grants under our 2005 Stock Option and IncentivePlan and 2006 Restricted Stock Plan.  TheTalecris Biotherapeutics Holdings Corp. 2009 Long-Term Incentive Plan (2009Plan), which was adopted by our board of directors on August 7, 2009, becameeffective in connection with our IPO. The 2009 Plan provides for the grant of awards in the form of incentivestock options, nonqualified stock options, share appreciation rights,restricted stock, RSU’s, unrestricted shares of common stock, deferred shareunits, and performance awards.  Ouremployees, directors, and consultants are eligible to receive awards under the2009 Plan.  The maximum number of sharesthat we may issue for all awards under the 2009 Plan is 7,200,000.  As of December 31, 2009, 6,112,896 sharesremain available for grant under the 2009 Plan.

 

We valueshare-based compensation at the grant date using a fair value model andrecognize this value as expense over the employees’ requisite service period,typically the period over which the share-based compensation vests.  We classify share-based compensation costsconsistent with each grantee’s salary. In connection with stock option exercises and restricted share vesting,we recognized net tax benefits of $20.4 million and $3.3 million for the yearsended December 31, 2009 and 2008, respectively. We record income tax benefits realized upon exercise or vesting of anaward in excess of that previously recognized in earnings as additionalpaid-in-capital.  We recognized excesstax benefits related to share-based compensation of $13.4 million during theyear ended December 31, 2009.

 

Share-basedcompensation expense for the years ended December 31, 2009, 2008, and 2007 wasas follows:

 
| ** **                        | ** ** | **Stock  Options** | ** ** | ** **       | ** ** | ** **     | ** ** |
|-----------------------------------|------------|--------------------|------------|------------------|------------|----------------|------------|
| ** **                        | ** ** | **Service-**       | ** ** | **Performance-** | ** ** | **Restricted** | ** ** | ** ** | ** ** |
| **Year  Ended December 31, 2009** | ** ** | **Based**          | ** ** | **Based**        | ** ** | **Stock**      | ** ** | **RSU’s** | ** ** |
| SG&A                          |       | $                  | 27,246     |             | $          | 4,102          |       | $ | 9,402 |   | $ | 218 |   |
| R&D                           |       | 1,295              |       | 415              |       | 535            |       | 58 |   |
| Cost of goods sold                |       | 2,585              |       | 854              |       | 836            |       | — |   |
| Total expense                     |       | $                  | 31,126     |             | $          | 5,371          |       | $ | 10,773 |   | $ | 276 |   |

 
| ** **                        | ** ** | **Stock  Options** | ** ** | ** **       | ** ** | ** **     | ** ** |
|-----------------------------------|------------|--------------------|------------|------------------|------------|----------------|------------|
| ** **                        | ** ** | **Service-**       | ** ** | **Performance-** | ** ** | **Restricted** | ** ** | ** ** | ** ** |
| **Year  Ended December 31, 2008** | ** ** | **Based**          | ** ** | **Based**        | ** ** | **Stock**      | ** ** | **Total** | ** ** |
| SG&A                          |       | $                  | 16,245     |             | $          | 7,992          |       | $ | 9,543 |   | $ | 33,780 |   |
| R&D                           |       | 1,011              |       | 815              |       | 535            |       | 2,361 |   |
| Cost of goods sold                |       | 975                |       | 854              |       | 737            |       | 2,566 |   |
| Total expense                     |       | $                  | 18,231     |             | $          | 9,661          |       | $ | 10,815 |   | $ | 38,707 |   |

 
| ** **                        | ** ** | **Stock  Options** | ** ** | ** **       | ** ** | ** **     | ** ** |
|-----------------------------------|------------|--------------------|------------|------------------|------------|----------------|------------|
| ** **                        | ** ** | **Service-**       | ** ** | **Performance-** | ** ** | **Restricted** | ** ** | ** ** | ** ** |
| **Year  Ended December 31, 2007** | ** ** | **Based**          | ** ** | **Based**        | ** ** | **Stock**      | ** ** | **Total** | ** ** |
| SG&A                          |       | $                  | 4,697      |             | $          | 7,406          |       | $ | 6,509 |   | $ | 18,612 |   |
| R&D                           |       | 117                |       | 743              |       | 536            |       | 1,396 |   |
| Cost of goods sold                |       | 484                |       | 464              |       | 285            |       | 1,233 |   |
| Total expense                     |       | $                  | 5,298      |             | $          | 8,613          |       | $ | 7,330 |   | $ | 21,241 |   |

 

During the yearsended December 31, 2009, 2008, and 2007, we capitalized $4.0 million, $4.0million, and $2.3 million of share-based compensation cost withininventory.  Amounts capitalized ininventory are recognized in cost of goods sold in our consolidated incomestatements primarily within twelve months.

 

The followingtable summarizes the remaining unrecognized compensation cost related to ourshare-based compensation awards as of December 31, 2009 and the weightedaverage period over which the non-cash compensation cost is expected to berecognized:

 

142

----

Table ofContents

 
| ** **              | ** ** | ** **       | ** ** | **Weighted-** | ** ** |
|-------------------------|------------|------------------|------------|---------------|------------|
| ** **              | ** ** | **Unrecognized** | ** ** | **Average**   | ** ** |
| ** **              | ** ** | **Compensation** | ** ** | **Period**    | ** ** |
| ** **              | ** ** | **Cost**         | ** ** | **(Years)**   | ** ** |
| Stock options           |       | $                | 9,878      |          | 1.75       |   |
| Restricted share awards |       | 6,977            |       | 0.66          |       |
| RSU’s              |       | 7,912            |       | 3.25          |       |
| Total                   |       | $                | 24,767     |          | 1.92       |   |

 

In addition to theunrecognized compensation cost included in the table above, at December 31,2009, $3.2 million of compensation cost was included in inventory on ourconsolidated balance sheet, which we expect to be recognized as non-cashcompensation expense in our consolidated income statement primarily during2010.  The amount of share-basedcompensation expense that we will ultimately be required to record could changein the future as a result of additional grants, changes in the fair value ofshares for performance-based options, differences between our anticipatedforfeiture rate and the actual forfeiture rate, the probability of achievingtargets established for performance share vesting, and other actions by ourboard of directors or its compensation committee.

 

***StockOptions***

 

Stock options,which entitle the holder to purchase, after the end of a vesting term, aspecified number of shares of our common stock at a price per share equal tothe exercise price, are accounted for at fair value at the date of thegrant.  Option awards are granted with anexercise price at least equal to the fair value of our common stock at the dateof grant and generally vest over periods of three to five years.  The exercise price of stock options isdetermined by our board of directors. The stock options that we granted to employees typically haveservice-based and performance-based components. The stock options granted to members of our board of directors areservice-based only.  Our stock optionsgenerally expire ten years after the date of grant, or earlier if an optionholder ceases to be employed by the Company. Stock option exercises are settled with newly issued common stockpreviously authorized and available for issuance.

 

The following is asummary of stock option activity for the years ended December 31, 2009, 2008,and 2007:

 
| ** **                                       | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|--------------------------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** **   | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining**   | ** ** | ** **    | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **Average**  | ** ** | **Contractual** | ** ** | **Aggregate** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term**        | ** ** | **Intrinsic** | ** ** |
| ** **                                       | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(Years)**     | ** ** | **Value**     | ** ** |
| Outstanding at December 31, 2006                 |       | 10,454,424 |       | $            | 2.72       |            |       |          |       |   |
| Granted                                          |       | 2,637,152  |       | $            | 21.21      |            |       |          |       |   |
| Forfeited                                        |       | (159,232   | )          | $            | 8.54       |            |       |          |       |   |
| Outstanding at December 31, 2007                 |       | 12,932,344 |       | $            | 6.42       |            |       |          |       |   |
| Granted                                          |       | 2,291,304  |       | $            | 10.98      |            |       |          |       |   |
| Forfeited                                        |       | (945,232   | )          | $            | 2.98       |            |       |          |       |   |
| Outstanding at December 31, 2008                 |       | 14,278,416 |       | $            | 6.96       |            |       |          |       |   |
| Granted                                          |       | 638,472    |       | $            | 18.91      |            |       |          |       |   |
| Forfeited                                        |       | (392,688   | )          | $            | 4.89       |            |       |          |       |   |
| Exercised                                        |       | (2,394,762 | )          | $            | 3.17       |            |       |          |       |   |
| Outstanding at December 31, 2009                 |       | 12,129,438 |       | $            | 8.40       |            | 6.7        |          | $          | 168,235 |   |
|                                             |       |       |       |         |       |            |       |          |       |
| Exercisable at December 31, 2009                 |       | 8,711,838  |       | $            | 8.16       |            | 5.8        |          | $          | 122,924 |   |
|                                             |       |       |       |         |       |            |       |          |       |
| Vested and expected to vest at December 31, 2009 |       | 12,111,507 |       | $            | 8.40       |            | 6.7        |          | $          | 167,987 |   |

 

At December 31,2008 and 2007, stock options with a weighted average exercise price of $4.02and $2.15 were exercisable for 6,950,872 shares and 4,426,880 shares,respectively.  Our estimate of the stockoptions vested and expected to vest at December 31, 2009 considers an expectedforfeiture rate of 3%.

 

The aggregateintrinsic value in the table above represents the difference between the $22.27closing price of our common stock as reported by The NASDAQ Global SelectMarket on December 31, 2009 and the weighted average exercise price, multipliedby the number of options outstanding or exercisable.  The total intrinsic value and net cashproceeds to us from stock option exercises during the year ended December 31,2009 were $41.6 million and $7.6 million, respectively.  We do not record the aggregate intrinsicvalue for financial accounting purposes and the value changes based uponchanges in the fair value of our common stock. The total 

 

143

----

Table of Contents

 

fair value of stock options that vested during theyears ended December 31, 2009, 2008, and 2007 were $72.5 million, $24.7million, and $20.2 million, respectively.

 

The weightedaverage grant date fair value of options granted during the years ended December31, 2009, 2008, and 2007 were $9.49, $4.35, and $11.65, respectively.  We estimated the fair value of stock optionsat their grant date using the Black-Scholes option pricing model.  This model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable, characteristics that are not present in our optiongrants.  If the model permittedconsideration of the unique characteristics of employee stock options, theresulting estimate of the fair value of stock options could be different.  The following weighted-average assumptionswere used to estimate the fair value of stock options granted during the yearsended December 31, 2009, 2008, and 2007:

 
| ** **              | ** ** | **Years  Ended December 31,** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free interest rate |       | 2.66%                         |       | 2.65% |   | 5.00% |   |
| Expected term (life)    |       | 5.97                          |       | 5.20 |   | 6.2 |   |
| Expected volatility     |       | 50%                           |       | 50% |   | 50% |   |
| Expected dividend yield |       | 0%                            |       | 0% |   | 0% |   |

 

The risk-freeinterest rate is based upon the U.S. Treasury yield curve at the time ofgrant.  The expected life of options isreflective of our historical experience, vesting schedules, and contractualterms.  There is limited trading historyfor our common stock; therefore, our application of the Black-Scholes optionpricing model incorporated historical volatility measures of similar publiccompanies.  We currently do not expect topay dividends in the future.  Wegenerally apply a 3% annual forfeiture rate to the options granted over theterm of the award.  This rate iscalculated based upon historical attrition rates and represents an estimate ofthe granted options not expected to vest. If actual forfeitures differ from the expected rate, we may be requiredto make additional adjustments to compensation expense in future periods.

 

***RestrictedStock Units***

 

RSU’s, whichentitle the holder to receive, at the end of a vesting term, a specified numberof shares of our common stock, are accounted for at fair value at the date ofgrant.  We granted 483,100 RSU’s inconnection with our IPO.  These RSU’swill vest one-third on each of April 1 of 2011, 2012, and 2013, subject to theaward holder being employed on the vesting date.  The aggregate fair value of the RSU’s was$8.4 million, which will be recognized as compensation expense ratably through Aprilof 2013.  The following is a summary ofRSU activity for the year ended December 31, 2009:

 
| ** **                       | ** ** | ** ** | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|----------------------------------|------------|------------|------------|-----------------|------------|-----------------|------------|---------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** **      | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                       | ** ** | ** ** | ** ** | **Weighted**    | ** ** | **Remaining**   | ** ** | ** **    | ** ** |
| ** **                       | ** ** | ** ** | ** ** | **Average**     | ** ** | **Contractual** | ** ** | **Aggregate** | ** ** |
| ** **                       | ** ** | ** ** | ** ** | **Grant  Date** | ** ** | **Term**        | ** ** | **Intrinsic** | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **Fair  Value** | ** ** | **(Years)**     | ** ** | **Value**     | ** ** |
| Outstanding at December 31, 2008 |       | —     |       | —          |       |            |       |          |       |
| Granted                          |       | 483,100    |       | $               | 19.00      |            |       |          |       |   |
| Forfeited                        |       | (3,076     | )          | $               | 19.00      |            |       |          |       |   |
| Outstanding at December 31, 2009 |       | 480,024    |       | $               | 19.00      |            | 3.25       |          | $          | 10,690 |   |
|                                  |            |            |            |                 |            |                 |            |               |            |  |  |

 

***RestrictedStock***

 

Restricted sharesof our common stock, which entitle the holder to receive, at the end of avesting term, a specified number of shares of our common stock, are accountedfor at fair value at the date of grant. Restricted share awards vest on terms determined by our board ofdirectors or its compensation committee at the time of the grant.  The majority of our restricted share awardscurrently outstanding vest annually over a four-year period from the date ofgrant unless accelerated by the compensation committee upon the event of achange in control, as defined.  Anyrestricted share awards that have not vested at the time of termination ofservice are forfeited except in the event of death, disability, or a change incontrol.  The restricted share awards areconsidered issued and outstanding and have full voting rights.  Any dividends declared with respect to ourcommon stock will vest at the same time as the underlying restricted stock award.  At December 31, 2009, vested and unvestedrestricted stock awards represented 2.1% of all shares of our common stockoutstanding.

 

The following is asummary of restricted share activity for the years ended December 31, 2009,2008, and 2007:

 

144

----

Table ofContents

 
| ** **                                    | ** ** | ** ** | ** ** | **Weighted**    | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------|------------|
|                                          |       |       | ** ** | **Average**     | ** ** |
|                                          |       |       | ** ** | **Grant  Date** | ** ** |
|                                          | ** ** | **Shares** | ** ** | **Fair  Value** | ** ** |
| December 31, 2006 unvested shares outstanding |       | 2,066,792  |       | $               | 11.00      |   |
| Granted                                       |       | 762,400    |       | $               | 21.25      |   |
| Forfeited                                     |       | (18,192    | )          | $               | 11.00      |   |
| December 31, 2007 unvested shares outstanding |       | 2,811,000  |       | $               | 13.78      |   |
| Granted                                       |       | 42,720     |       | $               | 9.88       |   |
| Forfeited                                     |       | (287,784   | )          | $               | 11.00      |   |
| Vested                                        |       | (870,432   | )          | $               | 13.45      |   |
| December 31, 2008 unvested shares outstanding |       | 1,695,504  |       | $               | 14.40      |   |
| Granted                                       |       | 14,464     |       | $               | 16.63      |   |
| Forfeited                                     |       | (16,368    | )          | $               | 11.00      |   |
| Vested                                        |       | (779,744   | )          | $               | 13.50      |   |
| December 31, 2009 unvested shares outstanding |       | 913,856    |       | $               | 15.27      |   |

 

The total fairvalue of restricted shares that vested during the years ended December 31, 2009and 2008 were $13.0 million and $8.6 million, respectively.

 

The common sharesthat we have issued to employees and members of our board of directors had anembedded feature that permitted the participant (or designated beneficiary orestate) to sell, or “put,” the shares of our common stock back to us at fairmarket value in the event of a participant’s termination of service due todeath or disability.  In addition, we hadthe right to repurchase, or “call,” the shares of our common stock upon aparticipant’s termination of continuous service, as defined.  Both our redemption rights and theparticipants’ put rights were terminated in connection with the closing of ourIPO.  As a result, we reclassified thefair value of vested common stock from obligations under common stock put/calloption to permanent equity on our consolidated balance sheets during the yearended December 31, 2009.  At December 31,2008, $29.4 million was recorded in obligations under common stock put/calloption on our consolidated balance sheet.

 

***OtherInformation about our Stock Option Plan***

 

During the thirdquarter of 2009, we entered into an amended and restated employment agreementwith our Chairman and Chief Executive Officer which included accelerating thevesting of options to purchase 1,008,000 shares of our common stock at anexercise price of $21.25 per common share to August 19, 2009.  The acceleration of these options resulted inthe recognition of a non-cash charge of $11.8 million of compensation expenseduring the third quarter of 2009. Options to purchase these shares were previously scheduled to vest in Aprilof 2010 (504,000 options) and April of 2011 (504,000 options).

 

During the secondquarter of 2008, the compensation committee of our board of directors amendedthe exercise price of 570,400 stock options outstanding to certain employeesfrom $21.25 per share to $11.00 per share and during the second quarter of2008, the compensation committee also amended the exercise price of 17,152stock options outstanding to certain members of our board of directors from$21.25 per share to $11.00 per share. The stock options that were re-priced were granted during 2007.

 

During the firstquarter of 2008, our board of directors revised the 2008 corporate objectivesrelated to the performance-based component of stock options scheduled to veston April 1, 2009.  In addition, duringthe second quarter of 2008, we began recognizing compensation cost related tothe performance-based component of stock options scheduled to vest on April 1,2010 based on our probability assessment of achieving the related performanceobjectives.

 

During the thirdquarter of 2007, the compensation committee of our board of directors approvedan amendment to our then existing 2005 Stock Option and Incentive Plan in whichthe percentage of options vesting based on performance targets was changed from65% to 35% and the percentage of options vesting based on service was changedfrom 35% to 65% for options scheduled to vest on April 1 of 2009 and 2010.

 

During the thirdquarter of 2007, the compensation committee of our board of directors approvedthe 2008 and 2009 corporate objectives related to the performance-basedcomponent of stock options scheduled to vest on April 1 of 2009 and 2010.  The objectives related to theperformance-based component of the stock options scheduled to vest on April 1,2009 were subsequently modified during the first quarter of 2008 as indicatedabove.

 

During the firstquarter of 2007, the compensation committee of our board of directors approvedthe 2007 corporate objectives related to the performance-based component of thestock options scheduled to vest on April 1, 2008.

 

145

----

Table of Contents

 

**18.****      ****EmployeeBenefit Plans**

 

***SavingsPlan and Profit Sharing Plan***

 

We have a definedcontribution plan (Savings Plan), which qualifies as a deferred salaryarrangement under Section 401 (k) of the Internal Revenue Code (IRC).  Once eligible, employees may elect tocontribute a portion of their wages to the Savings Plan, subject to certainlimitations.  We match 100% of the first3% of employee contributions and 50% of the next 2% of employeecontributions.  Our contributions and theemployee contributions are fully vested when contributed.  The plan assets are held in trust andinvested as directed by the plan participants. Matching contribution cost for the Savings Plan was $7.8 million forboth the years ended December 31, 2009 and 2008 and $6.3 million for the yearended December 31, 2007, and is recorded consistent with each participant’ssalary.

 

Under the profitsharing portion of the Savings Plan, we may elect to contribute to eligibleemployees’ Savings Plan accounts up to 3% of their eligible earnings, asdefined.  The profit sharing portion ofthe plan is discretionary, with the percentage amount determined by thecompensation committee of our board of directors, based upon the attainment ofcertain financial targets as established by the compensation committee.  Our cost for the profit sharing portion ofthe Savings Plan was $5.8 million, $7.9 million, and $6.3 million for the yearsended December 31, 2009, 2008, and 2007, respectively, and is recordedconsistent with each participant’s salary.

 

***SupplementalSavings Plan***

 

We have aSupplemental Savings Plan, which is an unfunded nonqualified deferredcompensation plan in which employees at certain executive levels are eligibleto defer pre-tax earnings as well as to make additional contributions, subjectto certain limitations.  Our matchingcontribution is similar to the Savings Plan described above and is fully vestedwhen contributed.  Our costs related tothe Supplemental Savings Plan for the periods presented were not material toour consolidated financial statements. At December 31, 2009 and 2008, we have recorded $5.1 million and $2.9million, respectively, within accrued expenses and other liabilities on ourconsolidated balance sheets.

 

***OtherPlans***

 

We provide anunfunded defined benefit pension plan to certain of our TalecrisBiotherapeutics, GmbH employees in Germany as required by statutory law.  Pension cost related to this plan was notmaterial for the periods presented.  At December31, 2009 and 2008, no material obligations related to this plan were recordedon our consolidated balance sheets.

 

**19.****      ****DeferredCompensation**

 

In October of2006, the compensation committee of our board of directors approved a SpecialRecognition Bonus Plan (Bonus Plan) as a vehicle to award certain employees,senior executives, and members of our board of directors for the financialsuccess of our Company from its inception through the effective date of theBonus Plan.  The Bonus Plan is anunfunded, non-qualified retirement plan as defined in the IRC.  Employees eligible for awards under thisBonus Plan must be employed by us at the time bonus payments are made, or theyforfeit any unpaid portion of their award. Vesting of unpaid amounts will be accelerated for a change in control,as defined, as well as for death or disability. We recorded compensation expense of $0.6 million, $0.7 million, and $1.7million for the years ended December 31, 2009, 2008, and 2007, respectively,related to the Bonus Plan.  We madepayments of $0.9 million in March of 2009 and $1.2 million in both March of2008 and 2007.  The balance of the awardtotaling $0.9 million will be paid in March of 2010, adjusted for employeeforfeitures.

 

In December of2006, the compensation committee of our board of directors approved arestricted share and cash recognition award to certain employees, seniorexecutives, and members of our board of directors for the financial success ofour Company from its inception through the effective date of the award.  Employees eligible for these awards must beemployed by us at the time bonus payments are made, or they forfeit any unpaidportion of their award.  Vesting ofunpaid amounts will be accelerated for a change in control, as defined, as wellas for death or disability.  We funded anirrevocable trust for cash installments under this award, which are segregatedfrom our assets and protected from our creditors.  Any interest income earned on trust assetsaccrues for the benefit of the participants. We recorded compensation expense of $5.7 million, $5.9 million, and $6.8million for the years ended December 31, 2009, 2008, and 2007, respectively,under the cash recognition portion of the award.  We made cash payments of $6.0 million and$7.4 million in March of 2009 and 2008, respectively, out of the irrevocabletrust.  The balance of the award totaling$5.8 million will be paid in March of 2010, adjusted for employeeforfeitures.  At December 31, 2009 and2008, unamortized deferred compensation cost related to the assets held by theirrevocable trust totaling $1.3 million and $5.4 million, respectively, wasrecorded within prepaid expenses and other on our consolidated balance sheetsand at December 31, 2008, $1.3 million was recorded within other long-term 

 

146

----

Table of Contents

 

assets on our consolidated balance sheets.  Information regarding restricted share awardsis included in Note 17, “Share-Based Compensation.”

 

**20.****      ****SegmentReporting**

 

We operate ourplasma-derived protein therapeutics business as a single reportable businesssegment since all operating activities are directed from our North Carolinaheadquarters and all of our products are derived from a single source andresult from a common manufacturing process. All products are manufactured from a single raw material source, humanplasma, and are processed in whole, or in part, at our principal manufacturingfacilities located in Clayton, North Carolina. Our Melville, New York, facility primarily supplies intermediate plasmafractions to our Clayton facilities. Gamunex and Prolastin constitute the majority of our net revenue.  Although we sell our products worldwide, themajority of our net revenue was concentrated in the United States and Canadafor the periods presented.

 

In the followingtable, we have presented our net revenue by significant product category.  Our Immunology/Neurology product categoryincludes the products that are used to provide antibodies to patients who havea genetic or acquired inability to produce these antibodies, as well as atreatment for CIDP, and also products that provide antibodies to counterspecific antigens such as rabies.  OurPulmonology product category is comprised of our Prolastin product, which isused to treat patients with a genetic alpha-1 antitrypsin deficiency.  Our Critical Care/Hemostasis product categoryincludes products that are used to supplement, restore, or maintain normalplasma parameters such as volume or coagulation values.  Other product net revenue primarily consistsof sales of PPF powder and intermediate products, such as cryoprecipitate.  Other non-product revenue primarily consistsof royalties under collaborative agreements as described further in Note 7, “Collaborativeand Other Agreements.”

 
| ** **                | ** ** | **Years  Ended December 31,** | ** ** |
|---------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Product net revenue:      |       |                          |       |   |   |   |   |
| Immunology/Neurology      |       | $                             | 928,054    |   | $ | 781,408 |   | $ | 743,128 |   |
| Pulmonology               |       | 319,080                       |       | 316,495 |   | 276,538 |   |
| Critical Care/ Hemostasis |       | 167,469                       |       | 134,216 |   | 127,935 |   |
| Other                     |       | 93,151                        |       | 102,431 |   | 49,085 |   |
| Total product net revenue |       | 1,507,754                     |       | 1,334,550 |   | 1,196,686 |   |
| Other revenue             |       | 25,455                        |       | 39,742 |   | 21,823 |   |
| Total net revenue         |       | $                             | 1,533,209  |   | $ | 1,374,292 |   | $ | 1,218,509 |   |

 

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

 
| ** **        | ** ** | **Years  Ended December 31,** | ** ** |
|-------------------|------------|-------------------------------|------------|
| ** **        | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| United States     |       | $                             | 1,011,468  |   | $ | 906,376 |   | $ | 817,276 |   |
| Canada            |       | 214,883                       |       | 215,964 |   | 189,923 |   |
| Europe            |       | 185,297                       |       | 168,081 |   | 136,972 |   |
| Other             |       | 121,561                       |       | 83,871 |   | 74,338 |   |
| Total net revenue |       | $                             | 1,533,209  |   | $ | 1,374,292 |   | $ | 1,218,509 |   |

 

We did notmaintain significant long-lived assets outside of the United States at December31, 2009 and 2008.

 

**21.****      ****Earningsper Share**

 

The followingtable illustrates the calculation of our basic earnings per common shareoutstanding for the periods presented:

 

147

----

Tableof Contents

 
| ** **                                                            | ** ** | **Years  Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                            | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                            |       | $                             | 153,889    |   | $ | 65,797 |   | $ | 123,565 |   |
| Less:                                                                 |       |                          |       |   |   |   |   |
| Series A preferred stock undeclared dividends                         |       | (9,602                        | )          | (11,745 | ) | (10,641 | ) |
| Series B preferred stock undeclared dividends                         |       | (2,142                        | )          | (2,619 | ) | (2,373 | ) |
| Accretion of common stock put option                                  |       | —                        |       | (308 | ) | — |   |
| Net income available to common stockholders                           |       | $                             | 142,145    |   | $ | 51,125 |   | $ | 110,551 |   |
|                                                                  |       |                          |       |   |   |   |   |
| Weighted average common shares outstanding                            |       | 31,166,613                    |       | 1,310,448 |   | 1,685,784 |   |
|                                                                  |       |                          |       |   |   |   |   |
| Basic net income per common share                                     |       | $                             | 4.56       |   | $ | 39.01 |   | $ | 65.58 |   |
|                                                                  |       |                          |       |   |   |   |   |
| Pro forma basic income per common share  (unaudited):                 |       |                          |       |   |   |   |   |
| Numerator:                                                            |       |                          |       |   |   |   |   |
| Net income                                                            |       | $                             | 153,889    |   |   |   |   |   |
| Interest expense reduction due to debt repayment                      |       | 5,555                         |       |   |   |   |   |
| Numerator for pro forma basic income per common  share                |       | $                             | 159,444    |   |   |   |   |   |
|                                                                  |       |                          |       |   |   |   |   |
| Denominator:                                                          |       |                          |       |   |   |   |   |
| Shares used above                                                     |       | 31,166,613                    |       |   |   |   |   |
| Pro forma adjustments to reflect assumed weighted  average effect of: |       |                          |       |   |   |   |   |
| Conversion of series A preferred stock                                |       | 53,654,795                    |       |   |   |   |   |
| Conversion of series B preferred stock                                |       | 10,318,354                    |       |   |   |   |   |
| Shares issued for preferred stock dividend                            |       | 1,774,743                     |       |   |   |   |   |
| Newly issued shares for IPO                                           |       | 22,047,585                    |       |   |   |   |   |
| Denominator for pro forma basic income per common  share              |       | 118,962,090                   |       |   |   |   |   |
|                                                                  |       |                          |       |   |   |   |   |
| Pro forma basic income per common share (unaudited)                   |       | $                             | 1.34       |   |   |   |   |   |

 

The followingtable illustrates the calculation of our diluted earnings per common shareoutstanding for the periods presented:

 

148

----

Tableof Contents

 
| ** **                                                            | ** ** | **Years  Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                            | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                            |       | $                             | 153,889    |   | $ | 65,797 |   | $ | 123,565 |   |
| Less accretion of common stock put option                             |       | —                        |       | (308 | ) | — |   |
| Net income available to common stockholders                           |       | $                             | 153,889    |   | $ | 65,489 |   | $ | 123,565 |   |
|                                                                  |       |                          |       |   |   |   |   |
| Weighted average common shares outstanding                            |       | 31,166,613                    |       | 1,310,448 |   | 1,685,784 |   |
| Plus incremental shares from assumed conversions:                     |       |                          |       |   |   |   |   |
| Series A preferred stock                                              |       | 53,654,795                    |       | 72,000,000 |   | 72,000,000 |   |
| Series B preferred stock                                              |       | 10,318,354                    |       | 13,846,320 |   | 13,846,320 |   |
| Stock options and restricted shares                                   |       | 7,374,601                     |       | 5,605,032 |   | 3,533,496 |   |
| Dilutive potential common shares                                      |       | 102,514,363                   |       | 92,761,800 |   | 91,065,600 |   |
|                                                                  |       |                          |       |   |   |   |   |
| Diluted net income per common share                                   |       | $                             | 1.50       |   | $ | 0.71 |   | $ | 1.36 |   |
|                                                                  |       |                          |       |   |   |   |   |
| Pro forma diluted income per common share  (unaudited):               |       |                          |       |   |   |   |   |
| Numerator:                                                            |       |                          |       |   |   |   |   |
| Net income                                                            |       | $                             | 153,889    |   |   |   |   |   |
| Interest expense reduction due to debt repayment                      |       | 5,555                         |       |   |   |   |   |
| Numerator for pro forma diluted income per common  share              |       | $                             | 159,444    |   |   |   |   |   |
|                                                                  |       |                          |       |   |   |   |   |
| Denominator:                                                          |       |                          |       |   |   |   |   |
| Shares used above                                                     |       | 31,166,613                    |       |   |   |   |   |
| Pro forma adjustments to reflect assumed weighted  average effect of: |       |                          |       |   |   |   |   |
| Conversion of series A preferred stock                                |       | 53,654,795                    |       |   |   |   |   |
| Conversion of series B preferred stock                                |       | 10,318,354                    |       |   |   |   |   |
| Shares issued for preferred stock dividend                            |       | 1,774,743                     |       |   |   |   |   |
| Newly issued shares for IPO                                           |       | 22,047,585                    |       |   |   |   |   |
| Stock options and restricted shares                                   |       | 7,374,601                     |       |   |   |   |   |
| Denominator for pro forma diluted income per common  share            |       | 126,336,691                   |       |   |   |   |   |
|                                                                  |       |                          |       |   |   |   |   |
| Pro forma diluted income per common share  (unaudited)                |       | $                             | 1.26       |   |   |   |   |   |

 

The pro formaearnings per common share calculations reflect an adjustment to net income forreduced interest expense as if the net primary proceeds to us from our IPO hadbeen applied to repay our debt at the beginning of 2009, net of interest ratedifferences from the bond refinancing. The pro forma adjustment to the denominator reflects the impacts for theissuance of common shares to convert preferred stock, settle accrued dividendson the preferred stock, and complete the IPO as if these events occurred at thebeginning of 2009.

 

Options topurchase the following number of common shares at the following weightedaverage exercise prices were outstanding but excluded from the computation ofdiluted earnings per share because their exercise prices and assumed taxbenefits upon exercise were greater than the average market price for thecommon shares during the period, so including these options would beanti-dilutive:

 
| ** **                      | ** ** | **Years  Ended December 31,** | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Number of common share options  |       | 2,168,730                     |       | 2,016,000 |   | 1,073,192 |   |
| Weighted average exercise price |       | $                             | 21.09      |   | $ | 21.25 |   | $ | 21.25 |   |
|                                 |            |                               |            |  |  |  |  |  |  |  |

 

**22.****      ****OtherConsolidated Balance Sheet Information**

 

Informationregarding other accounts on our consolidated balance sheets is as follows:

 

149

----

Tableof Contents

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2009**         | ** ** | **2008** | ** ** |
| Accrued expenses and other liabilities:         |       |             |       |   |   |
| Accrued goods and services                      |       | $                | 45,044     |   | $ | 51,449 |   |
| Accrued payroll, bonuses, and employee benefits |       | 73,983           |       | 72,662 |   |
| Medicaid, commercial rebates, and chargebacks   |       | 30,771           |       | 16,544 |   |
| Interest payable                                |       | 9,111            |       | 11,350 |   |
| Other                                           |       | 11,624           |       | 15,372 |   |
| Total accrued expenses and other liabilities    |       | $                | 170,533    |   | $ | 167,377 |   |

 

**23.****      ****CashFlow Supplemental Disclosures**

 

***Supplemental Disclosures of Cash Flow Information***

 

Cash paid for:

 
| ** **                               | ** ** | **Years  Ended December 31,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest, net of amounts capitalized (1) |       | $                             | 55,131     |   | $ | 87,213 |   | $ | 97,369 |   |
| Income taxes                             |       | $                             | 56,849     |   | $ | 48,910 |   | $ | 12,027 |   |

 

----

(1) Interest paidin the table above excludes payments related to our interest rate swap contracts,which amounted to $17.0 million and $9.2 million for the years ended December 31,2009 and 2008, respectively.  No amountswere paid related to our interest rate swap contracts during the year ended December31, 2007.

 

Changes in assetsand liabilities, excluding the effects of business acquisitions:

 
| ** **                             | ** ** | **Years  Ended December 31,** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Changes in:                            |       |                          |       |   |   |   |   |
| Accounts receivable                    |       | $                             | 8,575      |   | $ | (26,894 | ) | $ | (9,175 | ) |
| Inventories                            |       | (57,452                       | )          | (92,856 | ) | 26,756 |   |
| Prepaid expenses and other assets      |       | 7,987                         |       | (15,823 | ) | 164 |   |
| Accounts payable                       |       | 16,143                        |       | 16,594 |   | 12,095 |   |
| Interest payable                       |       | (2,239                        | )          | (1,957 | ) | 11,830 |   |
| Accrued expenses and other liabilities |       | 14,913                        |       | 21,626 |   | 6,114 |   |
| Deferred margin                        |       | (36                           | )          | (745 | ) | (9,805 | ) |
| Total                                  |       | $                             | (12,109    | ) | $ | (100,055 | ) | $ | 37,979 |   |

 

***Supplemental Schedule of Non-Cash Investing and Financing Activities***

 

**For the Year Ended December 31, 2009**

 

We entered into anumber of capital lease agreements related to buildings with an unaffiliatedthird party.  We recorded $4.9 milliondirectly to property, plant, and equipment, net and capital lease obligations.

 

The common sharesthat we have issued to employees and members of our board of directors underour share-based compensation plans had an embedded feature that permitted theparticipant (or designated beneficiary or estate) to sell, or “put,” the sharesof our common stock back to us at fair market value in the event of theparticipant’s termination of service due to death or disability.  In addition, we had the right to repurchase,or “call,” the shares of our common stock upon a participant’s termination ofcontinuous service, as defined.  Werecorded a fair market value adjustment of $6.6 million related to the vestedshares of our common stock to increase obligations under common stock put/calloption and decrease additional paid-in capital on our consolidated balancesheet.  Both our redemption rights andthe participants’ put rights were terminated in connection with the closing ofour IPO.  As a result, we reclassifiedthe fair value of vested common stock totaling $39.9 million from obligationsunder common stock put/call option to permanent equity on our consolidatedbalance sheet.

 

We declared adividend of $45.3 million related to our Series A and B preferred stock.  In connection with our IPO, 1,000,000 sharesof our Series A preferred stock and 192,310 shares of our Series B preferredstock were converted into an aggregate 

 

150

----

Table of Contents

 

of 85,846,320 shares of our common stock.  In addition, 2,381,548 shares of our commonstock were issued to settle the $45.3 million preferred stock dividend uponconversion of our Series A and B preferred stock.

 

We retired 251,108shares of our common stock, which were repurchased from employees.

 

We reclassified apreviously unrealized loss related to our interest rate swap contracts ofapproximately $23.3 million, net of income tax benefit of $14.2 million, toearnings as a result of their settlement and termination.  In addition, we recorded other comprehensiveincome of $0.5 million.  Additionalinformation regarding the components of our comprehensive income is included inNote 2, “Summary of Significant Accounting Policies.”

 

We entered intotwo plasma center development agreements related to buildings to be leased froman unaffiliated third party during 2008, for which we made the decision not toopen as plasma collection centers during 2009. As a result, we recorded a loss on contract obligations of $3.4 million,which decreased our assets under capital leases.

 

**For the Year Ended December 31, 2008**

 

We entered into a numberof capital lease agreements related to buildings with an unaffiliated thirdparty. We recorded $6.0 million directly to property, plant, and equipment, netand capital lease obligations.

 

We reclassified $1.6 millionof long-lived assets related to two plasma collection centers, net ofimpairment charges of $0.8 million, to assets held for sale within prepaidexpenses and other on our consolidated balance sheet.

 

As a result of the putfeature related to the common shares issued under our share-based compensationplans described above, we recorded a fair value adjustment of $8.9 million toincrease obligations under common stock put/call option and decrease additionalpaid-in capital on our consolidated balance sheet.

 

We issued shares of ourcommon stock, which had an embedded put option, to IBR in connection with our2006 business acquisition as described below. We recorded accretion of $0.3 million related to the IBR put optiondirectly to obligations under common stock put/call option and additionalpaid-in capital on our consolidated balance sheet.

 

We retired 2,215,880shares of our common stock, of which 2,146,232 shares were repurchased from IBRand 69,648 shares were repurchased from employees.

 

We recorded othercomprehensive loss of $11.8 million, primarily related to unrealized lossesassociated with our interest rate swap contracts, net of taxes.

 

**For the Year Ended December 31, 2007**

 

We entered into acapital lease agreement with an unaffiliated third party for the lease of abuilding.  We recorded $0.9 milliondirectly to property, plant, and equipment, net and capital lease obligations.

 

We issued2,146,232 shares of our common stock to IBR as discussed in Note 5, “BusinessAcquisitions.”  We recorded the put valueof the shares of $33.5 million in obligations under common stock put/calloption on our consolidated balance sheet and the difference between the putvalue and the fair value of the common stock (on the issuance date) inadditional paid-in capital on our consolidated balance sheet.  We also recorded $37.0 million and $8.6million in goodwill and other long-term assets, respectively, on ourconsolidated balance sheet, representing the fair value of the common sharesissued to IBR.  In addition, we recordedaccretion of $1.6 million related to the IBR put option directly to obligationsunder common stock put/call option and additional paid-in capital on ourconsolidated balance sheet.

 

As a result of theput feature related to the common shares issued under our share-basedcompensation plans described above, we recorded a fair value adjustment of $2.1million to increase obligations under common stock put/call option and decreaseadditional paid-in capital on our consolidated balance sheet.

 

We recorded othercomprehensive loss of $11.7 million, primarily related to unrealized lossesassociated with our interest rate swap contracts, net of taxes.

 

We adopted newaccounting guidance regarding the accounting for uncertainty in income taxes,which resulted in a charge of $0.7 million directly to accumulated deficit.

 

151

----

Table of Contents

** **

**24.****      ****Subsequent Events**

 

We evaluated allevents and transactions that occurred after December 31, 2009 up through February 23,2010, the date that we filed these audited consolidated financial statementswith the U.S. Securities and Exchange Commission.

 

**25.****      ****SelectedUnaudited Quarterly Financial Data**

 

The followingtable summarizes our unaudited quarterly financial results for the years ended December 31,2009 and 2008.  In our opinion, thequarterly financial results presented below have been prepared on the samebasis as our annual audited consolidated financial statements.

 
| ** **                                      | ** ** | **2009 Quarter Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Net revenue                                     |       | $                      | 371,795    |   | $ | 375,570 |   | $ | 395,731 |   | $ | 390,113 |   |
| Cost of goods sold                              |       | 209,201                |       | 224,008 |   | 230,666 |   | 237,202 |   |
| Gross profit                                    |       | 162,594                |       | 151,562 |   | 165,065 |   | 152,911 |   |
| Operating expenses                              |       | 88,963                 |       | 81,023 |   | 95,655 |   | 95,511 |   |
| Operating income                                |       | 73,631                 |       | 70,539 |   | 69,410 |   | 57,400 |   |
| Total other non-operating (expense) income, net |       | (21,256                | )          | 54,582 |   | (19,475 | ) | (55,934 | ) |
| Income before income taxes                      |       | 52,375                 |       | 125,121 |   | 49,935 |   | 1,466 |   |
| Provision for income taxes                      |       | (18,940                | )          | (41,849 | ) | (14,125 | ) | (94 | ) |
| Net income                                      |       | $                      | 33,435     |   | $ | 83,272 |   | $ | 35,810 |   | $ | 1,372 |   |
|                                            |       |                   |       |   |   |   |   |   |   |
| Earnings per share:                             |       |                   |       |   |   |   |   |   |   |
| Basic                                           |       | $                      | 25.09      |   | $ | 47.42 |   | $ | 12.01 |   | $ | 0.01 |   |
| Diluted                                         |       | $                      | 0.36       |   | $ | 0.89 |   | $ | 0.38 |   | $ | 0.01 |   |

 
| ** **                             | ** ** | **2008 Quarter Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Net revenue                            |       | $                      | 305,203    |   | $ | 317,185 |   | $ | 350,492 |   | $ | 401,412 |   |
| Cost of goods sold                     |       | 206,720                |       | 209,785 |   | 211,856 |   | 253,796 |   |
| Gross profit                           |       | 98,483                 |       | 107,400 |   | 138,636 |   | 147,616 |   |
| Operating expenses                     |       | 57,607                 |       | 68,005 |   | 81,650 |   | 86,268 |   |
| Operating income                       |       | 40,876                 |       | 39,395 |   | 56,986 |   | 61,348 |   |
| Total other non-operating expense, net |       | (24,586                | )          | (23,509 | ) | (24,285 | ) | (23,834 | ) |
| Income before income taxes             |       | 16,290                 |       | 15,886 |   | 32,701 |   | 37,514 |   |
| Provision for income taxes             |       | (6,725                 | )          | (6,412 | ) | (12,147 | ) | (11,310 | ) |
| Net income                             |       | $                      | 9,565      |   | $ | 9,474 |   | $ | 20,554 |   | $ | 26,204 |   |
|                                   |       |                   |       |   |   |   |   |   |   |
| Earnings per share:                    |       |                   |       |   |   |   |   |   |   |
| Basic                                  |       | $                      | 3.35       |   | $ | 4.94 |   | $ | 14.65 |   | $ | 19.40 |   |
| Diluted                                |       | $                      | 0.10       |   | $ | 0.10 |   | $ | 0.22 |   | $ | 0.28 |   |

 

Earnings per shareamounts for the 2009 and 2008 quarters and full years have been computedseparately.  Accordingly, quarterlyamounts may not add to the annual amounts because of differences in theweighted average shares outstanding during each quarter due to the effect ofpotentially dilutive securities only in the periods in which such effect wouldbe dilutive.

 

Our net income forthe second quarter of 2009 includes a $75.0 million (approximately $48.8million after tax) payment we received from CSL as a result of the terminationof the definitive merger agreement.  Ournet income for the fourth quarter of 2009 includes a charge of $43.0 million(approximately $26.3 million after tax) as a result of the settlement andtermination of our interest rate swap contracts and the write-off of deferreddebt issuance costs associated with our First and Second Lien Term Loans.  Additional information regarding ourterminated merger agreement with CSL is included in Note 4, “Definitive MergerAgreement with CSL Limited (CSL)” and additional information regarding ourrefinancing transactions is included in Note 11, “Long-Term Debt and CapitalLease Obligations.”

 

152

----

Tableof Contents

 

**Schedule II**

 

**Talecris Biotherapeutics Holdings Corp.**

**Valuation and Qualifying Accounts**

**Years Ended December 31, 2009, 2008, and 2007**

(in thousands)

 
| ** **                                                     | ** ** | **Balance at**   | ** ** | **Charges to** | ** ** | **Charges to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                                     | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | **Other**      | ** ** | ** **     | ** ** | **End of**     | ** ** |
| ** **                                                     | ** ** | **Period**       | ** ** | **Expenses**   | ** ** | **Accounts**   | ** ** | **Deductions** | ** ** | **Period**     | ** ** |
| **Reserve  for doubtful accounts receivable:**                 |       |             |       |           |       |           |       |           |       |           |       |
| Year ended December 31,  2009                             |       | $                | 2,020      |           | $          | 2,858          |       | $              | —     |           | $          | (1,417 | )(1) | $ | 3,461 |   |
| Year ended  December 31, 2008                             |       | $                | 2,631      |           | $          | 728            |       | $              | —     |           | $          | (1,339 | )(1) | $ | 2,020 |   |
| Year ended  December 31, 2007                             |       | $                | 4,690      |           | $          | 525            |       | $              | —     |           | $          | (2,584 | )(1) | $ | 2,631 |   |
|                                                           |       |             |       |           |       |           |       |           |       |           |       |
| **Reserve  for doubtful notes receivable and other advances:** |       |             |       |           |       |           |       |           |       |           |       |
| Year ended  December 31, 2009                             |       | $                | 4,250      |           | $          | —         |       | $              | —     |           | $          | — |   | $ | 4,250 |   |
| Year ended  December 31, 2008                             |       | $                | —     |           | $          | 4,250          | (4)        | $              | —     |           | $          | — |   | $ | 4,250 |   |
| Year ended  December 31, 2007                             |       | $                | —     |           | $          | —         |       | $              | —     |           | $          | — |   | $ | — |   |
|                                                           |       |             |       |           |       |           |       |           |       |           |       |
| **Inventory  reserves:**                                       |       |             |       |           |       |           |       |           |       |           |       |
| Year ended  December 31, 2009                             |       | $                | 49,766     |           | $          | 21,758         |       | $              | —     |           | $          | (27,147 | )(2) | $ | 44,377 |   |
| Year ended  December 31, 2008                             |       | $                | 47,534     |           | $          | 36,840         |       | $              | —     |           | $          | (34,608 | )(2) | $ | 49,766 |   |
| Year ended  December 31, 2007                             |       | $                | 43,381     |           | $          | 39,043         |       | $              | —     |           | $          | (34,890 | )(2) | $ | 47,534 |   |
|                                                           |       |             |       |           |       |           |       |           |       |           |       |
| **Deferred  tax assset valuation allowance:**                  |       |             |       |           |       |           |       |           |       |           |       |
| Year ended  December 31, 2009                             |       | $                | —     |           | $          | —         |       | $              | —     |           | $          | — |   | $ | — |   |
| Year ended  December 31, 2008                             |       | $                | —     |           | $          | —         |       | $              | —     |           | $          | — |   | $ | — |   |
| Year ended  December 31, 2007                             |       | $                | 60,157     |           | $          | —         |       | $              | —     |           | $          | (60,157 | )(3) | $ | — |   |

 

----

(1)          Includes write-offs of uncollectible accountsreceivable and the effects of foreign exchange.

(2)          Includes the net of write-offs, reversals of reservedinventory that was sold or recoverable for other purposes such as testing, andthe effects of foreign exchange.

(3)          Includes $55.8 million attributable to the reversal ofthe valuation allowance as a 2007 non-cash income tax benefit, and $4.4 milliondue to the impact of the adoption of new accounting guidance related touncertainties in income taxes.

(4)          Includes a provision for $3.2 million related to notesreceivables and $1.0 million related to advances for unlicensed plasma from athen existing third party supplier due to uncertainty regarding collection.

 

153

----

Tableof Contents

 

**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

There were no changes in or disagreements with ouraccountants on accounting and financial disclosure matters.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

Our management, with the participation of our ChiefExecutive Officer and our Chief Financial Officer, evaluated the effectivenessof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the period covered bythis report.  Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of December 31, 2009.

 

***Management’s Report on Internal Control over Financial Reporting***

 

This Annual Report does not include a report ofmanagement’s assessment regarding internal control over financial reporting oran attestation report of the company’s registered public accounting firm due toa transition period established by rules of the Securities and ExchangeCommission for newly public companies.

 

***Changes in Internal Control over Financial Reporting***

 

There was no change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) and 15d-15(f) ofthe Exchange Act) that occurred during the quarter ended December 31, 2009that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

154

----

Tableof Contents

 

**PART III**

 

**ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

 

**Executive Officers**

 

Our executive officers and their respective ages andpositions as of March 1, 2010 are as follows:

 
| **Name**                           | ** ** | **Age** | ** ** | **Position**                                                                                      |
|------------------------------------|------------|---------|------------|---------------------------------------------------------------------------------------------------|
| Lawrence D.  Stern                 |       | 53      |       | Chairman, Chief  Executive Officer and Director                                                   |
| John M. Hanson                     |       | 57      |       | Executive Vice  President and Chief Financial Officer                                             |
| John F.  Gaither, Jr.         |       | 60      |       | Executive Vice  President, General Counsel and Secretary                                          |
| Mary J. Kuhn                       |       | 51      |       | Executive Vice  President, Operations                                                             |
| Stephen R.  Petteway, Jr. PhD |       | 64      |       | Executive Vice  President, Research & Development                                        |
| Joel E. Abelson                    |       | 51      |       | Senior Vice  President and General Manager, Portfolio Management and International  Business |
| James R. Engle                     |       | 54      |       | Senior Vice  President, Information Technology                                                    |
| Kari D. Heerdt                     |       | 42      |       | Senior Vice  President, Human Resources                                                           |
| Thomas J.  Lynch, PhD         |       | 59      |       | Senior Vice  President, Corporate Compliance, Regulatory and Public Policy                   |
| Daniel L.  Menichella              |       | 50      |       | Senior Vice  President, Business Development                                                      |
| Bruce Nogales                      |       | 53      |       | Senior Vice  President and General Manager, Talecris Plasma Resources                        |
| John R. Perkins                    |       | 39      |       | Senior Vice  President and General Manager, Portfolio Management and U.S. Business           |

 

*LawrenceD. Stern* hasserved as our Chairman and Chief Executive Officer since June 2007, as adirector since April 2005, and currently serves as chairman of theexecutive committee and as a member of our compliance committee. He waspreviously our Executive Chairman from April 2005 until June 2007.From December 2003 until March 2005, Mr. Stern worked primarilywith Cerberus and Ampersand in connection with our formation transaction. From January throughNovember 2003, Mr. Stern worked as an independent consultantsupporting debt and equity transactions. Mr. Stern received his BS inChemical Engineering from Cornell University and his MS from the MassachusettsInstitute of Technology.

 

*John M. Hanson* has served as Executive Vice President and ChiefFinancial Officer for our company since October 2005. From April 2003until he joined us in 2005, Mr. Hanson was employed at Andrx Corporation,a specialty pharmaceuticals company, where he ultimately served as Senior VicePresident and Chief Financial Officer. Mr. Hanson took some time off from August 2001to March 2003 to pursue personal interests. Mr. Hanson has anextensive history of executive experience in the pharmaceuticals industry. FromNovember 2000 to July 2001, Mr. Hanson served as Chief FinancialOfficer of Mylan Laboratories and from September 1996 to October 2000,Mr. Hanson served as Chief Financial Officer of Zenith GoldlinePharmaceuticals, Inc., the U.S. generic products subsidiary of IVAXCorporation. Mr. Hanson was employed by Arthur Andersen LLP from 1984 to1995. Mr. Hanson is a Certified Public Accountant and earned both his BSin Biology and his MPA from the University of South Dakota.

 

*John F. Gaither, Jr.* has been our Executive Vice President,General Counsel and Secretary since September 2006. Prior to joining us in2006, Mr. Gaither served as Senior Vice President, General Counsel andSecretary of NeighborCare, Inc., one of the largest providers ofinstitutional pharmacy services in the United States, from 2003 through 2005. Mr. Gaitherearned both his BBA in Accounting and his JD from the University of Notre Dame.

 

*Mary J. Kuhn* became our Executive Vice President, Operations, in August 2009after being our Senior Vice President, Operations since April 2005. Priorto joining us, Ms. Kuhn was a Senior Vice President of Operations at Bayerfrom October 2002 to April 2005. During the previous two decades, Ms. Kuhnheld numerous positions with increasing responsibility within Bayer’s NorthAmerican Pharmaceutical Division’s Headquarters, including Supervisor,Pharmaceutical Formulations Lab; Manager, Pharmaceutical Technical Services;Manager, Manufacturing Operations; Director, Manufacturing; and, VicePresident, Technical Operations and Ethical Product Manufacturing; andVice-President of Operations. Ms. Kuhn earned her BS in Pharmacy fromPurdue 

 

155

----

Table of Contents

 

University and her EMBAfrom the University of New Haven.

 

*Stephen R. Petteway, Jr.*, PhD became our Executive VicePresident, Research and Development, in August 2009 after being our SeniorVice President, Research & Development since April 2005. Prior toour formation transaction, Dr. Petteway held various positions for BayerBiological Products, including: Senior Director, Pathogen Safety &Research; Vice President, Pathogen Safety & Research; and Acting Head,Research & Technology. Dr. Petteway is the author of numerousscientific publications and patents related to diagnostics and therapeutics. Dr. Pettewayearned his BA in Microbiology/Chemistry from the University of South Florida atTampa, and his PhD in Molecular Cell Biology from the University of Alabama atBirmingham.

 

*Joel E. Abelson* has served as our Senior Vice Presidentand General Manager, Portfolio Management and International Business since April 2008.Previously, he was Vice President and General Manager, International CommercialOperations from August 2007 to April 2008 and before that he was VicePresident, Canada and Intercontinental Commercial Operations from March 2006to August 2007. From April 2005 until March 2006, Mr. Abelsonworked in a consulting role for Talecris supporting both the formation of thenew company and the planning and establishment of our Canadian business. From July 2002to March 2005, Mr. Abelson served as Vice President, Global StrategicMarketing for Bayer’s Biological Products Division. Mr. Abelson receivedhis BA (Honours) degree from Carleton University and his MA degree in PublicAdministration from the University of Toronto.

 

*James R. Engle* has been our Senior Vice President,Information Technology since April 2005. Prior to joining us in 2005, Mr. Englewas with Aventis from 1988 to 2004. His most recent position at Aventis wasSenior Vice President, IT for Aventis Behring (subsequently acquired by CSL Limitedand renamed CSL Behring) from 1999 to 2004. Mr. Engle attended DelawareValley College of Science and Agriculture, where he earned his BS in BusinessAdministration.

 

*Kari D. Heerdt* has been our Senior Vice President,Human Resources since January 2008. Prior to joining Talecris, Ms. Heerdtserved as Senior Vice President of Human Resources for Mervyns, a mid-marketdepartment store partially owned by Cerberus Capital Management, from 2004 to2008. Prior to that, she was a consultant to Cerberus Capital Management, aleading investment management firm. From 2000 to 2004, Ms. Heerdt was aSenior Consultant for Hewitt Associates, a global Human Resources consultingfirm. Ms. Heerdt earned a BA degree from Mount Holyoke College, and a MSfrom the Krannert Graduate School of Management at Purdue University.

 

*Thomas J. Lynch, PhD* began as our Vice President of CorporateGovernance and Compliance in April 2005, and assumed his current positionas Senior Vice President, Corporate Compliance, Regulatory and Public Affairsin early 2006. From 2003 to 2005, Dr. Lynch served as Vice President ofRegulatory Affairs and Quality Assurance for CryoLife, Inc., a medicaldevice and human tissue company. Prior to that, from 2000 to 2003, he served asSenior Vice President, Regulatory Affairs and Quality Assurance at Clearant, abiotechnology company engaged in pathogen inactivation research &development. From 1993 to 2000, Dr. Lynch was with the U.S. Food and DrugAdministration, most recently as Deputy Director of the Division of Hematology.He holds a Ph.D. in biochemistry from Wayne State University and a JD fromGeorgetown University.

 

*Daniel L. Menichella* joined our company in October 2007as Senior Vice President, Business Development. Prior to joining our company, Mr. Menichellaserved in various capacities related to business development and strategicplanning at Merck KGaA, the global pharmaceutical and chemical company, from December 2002until October 2007. Over the course of his five years at Merck KGaA, Mr. Menichellaserved as Vice President, Business Development, Vice President, CorporateStrategic Planning and Vice President, Corporate Business Development andAlliance Management. Mr. Menichella earned his AB from Harvard Universityand his MBA from the University of North Carolina at Chapel Hill.

 

*Bruce Nogales* joined our company in 2005 as VicePresident, International, responsible for our business transitions in Europeand Intercontinental Markets. He has also served as Vice President of both theImmunology and Pulmonary Commercial Development groups. In April 2007, Mr. Nogaleswas named Vice President and General Manager, International CommercialOperations and in September 2007, Mr. Nogales was named Senior VicePresident and General Manager, Talecris Plasma Resources. Prior to joining us, Mr. Nogaleshad served from 1999 through 2004 as both Vice President and General Manager ofIntercontinental Commercial Operations and of the Wound Healing Business Unitat Aventis Behring (subsequently acquired by CSL Limited and renamed CSLBehring), which is engaged in the global protein therapeutics business. Mr. Nogalesearned his BS in Finance from California State University, Long Beach in 1978and completed an Executive Development Program at the University ofPennsylvania’s Wharton School of Business.

 

*John R. Perkins* joined our company in 2006 and since April 2008has served as our Senior Vice President and General Manager, PortfolioManagement and U.S. Business. Previously, he was Vice President, U.S.Commercial Operations. Prior to joining our company, Mr. Perkins was aconsultant to Cerberus Capital Management where he provided executivemanagement since 2004 for several existing portfolio companies, including thecompany, and operational due diligence for potential investments. Mr. Perkinsjoined Cerberus from General Electric where he was an executive in itsCorporate Business Development group since 2001. Mr. Perkins started hiscareer with General Electric where he held a variety of additional positionsincluding marketing/product 

 

156

----

Table of Contents

 

management, sales,operations and corporate audit. Mr. Perkins is a graduate of GeneralElectric’s Management Development Program. He received his BA from DePauwUniversity and earned his MBA from Northwestern’s Kellogg School of Management.

 

The other informationunder the sections entitled “Board of Directors”, “Corporate Governance” and “Section 16(a)Beneficial Ownership Reporting Compliance” from our definitive proxy statementfor the 2010 Annual Meeting, which is to be filed with the SEC not later than120 days after the close of our fiscal year ended December 31, 2009 (the2010 Proxy Statement), is hereby incorporated by reference.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

The information under the sections entitled “CompensationDiscussion & Analysis”, “Executive Compensation”, “CompensationCommittee Interlocks and Insider Participation”, and “Compensation CommitteeReport” from the 2010 Proxy Statement is hereby incorporated by reference.

 

**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

**Equity Compensation Plan Information**

 

The following table sets forth certain informationregarding the following equity compensation plans, pursuant to which we havemade equity compensation available to eligible participants as of December 31,2009: 2005 Stock Option and Incentive Plan (2005 Plan), 2006 Restricted StockPlan (2006 Plan), and 2009 Long-Term Incentive Plan (2009 Plan).  In connection with our IPO, we ceased furthergrants under our 2005 and 2006 Plans and the 2009 Plan became effective.  The 2009 Plan provides for the grant ofawards 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 performanceawards.  All of our plans have beenapproved by our stockholders.

 
| **Plan Category**                                       | ** ** | **(a)**    | ** ** | **(b)** | ** ** | **(c)** | ** ** |
|---------------------------------------------------------|------------|------------|------------|---------|------------|---------|------------|
|                                                    |       |       |       |    |       |    |       |
| Equity compensation plans approved by shareholders      |       | 12,129,438 |       | $       | 8.40       |    | 6,112,896  |   |
| Equity compensation plans not approved by  shareholders |       | —     |       | NA      |       | —  |       |
| Total                                                   |       | 12,129,438 |       | $       | 8.40       |    | 6,112,896  |   |

 

----

| **(a)** | Number of securities to be issued upon exercise of outstanding  options, warrants, and rights                                                |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------|
| **(b)** | Weighted-average exercise price of outstanding options, warrants, and  rights                                                                |
| **(c)** | Number of securities remaining available for future issuance under  equity compensation plans (excluding securities reflected in column (a)) |

 

The maximum number of shares that we may issue for allawards under the 2009 Plan is 7,200,000. At December 31, 2009, 607,080 and 480,024 stock options and RSU’s,respectively, were outstanding, and 6,112,896 securities were remaining forfuture issuance under the 2009 Plan.

 

The other information under the section entitled “SecurityOwnership of Certain Beneficial Holders and Management” from the 2010 ProxyStatement is hereby incorporated by reference.

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

The information under the sections entitled “Board of Directors” and “CertainRelationships and Related Person Transactions” from the 2010 Proxy Statement ishereby incorporated by reference.

 

**ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The information under the section entitled “Audit andNon-Audit Fees” from the 2010 Proxy Statement is hereby incorporated byreference.

 

157

----

Tableof Contents

 

**PART IV**

 

**ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 

**1. Financial Statements.** The following are included in Item 8, “FinancialStatements and Supplementary Data:”

 

Report of IndependentRegistered Public Accounting Firm

Consolidated BalanceSheets at December 31, 2009 and 2008

Consolidated IncomeStatements for the years ended December 31, 2009, 2008, and 2007

Consolidated Statementsof Cash Flows for the years ended December 31, 2009, 2008, and 2007

Consolidated Statementsof Stockholders’ Equity (Deficit) for the years ended December 31, 2009,2008, and 2007

Notes to ConsolidatedFinancial Statements

 

**2.  FinancialStatement Schedule**. The following is included in Item 8, “Financial Statements andSupplementary Data:”

 

Schedule II- Valuation and Qualifying Accounts for theyears ended December 31, 2009, 2008, and 2007

 

All other schedules for which provision is made in theapplicable accounting regulations of the SEC are not required under the relatedinstructions or are inapplicable and therefore have been omitted.

 

**3.  Exhibits**

 
| **Exhibit Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **              | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.1                     |       | Amended and Restated Certificate of Incorporation of  Talecris Biotherapeutics Holdings Corp. (incorporated by reference to  Exhibit 3.1 of Amendment No. 9 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 11, 2009)                                                                                                                                                                                                  |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2                     |       | Amended and Restated By-Laws of Talecris  Biotherapeutics Holdings Corp. (incorporated by reference to Exhibit 3.2  of Amendment No. 8 to our Registration Statement on Form S-1 (File  No. 333-144941) filed on August 19, 2009)                                                                                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1                     |       | Indenture dated as of October 21, 2009 among  Talecris Biotherapeutics Holdings Corp., the Guarantors named therein, and  The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to  Exhibit 4.1 to our Current Report on Form 8-K filed on  October 21, 2009)                                                                                                                                                                              |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1                    |       | Revolving Credit Agreement, dated as of  December 6, 2006, by and among Talecris Biotherapeutics Holdings Corp.,  Talecris Biotherapeutics, Inc., Precision Pharma Services, Inc.,  Talecris Plasma Resources, Inc., Wells Fargo Foothill, Inc. and Wachovia  Bank, N.A. (incorporated by reference to Exhibit 10.12 of Amendment  No. 1 to our Registration Statement on Form S-1 (File  No. 333-144941) filed on September 24, 2007) |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2                    |       | First Amendment to Revolving Credit Agreement, dated  as of October 12, 2009 by and among Talecris Biotherapeutics Holdings  Corp., Wachovia Bank, National Association, Wells Fargo Foothill, Inc.,  and other signatories thereto (incorporated by reference to Exhibit 10.1  to our Current Report on Form 8-K filed on October 16, 2009)                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3                    |       | Registration  Rights Agreement dated as of October 21, 2009 among Talecris  Biotherapeutics Holdings Corp., Morgan Stanley & Co. Incorporated,  Goldman, Sachs & Co., Wells Fargo Securities, LLC, Citigroup Global  Markets Inc., and the Guarantors named therein (incorporated by reference to  Exhibit 10.1 to our Current Report on Form 8-K filed on  October 21, 2009)                                                                 |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4                    |       | Supply  Agreement, dated as of March 31, 2005, by and between Bayer Healthcare  LLC, Biological Products Division, and Talecris Biotherapeutics, Inc.  (F/K/A NPS Biotherapeutics, Inc.) (incorporated by reference to  Exhibit 10.31 of Amendment No. 9 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 11, 2009)+                                                                                     |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5                    |       | Amendment to  Supply Agreement, dated as of June 30, 2008, by and between Bayer Healthcare  LLC and Talecris Biotherapeutics, Inc. (incorporated by reference to  Exhibit 10.31.1 of Amendment No. 9 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 11, 2009)+                                                                                                                                              |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6                    |       | Amended and  Restated Plasma Sale/Purchase Agreement, dated October 13, 2006, by and  between                                                                                                                                                                                                                                                                                                                                                                                  |

 

158

----

Table of Contents

 
|   |   | TalecrisBiotherapeutics,Inc.andInterstateBloodBank,Inc.(incorporatedbyreferencetoExhibit10.32ofAmendmentNo.8toourRegistrationStatementonFormS-1(FileNo.333-144941)filedonAugust19,2009)+                                                                                                                                                                                                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7   |   | Profit Sharing  Agreement, dated November 18, 2006, by and between International BioResources,  L.L.C. and Talecris Plasma Resources, Inc. (incorporated by reference to  Exhibit 10.19 of Amendment No. 1 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 24, 2007)                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8   |   | Fractionation  Services and Commercial Products Agreement, dated as of April 1, 2008,  between and amongst Canadian Blood Services/Societe Canadienne Du Sang,  Talecris Biotherapeutics, Inc. and Talecris Biotherapeutics, Ltd.  (incorporated by reference to Exhibit 10.29 of Amendment No. 9 to our  Registration Statement on Form S-1 (File No. 333-144941) filed on  September 11, 2009)+                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9   |   | Fractionation  Services and Commercial Products Agreement, dated as of April 1, 2008,  between and amongst Héma-Québec, Talecris Biotherapeutics, Ltd. and Talecris  Biotherapeutics, Inc. (incorporated by reference to Exhibit 10.30.1 of  Amendment No. 9 to our Registration Statement on Form S-1 (File  No. 333-144941) filed on September 11, 2009)+                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10  |   | Amending  Agreement No. 1, effective as of May 26, 2008, to Fractionation  Services and Commercial Products, dated as of April 1, 2008, by and  among Héma-Québec, Talecris Biotherapeutics, Ltd. and Talecris  Biotherapeutics, Inc. (incorporated by reference to Exhibit 10.30.2 of  Amendment No. 6 to our Registration Statement on Form S-1 (File  No. 333-144941) filed on July 2, 2009)+ |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11  |   | TollManufacturingAgreementforTestingandPackaging,datedApril4,2008,byandbetweenTalecrisBiotherapeutics,GmbHandCatalentFranceLimogesSAS(incorporatedbyreferencetoExhibit10.35ofAmendmentNo.8toourRegistrationStatementonFormS-1(FileNo.333-144941)filedonAugust19,2009)+                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12  |   | Plasma  Sale/Purchase Agreement, dated as of August 12, 2008, by and between CSL  Plasma Inc. (f/k/a ZLB Bioplasma Inc.) and Talecris Biotherapeutics, Inc.  (incorporated by reference to Exhibit 10.33 of Amendment No. 7 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on July 21, 2009)+                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.13  |   | Amended and  Restated Services Agreement, dated January 1, 2009, by and between  Talecris Biotherapeutics, Inc. and Centric Health Resources, Inc.  (incorporated by reference to Exhibit 10.34 of Amendment No. 9 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on September 11, 2009)+                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.14  |   | Retained Intellectual Property License Agreement,  dated as of March 31, 2005, by and between Bayer Healthcare LLC and  Talecris Biotherapeutics, Inc. (f/k/a NPS Biotherapeutics, Inc.)  (incorporated by reference to Exhibit 10.31.1 of Amendment No. 1 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on September 24, 2007)                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.15  |   | Amendment to Retained Intellectual Property  Licensing Agreement, entered into as of August 10, 2007, by and between  Bayer Healthcare LLC and Talecris Biotherapeutics, Inc. (incorporated by  reference to Exhibit 10.31.2 of Amendment No. 1 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  September 24, 2007)                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16  |   | Management  Agreement, dated as of March 31, 2005, by and between Cerberus-Plasma  Holdings LLC, Ampersand 2001 Limited Partnership, Talecris Biotherapeutics  Holdings Corp., and Talecris Biotherapeutics, Inc. (incorporated by  reference to Exhibit 10.27.1 of Amendment No. 1 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  September 24, 2007)                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.17  |   | Amendment to  Management Agreement, dated as of December 6, 2006, by and between  Cerberus-Plasma Holdings LLC, Ampersand 2001 Limited Partnership, Talecris  Biotherapeutics Holdings Corp., and Talecris Biotherapeutics, Inc.  (incorporated by reference to Exhibit 10.27.2 of Amendment No. 1 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on September 24, 2007)               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.18  |   | Second Amendment  to Management Agreement, dated August 17, 2009, by and between  Cerberus-Plasma Holdings LLC, Ampersand 2001 Limited Partnership, Talecris  Biotherapeutics Holdings Corp., and Talecris Biotherapeutics, Inc.  (incorporated by reference to Exhibit 10.27.3 of Amendment No. 9 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on September 11, 2009)               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.19  |   | Stockholders  Agreement, dated March 31, 2005, by and among Talecris Biotherapeutics  Holdings Corp., Talecris Holdings, LLC and Bayer Healthcare LLC and its  affiliates party thereto (incorporated by reference to Exhibit 10.16.1  of Amendment No. 8 to our Registration Statement on Form S-1 (File No. 333-144941)                                                                                                 |

 

159

----

Table of Contents

 
|   |   | filed on  August 19, 2009)                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.20  |   | First Amendment  to Stockholders Agreement, dated August 17, 2009, by and among Talecris  Biotherapeutics Holdings Corp. and Talecris Holdings, LLC (incorporated by  reference to Exhibit 10.15.2 of Amendment No. 9 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  September 11, 2009)                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.21  |   | Stockholders  Agreement, dated December 7, 2006, by and among Talecris Biotherapeutics  Holdings Corp., Talecris Holdings, LLC and certain other stockholders of  Talecris Biotherapeutics Holdings Corp. party thereto (incorporated by  reference to Exhibit 10.21 of Amendment No. 1 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  September 24, 2007) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.22  |   | Agreement for  Domestic and Global Relocation Services, dated July 14, 2008, by and  between Talecris Biotherapeutics, Inc. and GMAC Global Relocation  Services, LLC (incorporated by reference to Exhibit 10.36.1 of Amendment  No. 8 to our Registration Statement on Form S-1 (File  No. 333-144941) filed on August 19, 2009)                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.23  |   | Amendment to  Agreement for Domestic and Global Relocation Services, dated August 15,  2008, by and between Talecris Biotherapeutics, Inc. and GMAC Global  Relocation Services, LLC (incorporated by reference to Exhibit 10.36.2  of Amendment No. 8 to our Registration Statement on Form S-1 (File  No. 333-144941) filed on August 19, 2009)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.24  |   | Master  Consulting and Advisory Services Agreement, dated as of July 18, 2008,  by and between Cerberus Operations and Advisory Company LLC and Talecris  Biotherapeutics Holding Corp. (incorporated by reference to  Exhibit 10.37 of Amendment No. 9 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 11, 2009)+                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.25  |   | Talecris Biotherapeutics  Holdings Corp. 2005 Stock Option and Incentive Plan (incorporated by  reference to Exhibit 10.1 of Amendment No. 1 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  September 24, 2007)*                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.26  |   | Talecris  Biotherapeutics Holdings Corp. Supplemental Savings Plan (incorporated by  reference to Exhibit 10.4 of Amendment No. 1 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  September 24, 2007)*                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.27  |   | Talecris  Biotherapeutics Holdings Corp. Irrevocable Trust Agreement, dated as of  December 6, 2006, by and between Talecris Biotherapeutics Holdings Corp.  and Wilmington Trust Company, as trustee (incorporated by reference to  Exhibit 10.36 of Amendment No. 1 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 24, 2007)*                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.28  |   | Talecris  Biotherapeutics Holdings Corp. Special Recognition Bonus Plan (incorporated  by reference to Exhibit 10.5 of Amendment No. 1 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  September 24, 2007)*                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.29  |   | Talecris  Biotherapeutics Holdings Corp. Incentive Plan (Management Bonus Plan), as  amended (incorporated by reference to Exhibit 10.6 of Amendment  No. 1 to our Registration Statement on Form S-1 (File No. 333-144941)  filed on September 24, 2007)*                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.30  |   | Talecris  Biotherapeutics Holdings Corp. 2009 Long-Term Incentive Plan (incorporated by  reference to Exhibit 10.7 of Amendment No. 9 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on September 11,  2009)*                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.31  |   | Form of  Stock Option Award Agreement under the 2009 Long-Term Incentive Plan of  Talecris Biotherapeutics Holdings Corp. (incorporated by reference to  Exhibit 10.7.2 of Amendment No. 11 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 28, 2009)*                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.32  |   | Form of  Restricted Share Unit Award Agreement under the 2009 Long-Term Incentive Plan  of Talecris Biotherapeutics Holdings Corp. (incorporated by reference to  Exhibit 10.7.3 of Amendment No. 11 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on September 28, 2009)*                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.33  |   | Third Restated  Employment Agreement, dated as of April 1, 2009, by and between Talecris  Biotherapeutics Holdings Corp. and Lawrence D. Stern (incorporated by  reference to Exhibit 10.22 of Amendment No. 8 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  August 19, 2009)*                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.34  |   | Employment  Agreement, as amended and restated as of October 10, 2008, by and  between Talecris Biotherapeutics Holdings Corp. and John M. Hanson  (incorporated by reference to Exhibit 10.23 of Amendment No. 6 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on July 2, 2009)*                                                                            |

 

160

----

Table of Contents

 
| 10.35  |   | Employment  Agreement, as amended and restated as of November 6, 2008, by and  between Talecris Biotherapeutics Holdings Corp. and John F. Gaither, Jr.  (incorporated by reference to Exhibit 10.25 of Amendment No. 6 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on July 2, 2009)*                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.36  |   | Employment  Letter, dated November 19, 2004, by and among NPS LLC, Bayer Healthcare  LLC and Mary J. Kuhn (incorporated by reference to Exhibit 10.24.1 of  Amendment No. 6 to our Registration Statement on Form S-1 (File  No. 333-144941) filed on July 2, 2009)*                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.37  |   | Employment Offer  Letter and supplemental termination provisions, dated February 8, 2005,  by and between Talecris Biotherapeutics, Inc. and Mary J. Kuhn  (incorporated by reference to Exhibit 10.24 of Amendment No. 5 to  our Registration Statement on Form S-1 (File No. 333-144941) filed  on July 23, 2008)*                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.38  |   | Letter  Agreement, dated December 19, 2008, amending the terms of a certain  Employment Letter, dated November 19, 2004, by and between Talecris  Biotherapeutics, Inc. and Mary J. Kuhn (incorporated by reference to  Exhibit 10.24.3 of Amendment No. 6 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on July 2, 2009)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.39  |   | Employment Offer  Letter, dated March 2, 2006, by and between Talecris  Biotherapeutics, Inc. and John R. Perkins (incorporated by reference to  Exhibit 10.26 of Amendment No. 5 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on July 23, 2008)*                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.40  |   | Letter  Agreement, dated December 19, 2008, amending the terms of a certain  Employment Letter, dated March 2, 2006, by and between Talecris  Biotherapeutics, Inc. and John R. Perkins (incorporated by reference to  Exhibit 10.26.2 of Amendment No. 6 to our Registration Statement on  Form S-1 (File No. 333-144941) filed on July 2, 2009)*  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.41  |   | Employment  Agreement, as amended and restated as of November 26, 2008, by and between  Talecris Biotherapeutics Holdings Corp. and Kari Heerdt (incorporated by  reference to Exhibit 10.21 of Amendment No. 8 to our Registration  Statement on Form S-1 (File No. 333-144941) filed on  August 19, 2009)*                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 21     |   | Subsidiaries of  Talecris Biotherapeutics Holdings Corp.                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 23.1   |   | Consent of  Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 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 to 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**                                                                                                                                                                                                                             |

 

----

+                 Portionsof the exhibit have been omitted pursuant to an order granting confidentialtreatment dated September 30, 2009 by the Securities and ExchangeCommission

 

*                 Managementcontract or compensatory plan or arrangement

 

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

 

161

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, inthe city of Research Triangle Park, State of North Carolina, on February 23,2010.

 
|   | **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 |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons in the capacities and on the dates indicated:

 
| **Signature**          | ** ** | **Title**                              | ** ** | **Date**               |
|------------------------|------------|----------------------------------------|------------|------------------------|
|                   |       |                                   |       |                   |
| /s/ Lawrence D. Stern  |       | Chairman and Chief Executive Officer   |       | February 23, 2010 |
| Lawrence D. Stern      |       | (principal executive officer)          |       |                   |
|                   |       |                                   |       |                   |
| /s/ John M. Hanson     |       | Executive Vice President and Chief     |       | February 23, 2010 |
| John M. Hanson         |       | Financial Officer (principal financial |       |                   |
|                   |       | and accounting officer)                |       |                   |
|                   |       |                                   |       |                   |
| /s/ Stuart A. Auerbach |       | Director                               |       | February 23, 2010 |
| Stuart A. Auerbach     |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ Richard A. Charpie |       | Director                               |       | February 23, 2010 |
| Richard A. Charpie     |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ Paul N. Clark      |       | Director                               |       | February 23, 2010 |
| Paul N. Clark          |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ W. Brett Ingersoll |       | Director                               |       | February 23, 2010 |
| W. Brett Ingersoll     |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ James T. Lenehan   |       | Director                               |       | February 23, 2010 |
| James T. Lenehan       |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ Steven F. Mayer    |       | Director                               |       | February 23, 2010 |
| Steven F. Mayer        |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ Kenneth J. Martin  |       | Director                               |       | February 23, 2010 |
| Kenneth J. Martin      |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ Dean J. Mitchell   |       | Director                               |       | February 23, 2010 |
| Dean J. Mitchell       |       |                                   |       |                   |
|                   |       |                                   |       |                   |
| /s/ Ruedi E. Waeger    |       | Director                               |       | February 23, 2010 |
| Ruedi E. Waeger        |       |                                   |       |                   |

 

162

----