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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D. C.  20549**

 

**Form 10-Q**

 

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

 

**For the quarterly period ended June 30,2010**

 

**or**

 

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

 

**For theTransition Period from          to          **

 

**Commission File Number: 001-34473**

 

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**Talecris Biotherapeutics HoldingsCorp.**

(Exact name of registrant asspecified in its charter)

 

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

 

**P.O. Box110526**

**4101Research Commons**

**79 T.W.Alexander Drive**

**ResearchTriangle Park, North Carolina 27709**

(Addressof principal executive offices, including Zip Code)

 

**(919) 316-6300**

(Registrants telephonenumber, including area code)

 

**Not applicable**

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

 

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

 

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

 

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

 

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

 

| 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 theExchange Act).  Yes o   No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date. 123,126,654 sharesof Common Stock, $0.01 par value, as of July 21, 2010

 

 

 

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**Talecris Biotherapeutics Holdings Corp.**

**Form 10-Q**

**Table of Contents**

 
| ** **                             | ** **                                                                                      | **Page** |
|----------------------------------------|-------------------------------------------------------------------------------------------------|----------|
| **Part I- Financial Information** |                                                                                            |     |
| ** **                             |                                                                                            |     |
| Item 1.                                | Unaudited Interim  Consolidated Financial Statements:                                           | 3        |
|                                   |                                                                                            |     |
|                                   | Consolidated  Balance Sheets as of June 30, 2010 and December 31, 2009                | 3        |
|                                   |                                                                                            |     |
|                                   | Consolidated  Income Statements for the Three and Six Months Ended June 30, 2010 and  2009 | 4        |
|                                   |                                                                                            |     |
|                                   | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2010 and 2009     | 5        |
|                                   |                                                                                            |     |
|                                   | Notes to Consolidated Financial Statements                                                      | 6        |
|                                   |                                                                                            |     |
| Item 2.                                | Management’s Discussion and  Analysis of Financial Condition and Results of Operations     | 24       |
|                                   |                                                                                            |     |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                     | 47       |
|                                   |                                                                                            |     |
| Item 4.                                | Controls  and Procedures                                                                        | 49       |
|                                   |                                                                                            |     |
| **Part II-  Other Information**   |                                                                                            |     |
| ** **                             |                                                                                            |     |
| Item 1.                                | Legal  Proceedings                                                                              | 50       |
|                                   |                                                                                            |     |
| Item 1A.                               | Risk Factors                                                                                    | 50       |
|                                   |                                                                                            |     |
| Item 6.                                | Exhibits                                                                                        | 53       |
|                                   |                                                                                            |     |
|                                   | Signatures                                                                                      | 54       |

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Balance Sheets**

(inthousands, except share and per share amounts)

(Unaudited)

 
| ** **                                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                              |       |              |       |                  |       |
| Current  assets:                                                                                                                        |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                              |       | $                 | 89,502     |                  | $          | 65,239 |   |
| Accounts  receivable, net of allowances of $3,540 and $3,461, respectively                                                              |       | 169,030           |       | 136,978               |       |
| Inventories                                                                                                                             |       | 653,384           |       | 644,054               |       |
| Deferred  income taxes                                                                                                                  |       | 88,652            |       | 88,652                |       |
| Prepaid  expenses and other                                                                                                             |       | 36,652            |       | 31,466                |       |
| Total  current assets                                                                                                                   |       | 1,037,220         |       | 966,389               |       |
|                                                                                                                                    |       |              |       |                  |       |
| Property,  plant, and equipment, net                                                                                                    |       | 303,078           |       | 267,199               |       |
| Investment  in affiliate                                                                                                                |       | 2,261             |       | 1,935                 |       |
| Intangible  assets                                                                                                                      |       | 10,880            |       | 10,880                |       |
| Goodwill                                                                                                                                |       | 172,860           |       | 172,860               |       |
| Deferred  income taxes                                                                                                                  |       | —            |       | 5,848                 |       |
| Other                                                                                                                                   |       | 17,891            |       | 19,894                |       |
| Total  assets                                                                                                                           |       | $                 | 1,544,190  |                  | $          | 1,445,005 |   |
|                                                                                                                                    |       |              |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                          |       |              |       |                  |       |
|                                                                                                                                    |       |              |       |                  |       |
| Current  liabilities:                                                                                                                   |       |              |       |                  |       |
| Accounts  payable                                                                                                                       |       | $                 | 70,276     |                  | $          | 71,046 |   |
| Accrued  expenses and other liabilities                                                                                                 |       | 156,814           |       | 170,533               |       |
| Current  portion of capital lease obligations                                                                                           |       | 789               |       | 740                   |       |
| Total  current liabilities                                                                                                              |       | 227,879           |       | 242,319               |       |
|                                                                                                                                    |       |              |       |                  |       |
| Long-term  debt and capital lease obligations                                                                                           |       | 605,149           |       | 605,267               |       |
| Deferred  income taxes                                                                                                                  |       | 5,693             |       | —                |       |
| Other                                                                                                                                   |       | 14,929            |       | 15,265                |       |
| Total  liabilities                                                                                                                      |       | 853,650           |       | 862,851               |       |
|                                                                                                                                    |       |              |       |                  |       |
| Commitments  and contingencies                                                                                                          |       |              |       |                  |       |
|                                                                                                                                    |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                             |       |              |       |                  |       |
| Common  stock, $0.01 par value; 400,000,000 shares authorized; 123,051,387 and  122,173,274 shares issued and outstanding, respectively |       | 1,227             |       | 1,212                 |       |
| Additional  paid-in capital                                                                                                             |       | 783,980           |       | 767,032               |       |
| Accumulated  deficit                                                                                                                    |       | (93,484           | )          | (186,446              | )          |
| Accumulated  other comprehensive (loss) income, net of tax                                                                              |       | (1,183            | )          | 356                   |       |
| Total  stockholders’ equity                                                                                                        |       | 690,540           |       | 582,154               |       |
| Total  liabilities and stockholders’ equity                                                                                        |       | $                 | 1,544,190  |                  | $          | 1,445,005 |   |

 

Theaccompanying notes are an integral part of these unaudited interim consolidatedfinancial statements.  

 

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**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Income Statements**

(inthousands, except per share amounts)

(Unaudited)

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                      | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net revenue:**                                |       |                   |       |                 |       |   |   |   |   |
| Product                                         |       | $                      | 397,102    |                 | $          | 370,116 |   | $ | 771,717 |   | $ | 734,979 |   |
| Other                                           |       | 5,724                  |       | 5,454                |       | 12,070 |   | 12,386 |   |
| Total                                           |       | 402,826                |       | 375,570              |       | 783,787 |   | 747,365 |   |
| Cost  of goods sold                             |       | 223,217                |       | 224,008              |       | 440,568 |   | 433,209 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| **Gross profit**                                |       | 179,609                |       | 151,562              |       | 343,219 |   | 314,156 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Operating  expenses:                            |       |                   |       |                 |       |   |   |   |   |
| Selling,  general, and administrative           |       | 76,004                 |       | 62,003               |       | 143,624 |   | 134,425 |   |
| Research  and development                       |       | 15,888                 |       | 19,020               |       | 32,159 |   | 35,561 |   |
| Total                                           |       | 91,892                 |       | 81,023               |       | 175,783 |   | 169,986 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| **Income from operations**                      |       | 87,717                 |       | 70,539               |       | 167,436 |   | 144,170 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Other  non-operating (expense) income:          |       |                   |       |                 |       |   |   |   |   |
| Interest  expense, net                          |       | (12,123                | )          | (20,513              | )          | (23,386 | ) | (41,858 | ) |
| Merger  termination fee                         |       | —                 |       | 75,000               |       | — |   | 75,000 |   |
| Equity  in earnings of affiliate                |       | 179                    |       | 95                   |       | 326 |   | 184 |   |
| Total                                           |       | (11,944                | )          | 54,582               |       | (23,060 | ) | 33,326 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Income  before income taxes                     |       | 75,773                 |       | 125,121              |       | 144,376 |   | 177,496 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Provision  for income taxes                     |       | (28,150                | )          | (41,849              | )          | (51,414 | ) | (60,789 | ) |
|                                            |       |                   |       |                 |       |   |   |   |   |
| **Net income**                                  |       | 47,623                 |       | 83,272               |       | 92,962 |   | 116,707 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Less  dividends to preferred stockholders       |       | —                 |       | (3,914               | )          | — |   | (7,732 | ) |
| **Net income available to common stockholders** |       | $                      | 47,623     |                 | $          | 79,358 |   | $ | 92,962 |   | $ | 108,975 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| **Net income per common share:**                |       |                   |       |                 |       |   |   |   |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Basic                                           |       | $                      | 0.39       |                 | $          | 47.42 |   | $ | 0.76 |   | $ | 76.29 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Diluted                                         |       | $                      | 0.37       |                 | $          | 0.89 |   | $ | 0.73 |   | $ | 1.24 |   |

 

Theaccompanying notes are an integral part of these unaudited interim consolidatedfinancial statements.

 

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**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Statements of Cash Flows**

(inthousands)

(Unaudited)

 
| ** **                                                                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                          | ** ** | **June 30,**    | ** ** |
| ** **                                                                          | ** ** | **2010**             | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                           |       |                 |       |   |   |
|                                                                                |       |                 |       |   |   |
| Net  income                                                                         |       | $                    | 92,962     |   | $ | 116,707 |   |
|                                                                                |       |                 |       |   |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:  |       |                 |       |   |   |
| Depreciation  and amortization                                                      |       | 16,851               |       | 13,921 |   |
| Amortization  of deferred loan fees and debt discount                               |       | 2,108                |       | 1,882 |   |
| Share-based  compensation expense                                                   |       | 10,584               |       | 20,171 |   |
| Change  in allowance for doubtful receivables and advances                          |       | 981                  |       | 1,976 |   |
| Recognition  of previously deferred revenue                                         |       | (109                 | )          | (113 | ) |
| Amortization  of deferred compensation                                              |       | 1,709                |       | 3,062 |   |
| Equity  in earnings of affiliate                                                    |       | (326                 | )          | (184 | ) |
| Asset  impairment                                                                   |       | 231                  |       | 369 |   |
| Loss  on disposal of property, plant, and equipment                                 |       | 92                   |       | 869 |   |
| Decrease  in deferred tax assets                                                    |       | 11,541               |       | 4,216 |   |
| Excess  tax benefits from share-based payment arrangements                          |       | (5,708               | )          | (1,437 | ) |
| Changes  in assets and liabilities, excluding the effects of business acquisitions: |       |                 |       |   |   |
| Accounts  receivable                                                                |       | (33,053              | )          | (7,539 | ) |
| Inventories                                                                         |       | (10,047              | )          | (21,965 | ) |
| Prepaid  expenses and other assets                                                  |       | (6,409               | )          | 14,260 |   |
| Accounts  payable                                                                   |       | (770                 | )          | (4,203 | ) |
| Accrued  expenses and other liabilities                                             |       | (5,136               | )          | (9,799 | ) |
| Interest  payable                                                                   |       | (3,102               | )          | (1,287 | ) |
| Net  cash provided by operating activities                                          |       | 72,399               |       | 130,906 |   |
|                                                                                |       |                 |       |   |   |
| **Cash flows from investing activities:**                                           |       |                 |       |   |   |
| Purchases  of property, plant, and equipment                                        |       | (53,205              | )          | (23,672 | ) |
| Business  acquisitions, net of cash acquired                                        |       | —               |       | (18,234 | ) |
| Financing  arrangements with third party suppliers, net of repayments               |       | 361                  |       | (1,575 | ) |
| Other                                                                               |       | —               |       | 232 |   |
| Net  cash used in investing activities                                              |       | (52,844              | )          | (43,249 | ) |
|                                                                                |       |                 |       |   |   |
| **Cash flows from financing activities:**                                           |       |                 |       |   |   |
| Borrowings  under Revolving Credit Facility                                         |       | 430                  |       | 734,598 |   |
| Repayments  of borrowings under Revolving Credit Facility                           |       | (430                 | )          | (821,301 | ) |
| Repayments  of borrowings under term loan                                           |       | —               |       | (3,500 | ) |
| Financing  transaction costs                                                        |       | (417                 | )          | — |   |
| Repayments  of capital lease obligations                                            |       | (356                 | )          | (257 | ) |
| Proceeds  from exercises of stock options                                           |       | 6,057                |       | — |   |
| Repurchases  of common stock from employees                                         |       | (4,917               | )          | (3,902 | ) |
| Excess  tax benefits from share-based payment arrangements                          |       | 5,708                |       | 1,437 |   |
| Net  cash provided by (used in) financing activities                                |       | 6,075                |       | (92,925 | ) |
|                                                                                |       |                 |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                       |       | (1,367               | )          | 118 |   |
| **Net increase (decrease) in cash and cash equivalents**                            |       | 24,263               |       | (5,150 | ) |
| **Cash and cash equivalents at beginning of period**                                |       | 65,239               |       | 16,979 |   |
| **Cash and cash equivalents at end of period**                                      |       | $                    | 89,502     |   | $ | 11,829 |   |

 

Theaccompanying notes are an integral part of these unaudited interim consolidatedfinancial statements.

 

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**TalecrisBiotherapeutics Holdings Corp.**

**Notes to Unaudited Consolidated Financial Statements**

 

**1.****                  ****Descriptionof Business**

 

We are a biopharmaceuticalcompany that researches, develops, manufactures, markets, and sellsprotein-based therapies that extend and enhance the lives of individuals whosuffer from chronic and acute, often life-threatening, conditions, such asprimary immune deficiencies, chronic inflammatory demyelinating polyneuropathy(CIDP), alpha-1 antitrypsin deficiency-related emphysema, bleeding disorders,infectious diseases, and severe trauma.  Our primary products have orphandrug designation to serve populations with rare, chronic diseases. 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 many therapeutic proteins, which we extractthrough the process of fractionation at our Clayton, North Carolina andMelville, New York facilities. The fractionated intermediates are thenpurified, formulated into final bulk, and aseptically filled into finalcontainers for distribution. We also sell the fractionated intermediateproducts.

 

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-related emphysema.These therapeutic areas are served by our branded products: Gamunex, ImmuneGlobulin Intravenous (Human), 10% Caprylate/Chromatography Purified (Gamunex,Gamunex IGIV) and Prolastin Alpha-1 Proteinase Inhibitor (Human) (Prolastin,Prolastin A1PI, Prolastin-C A1PI).  Thelaunch of our next generation Prolastin product, Prolastin-C A1PI, has beenessentially completed in the United States and we will launch Prolastin-C A1PIin Canada in the 2010 third quarter. Sales of Gamunex and Prolastin/Prolastin-CA1PI together comprised 74.9% and 74.8% of our net revenue for the three monthsended June 30, 2010 and 2009, respectively, and 75.9% and 75.0% of our netrevenue for the six months ended June 30, 2010 and 2009,respectively.  We also have a line ofhyperimmune therapies that provides treatment for tetanus, rabies, hepatitis A,hepatitis B, and Rh factor control during pregnancy and at birth. In addition,we provide plasma-derived therapies for critical care/homeostasis, includingthe treatment of hemophilia, an anti-coagulation factor (Thrombate III), aswell as albumin to expand blood volume. Although we sell our productsworldwide, the majority of our sales are concentrated in the United States andCanada.

 

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 includefractionation, purification, filling, and finishing.  We have an integrated plasma collectioncenter platform, which as of June 30, 2010, consisted of 69 operatingcenters, of which 64 were licensed and 5 were unlicensed.  Subsequent to June 30, 2010, we receivedFDA licensure for two additional plasma collection centers.  In addition to our U.S. operations, we havesales and marketing operations located in Germany and Canada, as well as a teamdedicated to the development of our international markets.

 

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 Facilityand completed the issuance of $600.0 million, 7.75% Unsecured Senior Notes, dueNovember 15, 2016, at a price of 99.321% of par, in a private placement tocertain qualified institutional buyers. The issuance of the notes resulted innet proceeds to us of $583.9 million. Proceeds from these transactions were used to repay and terminate ourthen existing First and Second Lien Term Loans, settle and terminate certaininterest rate swap contracts, and repay amounts outstanding under our RevolvingCredit Facility.  Additional informationregarding our IPO and refinancing transactions is included in our Annual Reporton Form 10-K for the year ended December 31, 2009 filed with theSecurities and Exchange Commission (SEC) on February 23, 2010 (2009 Form 10-K).

 

On July 19, 2010, weexchanged all of our then outstanding 7.75% Senior Notes due 2016 for 7.75%Senior Notes due 2016 that have been registered under the Securities Act of1933, as amended (Exchange Notes). Additional information regarding this transaction is included in Note15, “Subsequent Events.”

 

Until January 21, 2010,a majority of our outstanding common stock was owned by Talecris Holdings,LLC.  Talecris Holdings, LLC is owned by(i) Cerberus-Plasma Holdings LLC, the managing member of which is CerberusPartners, L.P., and (ii) limited partnerships affiliated with AmpersandVentures. Substantially all rights of management and control of TalecrisHoldings, LLC are held by Cerberus-Plasma Holdings LLC. As of June 30,2010, Talecris Holdings, LLC owned approximately 49.7% of our outstandingcommon stock.

 

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As discussed in Note 3, weentered into a definitive merger agreement with Grifols S.A. and Grifols, Inc.(Grifols) on June 6, 2010. Under the terms of the agreement, Grifols willacquire, through merger transactions, all of the common stock of Talecris for acombination of $19.00 in cash and 0.641 of a newly-issued non-voting Grifols’ (Class B)ordinary share for each outstanding Talecris share.  Under the terms of the agreement, completionof the transaction is subject to obtaining certain regulatory approvals,shareholder approvals, as well as other customary conditions.

 

**2.****                  ****Summaryof Significant Accounting Policies**

 

Throughout the unauditedinterim consolidated financial statements, references to “TalecrisBiotherapeutics Holdings Corp.,” “Talecris,” “the Company,” “we,” “us,” and “our”are references to Talecris Biotherapeutics Holdings Corp. and its wholly-ownedsubsidiaries.

 

All tabular disclosures ofdollar amounts are presented in thousands. All share and per share amounts arepresented 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 to reflect the share dividend.

 

***Interim Financial Statements***

 

We have prepared theaccompanying unaudited interim consolidated financial statements in accordancewith accounting principles generally accepted in the United States of America(U.S. GAAP) for interim financial statements and with the instructions to Form 10-Qand Article 10 of Regulation S-X issued by the SEC.  The accompanying unaudited interimconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements included in our 2009 Form 10-K.  In our opinion, the accompanying unauditedinterim consolidated financial statements have been prepared on the same basisas our annual audited consolidated financial statements and contain allmaterial adjustments (consisting of normal recurring accruals and adjustments)necessary to present fairly our financial condition, results of operations, andcash flows for the periods presented. The consolidated balance sheet that wehave presented as of December 31, 2009 has been derived from the auditedconsolidated financial statements on that date, but does not include all of theinformation and footnotes required by U.S. GAAP for complete financialstatements.

 

***Significant Accounting Policies***

 

A detailed description ofour significant accounting policies is presented in the footnotes to our annualaudited consolidated financial statements included in our 2009 Form 10-K.Our significant accounting policies, estimates, and assumptions have notchanged materially since December 31, 2009.

 

***Recent Accounting Pronouncements***

 

There were no accountingpronouncements during the six months ended June 30, 2010 that are expectedto have a material impact on our consolidated financial statements or relateddisclosures.

 

**3.****                  ****DefinitiveMerger Agreement with Grifols S.A. and Grifols, Inc. (Grifols)**

 

We entered into a definitivemerger agreement with Grifols on June 6, 2010. Under the terms of theagreement, Grifols will acquire, through merger transactions, all of the commonstock of Talecris for a combination of $19.00 in cash and 0.641 of anewly-issued non-voting Grifols’ (Class B) ordinary share for eachoutstanding Talecris share (the merger consideration).  Under the terms of the agreement, completionof the transaction is subject to obtaining certain regulatory approvals,shareholder approvals, as well as other customary conditions. The 0.641exchange ratio is generally fixed but is subject to adjustment to a lowerexchange ratio to the extent that application of 0.641 exchange ratio wouldresult in Grifols issuing in excess of 86.5 million Grifols non-voting sharesin the transaction. The Grifols non-voting shares will be listed on NASDAQ inthe form of American Depositary Shares and the Madrid, Barcelona, Bilbao andValencia stock exchanges and quoted on the Automated Quotation System of theSpanish Stock Exchanges.  Grifolsnon-voting shares will carry the same economic rights as Grifols ordinaryshares. Additionally, Talecris share-based compensation, whether vested orunvested, generally will be converted into the right to receive or acquire themerger consideration, or, in the case of employee stock options, the right toacquire the merger consideration, as described in the merger agreement in lieuof Talecris common stock.  The mergeragreement provides that if the merger agreement is terminated under specifiedcircumstances

 

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Grifols will be required to pay Talecris a termination fee of either$100 million or $375 million, depending on the specified circumstances. If themerger agreement is terminated under other specified circumstances, Talecriswill be required to pay Grifols a termination fee of $100 million. Generally,except as noted above, all fees and expenses incurred in connection with themerger agreement and the transactions contemplated by the merger agreement willbe paid by the party incurring those expenses. We have incurred and will continue to incur significant costs related toinvestment banking, legal, and accounting activities, as well as retentionexpenses, related to this merger transaction. The leading shareholders of Grifols have entered into an agreement withus, subject to conditions, to vote their Grifols shares in favor of thetransaction and, separately, an affiliate of Cerberus Capital Management,L.P., which owns approximately 49% of the outstanding Talecris common stock,has entered into an agreement with Grifols, subject to conditions, to vote itsTalecris shares in favor of the transaction.

 

**4.****                  ****DefinitiveMerger Agreement with CSL Limited (CSL)**

 

We entered into a definitivemerger agreement with CSL on August 12, 2008, which was subject to thereceipt of certain regulatory approvals as well as other customary conditions.  The U.S. Federal Trade Commission filed anadministrative complaint before the Commission challenging the merger and acomplaint in Federal district court seeking to enjoin the merger during theadministrative process.  On June 8,2009, the merger parties agreed to terminate the definitive merger agreement,and as a result, CSL paid us a merger termination fee of $75.0 million duringthe 2009 second quarter.  The U.S.Federal Trade Commission’s complaints were subsequently dismissed.  We incurred retention expense, includingfringe benefits, of $3.0 million and $6.7 for the three and six months ended June 30,2009, respectively, and legal costs associated with the regulatory reviewprocess of $0.3 million and $6.0 million during the three and six months ended June 30,2009, respectively.  No amounts wereincurred during 2010. All retention amounts were paid during 2009.

 

**5.****                  ****Inventoriesand Cost of Goods Sold**

 

Inventories consisted of thefollowing:

 
| ** **         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Raw  material      |       | $                 | 173,948    |                  | $          | 171,866 |   |
| Work-in-process    |       | 337,825           |       | 312,178               |       |
| Finished  goods    |       | 141,611           |       | 160,010               |       |
| Total  inventories |       | $                 | 653,384    |                  | $          | 644,054 |   |

 

Our raw material inventoriesinclude unlicensed plasma and related testing costs of $11.8 million and $7.6million at June 30, 2010 and December 31, 2009, respectively, whichwe believe are realizable.

 

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

 

Our cost of goods soldincludes $1.7 million and $11.0 million for the three months ended June 30,2010 and 2009, respectively, and $3.7 million and $25.4 million for the sixmonths ended June 30, 2010 and 2009, respectively, related to unabsorbedTPR infrastructure and start-up costs associated with the development of ourplasma collection center platform.  Untilour plasma collection centers reach normal operating capacity, we chargeunabsorbed overhead costs directly to cost of goods sold.

 

**6.****                  ****ComprehensiveIncome**

 

The following table includes the components of our comprehensive income:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                           | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income                                                          |       | $                      | 47,623     |                 | $          | 83,272 |   | $ | 92,962 |   | $ | 116,707 |   |
| Foreign  currency translation adjustments                            |       | (989                   | )          | 456                  |       | (1,539 | ) | 90 |   |
| Net  unrealized gain on derivative financial instruments, net of tax |       | —                 |       | 3,176                |       | — |   | 5,088 |   |
| Total  comprehensive income                                          |       | $                      | 46,634     |                 | $          | 86,904 |   | $ | 91,423 |   | $ | 121,885 |   |

 

During the fourth quarter of2009, we settled and terminated our interest rate swap contracts as discussedfurther in our 2009

 

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Form 10-K.

 

**7.****                  ****IncomeTaxes**

 

Our income tax provision was$28.2 million and $41.8 million for the three months ended June 30, 2010and 2009, respectively, resulting in effective income tax rates of 37.2% and33.4%, respectively.  Our income taxprovision was $51.4 million and $60.8 million for the six months ended June 30,2010 and 2009, respectively, resulting in effective income tax rates of 35.6%and 34.2%, respectively.

 

For the three and six monthsended June 30, 2010, our effective income tax rate is higher than the U.S.statutory Federal income tax rate, primarily due to the non-deductibility oftransaction costs related to our definitive merger agreement with Grifols andthe effects of state taxes.  These itemswere partially offset by a domestic production deduction, which was statutorilyincreased to 9% for 2010, and credits for orphan drug clinical testing expenditures.

 

For the three and six monthsended June 30, 2009, our effective income tax rate is lower than the U.S.statutory Federal income tax rate, primarily due to credits for FederalResearch and Experimentation and orphan drug clinical testing expenditures andthe deduction of previously capitalized transaction costs related to ourterminated merger agreement with CSL. These factors offset the effects of state taxes.

 

**8.****                  ****RelatedParty Transactions**

 

Until January 21, 2010,a majority of our outstanding common stock was owned by Talecris Holdings,LLC.  Talecris Holdings, LLC is owned by(i) Cerberus-Plasma Holdings LLC, the managing member of which is CerberusPartners, L.P., and (ii) limited partnerships affiliated with AmpersandVentures. Substantially all rights of management and control of TalecrisHoldings, LLC are held by Cerberus-Plasma Holdings LLC. As of June 30,2010, Talecris Holdings, LLC owned approximately 49.7% of our outstandingcommon stock.  We had a managementagreement with Cerberus-Plasma Holdings LLC and an affiliate of AmpersandVentures, which was terminated as of September 30, 2009 in connection withour IPO.  We have a Master Consulting andAdvisory Services Agreement with an affiliate of Cerberus to provide certainadvisory services to us, for which we incurred no significant costs for theperiods presented.

 

We have an equity investment in Centric Health Resources, Inc.(Centric); therefore, we consider Centric to be a related party during theperiods presented.  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 of Prolastin/Prolastin-CA1PI.  Centric maintains inventory on ourbehalf which it utilizes to fill customer orders.  Centric also providesservices to us in collecting accounts receivable for sales made under theProlastin and Gamunex Direct programs. We provide Centric with a fee foreach unit of product provided to patients which escalates with volume.

 

The following table summarizes our related party transactions for thethree and six months ended June 30, 2010 and 2009 and our related partyaccounts payable balances at June 30, 2010 and December 31, 2009:

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                         | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Centric  (product distribution and other services) |       | $                      | 5,752      |                 | $          | 5,096 |   | $ | 11,076 |   | $ | 9,948 |   |
| Cerberus  (management fees)                        |       | $                      | —     |                 | $          | 1,898 |   | $ | — |   | $ | 3,757 |   |

 
| ** **         | ** ** | **Activity/**                            | ** ** | **Payable**            | ** ** |
|--------------------|------------|------------------------------------------|------------|------------------------|------------|
| **Related  Party** | ** ** | **Transaction**                          | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| Centric            |       | Product distribution and  other services |       | $                      | 6,169      |   | $ | 5,537 |   |
| Cerberus           |       | Operational support                      |       | $                      | 361        |   | $ | 349 |   |

 

**9.****                  ****Commitmentsand Contingencies**

 

We have disclosedinformation regarding our commercial commitments in our 2009 Form 10-K.  The following summarizes our significantchanges in material commitments and contingencies as of June 30, 2010.

 

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***Agreements related to Grifols Merger***

 

We have entered intoagreements with investment bankers related to our definitive merger agreementwith Grifols, as discussed in Note 3.  Weincurred fees totaling $2.5 million under these agreements during the threemonths ended June 30, 2010.  We areobligated to pay additional fees totaling $21.3 million upon successful closingof the merger transaction.  During the threemonths ended June 30, 2010, we also incurred legal, accounting, and otherfees of $5.9 million associated with the definitive merger agreement.  We expect to incur significant costs relatedto the retention of key employees, which we currently estimate at $10.5million.  Retention amounts will likely berecognized ratably through the second quarter of 2011.

 

***Capital Commitments***

 

As discussed in our 2009 Form 10-K,we have embarked on a substantial capital plan to address our manufacturingcapacity constraints.  As of June 30,2010, we have commitments for capital spending under this capital program ofapproximately $72.0 million.

 

***Litigation***

 

We are involved in variouslegal 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 potentiallosses.  In our opinion, the ultimateoutcome of these proceedings and claims is not anticipated to have a materialadverse effect on our consolidated financial position, results of operations,or cash flows.  However, the ultimateoutcome of litigation is unpredictable and actual results could be materiallydifferent from our estimates.  We recordanticipated recoveries under applicable insurance contracts when we are assuredof recovery.

 

***Grifols Transaction***

 

Four purported class action lawsuits have been filed against Talecris,the members of its board of directors, Grifols S.A. and subsidiaries and in onecase, Talecris’ principal stockholder, all alleging breach of various fiduciaryduties in approving the acquisition of Talecris by a subsidiary of Grifols,S.A.  The cases seek equitable andinjunctive relief, damages and/or punitive damages.  The cases are Laborers Local 235 BenefitFunds v. Charpie, et al (Delaware Chancery, June 14, 2010); Chiarantano v.Stern, et al (Delaware Chancery, June 30, 2010); Kovary v. TalecrisBiotherapeutics Holdings Corp et al (Wake County, NC, July 12, 2010); andRubin v. Charpie, et al (Durham County, NC, July 12, 2010).

 

***National Genetics Institute/Baxter HealthcareCorporation Litigation***

 

In May 2008, Baxter Healthcare Corporation (Baxter) and NationalGenetics Institute (NGI), a wholly-owned subsidiary of Laboratory Corporationof America, filed a complaint in the U.S. District Court for the EasternDistrict of North Carolina, alleging that we infringed U.S. Patent Nos.5,780,222, 6,063,563, and 6,566,052. They subsequently withdrew and re-filedthe case in November 2008. The patents deal primarily with a method ofscreening large numbers of biological samples utilizing various pooling andmatrix array strategies, and the complaint alleges that the patents are ownedby Baxter and exclusively licensed to NGI. In November 2008, we filed ouranswer to their complaint, asserting anti-trust and other counterclaims, andfiled a request for re-examination of the patents with the Patent and TrademarkOffice (PTO), which was subsequently granted. We filed a motion to staylitigation pending the PTO proceedings. The motion was unopposed andsubsequently granted on January 30, 2009. On June 29, 2010, the PTOissued Reexamination Certificates for U.S. Patent Nos. 5,780,222 and 6,063,563without amending the claims of the patents. The Reexamination Certificate for U.S. Patent No. 6,566,052 has notyet been issued by the PTO.  Neitherparty has yet filed motions to resume the litigation. We believe theallegations of infringement are without merit and that the patents are invalidas applied to our processes.

 

***Plasma Centers of America, LLC and G&M CrandallLimited Family Partnership***

 

We had a three year Amended and Restated Plasma Sale/Purchase Agreementwith Plasma Centers of America, LLC (PCA) under which we were required topurchase annual minimum quantities of plasma from plasma collection centersapproved by us, including the prepayment of 90% for unlicensed plasma.  We were also committed to finance thedevelopment of up to eight plasma collection centers, which were to be used tosource plasma for us.  Under the terms ofthe agreement, we had the obligation to 

 

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purchase such centers under certain conditions for a sum determined bya formula set forth in the agreement.  Weprovided $3.2 million in financing, including accrued interest, related to thedevelopment of such centers, and we advanced payment of $1.0 million forunlicensed plasma.  We recorded aprovision within SG&A during 2008 related to these advances.

 

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

 

***Foreign Corrupt Practices Act***

 

We are conducting an internal investigation into potential violationsof the Foreign Corrupt Practices Act (FCPA) that we became aware of during theconduct of an unrelated review.  The FCPAinvestigation is being conducted by outside counsel under the direction of aspecial committee of our board of directors. The investigation initially focused on sales to certain Eastern Europeanand Middle Eastern countries, but our investigation is also reviewing salespractices in other countries as determined appropriate.

 

In July 2009, we voluntarily contacted the U.S. Department ofJustice (DOJ) to advise them of the investigation and to offer our cooperationin any investigation that they want to conduct or they want us to conduct. TheDOJ has not indicated what action it may take, if any, against us or anyindividual, or the extent to which it may conduct its own investigation. TheDOJ or other federal agencies may seek to impose sanctions on us that mayinclude, among other things, injunctive relief, disgorgement, fines, penalties,appointment of a monitor, appointment of new control staff, or enhancement ofexisting compliance and training programs. Other countries in which we dobusiness may initiate their own investigations and impose similar penalties. Asa result of this investigation, we have suspended shipments to some of thesecountries while we put additional safeguards in place. In some cases,safeguards involved terminating consultants and suspending relations with orterminating distributors in countries under investigation as circumstanceswarranted. These actions unfavorably affected revenue from these countries in2009 and have an ongoing unfavorable impact on revenue in 2010. We have resumedsales in countries where we have appropriate safeguards in place and arereallocating 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 unaudited interim consolidatedfinancial statements as of June 30, 2010.

 

***Pharmaceutical Pricing Agreement under the PublicHealth Service Program***

 

In November 2009, wereceived 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.The PPA 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 are inconsistent with theterms of the PPA, the USAO has stated that it may file a civil action againstus under the Anti-fraud Injunction Act and seek a court order directing thecompany to comply with the PPA or, potentially, proceed under some other legaltheory.   We could also be subject tofines, damages, penalties, appointment of a monitor, or enhancement of existingcompliance and training programs as a result of government action. We arecooperating with the investigation and intend to respond to informationrequests from the USAO.

 

**10.****           ****Share-BasedCompensation**

 

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

 

Share-based compensationexpense for the three and six months ended June 30, 2010 and 2009 was asfollows:

 

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| ** **                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| SG&A                  |       | $                      | 2,270      |                 | $          | 7,477 |   | $ | 7,950 |   | $ | 16,450 |   |
| R&D                   |       | 177                    |       | 512                  |       | 715 |   | 1,179 |   |
| Cost  of goods sold       |       | 910                    |       | 1,120                |       | 1,919 |   | 2,542 |   |
| Total  expense            |       | $                      | 3,357      |                 | $          | 9,109 |   | $ | 10,584 |   | $ | 20,171 |   |
|                      |       |                   |       |                 |       |   |   |   |   |
| Capitalized  in inventory |       | $                      | 419        |                 | $          | 868 |   | $ | 1,445 |   | $ | 2,006 |   |

 

Amounts capitalized ininventory are recognized in cost of goods sold in our consolidated incomestatement primarily within twelve months.

 

The following tablesummarizes the remaining unrecognized compensation cost related to ourshare-based compensation programs as of June 30, 2010 and the weightedaverage period over which the non-cash compensation cost is expected to berecognized:

 
| ** **                | ** ** | ** **       | ** ** | **Weighted-** | ** ** |
|---------------------------|------------|------------------|------------|---------------|------------|
| ** **                | ** ** | **Unrecognized** | ** ** | **Average**   | ** ** |
| ** **                | ** ** | **Compensation** | ** ** | **Period**    | ** ** |
| ** **                | ** ** | **Cost**         | ** ** | **(Years)**   | ** ** |
| Stock  options            |       | $                | 4,819      |          | 2.60       |   |
| Restricted  share awards  |       | 3,244            |       | 0.75          |       |
| RSU’s                |       | 7,302            |       | 2.66          |       |
| Performance  share awards |       | 4,248            |       | 2.76          |       |
| Total                     |       | $                | 19,613     |          |       |   |

 

In addition to the unrecognized compensation cost included in the tableabove, at June 30, 2010, $2.1 million of compensation cost was included ininventory on our unaudited interim consolidated balance sheet, which we expectto be recognized as non-cash compensation expense in our consolidated incomestatement primarily within the next twelve months.  The amount of share-based compensationexpense that we will ultimately be required to record could change in thefuture as a result of additional grants, changes in the fair value of sharesfor performance-based awards, differences between our anticipated forfeiturerate and the actual forfeiture rate, the probability of achieving targetsestablished for performance award vesting, and other actions by our board ofdirectors or its compensation committee.

 

***Stock Options***

 

The following is a summary of stock option activity for the six monthsended June 30, 2010:

 
| ** **                                         | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|----------------------------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **   | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining**   | ** ** | ** **    | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Average**  | ** ** | **Contractual** | ** ** | **Aggregate** | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term**        | ** ** | **Intrinsic** | ** ** |
| ** **                                         | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(Years)**     | ** ** | **Value**     | ** ** |
| Outstanding  at December 31, 2009             |       | 12,129,438 |       | $            | 8.40       |            |       |          |       |   |
| Granted                                            |       | 73,593     |       | $            | 20.39      |            |       |          |       |   |
| Forfeited                                          |       | (13,581    | )          | $            | 19.00      |            |       |          |       |   |
| Exercised                                          |       | (1,124,936 | )          | $            | 5.39       |            |       |          |       |   |
| Outstanding  at June 30, 2010                 |       | 11,064,514 |       | $            | 8.77       |            | 6.2        |          | $          | 136,373 |   |
|                                               |       |       |       |         |       |            |       |          |       |
| Exercisable  at June 30, 2010                 |       | 10,406,789 |       | $            | 8.12       |            | 5.3        |          | $          | 135,094 |   |
|                                               |       |       |       |         |       |            |       |          |       |
| Vested  and expected to vest at June 30, 2010 |       | 11,011,447 |       | $            | 8.72       |            | 6.2        |          | $          | 136,322 |   |

 

The aggregate intrinsic value in the table above represents thedifference between the $21.10 closing price of our common stock as reported byThe NASDAQ Global Select Market on June 30, 2010 and the weighted averageexercise price, multiplied by the number of options outstanding orexercisable.  The total intrinsic valueand cash proceeds to us from stock option exercises during the

 

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six months ended June 30, 2010 were $18.8 million and $6.1million, respectively.    We do notrecord the aggregate intrinsic value for financial accounting purposes and thevalue changes based upon changes in the fair value of our common stock.

 

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

 
| ** **               | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------|------------|
| ** **               | ** ** | **June 30,**    | ** ** |
| ** **               | ** ** | **2010**             | ** ** | **2009** | ** ** |
| Risk-free  interest rate |       | 2.66                 | %          | 1.79 | % |
| Expected  term           |       | 5.66                 |       | 5.25 |   |
| Expected  volatility     |       | 50                   | %          | 50 | % |
| Expected  dividend yield |       | 0                    | %          | 0 | % |

 

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

 

***Restricted Stock***

 

The following is a summary of restricted stock activity for the sixmonths ended June 30, 2010:

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

 

During the six months ended June 30,2010, we repurchased 246,823 shares of our common stock from employees for $4.9million to settle their withholding tax obligations upon vesting of 727,256shares of restricted stock.  During thesix months ended June 30, 2009, we repurchased 234,704 shares of ourcommon stock from employees for $3.9 million to settle their withholding taxobligations upon vesting of 771,744 shares of restricted stock.  The total fair value of the restricted stockthat vested during the six months ended June 30, 2010 and 2009 was $14.5million and $12.8 million, respectively.

 

***Restricted Stock Units (RSU’s)***

 

The following is a summaryof RSU activity for the six months ended June 30, 2010:

*** ***
| ** **                             | ** ** | ** ** | ** ** | ** **     | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|----------------------------------------|------------|------------|------------|----------------|------------|-----------------|------------|---------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **     | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Weighted**   | ** ** | **Remaining**   | ** ** | ** **    | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average**    | ** ** | **Contractual** | ** ** | **Aggregate** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Grant Date** | ** ** | **Term**        | ** ** | **Intrinsic** | ** ** |
| ** **                             | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **(Years)**     | ** ** | **value**     | ** ** |
| Outstanding  at December 31, 2009 |       | 480,024    |       | $              | 19.00      |            |       |          |       |   |
| Granted                                |       | 36,015     |       | $              | 20.40      |            |       |          |       |   |
| Forfeited                              |       | (14,167    | )          | $              | 19.00      |            |       |          |       |   |
| Outstanding  at June 30, 2010     |       | 501,872    |       | $              | 19.10      |            | 2.7        |          | $          | 10,589 |   |
|                                        |            |            |            |                |            |                 |            |               |            |  |  |

 

***Performance Share Units***

 

The compensation committee of our board of directors approved a grantof 261,327 performance share units on March 8, 2010, which had a weightedaverage grant date fair value of $21.51 per share.  Performanceshare units are awards that vest based on the achievement ofpre-established objective performance goals, which are generally financial innature. For performance awards, the compensation committee establishes aperformance period and the performance targets for each performance measurethat must be achieved at the end of the performance period for awards to vest.The number of shares issued upon the vesting of the performance awards variesbased on actual performance in a year relative to a defined minimum and maximumfinancial target for that year. The 

 

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performance share units granted on March 8, 2010 will vestannually over a three-year performance period with the potential for 0% to 125%payout, based on the achievement of annual earnings per share targets that wereestablished at the time of grant.

 

***Income Taxes***

 

In connection with stock option exercises and restricted stock vesting,we recognized net tax benefits of $12.4 million and $4.7 million for the six monthsended June 30, 2010 and 2009, respectively.  We record income tax benefits realized uponexercise or vesting of an award in excess of that previously recognized inearnings as additional paid-in-capital. We recognized excess tax benefits related to share-based compensation of$5.7 million and $1.4 million for the six months ended June 30, 2010 and2009, respectively.

 

**11.****           ****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 froma single raw material source, human plasma, and are processed in whole, or inpart, at our principal manufacturing facilities located in Clayton, NorthCarolina. Our Melville, New York, facility primarily supplies intermediateplasma fractions to our Clayton facilities. Gamunex and Prolastin/Prolastin-CA1PI constitute the majority of our net revenue. Although we sell our productsworldwide, the majority of our net revenue was concentrated in the UnitedStates and Canada for the periods presented.

 

In the following table, wehave presented our net revenue by significant product category. OurImmunology/Neurology product category includes the products that are used toprovide antibodies to patients who have a genetic or acquired inability toproduce these antibodies, as well as a treatment for CIDP, and also productsthat provide antibodies to counter specific antigens such as rabies. OurPulmonology product category is comprised of our Prolastin/Prolastin-C A1PIproduct, which is used to treat patients with a genetic alpha-1 antitrypsindeficiency.  Our Critical Care/Hemostasisproduct category includes products that are used to supplement, restore, ormaintain normal plasma parameters such as volume or coagulation values.  Other product net revenue primarily consistsof sales of PPF powder and intermediate products, such as cryoprecipitate.  Other net revenue consists of royalties andlicensing fees, milestones, and revenues related to contracted servicesperformed for third parties at our Melville, New York facility.

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                 | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Product  net revenue:      |       |                   |       |                 |       |   |   |   |   |
| Immunology/  Neurology     |       | $                      | 238,441    |                 | $          | 232,709 |   | $ | 471,708 |   | $ | 463,543 |   |
| Pulmonology                |       | 87,985                 |       | 76,821               |       | 168,169 |   | 149,380 |   |
| Critical  Care/ Hemostasis |       | 48,352                 |       | 38,800               |       | 86,718 |   | 76,734 |   |
| Other                      |       | 22,324                 |       | 21,786               |       | 45,122 |   | 45,322 |   |
| Total  product net revenue |       | 397,102                |       | 370,116              |       | 771,717 |   | 734,979 |   |
| Other  revenue             |       | 5,724                  |       | 5,454                |       | 12,070 |   | 12,386 |   |
| Total  net revenue         |       | $                      | 402,826    |                 | $          | 375,570 |   | $ | 783,787 |   | $ | 747,365 |   |

 

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

 
| ** **         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------|------------|------------------------|------------|----------------------|------------|
| ** **         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **         | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| United  States     |       | $                      | 275,504    |                 | $          | 249,675 |   | $ | 536,896 |   | $ | 497,089 |   |
| Canada             |       | 47,292                 |       | 53,873               |       | 96,537 |   | 103,865 |   |
| Europe             |       | 46,264                 |       | 42,361               |       | 94,647 |   | 86,661 |   |
| Other              |       | 33,766                 |       | 29,661               |       | 55,707 |   | 59,750 |   |
| Total  net revenue |       | $                      | 402,826    |                 | $          | 375,570 |   | $ | 783,787 |   | $ | 747,365 |   |

 

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

 

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**12.****           ****Earningsper Share**

 

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

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                      | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income                                                     |       | $                      | 47,623     |                 | $          | 83,272 |   | $ | 92,962 |   | $ | 116,707 |   |
| Less:                                                           |       |                   |       |                 |       |   |   |   |   |
| Series A  convertible preferred stock undeclared dividends |       | —                 |       | (3,200               | )          | — |   | (6,322 | ) |
| Series B  convertible preferred stock undeclared dividends |       | —                 |       | (714                 | )          | — |   | (1,410 | ) |
| Net  income available to common stockholders                    |       | $                      | 47,623     |                 | $          | 79,358 |   | $ | 92,962 |   | $ | 108,975 |   |
|                                                            |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares outstanding                     |       | 122,679,933            |       | 1,673,504            |       | 122,162,276 |   | 1,428,408 |   |
|                                                            |       |                   |       |                 |       |   |   |   |   |
| Basic  net income per common share:                             |       | $                      | 0.39       |                 | $          | 47.42 |   | $ | 0.76 |   | $ | 76.29 |   |

 

The following tableillustrates the calculation of our diluted earnings per common shareoutstanding:

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                         | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                        |       | $                      | 47,623     |                 | $          | 83,272 |   | $ | 92,962 |   | $ | 116,707 |   |
|                                               |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares outstanding        |       | 122,679,933            |       | 1,673,504            |       | 122,162,276 |   | 1,428,408 |   |
| Plus  incremental shares from assumed conversions: |       |                   |       |                 |       |   |   |   |   |
| Series A  preferred stock                     |       | —                 |       | 72,000,000           |       | — |   | 72,000,000 |   |
| Series B  preferred stock                     |       | —                 |       | 13,846,320           |       | — |   | 13,846,320 |   |
| Stock  options and restricted shares               |       | 5,195,299              |       | 6,353,208            |       | 5,666,813 |   | 6,588,232 |   |
| Dilutive  potential common shares                  |       | 127,875,232            |       | 93,873,032           |       | 127,829,089 |   | 93,862,960 |   |
|                                               |       |                   |       |                 |       |   |   |   |   |
| Diluted  net income per common share               |       | $                      | 0.37       |                 | $          | 0.89 |   | $ | 0.73 |   | $ | 1.24 |   |

 

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

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                       | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Stock  options                   |       | 2,690,147              |       | 2,047,392            |       | 2,659,811 |   | 2,032,648 |   |
| Weighted  average exercise price |       | $                      | 20.73      |                 | $          | 21.18 |   | $ | 20.73 |   | $ | 21.21 |   |
|                                  |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

**13.****           ****FairValue of Financial Instruments**

 

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

 

At June 30, 2010 and December 31, 2009, the estimated fairvalue of our 7.75% Notes was $628.5 million and $607.9 million, respectively.  We calculated the fair value by reference toopen bid/ask quotations of our 7.75% Notes at each balance sheet date.  We had no amounts outstanding under ourvariable rate Revolving Credit Facility at June 30, 2010 and December 31,2009.  At June 30, 2010 and December 31,2009, we have notes receivable outstanding, which bear interest at marketrates, and consequently, the recorded amounts approximate fair value.  The recorded amounts of all other financialinstruments, which consists of cash and cash equivalents, accounts receivable,net, accounts payable, accrued expenses and other liabilities, approximate fairvalue due to the short duration of the instruments.

 

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**14.****           ****CondensedConsolidating Financial Information**

 

In October 2009, wecompleted the issuance of our 7.75% Notes. The 7.75% Notes are guaranteed on a senior unsecured basis by ourexisting and future domestic subsidiaries. The accompanying condensed consolidating financial information has beenprepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “FinancialStatements of Guarantors and Issuers of Guaranteed Securities Registered orBeing Registered.”  Each of thesubsidiary guarantors are 100% owned, directly or indirectly, by us, and allguarantees are full and unconditional and joint and several.  Our investments in our consolidatedsubsidiaries are presented under the equity method of accounting.  No significant administrative costs are borneby the Parent.  Our unaudited condensedconsolidating financial statements are presented below:

 

**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Balance Sheets**

**June 30, 2010**

 
| ** **                                                 | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **Assets:**                                                |       |        |       |             |       |              |       |              |       |             |       |
| Current  assets:                                           |       |        |       |             |       |              |       |              |       |             |       |
| Cash                                                       |       | $           | —     |             | $          | 78,911            |       | $                 | 10,591     |             | $          | — |   | $ | 89,502 |   |
| Accounts  receivable, net                                  |       | —      |       | 268,844          |       | 37,571            |       | (137,385          | )          | 169,030          |       |
| Inventories                                                |       | —      |       | 617,554          |       | 35,830            |       | —            |       | 653,384          |       |
| Other                                                      |       | —      |       | 124,187          |       | 1,117             |       | —            |       | 125,304          |       |
| Total  current assets                                      |       | —      |       | 1,089,496        |       | 85,109            |       | (137,385          | )          | 1,037,220        |       |
| Property,  plant, and equipment, net                       |       | —      |       | 301,974          |       | 1,104             |       | —            |       | 303,078          |       |
| Intangible  assets                                         |       | —      |       | 10,880           |       | —            |       | —            |       | 10,880           |       |
| Goodwill                                                   |       | —      |       | 172,860          |       | —            |       | —            |       | 172,860          |       |
| Investment  in Subsidiaries                                |       | 753,677     |       | (31,411          | )          | —            |       | (722,266          | )          | —           |       |
| Advances  and notes between Parent and Subsidiaries        |       | 1,367,015   |       | 836,618          |       | —            |       | (2,203,633        | )          | —           |       |
| Other                                                      |       | —      |       | 19,861           |       | 291               |       | —            |       | 20,152           |       |
| Total  assets                                              |       | $           | 2,120,692  |             | $          | 2,400,278         |       | $                 | 86,504     |             | $          | (3,063,284 | ) | $ | 1,544,190 |   |
|                                                       |       |        |       |             |       |              |       |              |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit):**   |       |        |       |             |       |              |       |              |       |             |       |
| Current  liabilities:                                      |       |        |       |             |       |              |       |              |       |             |       |
| Accounts  payable                                          |       | $           | —     |             | $          | 105,545           |       | $                 | 102,116    |             | $          | (137,385 | ) | $ | 70,276 |   |
| Accrued  expenses and other liabilities                    |       | 6,009       |       | 144,492          |       | 6,313             |       | —            |       | 156,814          |       |
| Current  portion of capital lease obligations              |       | —      |       | 789              |       | —            |       | —            |       | 789              |       |
| Total  current liabilities                                 |       | 6,009       |       | 250,826          |       | 108,429           |       | (137,385          | )          | 227,879          |       |
| Long-term  debt and capital lease obligations              |       | 596,333     |       | 8,816            |       | —            |       | —            |       | 605,149          |       |
| Advances  and notes between Parent and Subsidiaries        |       | 827,810     |       | 1,367,015        |       | 8,808             |       | (2,203,633        | )          | —           |       |
| Other                                                      |       | —      |       | 19,944           |       | 678               |       | —            |       | 20,622           |       |
| Total  liabilities                                         |       | 1,430,152   |       | 1,646,601        |       | 117,915           |       | (2,341,018        | )          | 853,650          |       |
| Stockholders’  equity (deficit)                       |       | 690,540     |       | 753,677          |       | (31,411           | )          | (722,266          | )          | 690,540          |       |
| Total  liabilities and stockholders’ equity (deficit) |       | $           | 2,120,692  |             | $          | 2,400,278         |       | $                 | 86,504     |             | $          | (3,063,284 | ) | $ | 1,544,190 |   |

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Balance Sheets**

**December 31, 2009**

 
| ** **                                                 | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **Assets:**                                                |       |        |       |             |       |              |       |              |       |             |       |
| Current  assets:                                           |       |        |       |             |       |              |       |              |       |             |       |
| Cash                                                       |       | $           | —     |             | $          | 58,320            |       | $                 | 6,919      |             | $          | — |   | $ | 65,239 |   |
| Accounts  receivable, net                                  |       | —      |       | 222,007          |       | 64,454            |       | (149,483          | )          | 136,978          |       |
| Inventories                                                |       | —      |       | 605,324          |       | 38,730            |       | —            |       | 644,054          |       |
| Other                                                      |       | —      |       | 117,670          |       | 2,448             |       | —            |       | 120,118          |       |
| Total  current assets                                      |       | —      |       | 1,003,321        |       | 112,551           |       | (149,483          | )          | 966,389          |       |
| Property,  plant, and equipment, net                       |       | —      |       | 266,067          |       | 1,132             |       | —            |       | 267,199          |       |
| Intangible  assets                                         |       | —      |       | 10,880           |       | —            |       | —            |       | 10,880           |       |
| Goodwill                                                   |       | —      |       | 172,860          |       | —            |       | —            |       | 172,860          |       |
| Investment  in Subsidiaries                                |       | 680,459     |       | (27,925          | )          | —            |       | (652,534          | )          | —           |       |
| Advances  and notes between Parent and Subsidiaries        |       | 1,346,520   |       | 862,406          |       | —            |       | (2,208,926        | )          | —           |       |
| Other                                                      |       | —      |       | 27,054           |       | 623               |       | —            |       | 27,677           |       |
| Total  assets                                              |       | $           | 2,026,979  |             | $          | 2,314,663         |       | $                 | 114,306    |             | $          | (3,010,943 | ) | $ | 1,445,005 |   |
|                                                       |       |        |       |             |       |              |       |              |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit):**   |       |        |       |             |       |              |       |              |       |             |       |
| Current  liabilities:                                      |       |        |       |             |       |              |       |              |       |             |       |
| Accounts  payable                                          |       | $           | —     |             | $          | 103,460           |       | $                 | 117,069    |             | $          | (149,483 | ) | $ | 71,046 |   |
| Accrued  expenses and other liabilities                    |       | —      |       | 160,047          |       | 10,486            |       | —            |       | 170,533          |       |
| Current  portion of capital lease obligations              |       | —      |       | 740              |       | —            |       | —            |       | 740              |       |
| Total  current liabilities                                 |       | —      |       | 264,247          |       | 127,555           |       | (149,483          | )          | 242,319          |       |
| Long-term  debt and capital lease obligations              |       | 596,046     |       | 9,221            |       | —            |       | —            |       | 605,267          |       |
| Advances  and notes between Parent and Subsidiaries        |       | 848,779     |       | 1,346,515        |       | 13,632            |       | (2,208,926        | )          | —           |       |
| Other                                                      |       | —      |       | 14,221           |       | 1,044             |       | —            |       | 15,265           |       |
| Total  liabilities                                         |       | 1,444,825   |       | 1,634,204        |       | 142,231           |       | (2,358,409        | )          | 862,851          |       |
| Stockholders’  equity (deficit)                       |       | 582,154     |       | 680,459          |       | (27,925           | )          | (652,534          | )          | 582,154          |       |
| Total  liabilities and stockholders’ equity (deficit) |       | $           | 2,026,979  |             | $          | 2,314,663         |       | $                 | 114,306    |             | $          | (3,010,943 | ) | $ | 1,445,005 |   |

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Three Months Ended June 30, 2010**

 
| ** **                                   | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| Net  revenue                                 |       | $           | —     |             | $          | 363,817           |       | $                 | 39,009     |             | $          | — |   | $ | 402,826 |   |
| Cost  of goods sold                          |       | —      |       | 192,040          |       | 31,177            |       | —            |       | 223,217          |       |
| Gross  profit                                |       | —      |       | 171,777          |       | 7,832             |       | —            |       | 179,609          |       |
| Operating  expenses                          |       | —      |       | 81,812           |       | 10,080            |       | —            |       | 91,892           |       |
| Income  (loss) from operations               |       | —      |       | 89,965           |       | (2,248            | )          | —            |       | 87,717           |       |
| Equity  in earnings (losses) of Subsidiaries |       | 47,623      |       | (2,252           | )          | —            |       | (45,371           | )          | —           |       |
| Other  non-operating (expense) income, net   |       | —      |       | (11,948          | )          | 4                 |       | —            |       | (11,944          | )          |
| Income  (loss) before income taxes           |       | 47,623      |       | 75,765           |       | (2,244            | )          | (45,371           | )          | 75,773           |       |
| Provision  for income taxes                  |       | —      |       | (28,142          | )          | (8                | )          | —            |       | (28,150          | )          |
| Net  income (loss)                           |       | $           | 47,623     |             | $          | 47,623            |       | $                 | (2,252     | )                | $          | (45,371 | ) | $ | 47,623 |   |

 

**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Three Months Ended June 30, 2009**

 
| ** **                                   | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| Net  revenue                                 |       | $           | —     |             | $          | 343,584           |       | $                 | 31,986     |             | $          | — |   | $ | 375,570 |   |
| Cost  of goods sold                          |       | —      |       | 198,783          |       | 25,225            |       | —            |       | 224,008          |       |
| Gross  profit                                |       | —      |       | 144,801          |       | 6,761             |       | —            |       | 151,562          |       |
| Operating  expenses                          |       | 1,898       |       | 69,895           |       | 9,230             |       | —            |       | 81,023           |       |
| Income  (loss) from operations               |       | (1,898      | )          | 74,906           |       | (2,469            | )          | —            |       | 70,539           |       |
| Equity  in earnings (losses) of Subsidiaries |       | 35,756      |       | (2,333           | )          | —            |       | (33,423           | )          | —           |       |
| Other  non-operating (expense) income, net   |       | 75,000      |       | (20,428          | )          | 10                |       | —            |       | 54,582           |       |
| Income  (loss) before income taxes           |       | 108,858     |       | 52,145           |       | (2,459            | )          | (33,423           | )          | 125,121          |       |
| (Provision)  benefit for income taxes        |       | (25,586     | )          | (16,389          | )          | 126               |       | —            |       | (41,849          | )          |
| Net  income (loss)                           |       | $           | 83,272     |             | $          | 35,756            |       | $                 | (2,333     | )                | $          | (33,423 | ) | $ | 83,272 |   |

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Six Months Ended June 30, 2010**

 
| ** **                                   | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| Net  revenue                                 |       | $           | —     |             | $          | 704,402           |       | $                 | 79,385     |             | $          | — |   | $ | 783,787 |   |
| Cost  of goods sold                          |       | —      |       | 377,790          |       | 62,778            |       | —            |       | 440,568          |       |
| Gross  profit                                |       | —      |       | 326,612          |       | 16,607            |       | —            |       | 343,219          |       |
| Operating  expenses                          |       | —      |       | 157,232          |       | 18,551            |       | —            |       | 175,783          |       |
| Income  (loss) from operations               |       | —      |       | 169,380          |       | (1,944            | )          | —            |       | 167,436          |       |
| Equity  in earnings (losses) of Subsidiaries |       | 92,962      |       | (1,946           | )          | —            |       | (91,016           | )          | —           |       |
| Other  non-operating (expense) income, net   |       | —      |       | (23,066          | )          | 6                 |       | —            |       | (23,060          | )          |
| Income  (loss) before income taxes           |       | 92,962      |       | 144,368          |       | (1,938            | )          | (91,016           | )          | 144,376          |       |
| Provision  for income taxes                  |       | —      |       | (51,406          | )          | (8                | )          | —            |       | (51,414          | )          |
| Net  income (loss)                           |       | $           | 92,962     |             | $          | 92,962            |       | $                 | (1,946     | )                | $          | (91,016 | ) | $ | 92,962 |   |

 

**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Six Months Ended June 30, 2009**

** **
| ** **                                   | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| Net  revenue                                 |       | $           | —     |             | $          | 682,083           |       | $                 | 65,282     |             | $          | — |   | $ | 747,365 |   |
| Cost  of goods sold                          |       | —      |       | 381,622          |       | 51,587            |       | —            |       | 433,209          |       |
| Gross  profit                                |       | —      |       | 300,461          |       | 13,695            |       | —            |       | 314,156          |       |
| Operating  expenses                          |       | 3,757       |       | 149,367          |       | 16,862            |       | —            |       | 169,986          |       |
| Income  (loss) from operations               |       | (3,757      | )          | 151,094          |       | (3,167            | )          | —            |       | 144,170          |       |
| Equity  in earnings (losses) of Subsidiaries |       | 70,399      |       | (3,024           | )          | —            |       | (67,375           | )          | —           |       |
| Other  non-operating (expense) income, net   |       | 75,000      |       | (41,691          | )          | 17                |       | —            |       | 33,326           |       |
| Income  (loss) before income taxes           |       | 141,642     |       | 106,379          |       | (3,150            | )          | (67,375           | )          | 177,496          |       |
| (Provision)  benefit for income taxes        |       | (24,935     | )          | (35,980          | )          | 126               |       | —            |       | (60,789          | )          |
| Net  income (loss)                           |       | $           | 116,707    |             | $          | 70,399            |       | $                 | (3,024     | )                | $          | (67,375 | ) | $ | 116,707 |   |

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Statements of Cash Flows**

**Six Months Ended June 30, 2010**

 
| ** **                                                                                                | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **Cash flows from operating activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Net  income (loss)                                                                                        |       | $           | 92,962     |             | $          | 92,962            |       | $                 | (1,946     | )                | $          | (91,016 | ) | $ | 92,962 |   |
| Undistributed  equity in (earnings) losses of Subsidiaries                                                |       | (92,962     | )          | 1,946            |       | —            |       | 91,016            |       | —           |       |
| Adjustments  to reconcile net income (loss) to net cash flows provided by (used in) operating  activities |       | 16,406      |       | (68,815          | )          | 12,100            |       | 19,746            |       | (20,563          | )          |
| **Net cash provided by operating activities**                                                             |       | 16,406      |       | 26,093           |       | 10,154            |       | 19,746            |       | 72,399           |       |
|                                                                                                      |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from investing activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Purchases  of property, plant, and equipment                                                              |       | —      |       | (52,914          | )          | (291              | )          | —            |       | (53,205          | )          |
| Business  acquisitions, net of cash acquired                                                              |       | —      |       | —           |       | —            |       | —            |       | —           |       |
| Net  advances and notes between Parent and Subsidiaries                                                   |       | (23,254     | )          | —           |       | —            |       | 23,254            |       | —           |       |
| Other                                                                                                     |       | —      |       | 5,185            |       | (4,824            | )          | —            |       | 361              |       |
| **Net cash (used in) provided by investing activities**                                                   |       | (23,254     | )          | (47,729          | )          | (5,115            | )          | 23,254            |       | (52,844          | )          |
|                                                                                                      |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from financing activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Net  repayments of borrowings                                                                             |       | —      |       | —           |       | —            |       | —            |       | —           |       |
| Net  advances and notes between Parent and Subsidiaries                                                   |       | —      |       | 43,000           |       | —            |       | (43,000           | )          | —           |       |
| Other                                                                                                     |       | 6,848       |       | (773             | )          | —            |       | —            |       | 6,075            |       |
| **Net cash provided by (used in) financing activities**                                                   |       | 6,848       |       | 42,227           |       | —            |       | (43,000           | )          | 6,075            |       |
| Effect  of exchange rate changes on cash and cash equivalents                                             |       | —      |       | —           |       | (1,367            | )          | —            |       | (1,367           | )          |
| Net  increase in cash and cash equivalents                                                                |       | —      |       | 20,591           |       | 3,672             |       | —            |       | 24,263           |       |
| Cash  and cash equivalents at beginning of period                                                         |       | —      |       | 58,320           |       | 6,919             |       | —            |       | 65,239           |       |
| Cash  and cash equivalents at end of period                                                               |       | $           | —     |             | $          | 78,911            |       | $                 | 10,591     |             | $          | — |   | $ | 89,502 |   |

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Statements of Cash Flows**

**Six Months Ended June 30, 2009**

 
| ** **                                                                                                | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **Cash flows from operating activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Net  income (loss)                                                                                        |       | $           | 116,707    |             | $          | 70,399            |       | $                 | (3,024     | )                | $          | (67,375 | ) | $ | 116,707 |   |
| Undistributed  equity in (earnings) losses of Subsidiaries                                                |       | (70,399     | )          | 3,024            |       | —            |       | 67,375            |       | —           |       |
| Adjustments  to reconcile net income (loss) to net cash flows provided by (used in) operating  activities |       | 19,523      |       | (14,297          | )          | (4,529            | )          | 13,502            |       | 14,199           |       |
| **Net cash provided by (used in) operating activities**                                                   |       | 65,831      |       | 59,126           |       | (7,553            | )          | 13,502            |       | 130,906          |       |
|                                                                                                      |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from investing activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Purchases  of property, plant, and equipment                                                              |       | —      |       | (23,575          | )          | (97               | )          | —            |       | (23,672          | )          |
| Business  acquisitions, net of cash acquired                                                              |       | —      |       | (16,802          | )          | —            |       | —            |       | (16,802          | )          |
| Net  advances and notes between Parent and Subsidiaries                                                   |       | (63,366     | )          | —           |       | —            |       | 63,366            |       | —           |       |
| Other                                                                                                     |       | —      |       | (8,917           | )          | 6,142             |       | —            |       | (2,775           | )          |
| **Net cash (used in) provided by investing activities**                                                   |       | (63,366     | )          | (49,294          | )          | 6,045             |       | 63,366            |       | (43,249          | )          |
|                                                                                                      |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from financing activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Net  repayments of borrowings                                                                             |       | —      |       | (90,203          | )          | —            |       | —            |       | (90,203          | )          |
| Net  advances and notes between Parent and Subsidiaries                                                   |       | —      |       | 76,868           |       | —            |       | (76,868           | )          | —           |       |
| Other                                                                                                     |       | (2,465      | )          | (257             | )          | —            |       | —            |       | (2,722           | )          |
| **Net cash used in financing activities**                                                                 |       | (2,465      | )          | (13,592          | )          | —            |       | (76,868           | )          | (92,925          | )          |
| Effect  of exchange rate changes on cash and cash equivalents                                             |       | —      |       | —           |       | 118               |       | —            |       | 118              |       |
| Net  increase in cash and cash equivalents                                                                |       | —      |       | (3,760           | )          | (1,390            | )          | —            |       | (5,150           | )          |
| Cash  and cash equivalents at beginning of period                                                         |       | —      |       | 10,727           |       | 6,252             |       | —            |       | 16,979           |       |
| Cash  and cash equivalents at end of period                                                               |       | $           | —     |             | $          | 6,967             |       | $                 | 4,862      |             | $          | — |   | $ | 11,829 |   |

 

**15.****           ****SubsequentEvents**

 

During July 2010, we renewedthrough May 2022 several lease agreements for office space with a right toterminate such leases after 86 months. Annual lease costs are not materially different than our existing leaseagreements.

 

On July 19, 2010, weexchanged all of our then outstanding 7.75% Senior Notes due 2016 for 7.75%Senior Notes due 2016 that have been registered under the Securities Act of1933, as amended (Exchange Notes). The exchange offer was made pursuant to theregistration rights agreement that we entered into with the initial purchasersin connection with the issuance of the previously outstanding notes.  The Exchange Notes are substantiallyidentical to the previously outstanding notes, except that the transferrestrictions, registration rights, and additional interest provisions relatingto the previously outstanding notes will not apply to the Exchange Notes.  This exchange did not impact ourcapitalization.  Unless stated otherwisein the context of discussion, we use the term “7.75% Notes” to describe both ourpreviously outstanding notes and the Exchange Notes.

 

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**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report onForm 10-Q (Quarterly Report) contains forward-looking statements thatinvolve substantial risks and uncertainties. All statements, other thanstatements of historical facts, included in this Quarterly Report, regardingour strategy, future operations, future financial position, future revenue,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 or other variations on suchterms or comparable terminology. The forward-looking statements that we makeare based upon assumptions about many important risk factors, many of which arebeyond our control. Among the factors that could cause actual results to differmaterially are the following:

 

·                  the impact of theannouncement of our definitive merger agreement with Grifols and the potentialimpact of completion, termination, or delay of the proposed merger withGrifols;

 

·                  the impact of competitiveproducts and pricing;

 

·                  fluctuations in the balancebetween supply and demand with respect to the market for plasma-derivedproducts;

 

·                  recently enacted and additionalproposed U.S. healthcare legislation, regulatory action or legal proceedingsaffecting, among other things, the U.S. healthcare system, pharmaceuticalpricing and reimbursement, including Medicaid, Medicare and the Public HealthService Program and additional legislation and regulatory action now underconsideration;

 

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

 

·                  our ability to procureadequate quantities of plasma and other materials which are acceptable for usein our manufacturing processes from our own plasma collection centers or fromthird-party vendors at competitive costs;

 

·                  our ability to maintaincompliance with government regulations and licenses, including those related toplasma collection, production, and marketing;

 

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

 

·                  the timing of, and ourability to, obtain and/or maintain regulatory approvals for new productcandidates, the rate and degree of market acceptance, and the clinical utilityof our products;

 

·                  unexpected shut-downs of ourmanufacturing and storage facilities or delays in opening new plannedfacilities;

 

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

 

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

 

·                  our ability to resume orreplace sales to countries affected by our Foreign Corrupt Practices Actinvestigation;

 

·                  availability and cost offinancing opportunities;

 

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

 

·                  interest rate fluctuationsimpacting outstanding borrowings under our Revolving Credit Facility andforeign currency exchange rate fluctuations in the international markets inwhich we operate;

 

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

 

·                  other factors identifiedelsewhere in this Quarterly Report and in our Annual Report on Form 10-Kfor the year ended 

 

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December 31, 2009******filed with the Securities andExchange Commission (SEC) on February 23, 2010 (2009 Form 10-K).

 

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

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

The following discussion andanalysis contains forward-looking statements that involve risks anduncertainties.  You are encouraged toread the following discussion and analysis of our financial condition andresults of operations together with our unaudited interim consolidated financialstatements and related footnotes included elsewhere in this QuarterlyReport.  In addition, you are encouragedto refer to a discussion of risk factors included elsewhere in this QuarterlyReport, as well as in our 2009 Form 10-K, that could cause actual resultsto differ materially from those described or implied by the forward-lookingstatements contained in the following discussion and analysis. You are alsoencouraged to refer to our 2009 Form 10-K, which includes additionalinformation regarding our business and industry.  See “Special Note Regarding Forward-LookingStatements” included elsewhere in this Quarterly Report.

 

All tabular disclosures ofdollar amounts, except earnings per common share amounts, are presented inthousands.  Percentages and amountspresented herein may not calculate or sum precisely due to rounding.

 

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

 

**BUSINESS OVERVIEW**

 

We are a biopharmaceuticalcompany that researches, develops, manufactures, markets, and sellsprotein-based therapies that extend and enhance the lives of individuals whosuffer from chronic and acute, often life-threatening, conditions, such asprimary immune deficiencies, chronic inflammatory demyelinating polyneuropathy(CIDP), alpha-1 antitrypsin deficiency-related emphysema, bleeding disorders,infectious diseases, and severe trauma. Our primary products have orphan drug designation to serve populationswith rare, chronic diseases.  Ourproducts are derived from human plasma, the liquid component of blood, which issourced from our plasma collection centers or purchased from third parties,located in the United States.  Plasmacontains many therapeutic proteins, which we extract through the process offractionation at our Clayton, North Carolina and Melville, New Yorkfacilities.  The fractionatedintermediates are then purified, formulated into final bulk, and aseptically filledinto final containers for distribution. We also sell the fractionated intermediate products.

 

The majority of our salesare concentrated in the therapeutic areas of Immunology/Neurology andPulmonology.  Our largest product,representing 53.1% and 54.4% of our net revenue for the three and six monthsended June 30, 2010, Gamunex, Immune Globulin Intravenous (Human),10% Caprylate/Chromatography Purified (Gamunex, Gamunex IGIV), provides atreatment for primary immune deficiency and autoimmune diseases, as well asCIDP.  Our second largest product,representing 21.8% and 21.5% of our net revenue for the three and six monthsended June 30, 2010, Prolastin Alpha-1 Proteinase Inhibitor (Human)(Prolastin, Prolastin A1PI, Prolastin-C A1PI), provides a treatment for alpha-1antitrypsin deficiency-related emphysema. We are essentially complete with our conversion of patients toProlastin-C A1PI, our next generation A1PI product, in the United States and wewill launch Prolastin-C A1PI in Canada in the 2010 third quarter.

 

We believe that U.S. and internationalIGIV volume demand grew below our long-term view of 6% to 8% during the sixmonths ended June 30, 2010.  Theglobal IGIV market dynamics are becoming increasingly more competitive assupply has become more available and demand growth is slower than expected.

 

Demand in the U.S. markethas been impacted by increased scrutiny and price sensitivity in the hospitalsegment.  In addition, the increase inthe number of hospitals qualifying for the 340B discounts has effectivelyreduced demand from GPO’s who are not permitted to service this discountedchannel, which among other factors, has led us to accept reduced volume tiersunder certain of our GPO contracts.  Wealso continue to see inventory de-stocking within the distributionchannel.  The combination of slowernear-term demand growth and competitive pressures may result in thedeceleration of U.S. Gamunex growth.

 

Our ability to expand ourinternational business has been hampered by the effects of our internal FCPAinvestigation and increased price sensitivities of our customers.  Our profitability has and may continue to benegatively impacted by unfavorable euro/dollar exchange rates.  We have experienced, and expect to continueto experience, annual volume declines in Canada due to Canadian Blood Services(CBS) objective to have multiple sources of supply, which has impacted and willcontinue to impact our overall IGIV growth. CBS may further reduce volumes to contract minimums and Hema Quebec mayadopt a similar strategy.  The

 

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combination of these factors, among others, may reduce our near termglobal IGIV growth, relative to our prior expectations.

 

In the current IGIV marketwith reduced demand growth, we still anticipate that we will operate near to orat our fractionation capacity over the next few years depending upon the demandfor our products, the availability of source plasma and the impact ofvariability in yield, among other factors. We plan to utilize most of our available fractionation capacity in thenear term, which will result in increased inventory levels in order to maintainpace with projected future growth in product demand.

 

Our integrated plasmacollection center platform, Talecris Plasma Resources, Inc. (TPR),consisted of 69 operating centers, of which 64 were licensed and 5 wereunlicensed as of June 30, 2010 and provided approximately 65% and 67% ofour plasma during the three and six months ended June 30, 2010.  We will need to significantly increase plasmacollections generated from TPR in the near term to offset the expected decreasein plasma supplied by third parties and planned increases in our fractionation tomeet anticipated demand.  To meet ourplasma requirements, we may increase donor fees, increase marketing expense,and expand plasma center hours of operation, among other initiatives, which maylimit our ability to reduce our cost per liter of plasma.  Consequently, we expect to continue toproduce plasma at a cost per liter which we believe is significantly higherthan our competitors.  Subsequent to June 30,2010, we received FDA licensure for two additional plasma collection centers.

 

Our historical comparisonsillustrate the substantial reduction in both the collection cost per liter andthe amount of excess period costs charged directly to cost of goods sold as aresult of the maturation of our plasma collection center platform.  Decreasing collection costs and the reductionof excess period costs, combined with leveraging our manufacturing facilitiesas a result of higher volumes, have contributed to improving our grossmargins.  Our cost of goods sold reflects$1.7 million and $11.0 million for the three months ended June 30, 2010and 2009, respectively, and $3.7 million and $25.4 million for the six monthsended June 30, 2010 and 2009, respectively, related to excess period costsassociated with TPR.  We believe that wehave substantially eliminated unabsorbed TPR infrastructure and start-up costs.Consequently, future margin improvements will need to be derived from increasesin product pricing and volumes, product mix, improvements in the cost per literof plasma, manufacturing efficiencies, yield improvements or some combinationthereof. We believe that the current environment does not favor near-term priceincreases and we have limited opportunities to enhance product mix.  We have recently experienced and expect tocontinue to experience higher cost of goods sold due to yield variability, lessefficient utilization of each incremental liter of plasma fractionated as weincrease Gamunex production, and non-capitalizable costs associated with ourcapital projects, particularly the construction of our new fractionationfacility.

 

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

 

In response to our capacity constraints, we have embarked on asubstantial capital plan which we anticipate to be in the range of $800 millionto $850 million on a cumulative basis over the next five years.  The increase in our capital plan over thenext five years from prior estimates results primarily due to an increase inour anticipated cost for our new fractionation facility which we estimate to be$340 million plus an additional $40 million in capitalized interest. Estimatedcosts related to the construction of our new purification facilities forPlasmin, Koate and albumin have declined to $120 million. The successfulexecution of the capital plan, which is discussed further in the section titled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” in our 2009 Form 10-K, will benecessary to support our projected 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.

 

As discussed elsewhere inthis Quarterly Report, on June 6, 2010, we entered into a definitive mergeragreement with Grifols. During the first half of 2010, we incurred $8.4 millionof transaction-related expenses associated with this transaction.  We will continue to incur expenses related tothis transaction, such as investment banking fees, legal costs, accountingfees, among others.  In addition, weexpect to incur significant costs related to the retention of key employees,which we currently estimate at $10.5 million. Retention amounts will likely be recognized ratably through the secondquarter of 2011.

 

**2010 HIGHLIGHTS**

 

Our 2010 financial and business highlights are included below.

 

***2010 Financial Highlights***

 

·                  Total net revenue increased$27.3 million to $402.8 million for the three months ended June 30, 2010as compared to $375.6 million for the three months ended June 30,2009.  Total net revenue increased $36.4million to $783.8 million for the six 

 

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months ended June 30,2010 as compared to $747.4 million for the six months ended June 30, 2009.

 

·                  Gross margin was 44.6% and40.4% for the three months ended June 30, 2010 and 2009, respectively, and43.8% and 42.0% for the six months ended June 30, 2010 and 2009,respectively.

 

·                  Operating margin improved300 basis points to 21.8% for the three months ended June 30, 2010 ascompared to 18.8% for the three months ended June 30, 2009.  Operating margin improved 210 basis points to21.4% for the six months ended June 30, 2010 as compared to 19.3% for thesix months ended June 30, 2009.

 

·                  Net income was $47.6 millionand $93.0 million for the three and six months ended June 30, 2010,respectively, as compared to $83.3 million and $116.7 million for the three andsix months ended June 30, 2009, respectively.  Diluted earnings per common share were $0.37and $0.89 for the three months ended June 30, 2010 and 2009, respectively,and $0.73 and $1.24 for the six months ended June 30, 2010 and 2009,respectively.  Our 2009 results includethe impact of the CSL merger termination fee of $75.0 million (approximately$48.8 million after tax) and transaction-related costs related to theterminated CSL merger agreement.  Our2010 results include transaction-related costs associated with our definitivemerger agreement with Grifols.  Webelieve a meaningful comparison of our results for the periods presented isenhanced by a quantified presentation of the impact of the CSL mergertermination fee, CSL merger-related expenses and the Grifols merger-relatedexpenses.  The impacts of these items onour net income and diluted earnings per share are illustrated in the tablebelow.

 

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

 

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

 

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

 
| ** **                                                       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **     | ** ** | **Diluted Earnings** | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|----------------|------------|----------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **Pre-Tax** | ** ** | **Income Tax** | ** ** | ** **     | ** ** | **Per Common**       | ** ** |
| ** **                                                       | ** ** | **Amount**  | ** ** | **Effect**     | ** ** | **Net Income** | ** ** | **Share**            | ** ** |
| *Three Months Ended June 30, 2010*                          | ** ** | ** **  | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** |
| U.S.  GAAP                                                       |       | $           | 75,773     |           | $          | (28,150        | )          | $                    | 47,623     |   | $ | 0.37 |   |
| Grifols  merger-related expenses                                 |       | 8,423       |       | (3,268         | )          | 5,155          |       | 0.04                 |       |
| Excluding  merger-related items                                  |       | $           | 84,196     |           | $          | (31,418        | )          | $                    | 52,778     |   | $ | 0.41 |   |
|                                                             |       |        |       |           |       |           |       |                 |       |
| *Three Months Ended June 30, 2009*                          | ** ** | ** **  | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** |
| U.S.  GAAP                                                       |       | $           | 125,121    |           | $          | (41,849        | )          | $                    | 83,272     |   | $ | 0.89 |   |
| CSL  merger termination fee                                      |       | (75,000     | )          | 26,250         |       | (48,750        | )          | (0.52                | )          |
| CSL  merger-related expenses                                     |       | 3,352       |       | (1,301         | )          | 2,051          |       | 0.02                 |       |
| Excluding  merger-related items                                  |       | $           | 53,473     |           | $          | (16,900        | )          | $                    | 36,573     |   | $ | 0.39 |   |
|                                                             |       |        |       |           |       |           |       |                 |       |
| As  adjusted for pro forma weighted average number of shares (1) |       |        |       |           |       |           |       | $                    | 0.29       |   |
|                                                             |       |        |       |           |       |           |       |                 |       |
| *Six Months Ended June 30, 2010*                            |       |        |       |           |       |           |       |                 |       |
| U.S.  GAAP                                                       |       | $           | 144,376    |           | $          | (51,414        | )          | $                    | 92,962     |   | $ | 0.73 |   |
| Grifols  merger-related expenses                                 |       | 8,423       |       | (3,268         | )          | 5,155          |       | 0.04                 |       |
| Excluding  merger-related items                                  |       | $           | 152,799    |           | $          | (54,682        | )          | $                    | 98,117     |   | $ | 0.77 |   |
|                                                             |       |        |       |           |       |           |       |                 |       |
| *Six Months Ended June 30, 2009*                            |       |        |       |           |       |           |       |                 |       |
| U.S.  GAAP                                                       |       | $           | 177,496    |           | $          | (60,789        | )          | $                    | 116,707    |   | $ | 1.24 |   |
| CSL  merger termination fee                                      |       | (75,000     | )          | 26,250         |       | (48,750        | )          | (0.52                | )          |
| CSL  merger-related expenses                                     |       | 12,754      |       | (4,949         | )          | 7,805          |       | 0.08                 |       |
| Excluding  merger-related items                                  |       | $           | 115,250    |           | $          | (39,488        | )          | $                    | 75,762     |   | $ | 0.80 |   |
|                                                             |       |        |       |           |       |           |       |                 |       |
| As  adjusted for pro forma weighted average number of shares (1) |       |        |       |           |       |           |       | $                    | 0.61       |   |

 

----

(1) As discussedfurther in “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Matters Affecting Comparability,” we believe thecomparability of our diluted earnings per share between the periods presentedis enhanced by the use of an adjusted share base to reflect the impact for theissuance of common shares to convert our Series A and B preferred stock,settle accrued dividends on the preferred stock, and complete our IPO as ifthese events occurred at the beginning of 2009.

 

·                  Operating cash flows were$72.4 million and $130.9 million for the six months ended June 30, 2010and 2009, respectively. Capital expenditures were $53.2 million and $23.7million for the six months ended June 30, 2010 and 2009,respectively.  Operating cash flows forthe 2009 period included the impact of the CSL merger termination fee.

 

***2010 Second Quarter Business Highlights***

 

·                  On June 6, 2010, weentered into a definitive merger agreement with Grifols under which Grifolswill acquire, through merger transactions, all of the common stock of Talecrisfor a combination of $19.00 in cash and 0.641 of a newly-issued non-votingGrifols’ (Class B) ordinary share for each outstanding Talecris share (themerger consideration). The 0.641 exchange ratio is subject to revision underspecific circumstances.  The Grifolsnon-voting shares will be listed on the NASDAQ in the form of AmericanDepositary Shares and the Madrid, Barcelona, Bilbao and Valencia stockexchanges and quoted on the Automated Quotation System of the Spanish StockExchanges.  Grifols non-voting shareswill carry the same economic rights as Grifols ordinary shares. Additionally,Talecris share-based compensation will generally be converted into the right toreceive the merger consideration, or, in the case of employee stock options,the right to acquire the merger consideration, as described in the mergeragreement in lieu of Talecris common stock. The leading shareholders of Grifols have entered into an agreement withus, subject to conditions, to vote their Grifols shares in favor of thetransaction and, separately, an affiliate of Cerberus Capital Management,L.P., which owns approximately 49% of the outstanding Talecris common stock,has entered into an agreement with Grifols, subject to conditions, to vote itsTalecris shares in favor of the transaction. Under the terms of the agreement, completion of the transaction issubject to obtaining certain regulatory approvals, shareholder approvals, aswell as other customary conditions.

 

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·                  On May 24, 2010, ourcommon stock (NASDAQ: TLCR) was added to the NASDAQ Biotechnology Index(NASDAQ: NBI).  The Index is designed totrack the performance of a set of NASDAQ listed securities that are classifiedas either biotechnology or pharmaceutical according to the IndustryClassification Benchmark.

 

·                  On May 13, 2010, wereceived approval from Health Canada to launch Gamunex for subcutaneousadministration in Canada, giving Gamunex the broadest set of indications of anyapproved subcutaneous product in Canada. We anticipate launching subcutaneous administration in Canada in the secondhalf of 2010.

 

·                  We are essentially completewith the conversion of our U.S. patients to Prolastin-C A1PI (our nextgeneration A1PI product), which we launched in the U.S. in March 2010. Wewill launch Prolastin-C A1PI in Canada in the 2010 third quarter.

 

**HEALTHCARE REFORM**

 

InMarch 2010, healthcare reform legislation was enacted in theU.S. This legislation contains several provisions that impact ourbusiness.

 

Althoughmany provisions of the new legislation do not take effect immediately, severalprovisions became effective during the first half of 2010. These include(1) an increase in the minimum Medicaid rebate to states participating inthe Medicaid program from 15.1% to 23.1% of the Average Manufacturer Price(AMP) on our branded prescription drugs, with a limitation of this increase onclotting factors to 17.1% of AMP; (2) the extension of the Medicaid rebateto Managed Care Organizations that dispense drugs to Medicaid beneficiaries;and (3) the expansion of the 340B Public Health Services drug pricingprogram, which provides hospital outpatient drugs at reduced rates, to includeadditional hospitals, clinics, and healthcare centers.  We do not believe that these new provisionswill have a material impact on our 2010 financial results.

 

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

 

Beginningin 2012, the new law may require us to issue Internal Revenue Service Forms1099 to plasma donors whose remuneration exceeds six hundred dollars.  The cost of implementing this requirement, aswell as its potential impact on plasma donations, is unknown at this time.

 

Presently, uncertainty exists as many of the specific determinationswill be developed as regulatory bodies interpret the law and enact newregulations.  For example, determinationsas to how the Medicare Part D coverage gap will operate and how the annualfee on branded prescription drugs will be calculated and allocated remain to beclarified.  As noted above, theseprograms will become effective in 2011.

 

**CUSTOMER CONCENTRATION**

 

Our accounts receivable, net, includes amounts due from pharmaceuticalwholesalers and distributors, buying groups, hospitals, physicians’ offices,patients, and others.  The followingtable summarizes our concentrations with customers that represented more than10% of our accounts receivable, net:

 
| ** **  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------|------------|-------------------|------------|-----------------------|------------|
| ** **  | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Customer  A |       | 13.1              | %          | 14.6                  | %          |
| Customer  B |       | 12.9              | %          | <10                | %          |

 

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

 

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| ** **  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------|------------|------------------------|------------|----------------------|------------|
| ** **  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **  | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Customer  A |       | 14.2                   | %          | 14.4                 | %          | 14.9 | % | 14.2 | % |
| Customer  B |       | 13.8                   | %          | 13.5                 | %          | 13.0 | % | 13.1 | % |

 

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

 

**BASIS OF PRESENTATION**

 

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

 

The comparability of our financial results is impacted by significantevents and transactions during the periods presented as described in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations——Matters Affecting Comparability.”

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of consolidated financial statements in accordance withaccounting principles 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, expenses, and therelated disclosures of contingent assets and liabilities.  A detailed description of our significantaccounting policies is included in the footnotes to our audited consolidatedfinancial statements included in our 2009 Form 10-K.

 

There have been no significant changes in our application of ourcritical accounting policies and estimates during the six months ended June 30,2010 as compared to the prior year.  Weperiodically review our critical accounting policies and estimates with theaudit committee of our board of directors.

 

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

 

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

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **               | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Gross  product revenue   |       | $                      | 416,494    |                 | $          | 392,805 |   | $ | 815,995 |   | $ | 776,004 |   |
| Chargebacks              |       | (7,677                 | )          | (6,223               | )          | (14,314 | ) | (10,679 | ) |
| Cash  discounts          |       | (5,047                 | )          | (4,521               | )          | (9,968 | ) | (9,100 | ) |
| Rebates  and other       |       | (6,668                 | )          | (11,789              | )          | (19,626 | ) | (21,089 | ) |
| SG&A  reimbursements |       | —                 |       | (156                 | )          | (370 | ) | (157 | ) |
| Product  net revenue     |       | $                      | 397,102    |                 | $          | 370,116 |   | $ | 771,717 |   | $ | 734,979 |   |

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **               | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Gross  product revenue   |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Chargebacks              |       | (1.8                   | )%         | (1.6                 | )%         | (1.8 | )% | (1.4 | )% |
| Cash  discounts          |       | (1.2                   | )%         | (1.2                 | )%         | (1.2 | )% | (1.2 | )% |
| Rebates  and other       |       | (1.6                   | )%         | (3.0                 | )%         | (2.4 | )% | (2.7 | )% |
| SG&A  reimbursements |       | —                 |       | —               |       | — |   | — |   |
| Product  net revenue     |       | 95.4                   | %          | 94.2                 | %          | 94.6 | % | 94.7 | % |

 

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

 

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| ** **                         | ** ** | ** **      | ** ** | **Cash**      | ** ** | **Rebates and** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                         | ** ** | **Chargebacks** | ** ** | **Discounts** | ** ** | **Other**       | ** ** | **Total**  | ** ** |
| Balance  at December 31, 2009 |       | $               | 4,262      |          | $          | 1,274           |       | $          | 26,427     |   | $ | 31,963 |   |
| Provisions                         |       | 14,314          |       | 9,968         |       | 19,626          |       | 43,908     |       |
| Credits  issued                    |       | (14,114         | )          | (9,441        | )          | (17,334         | )          | (40,889    | )          |
| Balance  at June 30, 2010     |       | $               | 4,462      |          | $          | 1,801           |       | $          | 28,719     |   | $ | 34,982 |   |

 

As discussed elsewhere inthis Quarterly Report, the recently enacted healthcare reform legislationincreased the size of Medicaid rebates paid by drug manufacturers from 15.1% to23.1% of the AMP, with a limitation of this increase on clotting factors to17.1% of the AMP.   The increase in theprovisions for chargebacks during 2010 as compared to the prior year waslargely due to increased sales related to government contracts.  Rebates and other adjustments were alsoimpacted by the reduction of channel inventories during the three months ended June 30,2010.

 

**MATTERS AFFECTING COMPARABILITY**

 

We believe that thecomparability of our financial results between the periods presented issignificantly impacted by the following items:

 

***Definitive Merger Agreement with Grifols***

 

We have entered intoagreements with investment bankers related to our definitive merger agreementwith Grifols, as discussed in Note 3.  Weincurred fees totaling $2.5 million under these agreements during the threemonths ended June 30, 2010.  We areobligated to pay additional fees totaling $21.3 million upon successful closingof the merger transaction.  During thethree months ended June 30, 2010, we also incurred legal, accounting, andother fees of $5.9 million associated with the definitive mergeragreement.  We expect to incursignificant costs related to the retention of key employees, which we currentlyestimate at $10.5 million.  Retentionamounts will likely be recognized ratably through the second quarter of 2011.

 

***Financial Impact of IPO and RefinancingTransactions***

 

As discussed in our 2009 Form 10-K,we completed our IPO and refinancing transactions during the fourth quarter of2009, which has resulted in lower average borrowings during the three and sixmonths ended June 30, 2010 as compared to the three and six months ended June 30,2009, and correspondingly lower interest expense during the 2010 periods.  For the three months ended June 30, 2010and 2009, our interest expense was $11.7 million and $19.6 million,respectively, and for the six months ended June 30, 2010 and 2009, ourinterest expense was $23.9 million and $40.5 million, respectively.

 

***Comparability of Outstanding Common Shares and ProForma Diluted Earnings Per Common Share***

 

As discussed in our 2009 Form 10-K,we completed our IPO and refinancing transactions during the fourth quarter of2009.  Our IPO consisted of 56,000,000shares of our common stock of which 28,947,368 shares were newly issued andsold by us and 27,052,632 shares were sold by the selling stockholder, TalecrisHoldings, LLC.  We used the net primaryproceeds to us of $519.7 million to repay amounts outstanding under our thenexisting First and Second Lien Term Loans. In connection with our IPO, we also converted 1,000,000 shares of our Series Apreferred stock and 192,310 shares of our Series B preferred stock into85,846,320 shares of our common stock and issued 2,381,548 shares of our commonstock to settle $45.3 million of accrued dividends upon the conversion of our Series Aand B preferred stock.  The issuance ofnew common shares has resulted in a significant increase in the number ofcommon shares used in our computation of diluted earnings per commonshare.  The application of the netprimary proceeds to us from our IPO to repay our then existing indebtedness hasresulted in a significant reduction in interest expense during the three andsix months ended June 30, 2010 as compared to the prior year periods.

 

We believe that thecomparability of our financial results for the periods presented is enhanced bythe following pro forma presentation of our diluted earnings per commonshare.  In the table below, the pro formadiluted earnings per common share computation for the three and six monthsended June 30, 2009 reflects an adjustment to net income for reducedinterest expense as if the net primary proceeds to us from our IPO of $519.7million had been applied to repay our debt at the beginning of 2009, net ofinterest rate differences from our 7.75% Notes issuance. The pro formaadjustment to the denominator reflects the impacts for the issuance of commonshares to convert preferred stock, settle accrued dividends on the preferredstock, and complete the IPO as if these events occurred at the beginning of2009.

 

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| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **2010**                             | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                               | ** ** | **Actual**                           | ** ** | **Actual** | ** ** | **Pro forma** | ** ** |
|                                                     |       |                                 |       |   |   |   |   |
| Net  income                                              |       | $                                    | 47,623     |   | $ | 83,272 |   | $ | 83,272 |   |
| Interest  expense reduction due to debt repayment        |       | —                               |       | — |   | 1,944 |   |
| Numerator                                                |       | $                                    | 47,623     |   | $ | 83,272 |   | $ | 85,216 |   |
|                                                     |       |                                 |       |   |   |   |   |
| Weighted  average common shares outstanding Adjustments: |       | 122,679,933                          |       | 1,673,504 |   | 1,673,504 |   |
| Stock  options and restricted shares                     |       | 5,195,299                            |       | 6,353,208 |   | 6,353,208 |   |
| Series A  preferred stock                           |       | —                               |       | 72,000,000 |   | 72,000,000 |   |
| Series B  preferred stock                           |       | —                               |       | 13,846,320 |   | 13,846,320 |   |
| Shares  issued for preferred stock dividend              |       | —                               |       | — |   | 2,381,548 |   |
| Newly  issued shares for IPO                             |       | —                               |       | — |   | 28,947,368 |   |
| Dilutive  potential common shares                        |       | 127,875,232                          |       | 93,873,032 |   | 125,201,948 |   |
|                                                     |       |                                 |       |   |   |   |   |
| Diluted  net income per common share                     |       | $                                    | 0.37       |   | $ | 0.89 |   | $ | 0.68 |   |

 
| ** **                                               | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **2010**                           | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                               | ** ** | **Actual**                         | ** ** | **Actual** | ** ** | **Pro forma** | ** ** |
|                                                     |       |                               |       |   |   |   |   |
| Net  income                                              |       | $                                  | 92,962     |   | $ | 116,707 |   | $ | 116,707 |   |
| Interest  expense reduction due to debt repayment        |       | —                             |       | — |   | 3,867 |   |
| Numerator                                                |       | $                                  | 92,962     |   | $ | 116,707 |   | $ | 120,574 |   |
|                                                     |       |                               |       |   |   |   |   |
| Weighted  average common shares outstanding Adjustments: |       | 122,162,276                        |       | 1,428,408 |   | 1,428,408 |   |
| Stock  options and restricted shares                     |       | 5,666,813                          |       | 6,588,232 |   | 6,588,232 |   |
| Series A  preferred stock                           |       | —                             |       | 72,000,000 |   | 72,000,000 |   |
| Series B  preferred stock                           |       | —                             |       | 13,846,320 |   | 13,846,320 |   |
| Shares  issued for preferred stock dividend              |       | —                             |       | — |   | 2,381,548 |   |
| Newly  issued shares for IPO                             |       | —                             |       | — |   | 28,947,368 |   |
| Dilutive  potential common shares                        |       | 127,829,089                        |       | 93,862,960 |   | 125,191,876 |   |
|                                                     |       |                               |       |   |   |   |   |
| Diluted  net income per common share                     |       | $                                  | 0.73       |   | $ | 1.24 |   | $ | 0.96 |   |

 

***Definitive Merger Agreement with CSL***

 

We entered into a definitivemerger agreement with CSL on August 12, 2008, which was subject to thereceipt of certain regulatory approvals as well as other customary conditions.The U.S. Federal Trade Commission filed an administrative complaint before theCommission challenging the merger and a complaint in Federal district courtseeking to enjoin the merger during the administrative process.  On June 8, 2009, the merger partiesagreed to terminate the definitive merger agreement, and as a result, CSL paidus a merger termination fee of $75.0 million during the 2009 secondquarter.  The U.S. Federal TradeCommission’s complaints were subsequently dismissed.  We incurred retention expense, includingfringe benefits, of $3.0 million and $6.7 million for the three and six monthsended June 30, 2009, respectively, and legal costs associated with theregulatory review process of $0.3 million and $6.0 million during the three andsix months ended June 30, 2009, respectively.  All retention amounts were paid during 2009.

 

***Unabsorbed TPR Infrastructure and Start-Up Costs***

 

Our cost of goods soldincludes $1.7 million and $11.0 million for the three months ended June 30,2010 and 2009, respectively, and $3.7 million and $25.4 million for the sixmonths ended June 30, 2010 and 2009, respectively, related to unabsorbedTPR infrastructure and start-up costs associated with the development of ourplasma collection center platform.   Thereduction in unabsorbed TPR infrastructure and start-up costs resultedprimarily from the maturation of our plasma collection center platform.  We believe we have substantially eliminatedunabsorbed TPR infrastructure and start-up costs and as a result, we expectthat the TPR 

 

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excess period costs will continue to decline in 2010 as compared toprior periods.

 

***Share-Based Compensation Awards***

 

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

 

Share-based compensationexpense for the three and six months ended June 30, 2010 and 2009 was asfollows:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| SG&A                  |       | $                                     | 2,270      |                                | $          | 7,477 |   | $ | 7,950 |   | $ | 16,450 |   |
| R&D                   |       | 177                                   |       | 512                                 |       | 715 |   | 1,179 |   |
| Cost  of goods sold       |       | 910                                   |       | 1,120                               |       | 1,919 |   | 2,542 |   |
| Total  expense            |       | $                                     | 3,357      |                                | $          | 9,109 |   | $ | 10,584 |   | $ | 20,171 |   |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Capitalized  in inventory |       | $                                     | 419        |                                | $          | 868 |   | $ | 1,445 |   | $ | 2,006 |   |

 

The decrease in share-basedcompensation expense during 2010 was primarily driven by the final vesting ofawards under the 2005 Stock Option and Incentive Plan on April 1, 2010 andthe majority of the awards under our 2006 Restricted Stock Plan on March 31,2010.  In addition, a combination of anadjustment during the 2010 first quarter as a result of actual awardforfeitures being higher than initially estimated as well as the accelerationof certain option awards to our Chairman and Chief Executive Officer during the2009 third quarter further impacted the comparability of share-basedcompensation expense between the 2010 and 2009 periods.

 

The following tablesummarizes the remaining unrecognized compensation cost related to ourshare-based compensation programs as of June 30, 2010 and theweighted-average period over which the non-cash compensation cost is expectedto be recognized:

 
| ** **                | ** ** | ** **       | ** ** | **Weighted-** | ** ** |
|---------------------------|------------|------------------|------------|---------------|------------|
| ** **                | ** ** | **Unrecognized** | ** ** | **Average**   | ** ** |
| ** **                | ** ** | **Compensation** | ** ** | **Period**    | ** ** |
| ** **                | ** ** | **Cost**         | ** ** | **(Years)**   | ** ** |
| Stock  options            |       | $                | 4,819      |          | 2.60       |   |
| Restricted  share awards  |       | 3,244            |       | 0.75          |       |
| RSU’s                |       | 7,302            |       | 2.66          |       |
| Performance  share awards |       | 4,248            |       | 2.76          |       |
| Total                     |       | $                | 19,613     |          |       |   |

 

In addition to theunrecognized compensation cost included in the table above, at June 30,2010, $2.1 million of compensation cost was included in inventory on ourunaudited interim consolidated balance sheet, which we expect to be recognizedas non-cash compensation expense in our consolidated income statement primarilywithin the next twelve months.  Theamount of share-based compensation expense that we will ultimately be requiredto record could change in the future as a result of additional grants, changesin the fair value of shares for performance-based awards, differences betweenour anticipated forfeiture rate and the actual forfeiture rate, the probabilityof achieving targets established for performance award vesting, and otheractions by our board of directors or its compensation committee.

 

**RESULTS OF OPERATIONS**

 

We have included informationregarding our results of operations in the following table.  The subsequent discussion provides ananalysis of our results of operations for the three and six months ended June 30,2010 as compared to the three and six months ended June 30, 2009.

 

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| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                             | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  revenue:                          |       |                   |       |                 |       |   |   |   |   |
| Product                                |       | $                      | 397,102    |                 | $          | 370,116 |   | $ | 771,717 |   | $ | 734,979 |   |
| Other                                  |       | 5,724                  |       | 5,454                |       | 12,070 |   | 12,386 |   |
| Total                                  |       | 402,826                |       | 375,570              |       | 783,787 |   | 747,365 |   |
| Cost  of goods sold                    |       | 223,217                |       | 224,008              |       | 440,568 |   | 433,209 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Gross  profit                          |       | 179,609                |       | 151,562              |       | 343,219 |   | 314,156 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Operating  expenses:                   |       |                   |       |                 |       |   |   |   |   |
| SG&A                               |       | 76,004                 |       | 62,003               |       | 143,624 |   | 134,425 |   |
| R&D                                |       | 15,888                 |       | 19,020               |       | 32,159 |   | 35,561 |   |
| Total                                  |       | 91,892                 |       | 81,023               |       | 175,783 |   | 169,986 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Income  from operations                |       | 87,717                 |       | 70,539               |       | 167,436 |   | 144,170 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Other  non-operating (expense) income: |       |                   |       |                 |       |   |   |   |   |
| Interest  expense, net                 |       | (12,123                | )          | (20,513              | )          | (23,386 | ) | (41,858 | ) |
| Merger  termination fee                |       | —                 |       | 75,000               |       | — |   | 75,000 |   |
| Equity  in earnings of affiliate       |       | 179                    |       | 95                   |       | 326 |   | 184 |   |
| Total                                  |       | (11,944                | )          | 54,582               |       | (23,060 | ) | 33,326 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Income  before income taxes            |       | 75,773                 |       | 125,121              |       | 144,376 |   | 177,496 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Provision  for income taxes            |       | (28,150                | )          | (41,849              | )          | (51,414 | ) | (60,789 | ) |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Net  income                            |       | $                      | 47,623     |                 | $          | 83,272 |   | $ | 92,962 |   | $ | 116,707 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Earnings  per common share:            |       |                   |       |                 |       |   |   |   |   |
| Basic                                  |       | $                      | 0.39       |                 | $          | 47.42 |   | $ | 0.76 |   | $ | 76.29 |   |
| Diluted                                |       | $                      | 0.37       |                 | $          | 0.89 |   | $ | 0.73 |   | $ | 1.24 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Financial  measures:                   |       |                   |       |                 |       |   |   |   |   |
| Gross  margin                          |       | 44.6                   | %          | 40.4                 | %          | 43.8 | % | 42.0 | % |
| Operating  margin                      |       | 21.8                   | %          | 18.8                 | %          | 21.4 | % | 19.3 | % |
| Effective  income tax rate             |       | 37.2                   | %          | 33.4                 | %          | 35.6 | % | 34.2 | % |

 

***Three Months Ended June 30, 2010 as Comparedto Three Months Ended June 30, 2009***

 

The following discussion andanalysis contains information regarding our results of operations for the threemonths ended June 30, 2010 as compared to the three months ended June 30,2009:

 

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| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **2010**               | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| Net  revenue:                          |       |                   |       |       |       |   |   |   |   |
| Product                                |       | $                      | 397,102    |       | $          | 370,116 |   | $ | 26,986 |   | 7.3 | % |
| Other                                  |       | 5,724                  |       | 5,454      |       | 270 |   | 5.0 | % |
| Total                                  |       | 402,826                |       | 375,570    |       | 27,256 |   | 7.3 | % |
| Cost  of goods sold                    |       | 223,217                |       | 224,008    |       | 791 |   | 0.4 | % |
|                                   |       |                   |       |       |       |   |   |   |   |
| Gross  profit                          |       | 179,609                |       | 151,562    |       | 28,047 |   | 18.5 | % |
| Operating  expenses:                   |       |                   |       |       |       |   |   |   |   |
| SG&A                               |       | 76,004                 |       | 62,003     |       | (14,001 | ) | (22.6 | )% |
| R&D                                |       | 15,888                 |       | 19,020     |       | 3,132 |   | 16.5 | % |
| Total                                  |       | 91,892                 |       | 81,023     |       | (10,869 | ) | (13.4 | )% |
|                                   |       |                   |       |       |       |   |   |   |   |
| Income  from operations                |       | 87,717                 |       | 70,539     |       | 17,178 |   | 24.4 | % |
| Other  non-operating (expense) income: |       |                   |       |       |       |   |   |   |   |
| Interest  expense, net                 |       | (12,123                | )          | (20,513    | )          | 8,390 |   | 40.9 | % |
| Merger  termination fee                |       | —                 |       | 75,000     |       | (75,000 | ) | 100.0 | % |
| Equity  in earnings of affiliate       |       | 179                    |       | 95         |       | 84 |   | 88.4 | % |
| Total                                  |       | (11,944                | )          | 54,582     |       | (66,526 | ) | 121.9 | % |
|                                   |       |                   |       |       |       |   |   |   |   |
| Income  before income taxes            |       | 75,773                 |       | 125,121    |       | (49,348 | ) | (39.4 | )% |
| Provision  for income taxes            |       | (28,150                | )          | (41,849    | )          | 13,699 |   | 32.7 | % |
|                                   |       |                   |       |       |       |   |   |   |   |
| Net  income                            |       | $                      | 47,623     |       | $          | 83,272 |   | $ | (35,649 | ) | (42.8 | )% |
|                                   |       |                   |       |       |       |   |   |   |   |
| Earnings  per common share:            |       |                   |       |       |       |   |   |   |   |
| Basic                                  |       | $                      | 0.39       |       | $          | 47.42 |   | $ | (47.03 | ) | (99.2 | )% |
| Diluted                                |       | $                      | 0.37       |       | $          | 0.89 |   | $ | (0.52 | ) | (58.4 | )% |
|                                   |       |                   |       |       |       |   |   |   |   |
| Financial  measures:                   |       |                   |       |       |       |   |   |   |   |
| Gross  profit margin                   |       | 44.6                   | %          | 40.4       | %          |   |   |   |   |
| Operating  margin                      |       | 21.8                   | %          | 18.8       | %          |   |   |   |   |
| Effective  income tax rate             |       | 37.2                   | %          | 33.4       | %          |   |   |   |   |

 

**Net Revenue**

 

The following table containsinformation regarding our net revenue:

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **2010**               | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| Product  net revenue:                |       |                   |       |       |       |   |   |   |   |
| Gamunex  IGIV                        |       | $                      | 213,924    |       | $          | 204,152 |   | $ | 9,772 |   | 4.8 | % |
| Prolastin  A1PI                      |       | 87,985                 |       | 76,821     |       | 11,164 |   | 14.5 | % |
| Fraction  V (Albumin and Plasmanate) |       | 23,136                 |       | 20,557     |       | 2,579 |   | 12.5 | % |
| Factor  VIII (Koate DVI)             |       | 15,245                 |       | 9,567      |       | 5,678 |   | 59.3 | % |
| Hyperimmunes                         |       | 18,848                 |       | 21,759     |       | (2,911 | ) | (13.4 | )% |
| Other                                |       | 37,964                 |       | 37,260     |       | 704 |   | 1.9 | % |
| Total  product net revenue           |       | 397,102                |       | 370,116    |       | 26,986 |   | 7.3 | % |
| Other  net revenue                   |       | 5,724                  |       | 5,454      |       | 270 |   | 5.0 | % |
| Total  net revenue                   |       | $                      | 402,826    |       | $          | 375,570 |   | $ | 27,256 |   | 7.3 | % |

 

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| ** **                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **June 30,**      | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2010**               | ** ** | **2009**   | ** ** | **$**      | ** ** | **%** | ** ** |
| U.S.  product net revenue:               |       |                   |       |       |       |       |       |   |   |
| Gamunex  IGIV                            |       | $                      | 163,348    |       | $          | 146,148    |       | $ | 17,200 |   | 11.8 | % |
| Prolastin  A1PI                          |       | 57,424                 |       | 51,121     |       | 6,303      |       | 12.3 | % |
| Factor  V (Albumin and Plasmanate)       |       | 14,687                 |       | 11,117     |       | 3,570      |       | 32.1 | % |
| Factor  VIII (Koate DVI)                 |       | 4,412                  |       | 2,934      |       | 1,478      |       | 50.4 | % |
| Hyperimmunes                             |       | 14,147                 |       | 17,247     |       | (3,100     | )          | (18.0 | )% |
| Other  product net revenue               |       | 16,243                 |       | 16,189     |       | 54         |       | 0.3 | % |
| Total  U.S. product net revenue          |       | $                      | 270,261    |       | $          | 244,756    |       | $ | 25,505 |   | 10.4 | % |
|                                     |       |                   |       |       |       |       |       |   |   |
| International  product net revenue:      |       |                   |       |       |       |       |       |   |   |
| Gamunex  IGIV                            |       | $                      | 50,576     |       | $          | 58,004     |       | $ | (7,428 | ) | (12.8 | )% |
| Prolastin  A1PI                          |       | 30,561                 |       | 25,700     |       | 4,861      |       | 18.9 | % |
| Factor  V (Albumin and Plasmanate)       |       | 8,449                  |       | 9,440      |       | (991       | )          | (10.5 | )% |
| Factor  VIII (Koate DVI)                 |       | 10,833                 |       | 6,633      |       | 4,200      |       | 63.3 | % |
| Hyperimmunes                             |       | 4,701                  |       | 4,512      |       | 189        |       | 4.2 | % |
| Other  product net revenue               |       | 21,721                 |       | 21,071     |       | 650        |       | 3.1 | % |
| Total  international product net revenue |       | $                      | 126,841    |       | $          | 125,360    |       | $ | 1,481 |   | 1.2 | % |

 

Our product net revenue was$397.1 million and $370.1 million for the three months ended June 30, 2010and 2009, respectively, representing an increase of $27.0 million, or7.3%.  The increase consisted of highervolumes of $23.0 million and improved pricing of $4.0 million, including theeffects of unfavorable foreign exchange of $2.5 million.

 

The $9.8 million increase inour Gamunex net revenue was driven by higher volumes of $9.6 million.  We experienced higher Gamunex volumes of$17.7 million in the U.S. and Europe, which were partially offset by lowervolumes of $8.1 million in Canada and other international regions.  Our Canadian Gamunex volumes were negativelyimpacted by lower commercial sales to CBS as discussed below.  Gamunex volumes in other internationalregions were negatively impacted by competitive pressures, our ongoing internalinvestigation related to potential FCPA violations, and political tensions withIran, which are discussed elsewhere in this Quarterly Report.  We experienced competitive pressures inEurope during 2009, which negatively impacted our Gamunex volumes during theprior year period.  U.S. Gamunex pricingwas higher by $2.9 million during the 2010 period as compared to the prior yearperiod.  The benefit of the higherpricing in the U.S. was substantially offset by lower pricing of $2.8 millionin Europe and other international regions resulting from country mix as well ascompetitive pressures, including unfavorable foreign exchange of $0.7million.  As indicated elsewhere in thisQuarterly Report, the recently enacted healthcare reform legislation increasedthe size of the Medicaid rebates paid by drug manufacturers from 15.1% to 23.1%of the AMP.  We have also experiencedhigher Medicaid utilization and GPO administrative fees during 2010.  Although we have experienced a favorable pricingenvironment in prior periods largely as a result of supply constraints, weexpect product pricing to be flat given the current balance of supply anddemand.

 

The $11.2 million increasein our Prolastin net revenue primarily consisted of higher volumes of $10.2million, partially offset by $1.8 million of unfavorable foreign exchange.  The increase in volumes was driven by highervolumes of $9.8 million in Europe and the U.S, where we experienced net patientgains during the six months ended June 30, 2010.  Prolastin volumes are largely a function ofour ability to identify and enroll new patients as compared to the number ofpatients lost due to attrition and competition. Our ability to grow our European volumes will also depend on our abilityto obtain appropriate reimbursement on a country by country basis. Germanlegislative initiatives, including increased rebates paid by drug manufacturersand freezing prices, have been announced with the objective of reducing costswithin the healthcare sector.  Thesespecific initiatives are currently under discussion in Germany, but have notyet been finalized.  Implementation ofsuch initiatives could potentially impact both our Gamunex and Prolastinbusiness in Germany.

 

Our Fraction V productcategory consists of albumin and Plasmanate, with albumin representing themajority of sales in the category.  The$2.6 million increase in our Fraction V net revenue was driven by highervolumes of $2.4 million.  We experiencedhigher Fraction V volumes of $4.6 million in the U.S., Canada, and Europe as aresult of supply availability, which were partially offset by lower volumes of$2.2 million in other international regions due to opportunistic sales during2009, which did not recur during 2010.

 

The $5.7 million increase inFactor VIII (Koate DVI) net revenue was primarily driven by higher volumes of$6.6 million in other international regions due to supply availability andopportunistic sales, partially offset by lower pricing of $2.4 million in otherinternational regions due to country mix. The $2.9 million decrease in hyperimmune net revenue was driven by lowervolumes of $6.3

 

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million in the U.S. largely due to a customer systems issue, partiallyoffset by higher U.S. pricing of $3.2 million.

 

Our other product netrevenue consists primarily of revenue related to our contract manufacturingagreements for IGIV and Fraction V with the two Canadian blood systemoperators, CBS and Hema Quebec, intermediate products, Thrombate III (human),and contracted PPF powder.  The $0.7million increase in other product net revenue was driven by higher intermediateproduct sales, partially offset by lower contract manufacturing IGIV volumesdue to CBS’ multi-source strategy.  Salesof our contracted PPF powder are expected to decline in accordance with therelated agreement and intermediate product revenues are opportunistic and maybe lower in subsequent periods.

 

We believe that U.S. andinternational IGIV volume demand grew below our long-term view of 6% to 8%during the three months ended June 30, 2010.  The global IGIV market dynamics are becomingincreasingly more competitive as supply has become more available and demandgrowth is slower than expected.

 

Demand in the U.S. markethas been impacted by increased scrutiny and price sensitivity in the hospitalsegment.  In addition, the increase inthe number of hospitals qualifying for the 340B discounts has effectivelyreduced demand from GPO’s who are not permitted to service this discountedchannel, which among other factors, has led us to accept reduced volume tiersunder certain of our GPO contracts.  Wealso continue to see inventory de-stocking within the distribution channel.  The combination of slower near-term demandgrowth and competitive pressures may result in the deceleration of U.S. Gamunexgrowth.

 

Our ability to expand ourinternational business has been hampered by the effects of our internal FCPAinvestigation and increased price sensitivities of our customers.  Our profitability has been and may continueto be negatively impacted by unfavorable euro/dollar exchange rates.  We have experienced, and expect to continueto experience, annual volume declines in Canada due to CBS’ objective to havemultiple sources of supply, which has impacted and will continue to impact ouroverall IGIV growth.  CBS may furtherreduce volumes to contract minimums and Hema Quebec may adopt a similarstrategy.  The combination of thesefactors, among others, may reduce our near term global IGIV growth, relative toour prior expectations.

 

In the current IGIV marketwith reduced demand growth, we still anticipate that we will operate near to orat our fractionation capacity over the next few years depending upon the demandfor our products, the availability of source plasma and the impact ofvariability in yield, among other factors. We plan to utilize most of our available fractionation capacity in thenear term, which will result in increased inventory levels in order to maintainpace with projected future growth in product demand.

 

Although the Office ofForeign Asset Control (OFAC) renewed our license to supply humanitarianproducts, political tensions with Iran continue to impede our ability toconduct business in Iran, which has and may continue to negatively impact ourrevenue by as much as $15 million to $20 million in 2010. Additionally, theunfavorable change in the euro/dollar exchange rate has negatively impacted ourrevenue and profitability and may continue to do so.  As a result of a customer systems issue, wemay experience a shortfall in hyperimmune revenues in 2010 in the range of $5million to $10 million as compared to 2009.

 

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

 

**Cost of Goods Sold and Gross Profit**

 

Our gross profit was $179.6million and $151.6 million for the three months ended June 30, 2010 and2009, respectively, representing gross margin of 44.6% and 40.4%,respectively.  In general, our grossmargin and cost of goods sold are impacted by the volume and pricing of ourfinished products, our raw material costs, production mix, yield, and cycletimes, as well as our production capacities and normal production shut-downs,and the timing and amount of release of finished product.

 

Our cost of goods sold was$223.2 million, or 55.4% of net revenue, for the three months ended June 30,2010, as compared to $224.0 million, or 59.6% of net revenue, for the threemonths ended June 30, 2009.  Ourcost of goods sold benefited from lower TPR unabsorbed infrastructure andstart-up costs of $9.3 million during the three months ended June 30, 2010as compared to the three months ended June 30, 2009.  Our cost of goods sold also benefited fromlower costs of production of $14.8 million during the 2010 period primarilydriven by production mix associated with the conversion to our next generationA1PI product, Prolastin-C A1PI, as well as source mix.  Project spending during the three monthsended June 30, 2010 was $11.3 million as compared to $7.1 million

 

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during the same prior year period, driven by our new fractionationfacility, Koate reengineering, and Thrombate III projects.  We experienced higher costs of $19.9 millionassociated with increased volumes during the three months ended June 30,2010 as compared to the same prior year period.

 

The largest component of ourcost of goods sold is the cost of source plasma, which represented greater than50% of our cost of goods sold for the periods presented.  The overall cost of source plasma is impactedby the fully-loaded collection cost per liter, including donor fees, labor,soft goods, facility costs, testing, unabsorbed TPR infrastructure and start-upcosts, the cost of plasma purchased from third parties, and variability inprotein yields, among other factors.  Ourinternal cost per liter of plasma, including unabsorbed TPR infrastructure andstart-up costs, declined 2.2% for the three months ended June 30, 2010 ascompared to the prior year period, primarily driven by lower unabsorbed TPRinfrastructure and start-up costs and higher TPR plasma collections.  Our acquisition cost per liter of third partyplasma declined 0.4% during the three months ended June 30, 2010 ascompared to the prior year period.  Dueto our long manufacturing cycle times, which range from 100 days to in excessof 400 days, the cost of plasma is not expensed through cost of goods solduntil a significant period of time subsequent to its acquisition.

 

We believe that we havesubstantially eliminated unabsorbed TPR infrastructure and start-up costs.Consequently, future margin improvements will need to be derived from increasesin product pricing and volumes, product mix, improvements in the cost per literof plasma, manufacturing efficiencies, yield improvements or some combinationthereof. We believe that the current environment does not favor near-term priceincreases and we have limited opportunities to enhance product mix. We haverecently experienced and expect to continue to experience higher cost of goodssold due to yield variability, less efficient utilization of each incrementalliter of plasma fractionated as we increase Gamunex production, andnon-capitalizable costs associated with our capital projects, particularly theconstruction of our new fractionation facility.

 

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

 

**Operating Expenses**

 

Our SG&A was $76.0million and $62.0 million for the three months ended June 30, 2010 and2009, respectively, an increase of $14.0 million, or 22.6%.  The increase in SG&A was driven by $6.4million of unfavorable foreign exchange during the three months ended June 30,2010 as compared to favorable foreign exchange of $4.0 million during the sameprior year period, resulting from a strengthening U.S. dollar as compared tothe euro pertaining to our euro-denominated receivables.  We also experienced higher sales andmarketing expenses of $4.6 million during the 2010 period as a result of oursales force expansion, marketing of our Gamunex CIDP indication, Prolastinpatient identification efforts, launch of Prolastin-C A1PI, as well as supportfor other products.  During 2010, weincurred transaction-related expenses of $8.4 million related to our definitivemerger agreement with Grifols.  Ascompared to the three months ended June 30, 2009, our 2010 SG&A alsoreflects incremental new public company expenses.  Our 2010 SG&A reflects lower share-basedcompensation expense of $5.2 million as discussed previously and the absence of$2.1 million of legal and retention expenses related to our terminated mergeragreement with CSL.

 

SG&A in future periodswill be impacted by additional Grifols related transaction expenses such as legaland accounting costs as well as retention expenses.  We estimate retention expense to beapproximately $10.5 million, which will be recognized ratably through thesecond quarter of 2011.

 

Our R&D was $15.9million and $19.0 million for the three months ended June 30, 2010 and2009, respectively.  As a percentage ofnet revenue, R&D was 3.9% and 5.1% for the three months ended June 30,2010 and 2009, respectively.  R&Dexpenses are influenced by the timing of in-process projects and the nature andextent of expenses associated with these projects.  Additional information regarding our researchand development projects is included in our 2009 Form 10-K.  There have been no significant changes to ournew product candidates or life-cycle management projects since December 31,2009, except that we have decided not to initiate an aerosol trial withplasma-derived Prolastin A1PI.  We mayresume development in the future of an aerosol formulation of A1PI if warrantedwith recombinant A1PI.  The reduction inR&D period over period was primarily driven by the cancellation of theaerosol project discussed previously.  Weanticipate that R&D will increase in subsequent periods primarily as aresult of increased Plasmin clinical trials related to aPAO and ischemic stroke.

 

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**Total Other Non-Operating (Expense) Income, net**

 

The primary recurringcomponent of our other non-operating (expense) income, net, is interestexpense, which amounted to $11.7 million and $19.6 million for the three monthsended June 30, 2010 and 2009, respectively.  Our weighted average interest rates on ouroutstanding debt, excluding amortization of deferred debt issuance costs anddebt discount, were 7.9% and 5.3% for the three months ended June 30, 2010and 2009, respectively.  The reduction ininterest expense was driven by lower weighted average debt levels during the2010 period.

 

Our total other non-operatingincome, net, for the three months ended June 30, 2009 includes the CSLmerger termination fee of $75.0 million as discussed previously.

 

**Provision for Income Taxes**

 

Our income tax provision was$28.2 million and $41.8 million for the three months ended June 30, 2010and 2009, respectively, resulting in effective income tax rates of 37.2% and33.4%, respectively.

 

For the three months ended June 30,2010, our effective income tax rate is higher than the U.S. statutory Federalincome tax rate, primarily due to the non-deductibility of transaction costsrelated to our definitive merger agreement with Grifols and the effects ofstate taxes.  These items were partiallyoffset by a domestic production deduction, which was statutorily increased to9% for 2010, and credits for orphan drug clinical testing expenditures.

 

For the three months ended June 30,2009, our effective income tax rate is lower than the U.S. statutory Federalincome tax rate, primarily due to credits for Federal Research andExperimentation and orphan drug clinical testing expenditures and the deductionof previously capitalized transaction costs related to our terminated mergeragreement with CSL.  These factors offsetthe effect of state taxes.

 

**Net Income**

 

Our net income was $47.6million and $83.3 million (including the CSL merger termination fee, net oftax, of $48.8 million) for the three months ended June 30, 2010 and 2009,respectively.  The significant factorsand events contributing to the change in our net income are discussed above.

 

***Six Months Ended June 30, 2010 as Compared toSix Months Ended June 30, 2009***

 

The following discussion andanalysis contains information regarding our results of operations for the sixmonths ended June 30, 2010 as compared to the six months ended June 30,2009:

 

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| ** **                             | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | **June 30,**    | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **2010**             | ** ** | **2009**   | ** ** | **$**      | ** ** | **%** | ** ** |
| Net  revenue:                          |       |                 |       |       |       |       |       |   |   |
| Product                                |       | $                    | 771,717    |       | $          | 734,979    |       | $ | 36,738 |   | 5.0 | % |
| Other                                  |       | 12,070               |       | 12,386     |       | (316       | )          | (2.6 | )% |
| Total                                  |       | 783,787              |       | 747,365    |       | 36,422     |       | 4.9 | % |
| Cost  of goods sold                    |       | 440,568              |       | 433,209    |       | (7,359     | )          | (1.7 | )% |
|                                   |       |                 |       |       |       |       |       |   |   |
| Gross  profit                          |       | 343,219              |       | 314,156    |       | 29,063     |       | 9.3 | % |
| Operating  expenses:                   |       |                 |       |       |       |       |       |   |   |
| SG&A                               |       | 143,624              |       | 134,425    |       | (9,199     | )          | (6.8 | )% |
| R&D                                |       | 32,159               |       | 35,561     |       | 3,402      |       | 9.6 | % |
| Total                                  |       | 175,783              |       | 169,986    |       | (5,797     | )          | (3.4 | )% |
|                                   |       |                 |       |       |       |       |       |   |   |
| Income  from operations                |       | 167,436              |       | 144,170    |       | 23,266     |       | 16.1 | % |
| Other  non-operating (expense) income: |       |                 |       |       |       |       |       |   |   |
| Interest  expense, net                 |       | (23,386              | )          | (41,858    | )          | 18,472     |       | 44.1 | % |
| Merger  termination fee                |       | —               |       | 75,000     |       | (75,000    | )          | 100.0 | % |
| Equity  in earnings of affiliate       |       | 326                  |       | 184        |       | 142        |       | 77.2 | % |
| Total                                  |       | (23,060              | )          | 33,326     |       | (56,386    | )          | 169.2 | % |
|                                   |       |                 |       |       |       |       |       |   |   |
| Income  before income taxes            |       | 144,376              |       | 177,496    |       | (33,120    | )          | (18.7 | )% |
| Provision  for income taxes            |       | (51,414              | )          | (60,789    | )          | 9,375      |       | 15.4 | % |
|                                   |       |                 |       |       |       |       |       |   |   |
| Net  income                            |       | $                    | 92,962     |       | $          | 116,707    |       | $ | (23,745 | ) | (20.3 | )% |
|                                   |       |                 |       |       |       |       |       |   |   |
| Earnings  per common share:            |       |                 |       |       |       |       |       |   |   |
| Basic                                  |       | $                    | 0.76       |       | $          | 76.29      |       | $ | (75.53 | ) | (99.0 | )% |
| Diluted                                |       | $                    | 0.73       |       | $          | 1.24       |       | $ | (0.51 | ) | (41.1 | )% |
|                                   |       |                 |       |       |       |       |       |   |   |
| Financial  measures:                   |       |                 |       |       |       |       |       |   |   |
| Gross  profit margin                   |       | 43.8                 | %          | 42.0       | %          |       |       |   |   |
| Operating  margin                      |       | 21.4                 | %          | 19.3       | %          |       |       |   |   |
| Effective  income tax rate             |       | 35.6                 | %          | 34.2       | %          |       |       |   |   |

 

**Net Revenue**

 

The following table containsinformation regarding our net revenue:

 
| ** **                           | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **June 30,**    | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **2010**             | ** ** | **2009**   | ** ** | **$**      | ** ** | **%** | ** ** |
| Product  net revenue:                |       |                 |       |       |       |       |       |   |   |
| Gamunex  IGIV                        |       | $                    | 426,719    |       | $          | 411,458    |       | $ | 15,261 |   | 3.7 | % |
| Prolastin  A1PI                      |       | 168,169              |       | 149,380    |       | 18,789     |       | 12.6 | % |
| Fraction  V (Albumin and Plasmanate) |       | 44,353               |       | 38,429     |       | 5,924      |       | 15.4 | % |
| Factor  VIII (Koate DVI)             |       | 23,816               |       | 20,177     |       | 3,639      |       | 18.0 | % |
| Hyperimmunes                         |       | 33,799               |       | 37,602     |       | (3,803     | )          | (10.1 | )% |
| Other                                |       | 74,861               |       | 77,933     |       | (3,072     | )          | (3.9 | )% |
| Total  product net revenue           |       | 771,717              |       | 734,979    |       | 36,738     |       | 5.0 | % |
| Other  net revenue                   |       | 12,070               |       | 12,386     |       | (316       | )          | (2.6 | )% |
| Total  net revenue                   |       | $                    | 783,787    |       | $          | 747,365    |       | $ | 36,422 |   | 4.9 | % |

 

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| ** **                               | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **June 30,**    | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2010**             | ** ** | **2009**   | ** ** | **$**      | ** ** | **%** | ** ** |
| U.S.  product net revenue:               |       |                 |       |       |       |       |       |   |   |
| Gamunex  IGIV                            |       | $                    | 324,832    |       | $          | 299,720    |       | $ | 25,112 |   | 8.4 | % |
| Prolastin  A1PI                          |       | 108,269              |       | 98,927     |       | 9,342      |       | 9.4 | % |
| Factor  V (Albumin and Plasmanate)       |       | 27,055               |       | 21,316     |       | 5,739      |       | 26.9 | % |
| Factor  VIII (Koate DVI)                 |       | 8,211                |       | 5,658      |       | 2,553      |       | 45.1 | % |
| Hyperimmunes                             |       | 24,027               |       | 28,700     |       | (4,673     | )          | (16.3 | )% |
| Other  product net revenue               |       | 33,405               |       | 31,530     |       | 1,875      |       | 5.9 | % |
| Total  U.S. product net revenue          |       | $                    | 525,799    |       | $          | 485,851    |       | $ | 39,948 |   | 8.2 | % |
|                                     |       |                 |       |       |       |       |       |   |   |
| International  product net revenue:      |       |                 |       |       |       |       |       |   |   |
| Gamunex  IGIV                            |       | $                    | 101,887    |       | $          | 111,738    |       | $ | (9,851 | ) | (8.8 | )% |
| Prolastin  A1PI                          |       | 59,900               |       | 50,453     |       | 9,447      |       | 18.7 | % |
| Factor  V (Albumin and Plasmanate)       |       | 17,298               |       | 17,113     |       | 185        |       | 1.1 | % |
| Factor  VIII (Koate DVI)                 |       | 15,605               |       | 14,519     |       | 1,086      |       | 7.5 | % |
| Hyperimmunes                             |       | 9,772                |       | 8,902      |       | 870        |       | 9.8 | % |
| Other  product net revenue               |       | 41,456               |       | 46,403     |       | (4,947     | )          | (10.7 | )% |
| Total  international product net revenue |       | $                    | 245,918    |       | $          | 249,128    |       | $ | (3,210 | ) | (1.3 | )% |

 

Our product net revenue was$771.7 million and $735.0 million for the six months ended June 30, 2010and 2009, respectively, representing an increase of $36.7 million, or5.0%.  The increase consisted of highervolumes of $28.7 million and improved pricing of $8.0 million, including theeffects of favorable foreign exchange of $0.5 million.

 

The $15.3 million increasein our Gamunex net revenue consisted of higher volumes of $18.2 million,partially offset by lower pricing of $2.9 million.  We experienced higher Gamunex volumes of$33.2 million in the U.S. and Europe, which were partially offset by lowervolumes of $15.0 million in Canada and other international regions.  We experienced competitive pressures inEurope during 2009, which negatively impacted our Gamunex volumes during theprior year period.  Our Canadian volumeswere negatively impacted by lower commercial sales to CBS as a result of theirmulti-source strategy as discussed above. Gamunex volumes in otherinternational regions were negatively impacted by competitive pressures, ourongoing internal investigation related to potential FCPA violations andpolitical tensions with Iran, which are discussed elsewhere in this QuarterlyReport.  We experienced lower pricing of$4.4 million in Europe and other international regions resulting from countrymix as well as competitive pressures, partially offset by higher pricing of$1.5 million in the U.S. and Canada. Canadian pricing benefited from the annual price escalation, effective April 1,associated with our commercial contracts with CBS and Hema Quebec.  As indicated elsewhere in this QuarterlyReport, the recently enacted healthcare reform legislation increased the sizeof the Medicaid rebates paid by drug manufacturers from 15.1% to 23.1% of theAMP.  We have also experienced higherMedicaid utilization and GPO administrative fees during 2010.  Although we have experienced a favorablepricing environment in prior periods largely as a result of supply constraints,we expect pricing to be flat given the current balance of supply and demand.

 

The $18.8 million increasein our Prolastin net revenue consisted of higher volumes of $11.4 million andimproved pricing of $7.4 million, including $0.2 million of favorable foreignexchange.  The increase in volumes wasdriven by higher volumes of $11.0 million in Europe and the U.S., where weexperienced net patient gains during 2010. The increase in pricing was driven by higher pricing of $8.1 million inthe U.S. and Canada, partially offset by lower pricing in Europe, including theeffects of unfavorable foreign exchange. Our U.S. pricing was favorably impacted by a price increase implementedin the third quarter of 2009.  Our 2009Canadian pricing was impacted by a pricing adjustment of $2.3 million duringthe 2009 first quarter related to a pricing dispute.  Prolastin volumes are largely a function ofour ability to identify and enroll new patients as compared to the number ofpatients lost due to attrition and competition. Our ability to grow our European volumes will also depend on our abilityto obtain appropriate reimbursement on a country by country basis.

 

Our Fraction V productcategory consists of albumin and Plasmanate, with albumin representing themajority of sales in the category.  The$5.9 million increase in our Fraction V net revenue was driven by higher volumesof $7.9 million in the U.S., Canada, and Europe, as a result of supplyavailability, which were partially offset by lower volumes of $2.0 million inother international regions due to opportunistic sales during 2009, which didnot recur during 2010.

 

The $3.6 million increase inFactor VIII (Koate DVI) net revenue was driven by higher volumes of $5.8million in the U.S. and other international regions as a result of supplyavailability and opportunistic sales. The benefit of the higher volumes was partially offset by lower pricingof $2.2 million, primarily due to country mix in other internationalregions.  The $3.8 million decrease

 

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in hyperimmune revenue was driven by lower volumes of $8.6 million inthe U.S. due to a customer systems issue, partially offset by higher U.S.pricing of $3.9 million and increased sales of $0.8 million in Canada.

 

Our other product netrevenue consists primarily of revenue related to our contract manufacturingagreements for IGIV and Fraction V with the two Canadian blood systemoperators, CBS and Hema Quebec, intermediate products, Thrombate III (human),and contracted PPF powder.  The $3.1million decrease in our other product net revenue was driven by lower contractmanufacturing IGIV and Fraction V volumes due to CBS’ multi-source strategy,partially offset by higher Thrombate III. Sales of our contracted PPF powder are expected to decline in accordancewith the related agreement and intermediate product revenues are opportunisticand may be lower in subsequent periods.

 

Additional informationregarding our revenue expectations for the remainder of 2010 is included in ourquarter over quarter discussion and analysis and in “Managements Discussion andAnalysis of Financial Condition and Results of Operations——Business Overview,”included elsewhere in this Quarterly Report.

 

**Cost of Goods Sold and Gross Profit**

 

Our gross profit was $343.2million and $314.2 million for the six months ended June 30, 2010 and2009, respectively, representing gross margin of 43.8% and 42.0%,respectively.  In general, our grossmargin and cost of goods sold are impacted by the volume and pricing of ourfinished products, our raw material costs, production mix, yield, and cycletimes, as well as our production capacities and normal production shut-downs,and the timing and amount of release of finished product.

 

Our cost of goods sold was$440.6 million, or 56.2% of net revenue, for the six months ended June 30,2010, as compared to $433.2 million, or 58.0% of net revenue, for the sixmonths ended June 30, 2009.  Ourcost of goods sold benefited from lower TPR unabsorbed infrastructure andstart-up costs of $21.7 million during the six months ended June 30, 2010as compared to the six months ended June 30, 2009.  Our cost of goods sold also benefited fromlower costs of production of $8.4 million during the 2010 period primarilydriven by production mix associated with the conversion to our next generationA1PI product, Prolastin-C A1PI, as well as source mix.  Our cost of goods sold was negatively impactedby $22.9 million of inventory impairments during the six months ended June 30,2010, an increase of $6.8 million compared to the same prior year period,primarily driven by higher provisions for work-in-process inventories.  Project spending during the six months ended June 30,2010 was $23.0 million as compared to $13.2 million during the same prior yearperiod, driven by spending related to our new fractionation facility, Koatereengineering, and Thrombate III projects. We experienced higher costs of $20.9 million associated with increasedvolumes during the six months ended June 30, 2010 as compared to the sameprior year period.

 

The largest component of ourcost of goods sold is the cost of source plasma, which represented greater than50% of our cost of goods sold for the periods presented.  The overall cost of source plasma is impactedby the fully-loaded collection cost per liter, including donor fees, labor,soft goods, facility costs, testing, unabsorbed TPR infrastructure and start-upcosts, the cost of plasma purchased from third parties, and variability inprotein yields, among other factors.  Ourinternal cost per liter of plasma, including unabsorbed TPR infrastructure andstart-up costs, decreased 3.5% for the six months ended June 30, 2010 ascompared to the same prior year period, primarily driven by lower unabsorbedTPR infrastructure and start-up costs and higher TPR plasma collections.  Our acquisition cost per liter of third partyplasma increased 1.1% during the six months ended June 30, 2010 ascompared to the same prior year period. Due to our long manufacturing cycle times, which range from 100 days toin excess of 400 days, the cost of plasma is not expensed through cost of goodssold until a significant period of time subsequent to its acquisition.

 

Additional informationregarding our gross margin expectations for the remainder of 2010 is includedin our quarter over quarter discussion and analysis and in “ManagementsDiscussion and Analysis of Financial Condition and Results ofOperations——Business Overview,” included elsewhere in this Quarterly Report.

 

**Operating Expenses**

 

Our SG&A was $143.6million and $134.4 million for the six months ended June 30, 2010 and2009, respectively, an increase of $9.2 million, or 6.8%.  The increase in SG&A was driven by $10.3million of unfavorable foreign exchange during the six months ended June 30,2010 as compared to favorable foreign exchange of $0.2 million during the sameprior year period, resulting from a strengthening U.S. dollar as compared tothe euro pertaining to our euro-denominated receivables.  We also experienced higher sales andmarketing expenses of $10.7 million during the 2010 period as a result of oursales force expansion, marketing of our Gamunex CIDP indication, Prolastinpatient identification efforts, the launch of Prolastin-C A1PI, as well assupport for other products.  During 2010,we incurred transaction-related expenses of $8.4 million related to ourdefinitive merger agreement with Grifols. As compared to the six months ended June 30, 2009, our 2010SG&A also reflects incremental new public company

 

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expenses. Our 2010 SG&A reflects lower share-based compensationexpense of $8.5 million as discussed previously, the absence of $10.0 millionof legal and retention expenses related to our terminated merger agreement withCSL, and lower donations of $5.9 million as compared to the same prior yearperiod.

 

SG&A in future periodswill be impacted by additional Grifols related transaction expenses such aslegal and accounting costs as well as retention expenses.  We estimate retention expense to beapproximately $10.5 million, which will likely be recognized ratably throughthe second quarter of 2011.

 

Our R&D was $32.2million and $35.6 million for the six months ended June 30, 2010 and 2009,respectively.  As a percentage of netrevenue, R&D was 4.1% and 4.8% for the six months ended June 30, 2010and 2009, respectively.  R&D expensesare influenced by the timing of in-process projects and the nature and extentof expenses associated with these projects. Additional information regarding our research and development projectsis included in our 2009 Form 10-K. There have been no significant changes to our new product candidates orlife-cycle management projects since December 31, 2009, except that wehave decided not to initiate an aerosol trial with plasma-derived ProlastinA1PI.  We may resume development in thefuture of an aerosol formulation of A1PI if warranted with recombinantA1PI.  The reduction in R&D periodover period was primarily driven by the cancellation of the aerosol projectdiscussed previously.  We anticipate thatR&D will increase in subsequent periods primarily as a result of increasedPlasmin clinical trials related to aPAO and ischemic stroke.

 

**Total Other Non-Operating (Expense) Income, net**

 

The primary recurringcomponent of our other non-operating (expense) income, net, is interest expense,which amounted to $23.9 million and $40.5 million for the six months ended June 30,2010 and 2009, respectively.  Ourweighted average interest rates on our outstanding debt, excluding amortizationof deferred debt issuance costs and debt discount, were 7.8% and 5.5% for thesix months ended June 30, 2010 and 2009, respectively.  The reduction in interest expense was drivenby lower weighted average debt levels during the 2010 period.  During the six months ended June 30,2010 and 2009, we capitalized interest costs related to the construction ofplant and equipment of $2.3 million and $0.7 million, respectively.

 

Our total othernon-operating income, net, for the six months ended June 30, 2009 includesthe CSL merger termination fee of $75.0 million as discussed previously.

 

**Provision for Income Taxes**

 

Our income tax provision was$51.4 million and $60.8 million for the six months ended June 30, 2010 and2009, respectively, resulting in effective income tax rates of 35.6% and 34.2%,respectively.

 

For the six months ended June 30,2010, our effective income tax rate is higher than the U.S. statutory Federalincome tax rate, primarily due to the non-deductibility of transaction costsrelated to our definitive merger agreement with Grifols and the effects ofstate taxes.  These items were partiallyoffset by a domestic production deduction, which was statutorily increased to9% for 2010, and credits for orphan drug clinical testing expenditures.

 

For the six months ended June 30,2009, our effective income tax rate is lower than the U.S. statutory Federalincome tax rate, primarily due to credits for Federal Research andExperimentation and orphan drug clinical testing expenditures and the deductionof previously capitalized transaction costs related to our terminated mergeragreement with CSL.  These factors offsetthe effect of state taxes.

 

**Net Income**

 

Our net income was $93.0million and $116.7 million (including the CSL merger termination fee, net oftax, of $48.8 million) for the six months ended June 30, 2010 and 2009,respectively.  The significant factorsand events contributing to the change in our net income are discussed above.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

***Cash Flow Analysis***

 

The following table and subsequent discussion and analysis containinformation regarding our cash flows for the six months ended June 30,2010 and 2009:

 
| ** **                                                                                    | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**    | ** ** |
| ** **                                                                                    | ** ** | **2010**             | ** ** | **2009** | ** ** |
| **Operating activities:**                                                                     |       |                 |       |   |   |
| Net  income                                                                                   |       | $                    | 92,962     |   | $ | 116,707 |   |
| Non-cash  items                                                                               |       | 37,954               |       | 44,732 |   |
| Changes  in operating assets and liabilities, excluding the effects of business  acquisitions |       | (58,517              | )          | (30,533 | ) |
| **Net cash provided by operating activities**                                                 |       | $                    | 72,399     |   | $ | 130,906 |   |
|                                                                                          |       |                 |       |   |   |
| **Investing activities:**                                                                     |       |                 |       |   |   |
| Purchases  of property, plant, and equipment                                                  |       | $                    | (53,205    | ) | $ | (23,672 | ) |
| Business  acquisitions, net of cash acquired                                                  |       | —               |       | (18,234 | ) |
| Financing  arrangements with third parties, net of repayments                                 |       | 361                  |       | (1,575 | ) |
| Other                                                                                         |       | —               |       | 232 |   |
| **Net cash used in investing activities**                                                     |       | $                    | (52,844    | ) | $ | (43,249 | ) |
|                                                                                          |       |                 |       |   |   |
| **Financing activities:**                                                                     |       |                 |       |   |   |
| Repayments  under Revolving Credit Facility, net                                              |       | $                    | —     |   | $ | (86,703 | ) |
| Repayment  of borrowings under term loan                                                      |       | —               |       | (3,500 | ) |
| Repayments  of capital lease obligations                                                      |       | (356                 | )          | (257 | ) |
| Financing  transaction costs                                                                  |       | (417                 | )          | — |   |
| Proceeds  from exercises of stock options                                                     |       | 6,057                |       | — |   |
| Excess  tax benefits from share-based payment arrangements                                    |       | 5,708                |       | 1,437 |   |
| Repurchases  of common stock from employees                                                   |       | (4,917               | )          | (3,902 | ) |
| **Net cash provided by (used in) financing activities**                                       |       | $                    | 6,075      |   | $ | (92,925 | ) |

 

At June 30, 2010, ourcash and cash equivalents totaled $89.5 million.  We use our available cash balances to repayamounts outstanding under our Revolving Credit Facility. We deposit any excesscash amounts into an overnight investment account.  At June 30, 2010, we had unusedavailable borrowing capacity of $322.6 million under our Revolving CreditFacility.

 

We have financed ouroperations through a combination of equity funding and debt financing, andthrough internally generated funds. We expect our cash flows from operationscombined with our cash balances and availability of our Revolving CreditFacility to provide sufficient liquidity to fund our current obligations,projected working capital requirements, and capital expenditures for at leastthe next twelve months.

 

***Cash Flows from Operating Activities***

 

We generated netcash flows from operating activities of $72.4 million for the six months endedJune 30, 2010 as compared to $130.9 million for the six months ended June 30,2009.  Our net income was $93.0 millionand $116.7 million for the six months ended June 30, 2010 and 2009,respectively.  The net cash generatedfrom our operating activities during the six months ended June 30, 2009includes the $75.0 million (approximately $48.8 million after tax) payment wereceived from CSL as a result of the termination of the definitive mergeragreement.

 

Our non-cashoperating items were $38.0 million and $44.7 million for the six months ended June 30,2010 and 2009, respectively.  Thefollowing significant non-cash items impacted the comparability of the net cashprovided by our operating activities during the periods presented.

 

·                  Our depreciation and amortization expense forthe six months ended June 30, 2010 and 2009 was $16.9 million and $13.9million, respectively.  The increase indepreciation and amortization expense reflects our cumulative capitalinvestments, primarily related to our manufacturing facilities and TPR.

 

·                  Our share-based compensation expense for thesix months ended June 30, 2010 and 2009 was $10.6 million and $20.2million, respectively.  The decrease inshare-based compensation expense during 2010 was primarily driven by the finalvesting of awards under the 2005 Stock Option and Incentive Plan on April 1,2010 and the majority of the awards under the 2006 Restricted Stock Plan on March 31,2010.  In addition, a combination of anadjustment during the 2010 first 

 

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quarter as a result ofactual award forfeitures being higher than initially estimated as well as theacceleration of certain option awards to our Chairman and Chief ExecutiveOfficer during the 2009 third quarter further impacted the comparability ofshare-based compensation expense between the two periods.

 

·                  Amortization ofdeferred compensation related to special recognition bonus awards was $1.7 millionand $3.1 million for the six months ended June 30, 2010 and 2009,respectively.  We made the final specialrecognition bonus award payments during March 2010.

 

·                  During the six months ended June 30, 2010and 2009, our net deferred income tax assets decreased $11.5 million and $4.2million, respectively.  During the sixmonths ended June 30, 2010 and 2009, we recognized excess tax benefitsrelated to share-based compensation of $5.7 million and $1.4 million,respectively.

 

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

 

·                  Our accounts receivable, net, increased $33.1million and $7.5 million during the six months ended June 30, 2010 and2009, respectively.  Accounts receivable,net, balances are influenced by the timing of net revenue and customercollections.  Our days sales outstanding(DSO) were 38 days and 37 days at June 30, 2010 and 2009, respectively,primarily driven by an increase in international accounts receivable and timingof payments.  Our international salesterms generally range from 30 to 150 days due to industry and nationalpractices outside of the U.S., which can impact our DSO results.  We calculate DSO as our period end accountsreceivable, net, divided by our prior three months’ net sales, multiplied by 90days.  Our calculation of DSO may not beconsistent with similar calculations performed by other companies.

 

·                  Our inventories increased $10.0 million and$22.0 million during the six months ended June 30, 2010 and 2009,respectively.  Our inventories fluctuatebased upon our plasma collections, production mix and cycle times, productioncapacities, normal production shut-downs, finished product releases, targetedsafety stock levels, and demand for our products.  Our biological manufacturing processes resultin relatively long inventory cycle times ranging from 100 days to in excess of400 days for some specialty plasma in addition to a required 60 daypre-production holding period for plasma. Consequently, we have significant investment in raw material and work-in-processinventories for extended periods.

 

·                  Our prepaid expenses and other assets(increased) decreased $(6.4) million and $14.3 million during the six monthsended June 30, 2010 and 2009, respectively.  The increase for the six months ended June 30,2010 was primarily driven by an increase in prepaid income taxes of $8.3million, partially offset by lower corporate prepaid amounts.  The decrease for the six months ended June 30,2009 was primarily driven by a decrease in prepaid income taxes of $8.2 millionand prepaid plasma of $7.3 million.  Thedecrease in prepaid plasma resulted from the reclassification of prepaid plasmato raw material inventories as a result of plasma deliveries from InternationalBioResources, L.L.C. and affiliated entities (IBR) upon plasma collectioncenter licensure, for which we subsequently acquired the plasma collectioncenters.

 

·                  Our operating liabilities decreased $9.0 million and $15.3 millionduring the six months ended June 30, 2010 and 2009, respectively.  Our liabilities fluctuate as a result of ourcash management strategies and the varying due dates of accounts payable,accrued expenses, and other obligations. The decrease for the six months ended June 30, 2010 was primarilydriven by lower accrued payroll, bonuses, and employee benefits of $21.7 millionprimarily due to the payment of accrued 2009 corporate performance bonuses andthe final special recognition bonus payment in March 2010, as well as adecrease in interest payable obligations of $3.1 million associated with our7.75% Notes due to the timing of contractual payments.  These items were partially offset by anincrease in accrued goods and services of $8.6 million primarily as a result oftransaction costs related to our definitive merger agreement with Grifols andhigher Medicaid, commercial rebates, and chargebacks of $2.5 million primarilyas a result of the recently enacted healthcare reform legislation whichincreased the rate of AMP used to compute Medicaid rebates charged to drugmanufacturers and higher Medicaid utilization. The decrease for the six months ended June 30, 2009 was primarilydriven by lower accounts payable obligations of $4.2 million due to our cashmanagement strategies and a reduction of $12.3 million in accrued payroll,bonuses, and profit sharing primarily due to the payment of accrued 2008corporate performance bonuses.  Theseitems were partially offset by higher taxes payable of $4.1 million and higherMedicaid, commercial rebates, and chargebacks of $6.7 million.

 

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***Cash Flows from Investing Activities***

 

Our capital expenditures were $53.2 million and$23.7 million for the six months ended June 30, 2010 and 2009, respectively.Our capital expenditures reflect investments in our facilities to support aplatform for future growth and efficiency improvements, including complianceenhancements, general infrastructure upgrades, capacity expansions, and newfacilities.  Our capital expendituresalso reflect investments in our TPR infrastructure to support our plasmacollection efforts.  The increase in ourcapital spending reflects higher spending related to reliability/complianceinitiatives, as well as our initial investments in our new fractionationstrategic program, partially offset by lower TPR spending.  Information regarding our strategic capitalprograms is included in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” in our2009 Form 10-K.

 

Our cash flows used in investing activities for thesix months ended June 30, 2009 also include various other cash outflowsfor the development of our plasma collection center platform, including thepurchase price of seven plasma collection centers acquired from IBR and loansand other advances made third-party plasma suppliers, net of repayments, forthe development of plasma collection centers for which we had the option topurchase under certain conditions.  TheIBR center acquisition program was completed in December 2009.

 

***Cash Flows from Financing Activities***

 

During the six months ended June 30,2010, we received proceeds of $6.1 million from the exercise of 1,124,936 stockoptions.  In addition, we repurchased 246,823shares of our common stock from employees for $4.9 million to settle theirwithholding tax obligations upon vesting of restricted stock.  During the six months ended June 30,2010, we recognized excess tax benefits related to share-based compensation of$5.7 million.

 

During the six months ended June 30,2009, we repurchased 234,704 shares of our common stock from employees for $3.9million to settle their withholding tax obligations upon vesting of restrictedstock.  In addition, we recognized excesstax benefits related to share-based compensation of $1.4 million.  During the six months ended June 30,2009, we made contractual principal payments of $3.5 million under our FirstLien Term Loan, which was repaid and terminated during the fourth quarter of2009 with the proceeds from our IPO and refinancing transactions.

 

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

 

***Credit Ratings***

 

There were no changes to ourcredit ratings during the six months ended June 30, 2010.  Our credit ratings as of June 30, 2010were as follows:

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

 

Factors that can affect ourcredit ratings include changes in our operating performance, financialposition, business strategy, and the overall economic environment for theplasma-derived products business.  If adowngrade of our credit ratings were to occur, it could adversely impact, amongother things, our future borrowing costs and access to capital markets.

 

***Off Balance Sheet Arrangements***

 

As of June 30, 2010, wedo not have any off-balance sheet arrangements that are material or reasonablylikely to be material to our consolidated financial position or results ofoperations.

 

***Related Party Transactions***

 

We consider Cerberus, Ampersand, and Centric to be related partiesduring certain of the periods presented. Additional information regarding transactions with our related partiesis included in Note 8, “Related Party Transactions,” included elsewhere in thisQuarterly Report.

 

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**NON-GAAP FINANCIAL MEASURES**

 

We believe that a meaningfulanalysis of our operating performance is enhanced by the use of adjustedEBITDA, as defined in our Revolving Credit Facility, and Consolidated CashFlow, as defined in our 7.75% Notes.

 

Both adjusted EBITDA andConsolidated Cash Flow are financial measures that are not defined by U.S.GAAP.  A non-GAAP financial measure is anumerical measure of a company’s financial performance that (i) excludesamounts, or is subject to adjustments that have the effect of excludingamounts, that are included in a comparable measure calculated and presented inaccordance with U.S. GAAP in the statement of operations, such as net income,or the statement of cash flows, such as operating cash flow, or (ii) includesamounts, or is subject to adjustments that have the effect of including amounts,that are excluded from the comparable measures so calculated andpresented.  The non-GAAP financialmeasures that we use should not be considered a substitute for any performancemeasure determined in accordance with U.S. GAAP.  We do not rely solely on these non-GAAPfinancial measures and also consider our U.S. GAAP results.  Because the non-GAAP financial measures thatwe use are not calculated in the same manner by all companies, they may not becomparable to similarly titled measures used by other companies.  To properly and prudently evaluate ourbusiness, we encourage you to also review our U.S. GAAP unaudited interimconsolidated financial statements included elsewhere in this Quarterly Report,and not to rely on any single financial measure to evaluate our business.  These non-GAAP financial measures havematerial limitations as analytical tools and you should not consider thesemeasures in isolation, or as a substitute for analysis of our results as reportedunder U.S. GAAP.  Additional informationregarding our use of non-GAAP financial measures is included in our 2009 Form 10-K.

 

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

 

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

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net income**                                            |       | $                      | 47,623     |                 | $          | 83,272 |   | $ | 92,962 |   | $ | 116,707 |   |
| Interest  expense, net (a)                                |       | 12,123                 |       | 20,513               |       | 23,386 |   | 41,858 |   |
| Income  tax provision (b)                                 |       | 28,150                 |       | 41,849               |       | 51,414 |   | 60,789 |   |
| Depreciation  and amortization (c)                        |       | 8,800                  |       | 7,177                |       | 16,851 |   | 13,921 |   |
| **EBITDA**                                                |       | 96,696                 |       | 152,811              |       | 184,613 |   | 233,275 |   |
| Management  fees (d)                                      |       | —                 |       | 1,898                |       | — |   | 3,757 |   |
| Non-cash  share-based compensation expense (e)            |       | 3,357                  |       | 9,109                |       | 10,584 |   | 20,171 |   |
| Special  recognition bonus expense (f)                    |       | 202                    |       | 1,565                |       | 1,816 |   | 3,363 |   |
| Equity  in earnings of affiliate (g)                      |       | (179                   | )          | (95                  | )          | (326 | ) | (184 | ) |
| Merger-related  expenses (h)                              |       | 8,423                  |       | 3,020                |       | 8,423 |   | 6,737 |   |
| Other  (i)                                                |       | 176                    |       | 896                  |       | 223 |   | 777 |   |
| **Adjusted EBITDA/Consolidated Cash Flow as defined (j)** |       | $                      | 108,675    |                 | $          | 169,204 |   | $ | 205,333 |   | $ | 267,896 |   |

 

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

 

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

 

(c)          Represents depreciation andamortization expense associated with our property, plant, and equipment, andall other intangible assets.

 

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

 

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in connection with our IPO.

 

(e)          Represents our non-cashshare-based compensation expense associated with stock options, restrictedstock, RSU’s, and performance share units.

 

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

 

(g)         Represents non-operatingincome associated with our investment in Centric, which we believe are not partof our core operations.

 

(h)         Represents merger-relatedexpenses associated with our terminated merger agreement with CSL and ourmerger agreement with Grifols, including investment banker, legal, accounting,and other costs, as well as retention expenses.

 

(i)             For the three months ended June 30,2010, the amount includes long-lived asset impairment charges of $0.2 million,partially offset by inventory recoveries of $0.1 million.  For the six months ended June 30, 2010,the amount includes long-lived asset impairment charges of $0.2 million andlosses on disposals of equipment of $0.1 million, partially offset by inventoryrecoveries of $0.1 million.  For thethree months ended June 30, 2009, the amount includes losses on disposalsof equipment of $0.6 million, long-lived asset impairment charges of $0.4million, and $0.2 million of non-capitalizable IPO costs, partially offset byinventory recoveries of $0.2 million. For the six months ended June 30, 2009, the amount includes losseson disposals of equipment of $0.9 million, long-lived asset impairment chargesof $0.3 million, and $0.2 million of non-capitalizable IPO costs, partiallyoffset by inventory recoveries of $0.7 million.

 

(j)             The computation ofConsolidated Cash Flow is not applicable prior to the issuance of the 7.75%Notes on October 21, 2009.   Ouradjusted EBITDA for the three and six months ended June 30, 2009 includesa $75.0 million termination fee received from CSL as a result of thetermination of the definitive merger agreement. In addition, we incurred legal and other costs associated with theregulatory review process of our terminated merger agreement of $0.3 millionand $6.0 million for the three and six months ended June 30, 2009,respectively.  The merger termination feeand these expenses were not permitted as adjustments to our adjusted EBITDA asdefined in our then existing Revolving Credit Facility or First and Second LienTerm Loans.

 

In addition to the non-GAAPfinancial measures of adjusted EBITDA and Consolidated Cash Flow presentedabove, we have also presented a quantification of the impact to our financialresults for the CSL merger termination fee and CSL merger-related expenses forthe three and six months ended June 30, 2009, and for the Grifolsmerger-related expenses for the three and six months ended June 30, 2010,in the fourth bullet point of the “2010 Financial Highlights” section presentedabove.  We believe we have furtherenhanced the comparability of our financial results between the periodspresented by using an adjusted share base in the computation of dilutedearnings per share for the three and six month ended June 30, 2009,reflecting the impact for the issuance of common shares to convert our Series Aand B preferred stock, settle accrued dividends on the preferred stock, andcomplete our IPO as if these events occurred a the beginning of 2009.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We operate on a global basisand are exposed to the risk that our earnings and cash flows could be adverselyimpacted by

 

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fluctuations in interest rates, foreign exchange, and commodityprices.  The overall objective of ourfinancial risk management program has historically been to minimize the impactof these risks through operational means and by using various financialinstruments.  These practices may changeas economic conditions change.  At June 30,2010, we were not a party to any derivative financial instruments.

 

***Interest Rate Risk***

 

At June 30, 2010, our long-term debt consisted of our 7.75% Notes($600.0 million outstanding), which bears a fixed interest rate, and our $325.0million Revolving Credit Facility, which bears interest at a rate based uponeither ABR or LIBOR, at our option, plus applicable margins based uponborrowing availability.  Our exposure toadverse movements in ABR or LIBOR during 2010 has not been significant as aresult of minimal average borrowings outstanding under the Revolving CreditFacility during the period.  Assuming afully drawn Revolving Credit Facility and a 100 basis point increase in applicableinterest rates, our interest expense, net, would increase by $3.25 million onan annual basis.

 

At June 30, 2010, we had cash and cash equivalents of $89.5million.  We use our available cashbalances to repay amounts outstanding under our Revolving Credit Facility. Wedeposit any excess amounts into an overnight investment account, which earnsminimal interest.  Because our cash andcash equivalents are short-term in duration, we believe that our exposure to interestrate risk is not significant and a 100 basis point movement in market interestrates would not have a significant impact on the carrying value of our cash andcash equivalents.  We actively monitorchanges in interest rates.

 

***Foreign Currency Risk***

 

We operate internationallyand enter into transactions denominated in foreign currencies.  As such, our financial position, results ofoperations, cash flows, and competitive position are subject to the variabilitythat arises from exchange 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 net revenue and the remeasurement of our euro-denominated accountsreceivable.

 

Approximately 31.6% and31.5% of our net revenue for the three and six months ended June 30, 2010,respectively, was generated outside of the United States.  Foreign currency exchange rate fluctuationsin relation to the U.S. dollar unfavorably impacted our product net revenue by$2.5 million, or 0.7%, for the three months ended June 30, 2010 andfavorably impacted our product net revenue by $0.5 million, or 0.1%, for sixmonths ended June 30, 2010. In addition, we incurred transaction losses,net, of $6.4 million and $10.3 million during the three and six months ended June 30,2010, respectively, primarily related to the remeasurement of euro-denominatedaccounts receivable, which we recorded within SG&A in our unauditedconsolidated income statement.

 

For the purpose of specificrisk analysis, we used a sensitivity analysis to measure the potential impactto our unaudited consolidated income statement for a hypothetical 10%strengthening of the U.S. dollar compared with the euro and Canadian dollar forthe three and six months ended June 30, 2010.  Assuming a 10% strengthening of the U.S.dollar, our product net revenue would have been negatively impacted byapproximately $4.1 million and $8.4 million for the three and six months ended June 30,2010, respectively.  At June 30,2010, we had approximately €45.9 million in receivables.  An adverse movement in the value of the euroin relation to the U.S. dollar could have a significant impact on ourprofitability.     We have not hedged ourexposure to changes in foreign currency exchange rates.  Consequently, we could incur unanticipatedgains and losses as a result of changes in foreign currency exchange rates.

 

***Commodity Risk***

 

Plasma is the key raw material used in the production of our products,which we obtain from our plasma collection centers, as well as third partyplasma suppliers.  As of June 30,2010, our plasma collection center platform consisted of 69 operating centers,of which 64 were licensed and 5 were unlicensed.  These licensed centers collectedapproximately 65% and 67% of our plasma during the three and six months ended June 30,2010.  Subsequent to June 30, 2010,we received FDA licensure for two additional plasma collection centers.

 

For purposes of specific risk analysis, we used a sensitivity analysisto measure the potential impact to our unaudited consolidated income statementsfor a hypothetical 10% increase in the cost of plasma used to produce theproducts sold during the three and six months ended June 30, 2010.  Assuming this 10% increase in the cost ofplasma, our cost of goods sold would have increased by $14.1 million and $27.7million for the three and six months ended June 30, 2010, respectively,and our gross margin would have been negatively impacted by 349 basis pointsand 353 basis points for the three and six months ended June 30, 2010,respectively.  This sensitivity analysisassumes that we would not be able to pass the hypothetical cost increase to ourcustomers in the 

 

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form of pricing increases.  Thissensitivity analysis does not consider the fixed pricing of plasma purchasedfrom our third-party plasma suppliers.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

Our management, with theparticipation of our Chief Executive Officer and our Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures as of June 30,2010.  The term “disclosure controls andprocedures,” as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, means controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by a company inreports that it files or submits under the Exchange Act is recorded, processed,summarized, and reported, within the time periods as specified in the SEC’srules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by a company inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the company’s management, including its principal executive andprincipal financial officers, as appropriate to allow timely decisionsregarding required disclosure. Management recognizes that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingtheir objectives and management necessarily applies its judgment in evaluatingthe cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosurecontrols and procedures as of June 30, 2010, our Chief Executive Officerand Chief Financial Officer concluded that, as of such date, our disclosurecontrols and procedures were effective at the reasonable assurance level.

 

***Changes in Internal Control over FinancialReporting***

 

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

 

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**PART II - OTHERINFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

***Grifols Transaction***

 

Four purported class action lawsuits have been filed against Talecris,the members of its board of directors, Grifols S.A. and subsidiaries and in onecase, Talecris’ principal stockholder all alleging breach of various fiduciaryduties in approving the acquisition of Talecris by a subsidiary of Grifols,S.A.  The cases seek equitable andinjunctive relief, damages and/or punitive damages.  The cases are Laborers Local 235 BenefitFunds v. Charpie, et al (Delaware Chancery, June 14, 2010); Chiarantano v.Stern, et al (Delaware Chancery, June 30, 2010); Kovary v. TalecrisBiotherapeutics Holdings Corp et al (Wake County, NC, July 12, 2010); andRubin v. Charpie, et al (Durham County, NC, July 12, 2010).

 

***National Genetics Institute/Baxter HealthcareCorporation Litigation***

 

In May 2008, Baxter Healthcare Corporation (Baxter) and NationalGenetics Institute (NGI), a wholly-owned subsidiary of Laboratory Corporationof America, filed a complaint in the U.S. District Court for the EasternDistrict of North Carolina, alleging that we infringed U.S. Patent Nos.5,780,222, 6,063,563, and 6,566,052. They subsequently withdrew and re-filedthe case in November 2008. The patents deal primarily with a method ofscreening large numbers of biological samples utilizing various pooling andmatrix array strategies, and the complaint alleges that the patents are ownedby Baxter and exclusively licensed to NGI. In November 2008, we filed ouranswer to their complaint, asserting anti-trust and other counterclaims, andfiled a request for re-examination of the patents with the Patent and TrademarkOffice (PTO), which was subsequently granted. We filed a motion to staylitigation pending the PTO proceedings. The motion was unopposed andsubsequently granted on January 30, 2009. On June 29, 2010, the PTOissued Reexamination Certificates for U.S. Patent Nos. 5,780,222 and 6,063,563without amending the claims of the patents. The Reexamination Certificate for U.S. Patent No. 6,566,052 has notyet been issued by the PTO.  Neitherparty has yet filed motions to resume the litigation. We believe theallegations of infringement are without merit and that the patents are invalidas applied to our processes.

 

***Plasma Centers of America, LLC and G&M CrandallLimited Family Partnership***

 

We had a three year Amended and Restated Plasma Sale/Purchase Agreementwith Plasma Centers of America, LLC (PCA) under which we were required topurchase annual minimum quantities of plasma from plasma collection centersapproved by us, including the prepayment of 90% for unlicensed plasma.  We were also committed to finance thedevelopment of up to eight plasma collection centers, which were to be used tosource plasma for us.  Under the terms ofthe agreement, we had the obligation to purchase such centers under certainconditions for a sum determined by a formula set forth in the agreement.  We provided $3.2 million in financing,including accrued interest, related to the development of such centers, and weadvanced payment of $1.0 million for unlicensed plasma.  We recorded a provision within SG&A during2008 related to these advances.

 

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

 

**ITEM 1A. RISK FACTORS**

 

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

 

**Risks Related to Proposed Merger**

 

***Our proposed merger with Grifols may adverselyaffect our operations and financial performance.***

 

The announcement of our proposed merger with Grifols may result in theloss of key employees, suppliers, and customers.  The demand on management’s time and ourresources relating to regulatory approvals and integration planning mayinterfere with management’s day–to-day oversight of operations.  As a result, our operations and financialperformance could be adversely affected while we prepare for the merger or infuture periods should the merger not occur.

 

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**RisksRelated to Healthcare Reform and Reimbursement**

 

***We could be adversely affected if the implementation of recently passedhealthcare reform legislation or additional legislation under considerationsubstantially changes the market for medical care or healthcare coverage in theUnited States.***

 

Substantial changes could bemade to the current system for paying for healthcare in the U.S., includingchanges made in order to extend medical benefits to those who currently lackinsurance coverage. Approximately 47 million Americans currently lackhealth insurance of any kind. Extending coverage to such a large populationcould substantially change the structure of the health insurance system and themethodology for reimbursing medical services, drugs and devices. Thesestructural changes could entail modifications to the existing system of privatepayors and government programs (Medicare, Medicaid and State Children’s HealthInsurance Program), creation of state-based healthcare insurance exchanges, aswell as other changes. Restructuring the coverage of medical care in the U.S.could impact the reimbursement for prescribed drugs and biopharmaceuticals,such as those produced and marketed by us. If reimbursement for these productsis substantially reduced in the future, or rebate obligations associated withthem are substantially increased (discussed in more detail below), our businesscould be materially impacted.  Beginningin 2012, the new law may require us to issue Internal Revenue Service Forms1099 to plasma donors whose remuneration exceeds six hundred dollars.  The cost of implementing this requirement, aswell as its potential impact on plasma donations, is unknown at this time.

 

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

 

All of the changes discussedabove, and others, passed in this legislation are subject to rule-making andimplementation timelines that extend for several years. This uncertainty limitsour ability to forecast changes that may occur in the future and to manage ourbusiness accordingly.

 

***We could be adversely affected if government or private third-partypayors decrease or otherwise limit the amount, price, scope or othereligibility requirements for reimbursement for the purchasers of our products.***

 

We have experienced andexpect to experience pricing pressures on our current products and pipelineproducts from initiatives aimed at reducing healthcare costs by governmentaland private third-party payors, the increasing influence of health maintenanceorganizations, and regulatory proposals, both in the United States and inforeign markets. Healthcare reform in the United States is likely to increasethe pressure, which may include the effect of such proposed changes as thepossible introduction of a biosimilar pathway and the possible redefinition ofthe term “single source” products which plays a key role in determiningreimbursements under the Medicare Part B program.  Additional legislative changes to currentpricing rules are possible, including changes to the 340B Public HealthServices drug pricing program.  We cannotpredict which changes, if any, will eventually be adopted, or their impact onus.  Certain proposed changes could havea materially adverse impact on our financial performance.  In addition, prices in many Europeancountries are subject to local regulation.

 

If payors reduce the amountof reimbursement for a product, it may cause groups or individuals dispensingthe product to discontinue administration of the product, to administer lowerdoses, to substitute lower cost products or to seek additional price relatedconcessions. These actions could have a negative effect on our financialresults, particularly in cases where we have a product that commands a premiumprice in the marketplace, or where changes in reimbursement induce a shift inthe site of treatment. For example, beginning in 2005, the Medicare drugreimbursement 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 

 

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

 

Physicians frequentlyprescribe legally available therapies for uses that are not described in theproduct’s labeling and that differ from those tested in clinical studies andapproved by the FDA or similar regulatory authorities in other countries. Theseunapproved, or “off-label,” uses are common across medical specialties, andphysicians may believe such off-label uses constitute the preferred treatmentor treatment of last resort for many patients in varied circumstances. Webelieve that a significant portion of our IGIV volume may be used to fillphysician prescriptions for indications not approved by the FDA or similarregulatory authorities. If reimbursement for off-label uses of our products,including IGIV, is reduced or eliminated by Medicare or other third-partypayors, including those in the United States or the European Union, we could beadversely affected.

 

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

 

The U.S. economic stimuluslegislation enacted in February 2009 provided significant funding for thefederal government to conduct Comparative Effectiveness Research (CER). Whilethe stated intent of CER is to develop information to guide providers to themost efficacious therapies, outcomes of CER could influence the reimbursementor coverage for therapies that are determined to be less cost-effective thanothers. Should any of our products be determined to be less cost-effective thanalternative therapies, the levels of reimbursement for these products, or thewillingness to reimburse at all, could be impacted, which could materiallyimpact our financial results.

 

Additionally, the settlementof class action litigation against First DataBank and others will result in thedownward revision and possible eventual elimination of the published AverageWholesale Prices (AWPs) which are an important basis for reimbursement used bymany third-party payors for our products. Under the settlement, the revisionbecame effective in September 2009. First DataBank and other pricingcompendia have stated that they will or may discontinue publishing AWP withintwo years. Consequently, given the nature of our Prolastin Direct model in theU.S., we anticipate a decrease in Prolastin/Prolastin-C A1PI AWPs resulting ina decrease in our net price subsequent to the settlement. We currently estimatethe annual impact of the First DataBank settlement to be a reduction in the netrevenue between $3 million and $6 million.

 

Some payors, includingMedicare Part D plans and some state Medicaid programs, reimburseproviders for drugs based upon a discount off of the AWP. AWP is a list pricedetermined by third party publishers, which does not necessarily reflect actualtransactions in the distribution chain. We do not publish an AWP for any of ourproducts. We may be at a competitive disadvantage where providers arereimbursed on an AWP basis and competitors’ products are reimbursed at higherrates than our corresponding product.

 

**Risks Related to Our Business**

 

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

 

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.  Although the Office of Foreign Asset Control (OFAC)renewed our license to supply humanitarian products, political tensions withIran continue to impede our ability to conduct business in Iran, which has andmay continue to negatively impact our revenue by as much as $15 million to $20million in 2010.

 

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**ITEM 6.  EXHIBITS**

 
| **Exhibit Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                     |       | Agreement and Plan of Merger, dated as of June 6, 2010 by and  among Grifols S.A., Grifols Inc. and Talecris Biotherapeutics Holdings Corp.  including as exhibits thereto: 

·        Form of  Voting Agreement between Grifols and Talecris Holdings 

·      Form of  Amendments to the By-Laws of Grifols, S.A. 

(incorporated by reference to exhibit 2.1 to the Company’s  Form 8-K filed on June 16, 2010) |
| 10.1                    |       | Voting Agreement, dated as of June 6, 2010, between Talecris  Biotherapeutics Holdings Corp. and Deria, S.A. (incorporated by reference to  exhibit 10.1 to the Company’s Form 8-K filed on June 16, 2010)                                                                                                                                                                                                                                                                          |
| 31.1                    |       | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2                    |       | Certification of Chief Financial Officer pursuant Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1                    |       | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002*                                                                                                                                                                                                                                                                                                                                          |
| 32.2                    |       | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                                                                                                                          |

 

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* This certification shallnot be deemed filed for purposes of Section 18 of the Exchange Act, orincorporated by reference in any filing under the Securities Act of 1933, asamended, or the Exchange Act, except as may be expressly set forth by specificreference in such filing.

 

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, in the city of Research Triangle Park,State of North Carolina, on July 29, 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 |

 

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