Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C.  20549**

 

#### **Form 10-Q**

 

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

 

**For the quarterly period ended March 31, 2010**

 

**or**

 

**o**         **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from          to           **

 

**Commission File Number: 001-34473**

 

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**TalecrisBiotherapeutics Holdings Corp.**

(Exact name of registrant as specified 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. Box 110526**

**4101 Research Commons**

**79 T.W. Alexander Drive**

**Research Triangle Park,North Carolina 27709**

(Address of principalexecutive offices, including Zip Code)

 

**(919) 316-6300**

(Registrants telephone number, including area code)

 

**Not applicable**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x Noo

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date. 122,875,752****sharesof Common Stock, $0.01 par value, as of April 26, 2010

 

 

 

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# **TalecrisBiotherapeutics Holdings Corp.**

**Form 10-Q**

**Table ofContents**

 
| ** **                              | ** **                                                                                     | **Page** |
|-----------------------------------------|------------------------------------------------------------------------------------------------|----------|
| **Part I-  Financial Information** |                                                                                           |     |
|                                    |                                                                                           |     |
| Item 1.                                 | Unaudited Interim Consolidated  Financial Statements:                                          | 3        |
|                                    |                                                                                           |     |
|                                    | Consolidated Balance Sheets as of March 31, 2010  and December 31, 2009              | 3        |
|                                    |                                                                                           |     |
|                                    | Consolidated Income Statements for the Three Months  Ended March 31, 2010 and 2009        | 4        |
|                                    |                                                                                           |     |
|                                    | Consolidated Statements of Cash Flows for the Three  Months Ended March 31, 2010 and 2009 | 5        |
|                                    |                                                                                           |     |
|                                    | Notes to Consolidated Financial Statements                                                     | 6        |
|                                    |                                                                                           |     |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations    | 22       |
|                                    |                                                                                           |     |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                    | 35       |
|                                    |                                                                                           |     |
| Item 4.                                 | Controls and  Procedures                                                                       | 37       |
|                                    |                                                                                           |     |
| **Part II-  Other Information**    |                                                                                           |     |
|                                    |                                                                                           |     |
| Item  1A.                               | Risk Factors                                                                                   | 38       |
|                                    |                                                                                           |     |
| Item  6.                                | Exhibits                                                                                       | 40       |
|                                    |                                                                                           |     |
|                                    | Signatures                                                                                     | 41       |

 

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#### **PART I - FINANCIAL INFORMATION**

#### ** **

#### **ITEM 1. FINANCIALSTATEMENTS**

 

**Talecris Biotherapeutics Holdings Corp.**

**ConsolidatedBalance Sheets**

(in thousands, except share and per share amounts)

(Unaudited)

 
| ** **                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                              |       |               |       |                  |       |
| Current  assets:                                                                                                                        |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                               |       | $                  | 80,265     |                  | $          | 65,239 |   |
| Accounts  receivable, net of allowances of $3,352 and $3,461, respectively                                                              |       | 167,808            |       | 136,978               |       |
| Inventories                                                                                                                             |       | 647,170            |       | 644,054               |       |
| Deferred  income taxes                                                                                                                  |       | 88,652             |       | 88,652                |       |
| Prepaid  expenses and other                                                                                                             |       | 22,592             |       | 31,466                |       |
| Total  current assets                                                                                                                   |       | 1,006,487          |       | 966,389               |       |
|                                                                                                                                    |       |               |       |                  |       |
| Property,  plant, and equipment, net                                                                                                    |       | 276,728            |       | 267,199               |       |
| Investment  in affiliate                                                                                                                |       | 2,082              |       | 1,935                 |       |
| Intangible  assets, net                                                                                                                 |       | 10,880             |       | 10,880                |       |
| Goodwill                                                                                                                                |       | 172,860            |       | 172,860               |       |
| Deferred  income taxes                                                                                                                  |       | 2,964              |       | 5,848                 |       |
| Other                                                                                                                                   |       | 18,711             |       | 19,894                |       |
| Total  assets                                                                                                                           |       | $                  | 1,490,712  |                  | $          | 1,445,005 |   |
| ** **                                                                                                                              |       |               |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                           |       |               |       |                  |       |
| ** **                                                                                                                              |       |               |       |                  |       |
| Current  liabilities:                                                                                                                   |       |               |       |                  |       |
| Accounts  payable                                                                                                                       |       | $                  | 58,660     |                  | $          | 71,046 |   |
| Accrued  expenses and other liabilities                                                                                                 |       | 174,147            |       | 170,533               |       |
| Current  portion of capital lease obligations                                                                                           |       | 764                |       | 740                   |       |
| Total  current liabilities                                                                                                              |       | 233,571            |       | 242,319               |       |
|                                                                                                                                    |       |               |       |                  |       |
| Long-term  debt and capital lease obligations                                                                                           |       | 605,211            |       | 605,267               |       |
| Other                                                                                                                                   |       | 14,900             |       | 15,265                |       |
| Total  liabilities                                                                                                                      |       | 853,682            |       | 862,851               |       |
|                                                                                                                                    |       |               |       |                  |       |
| Commitments  and contingencies                                                                                                          |       |               |       |                  |       |
|                                                                                                                                    |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                             |       |               |       |                  |       |
| Common  stock, $0.01 par value; 400,000,000 shares authorized; 122,614,294 and  122,173,274 shares issued and outstanding, respectively |       | 1,223              |       | 1,212                 |       |
| Additional  paid-in capital                                                                                                             |       | 777,108            |       | 767,032               |       |
| Accumulated  deficit                                                                                                                    |       | (141,107           | )          | (186,446              | )          |
| Accumulated  other comprehensive (loss) income, net of tax                                                                              |       | (194               | )          | 356                   |       |
| Total  stockholders’ equity                                                                                                        |       | 637,030            |       | 582,154               |       |
| Total  liabilities and stockholders’ equity                                                                                        |       | $                  | 1,490,712  |                  | $          | 1,445,005 |   |

 

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**ConsolidatedIncome Statements**

(in thousands, except per share amounts)

(Unaudited)

 
| ** **                                      | ** ** | **Three  Months Ended** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **March 31,**      | ** ** |
| ** **                                      | ** ** | **2010**                | ** ** | **2009** | ** ** |
| **Net revenue:**                                |       |                    |       |   |   |
| Product                                         |       | $                       | 374,615    |   | $ | 364,863 |   |
| Other                                           |       | 6,346                   |       | 6,932 |   |
| Total                                           |       | 380,961                 |       | 371,795 |   |
| Cost  of goods sold                             |       | 217,351                 |       | 209,201 |   |
| **Gross profit**                                |       | 163,610                 |       | 162,594 |   |
| Operating  expenses:                            |       |                    |       |   |   |
| Selling,  general, and administrative           |       | 67,620                  |       | 72,422 |   |
| Research  and development                       |       | 16,271                  |       | 16,541 |   |
| Total                                           |       | 83,891                  |       | 88,963 |   |
| **Income from operations**                      |       | 79,719                  |       | 73,631 |   |
| Other  non-operating (expense) income:          |       |                    |       |   |   |
| Interest  expense, net                          |       | (11,263                 | )          | (21,345 | ) |
| Equity  in earnings of affiliate                |       | 147                     |       | 89 |   |
| Total                                           |       | (11,116                 | )          | (21,256 | ) |
| Income  before income taxes                     |       | 68,603                  |       | 52,375 |   |
| Provision  for income taxes                     |       | (23,264                 | )          | (18,940 | ) |
| **Net income**                                  |       | 45,339                  |       | 33,435 |   |
| Less  dividends to preferred stockholders       |       | —                  |       | (3,818 | ) |
| **Net income available to common stockholders** |       | $                       | 45,339     |   | $ | 29,617 |   |
|                                            |       |                    |       |   |   |
| **Net income per common share:**                |       |                    |       |   |   |
|                                            |       |                    |       |   |   |
| Basic                                           |       | $                       | 0.37       |   | $ | 25.09 |   |
|                                            |       |                    |       |   |   |
| Diluted                                         |       | $                       | 0.35       |   | $ | 0.36 |   |

 

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**ConsolidatedStatements of Cash Flows**

(in thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **Three  Months Ended** | ** **   |
|------------------------------------------------------------------------------------|------------|-------------------------|--------------|
| ** **                                                                         | ** ** | **March 31,**      | ** **   |
| ** **                                                                         | ** ** | **2010**                | ** **   | **2009** | ** ** |
| **Cash flows from operating activities:**                                          |       |                    |         |   |   |
| Net  income                                                                        |       | $                       |  45,339 |   | $ |  33,435 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                    |         |   |   |
| Depreciation  and amortization                                                     |       | 8,051                   |         | 6,744 |   |
| Amortization  of deferred loan fees and debt discount                              |       | 1,055                   |         | 941 |   |
| Share-based  compensation expense                                                  |       | 7,227                   |         | 11,062 |   |
| Provision  for doubtful receivables and advances                                   |       | 416                     |         | 449 |   |
| Recognition  of previously deferred revenue                                        |       | (52                     | )            | (56 | ) |
| Amortization  of deferred compensation                                             |       | 1,506                   |         | 1,656 |   |
| Equity  in earnings of affiliate                                                   |       | (147                    | )            | (89 | ) |
| Asset  impairment                                                                  |       | —                  |         | 79 |   |
| Loss  on disposal of property, plant, and equipment                                |       | 50                      |         | 266 |   |
| Decrease  in deferred tax assets                                                   |       | 2,884                   |         | 901 |   |
| Excess  tax benefits from share-based payment arrangements                         |       | (4,590                  | )            | (1,437 | ) |
| Changes  in assets and liabilities, excluding the effects of business acquisitions |       |                    |         |   |   |
| Accounts  receivable                                                               |       | (31,252                 | )            | 5,053 |   |
| Inventories                                                                        |       | (3,136                  | )            | (6,452 | ) |
| Prepaid  expenses and other assets                                                 |       | 7,814                   |         | 11,594 |   |
| Accounts  payable                                                                  |       | (12,386                 | )            | (9,902 | ) |
| Accrued  expenses and other liabilities                                            |       | (3,734                  | )            | (17,924 | ) |
| Interest  payable                                                                  |       | 11,625                  |         | (1,528 | ) |
| Net  cash provided by operating activities                                         |       | 30,670                  |         | 34,792 |   |
|                                                                               |       |                    |         |   |   |
| **Cash flows from investing activities:**                                          |       |                    |         |   |   |
| Purchase  of property, plant, and equipment                                        |       | (17,690                 | )            | (8,131 | ) |
| Business  acquisitions, net of cash acquired                                       |       | —                  |         | (7,512 | ) |
| Financing  arrangements with third party suppliers, net of repayments              |       | 174                     |         | (4 | ) |
| Net  proceeds from disposals of property, plant, and equipment                     |       | —                  |         | 7 |   |
| Net  cash used in investing activities                                             |       | (17,516                 | )            | (15,640 | ) |
|                                                                               |       |                    |         |   |   |
| **Cash flows from financing activities:**                                          |       |                    |         |   |   |
| Borrowings  under Revolving Credit Facility                                        |       | 212                     |         | 357,837 |   |
| Repayments  of borrowings under Revolving Credit Facility                          |       | (212                    | )            | (376,717 | ) |
| Repayments  of borrowings under term loan                                          |       | —                  |         | (1,750 | ) |
| Financing  transaction costs                                                       |       | (78                     | )            | — |   |
| Repayments  of capital lease obligations                                           |       | (176                    | )            | (113 | ) |
| Proceeds  from exercises of stock options                                          |       | 2,937                   |         | — |   |
| Repurchases  of common stock from employees                                        |       | (4,917                  | )            | (3,902 | ) |
| Excess  tax benefits from share-based payment arrangements                         |       | 4,590                   |         | 1,437 |   |
| Net  cash provided by (used in) financing activities                               |       | 2,356                   |         | (23,208 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                      |       | (484                    | )            | (324 | ) |
| **Net increase (decrease) in cash and cash equivalents**                           |       | 15,026                  |         | (4,380 | ) |
| **Cash and cash equivalents at beginning of period**                               |       | 65,239                  |         | 16,979 |   |
| **Cash and cash equivalents at end of period**                                     |       | $                       |  80,265 |   | $ |  12,599 |   |

 

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

 

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**Talecris Biotherapeutics Holdings Corp.**

 

**Notes to Unaudited ConsolidatedFinancial Statements**

 

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

 

***We are a biopharmaceutical company that researches,develops, manufactures, markets, and sells protein-based therapies that extendand enhance the lives of individuals who suffer from chronic and acute, oftenlife-threatening, conditions, such as primary immune deficiencies, chronicinflammatory demyelinating polyneuropathy (CIDP), alpha-1 antitrypsindeficiency, bleeding disorders, infectious diseases, and severe trauma. Our primary products have orphan drug designation to serve populations withrare, chronic diseases. Our products are derived from human plasma, the liquidcomponent of blood, which is sourced from our plasma collection centers orpurchased from third parties, located in the United States. Plasma containsmany therapeutic proteins, which we extract through the process offractionation at our Clayton, North Carolina and Melville, New York facilities.The fractionated intermediates are then purified, formulated into final bulk,and aseptically filled into final containers for distribution. We also sell thefractionated intermediate materials.***

*** ***

***The majority of our sales are concentrated in two keytherapeutic areas of the plasma business: Immunology/Neurology, through ourintravenous immune globulin (IGIV) product for the treatment of primary immunedeficiency and autoimmune diseases, as well as CIDP, and Pulmonology, throughour alpha-1 proteinase inhibitor (A1PI) product for the treatment of alpha-1antitrypsin deficiency-related emphysema. These therapeutic areas are served byour branded products: Gamunex, Immune Globulin Intravenous (Human), 10%Caprylate/Chromatography Purified (Gamunex or Gamunex IGIV) and Prolastin Alpha-1Proteinase Inhibitor (Human) (Prolastin or Prolastin A1PI).  In March 2010, we launched our nextgeneration Prolastin product, Prolastin-C A1PI, in the United States. Sales ofGamunex and Prolastin together comprised 76.9% and 75.3% of our net revenue forthe three months ended March 31, 2010 and 2009, respectively.  We also have a line of hyperimmune therapiesthat provides treatment for tetanus, rabies, hepatitis A, hepatitis B, and Rhfactor control during pregnancy and at birth. In addition, we provideplasma-derived therapies for critical care/hemostasis, including the treatmentof hemophilia, an anti-coagulation factor (Thrombate III), as well as albuminto expand blood volume. Although we sell our products worldwide, the majorityof our sales are concentrated in the United States and Canada.***

*** ***

***We are headquartered in Research Triangle Park, NorthCarolina and our primary manufacturing facilities are a short distance away inClayton, North Carolina.  Our Claytonsite is one of the world’s largest plasma protein processing facilities whoseoperations include fractionation, purification, filling, and finishing.  We have an integrated plasma collectioncenter platform, which as of March 31, 2010, consisted of 69 operatingcenters, of which 64 were licensed and 5 were unlicensed.  In addition to the United States, we haveoperations in Germany and Canada to support our international sales andmarketing activities.***

*** ***

***On October 6, 2009, we completed our initial publicoffering (IPO), which resulted in net primary proceeds to us of $519.7million.  In addition, during October 2009,we amended our Revolving Credit Facility and completed the issuance of $600.0million, 7.75% Unsecured Senior Notes, due November 15, 2016 (7.75%Notes), at a price of 99.321% of par, in a private placement to certainqualified institutional buyers. The issuance of the 7.75% Notes resulted in netproceeds 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).***

*** ***

***Until January 21, 2010, a majority of our outstandingcommon stock was owned by Talecris Holdings, LLC.  Talecris Holdings, LLC is owned by (i) Cerberus-PlasmaHoldings LLC, the managing member of which is Cerberus Partners, L.P., and (ii) limitedpartnerships affiliated with Ampersand Ventures. Substantially all rights ofmanagement and control of Talecris Holdings, LLC are held by Cerberus-PlasmaHoldings, LLC. As of March 31, 2010, Talecris Holdings, LLC ownedapproximately 49.9% of our outstanding common stock.***

*** ***

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

 

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

*** ***

***All tabular disclosures of dollar amounts are presented inthousands. All share and per share amounts are presented at their actualamounts.***

*** ***

***A seven-for-one share dividend on our common stock was paidon September 10, 2009.  All shareand per-share amounts***

 

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***have been retroactively adjusted to reflect the sharedividend.***

 

***InterimFinancial Statements***

 

***We have prepared the accompanying unaudited interimconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America (U.S. GAAP) for interimfinancial statements and with the instructions to Form 10-Q and Article 10of Regulation S-X issued by the SEC.  Theaccompanying unaudited interim consolidated financial statements should be readin conjunction with the audited consolidated financial statements included inour 2009 Form 10-K.  In our opinion,the accompanying unaudited interim consolidated financial statements have beenprepared on the same basis as our annual audited consolidated financialstatements and contain all material adjustments (consisting of normal recurringaccruals and adjustments) necessary to present fairly our financial condition,results of operations, and cash flows for the periods presented. Theconsolidated balance sheet that we have presented as of December 31, 2009has been derived from the audited consolidated financial statements on thatdate, but does not include all of the information and footnotes required byU.S. GAAP for complete financial statements.***

*** ***

***SignificantAccounting Policies***

*** ***

***A detailed description of our significant accountingpolicies is presented in the footnotes to our annual audited consolidatedfinancial statements included in our 2009 Form 10-K. Our significantaccounting policies, estimates, and assumptions have not changed materiallysince December 31, 2009.***

*** ***

***Recent AccountingPronouncements***

*** ***

***There were no accounting pronouncements during the threemonths ended March 31, 2010 that are expected to have a material impact onour consolidated financial statements or related disclosures.***

*** ***

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

 

***We entered into a definitive merger agreement with CSL on August 12,2008, which was subject to the receipt of certain regulatory approvals as wellas other customary conditions.  The U.S.Federal Trade Commission filed an administrative complaint before theCommission challenging the merger and a complaint in Federal district court seekingto 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 second quarter.  The U.S. Federal Trade Commission’s complaintswere subsequently dismissed.  We incurredretention expense, including fringe benefits, of $3.7 million, and legal costsassociated with the regulatory review process of $5.7 million during the threemonths ended March 31, 2009.  Noamounts were incurred during 2010. All retention amounts were paid during 2009.***

*** ***

**4.****                  ****Inventoriesand Cost of Goods Sold**

 

Inventoriesconsisted of the following:

 
| ** **         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Raw  material      |       | $                  | 167,996    |                  | $          | 171,866 |   |
| Work-in-process    |       | 331,061            |       | 312,178               |       |
| Finished  goods    |       | 148,113            |       | 160,010               |       |
| Total  inventories |       | $                  | 647,170    |                  | $          | 644,054 |   |

 

***Our raw materialinventories include unlicensed plasma and related testing costs of $9.3 millionand $7.6 million at March 31, 2010 and December 31, 2009,respectively, which we believe are realizable.***

 

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

 

***Our cost of goodssold includes $2.0 million and $14.4 million for the three months ended March 31,2010 and 2009, respectively, related to unabsorbed TPR infrastructure andstart-up costs associated with the development of our plasma collection centerplatform.  Until our plasma collectioncenters reach normal operating capacity, we charge unabsorbed overhead costsdirectly to cost of goods sold.***

 

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**5.****                  ****ComprehensiveIncome**

 

The following table includes the components of our comprehensiveincome:

 
| ** **                                                           | ** ** | **Three  Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                           | ** ** | **March 31,**      | ** ** |
| ** **                                                           | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Net income                                                           |       | $                       | 45,339     |   | $ | 33,435 |   |
| Foreign currency  translation adjustments                            |       | (550                    | )          | (366 | ) |
| Net unrealized gain on  derivative financial instruments, net of tax |       | —                  |       | 1,912 |   |
| Total  comprehensive income                                          |       | $                       | 44,789     |   | $ | 34,981 |   |

 

During the fourth quarterof 2009, we settled and terminated our interest rate swap contracts asdiscussed further in our 2009 Form 10-K.

 

**6.****                  ****IncomeTaxes**

 

Ourincome tax provision was $23.3 million and $18.9 million for the three monthsended March 31, 2010 and 2009, respectively, resulting in effective incometax rates of 33.9% and 36.2%, respectively.

 

Forthe three months ended March 31, 2010, our effective income tax rate islower than the U.S. statutory Federal income tax rate, primarily due to adomestic production deduction, which was statutorily increased to 9% for 2010and orphan drug clinical testing tax credits for qualifying expenditures,partially offset by state tax expense. For the three months ended March 31, 2009, our effective income taxrate is higher than the U.S. statutory Federal income tax rate, primarily dueto state tax expense, net of Federal benefit.

 

**7.****                  ****RelatedParty Transactions**

 

***Until January 21, 2010, a majority of our outstandingcommon stock was owned by Talecris Holdings, LLC.  Talecris Holdings, LLC is owned by (i) Cerberus-PlasmaHoldings, LLC, the managing member of which is Cerberus Partners, L.P., and (ii) limitedpartnerships affiliated with Ampersand Ventures. Substantially all rights ofmanagement and control of Talecris Holdings, LLC are held by Cerberus-PlasmaHoldings LLC. As of March 31, 2010, Talecris Holdings, LLC ownedapproximately 49.9% of our outstanding common stock.  We had a Management Agreement, as amended,with Cerberus-Plasma Holdings, LLC and an affiliate of Ampersand Ventures,which was terminated as of September 30, 2009 in connection with ourIPO.  We have a Master Consulting andAdvisory Services Agreement with an affiliate of Cerberus to provide certainadvisory services to us although no services were provided to us under thatagreement during the three months ended March 31, 2010.***

*** ***

We have an equityinvestment in Centric Health Resources, Inc. (Centric); therefore, weconsider Centric to be a related party during the periods presented.  Centric provides services in the managementof our Prolastin and Gamunex Direct programs. In this capacity, Centric provides warehousing, order fulfillment,distribution, home infusion, and customer relationship services for usprimarily related to our U.S. sales of Prolastin.  Centric maintains inventory on our behalfwhich it utilizes to fill customer orders.  Centric also provides servicesto us in collecting accounts receivable for sales made under the Prolastin andGamunex Direct programs. We provide Centric with a fee for each unit ofproduct provided to patients which escalates with volume.

 

The following tablesummarizes our related party transactions for three months ended March 31,2010 and 2009 and our related party accounts payable balances at March 31,2010 and December 31, 2009:

 

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| **Related  Party**  | ** **   | **Activity/Transaction**                     | ** ** | **Expenses** | ** ** |
|---------------------|--------------|----------------------------------------------|------------|--------------|------------|
|                |         |                                         |       |         |       |
|                | *** *** | ***Three months ended March 31, 2010*** |       |         |       |
| Centric             |         | Product distribution and  other services     |       | $            | 5,324      |   |
|                |         |                                         |       |         |       |
|                | *** *** | ***Three months ended March 31, 2009*** |       |         |       |
| Centric             |         | Product distribution and  other services     |       | $            | 4,852      |   |
| Cerberus/ Ampersand |         | Management fees                              |       | $            | 1,859      |   |
| Cerberus            |         | Operational support                          |       | $            | 638        |   |

 
| ** **        | ** ** | **Activity/**                            | ** ** | **Payable**             | ** ** |
|-------------------|------------|------------------------------------------|------------|-------------------------|------------|
| **Related Party** | ** ** | **Transaction**                          | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
| Centric           |       | Product distribution and  other services |       | $                       | 5,917      |   | $ | 5,537 |   |
| Cerberus          |       | Operational support                      |       | $                       | 299        |   | $ | 349 |   |

 

**8.****                  ****Commitmentsand Contingencies**

 

We have disclosedinformation regarding our commercial commitments in our 2009 Form 10-K.  There have been no significant changes to ourcommercial commitments since December 31, 2009.  The following summarizes our materialcontingencies as of March 31, 2010.

 

***Litigation***

 

We are involved invarious legal and regulatory proceedings that arise in the ordinary course ofbusiness.  We record accruals for suchcontingencies to the extent that we conclude that their occurrence is bothprobable and estimable.  We consider manyfactors in making these assessments, including the professional judgment ofexperienced members of management and our legal counsel.  We have estimated the likelihood ofsettlement, unfavorable outcomes, and the amounts of such 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.

 

***National Genetics Institute/Baxter Healthcare Corporation Litigation***

 

In May 2008, Baxter Healthcare Corporation(Baxter) and National Genetics Institute (NGI), a wholly-owned subsidiary ofLaboratory Corporation of America, filed a complaint in the U.S. District Courtfor the Eastern District of North Carolina, alleging that we infringed U.S.Patent Nos. 5,780,222, 6,063,563, and 6,566,052. They subsequently withdrew andre-filed the case in November 2008. The patents deal primarily with amethod of screening large numbers of biological samples utilizing variouspooling and matrix array strategies, and the complaint alleges that the patentsare owned by Baxter and exclusively licensed to NGI. In November 2008, wefiled our answer to their complaint, asserting anti-trust and othercounterclaims, and filed a request for re-examination of the patents with thePatent and Trademark Office (PTO), which was subsequently granted. We filed amotion to stay litigation pending the PTO proceedings. The motion was unopposedand subsequently granted on January 30, 2009. On July 7 and July 9,2009, the PTO mailed Notices of Intent to Issue Reexamination Certificateswithout amending the claims of the patents in dispute. Neither party has yetfiled motions to resume the litigation. We believe the allegations ofinfringement are without merit and that the patents are invalid as applied toour processes.

 

***Plasma Centers of America, LLC and G&M Crandall Limited FamilyPartnership***

 

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

 

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In August 2008, we notified PCA that they were inbreach of the Amended and Restated Plasma Sale/Purchase Agreement.  We terminated the agreement in September 2008.In November 2008, TPR filed suit in federal court in Raleigh, 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 court set for May 24,2010.

 

***Foreign Corrupt Practices Act***

 

We are conducting an internal investigation intopotential violations of the Foreign Corrupt Practices Act (FCPA) that we becameaware of during the conduct of an unrelated review.  The FCPA investigation is being conducted byoutside counsel under the direction of a special committee of our board ofdirectors.  The investigation initiallyfocused on sales to certain Eastern European and Middle Eastern countries, butour investigation is also reviewing sales practices in other countries asdetermined appropriate.

 

In July 2009, we voluntarily contacted the U.S.Department of Justice (DOJ) to advise them of the investigation and to offerour cooperation in any investigation that they want to conduct or they want usto conduct. The DOJ has not indicated what action it may take, if any, againstus or any individual, or the extent to which it may conduct its owninvestigation. The DOJ or other federal agencies may seek to impose sanctionson us that may include, among other things, injunctive relief, disgorgement,fines, penalties, appointment of a monitor, appointment of new control staff,or enhancement of existing compliance and training programs. Other countries inwhich we do business may initiate their own investigations and impose similarpenalties. As a result of this investigation, we have suspended shipments tosome of these countries while we put additional safeguards in place. In somecases, safeguards involved terminating consultants and suspending relationswith or terminating distributors in countries under investigation ascircumstances warranted. These actions unfavorably affected revenue from thesecountries in 2009 and have an ongoing unfavorable impact on revenue in 2010. Wehave resumed sales in countries where we have appropriate safeguards in placeand are reallocating product to other countries as necessary.  To the extent that we conclude, or the DOJconcludes, that we cannot implement adequate safeguards or otherwise need tochange our business practices, distributors, or 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 March 31, 2010.

 

***Pharmaceutical Pricing Agreement under the Public Health ServiceProgram***

 

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.

 

**9.****                  ****Share-BasedCompensation**

 

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

 

Share-based compensation expense for the three monthsended March 31, 2010 and 2009 was as follows:

 

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| ** **         | ** ** | **Three  Months Ended** | ** ** |
|--------------------|------------|-------------------------|------------|
| ** **         | ** ** | **March 31,**      | ** ** |
| ** **         | ** ** | **2010**                | ** ** | **2009** | ** ** |
| SG&A           |       | $                       | 5,680      |   | $ | 8,973 |   |
| R&D            |       | 538                     |       | 667 |   |
| Cost of goods sold |       | 1,009                   |       | 1,422 |   |
| Total  expense     |       | $                       | 7,227      |   | $ | 11,062 |   |

 

During the three months ended March 31, 2010 and2009, respectively, we capitalized $1.0 million and $1.1 million of share-basedcompensation cost within inventory. Amounts capitalized in inventory are recognized in cost of goods sold inour consolidated income statement primarily within twelve months.

 

The following table summarizes the remainingunrecognized compensation cost related to our share-based compensation programas of March 31, 2010 and the weighted average period over which thenon-cash compensation cost is expected to be recognized:

 
| ** **               | ** ** | ** **       | ** ** | **Weighted-** | ** ** |
|--------------------------|------------|------------------|------------|---------------|------------|
| ** **               | ** ** | **Unrecognized** | ** ** | **Average**   | ** ** |
| ** **               | ** ** | **Compensation** | ** ** | **Period**    | ** ** |
| ** **               | ** ** | **Cost**         | ** ** | **(Years)**   | ** ** |
| Stock options            |       | $                | 4,866      |          | 3.00       |   |
| Restricted share awards  |       | 3,965            |       | 1.00          |       |
| RSU’s               |       | 7,559            |       | 3.00          |       |
| Performance share awards |       | 4,999            |       | 3.00          |       |
| Total                    |       | $                | 21,389     |          |       |   |

 

In addition to the unrecognized compensation costincluded in the table above, at March 31, 2010, $2.6 million ofcompensation cost was included in inventory on our unaudited interimconsolidated balance sheet, which we expect to be recognized as non-cashcompensation expense in our consolidated income statement primarily within thenext twelve months.  The amount ofshare-based compensation expense that we will ultimately be required to recordcould change in the future as a result of additional grants, changes in thefair value of shares for performance-based awards, differences between ouranticipated forfeiture rate and the actual forfeiture rate, the probability ofachieving targets established for performance award vesting, and other actionsby our board of directors or its compensation committee.

 

***Stock Options***

 

The following is a summary of stock option activityfor the three months ended March 31, 2010:

 
| ** **                                          | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding  at December 31, 2009              |       | 12,129,438 |       | $                                      | 8.40       |                                                         |       |                            |       |   |
| Granted                                             |       | 23,545     |       | $                                      | 21.48      |                                                         |       |                            |       |   |
| Forfeited                                           |       | —     |       | $                                      | —     |                                                         |       |                            |       |   |
| Exercised                                           |       | (687,843   | )          | $                                      | 4.60       |                                                         |       |                            |       |   |
| Outstanding  at March 31, 2010                 |       | 11,465,140 |       | $                                      | 8.66       |                                                         | 6.4        |                            | $          | 129,138 |   |
|                                                |       |       |       |                                   |       |                                                         |       |                            |       |
| Exercisable  at March 31, 2010                 |       | 8,023,995  |       | $                                      | 8.47       |                                                         | 5.6        |                            | $          | 91,875 |   |
|                                                |       |       |       |                                   |       |                                                         |       |                            |       |
| Vested  and expected to vest at March 31, 2010 |       | 11,428,473 |       | $                                      | 8.62       |                                                         | 6.4        |                            | $          | 129,109 |   |

 

The aggregate intrinsic value in the table aboverepresents the difference between the $19.92 closing price of our common stockas reported by The NASDAQ Global Select Market on March 31, 2010 and theweighted average exercise price, multiplied by the number of optionsoutstanding or exercisable.  The totalintrinsic value and cash proceeds to us from stock option exercises during thethree months ended March 31, 2010 were $10.5 million and $2.9 million,respectively.  We do not record theaggregate intrinsic

 

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value for financial accounting purposes and the value changes basedupon changes in the fair value of our common stock.

 

The following weighted-average assumptions were usedto estimate the fair value of stock options granted during the three monthsended March 31, 2010 and 2009:

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **March 31,**     | ** ** |
| ** **              | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Risk-free interest rate |       | 2.75                   | %          | 1.79 | % |
| Expected term           |       | 6.0                    |       | 5.25 |   |
| Expected volatility     |       | 50                     | %          | 50 | % |
| Expected dividend yield |       | 0                      | %          | 0 | % |

 

We generally apply a 3% forfeiture rate to the optionsgranted over the term of the award, representing our estimate of those awardsnot expected to vest.

 

***Restricted Stock***

 

The following is a summary of restricted stockactivity for the three months ended March 31, 2010:

 
| ** **                                             | ** ** | ** ** | ** ** | **Weighted**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | **Average**    | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                                             | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested shares outstanding  at December 31, 2009 |       | 913,856    |       | $              | 15.27      |   |
| Granted                                                |       | —     |       | $              | —     |   |
| Forfeited                                              |       | —     |       | $              | —     |   |
| Vested                                                 |       | (712,792   | )          | $              | 13.68      |   |
| Unvested shares outstanding  at March 31, 2010    |       | 201,064    |       | $              | 20.92      |   |

 

During the three months ended March 31, 2010, werepurchased 246,823 shares of our common stock from employees for $4.9 millionto settle their withholding tax obligations upon vesting of restrictedstock.  During the three months ended March 31,2009, we repurchased 234,704 shares of our common stock from employees for $3.9million to settle their withholding tax obligations upon vesting of restrictedstock.  The total fair value of therestricted stock that vested during the three months ended March 31, 2010and 2009 was $14.2 million and $12.1 million, respectively.

 

***Restricted Stock Units (RSU’s)***

 

The following is a summary of RSU activity for thethree months ended March 31, 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                                |       | 11,863     |       | $              | 21.48      |            |       |          |       |   |
| Forfeited                              |       | (4,427     | )          | $              | 19.00      |            |       |          |       |   |
| Outstanding at  March 31, 2010    |       | 487,460    |       | $              | 19.06      |            | 3.0        |          | $          | 9,710 |   |
|                                        |            |            |            |                |            |                 |            |               |            |  |  |

 

***Performance Share Units***

 

The compensation committee of our board of directorsapproved a grant of 261,327 performance share units on March 8, 2010,which had a weighted average 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

 

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awards varies based on actual performance in a year relative to adefined minimum and maximum financial target for that year. The performanceshare units granted on March 8, 2010 will vest annually over athree-year performance period with the potential for 0% to 125% payout, basedon the achievement of annual earnings per share targets that were establishedat the time of grant.

 

***Income Taxes***

 

In connection with stock option exercises and restrictedstock vesting, we recognized net tax benefits of $9.8 million and $4.6 millionfor the three months ended March 31, 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$4.6 million and $1.4 million for the three months ended March 31, 2010and 2009, respectively.

 

**10.****           ****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 constitutethe majority of our net revenue. Although we sell our products worldwide, themajority of our net revenue was concentrated in the United States and Canadafor the periods presented.

 

Inthe following table, we have presented our net revenue by significant productcategory. Our Immunology/Neurology product category includes the products thatare used to provide antibodies to patients who have a genetic or acquiredinability to produce these antibodies, as well as a treatment for CIDP, andalso products that provide antibodies to counter specific antigens such asrabies. Our Pulmonology product category is comprised of our Prolastin product,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** | ** ** |
|----------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **March 31,**      | ** ** |
| ** **                 | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Product net revenue:       |       |                    |       |   |   |
| Immunology/  Neurology     |       | $                       | 233,267    |   | $ | 230,834 |   |
| Pulmonology                |       | 80,184                  |       | 72,559 |   |
| Critical  Care/ Hemostasis |       | 38,366                  |       | 37,934 |   |
| Other                      |       | 22,798                  |       | 23,536 |   |
| Total product net revenue  |       | 374,615                 |       | 364,863 |   |
| Other  revenue             |       | 6,346                   |       | 6,932 |   |
| Total net revenue          |       | $                       | 380,961    |   | $ | 371,795 |   |

 

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

 
| ** **        | ** ** | **Three  Months Ended** | ** ** |
|-------------------|------------|-------------------------|------------|
| ** **        | ** ** | **March 31,**      | ** ** |
| ** **        | ** ** | **2010**                | ** ** | **2009** | ** ** |
| United States     |       | $                       | 261,392    |   | $ | 247,414 |   |
| Canada            |       | 49,245                  |       | 49,992 |   |
| Europe            |       | 48,383                  |       | 44,300 |   |
| Other             |       | 21,941                  |       | 30,089 |   |
| Total net revenue |       | $                       | 380,961    |   | $ | 371,795 |   |

 

We did not maintain significant long-lived assetsoutside of the United States at March 31, 2010 and December 31, 2009.

 

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**11.****           ****Earningsper Share**

 

***The following table illustrates the calculation of our basicearnings per common share outstanding:***

 
| ** **                                                      | ** ** | **Three  Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **March 31,**      | ** ** |
| ** **                                                      | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Net income                                                      |       | $                       | 45,339     |   | $ | 33,435 |   |
| Less:                                                           |       |                    |       |   |   |
| Series A  convertible preferred stock undeclared dividends |       | —                  |       | (3,122 | ) |
| Series B  convertible preferred stock undeclared dividends |       | —                  |       | (696 | ) |
| Net income available to  common stockholders                    |       | $                       | 45,339     |   | $ | 29,617 |   |
|                                                            |       |                    |       |   |   |
| Weighted average common  shares outstanding                     |       | 121,638,867             |       | 1,180,584 |   |
|                                                            |       |                    |       |   |   |
| Basic net income per common  share:                             |       | $                       | 0.37       |   | $ | 25.09 |   |

 

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

 
| ** **                                         | ** ** | **Three  Months Ended** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **March 31,**      | ** ** |
| ** **                                         | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Net income                                         |       | $                       | 45,339     |   | $ | 33,435 |   |
|                                               |       |                    |       |   |   |
| Weighted average common  shares outstanding        |       | 121,638,867             |       | 1,180,584 |   |
| Plus  incremental shares from assumed conversions: |       |                    |       |   |   |
| Series A  preferred stock                     |       | —                  |       | 72,000,000 |   |
| Series B  preferred stock                     |       | —                  |       | 13,846,320 |   |
| Stock  options and restricted shares               |       | 6,544,322               |       | 6,330,664 |   |
| Dilutive potential common  shares                  |       | 128,183,189             |       | 93,357,568 |   |
|                                               |       |                    |       |   |   |
| Diluted net income per  common share               |       | $                       | 0.35       |   | $ | 0.36 |   |

 

Options topurchase 603,773 common shares at a weighted average exercise price of $19.03and options to purchase 2,017,392 common shares at a weighted average exerciseprice of $21.25 were outstanding but excluded from the computation of dilutedearnings per share because their exercise prices and assumed tax benefits uponexercise were greater than the average market price for the common sharesduring the three months ended March 31, 2010 and 2009, respectively, soincluding these options would be anti-dilutive.

 

**12.****           ****FairValue of Financial Instruments**

 

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

 

At March 31,2010 and December 31, 2009, the estimated fair value of our 7.75% Noteswas $600.8 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 March 31, 2010 and December 31,2009.  At March 31, 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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**13.****           ****CondensedConsolidating Financial Information**

 

In October 2009, we completed the issuance of our7.75% Notes.  The 7.75% Notes areguaranteed on a senior unsecured basis by our existing and future domesticsubsidiaries.  The accompanying condensedconsolidating financial information has been prepared and presented pursuant toSEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors andIssuers of Guaranteed Securities Registered or Being Registered.”  Each of the subsidiary guarantors are 100%owned, directly or indirectly, by us, and all guarantees are full andunconditional and joint and several.  Ourinvestments in our consolidated subsidiaries are presented under the equitymethod of accounting.  No significantadministrative costs are borne by the Parent. Our unaudited condensed consolidating financial statements are presentedbelow:

 

**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Balance Sheets**

**March 31, 2010**

 
| ** **                                                 | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **Assets:**                                                |       |        |       |             |       |              |       |              |       |             |       |
| Current assets:                                            |       |        |       |             |       |              |       |              |       |             |       |
| Cash                                                       |       | $           | —     |             | $          | 71,815            |       | $                 | 8,450      |             | $          | — |   | $ | 80,265 |   |
| Accounts  receivable, net                                  |       | —      |       | 263,873          |       | 36,337            |       | (132,402          | )          | 167,808          |       |
| Inventories                                                |       | —      |       | 610,963          |       | 36,207            |       | —            |       | 647,170          |       |
| Other                                                      |       | —      |       | 110,658          |       | 586               |       | —            |       | 111,244          |       |
| Total current assets                                       |       | —      |       | 1,057,309        |       | 81,580            |       | (132,402          | )          | 1,006,487        |       |
| Property, plant, and  equipment, net                       |       | —      |       | 275,417          |       | 1,311             |       | —            |       | 276,728          |       |
| Intangible assets, net                                     |       | —      |       | 10,880           |       | —            |       | —            |       | 10,880           |       |
| Goodwill                                                   |       | —      |       | 172,860          |       | —            |       | —            |       | 172,860          |       |
| Investment in Subsidiaries                                 |       | 706,054     |       | (28,168          | )          | —            |       | (677,886          | )          | —           |       |
| Advances  and notes between Parent and Subsidiaries        |       | 1,354,940   |       | 816,683          |       | —            |       | (2,171,623        | )          | —           |       |
| Other                                                      |       | —      |       | 23,052           |       | 705               |       | —            |       | 23,757           |       |
| Total assets                                               |       | $           | 2,060,994  |             | $          | 2,328,033         |       | $                 | 83,596     |             | $          | (2,981,911 | ) | $ | 1,490,712 |   |
| ** **                                                 |       |        |       |             |       |              |       |              |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit):**   |       |        |       |             |       |              |       |              |       |             |       |
| Current liabilities:                                       |       |        |       |             |       |              |       |              |       |             |       |
| Accounts  payable                                          |       | $           | —     |             | $          | 94,938            |       | $                 | 96,124     |             | $          | (132,402 | ) | $ | 58,660 |   |
| Accrued  expenses and other liabilities                    |       | 20,667      |       | 148,528          |       | 4,952             |       | —            |       | 174,147          |       |
| Current  portion of capital lease obligations              |       | —      |       | 764              |       | —            |       | —            |       | 764              |       |
| Total current liabilities                                  |       | 20,667      |       | 244,230          |       | 101,076           |       | (132,402          | )          | 233,571          |       |
| Long-term debt and capital  lease obligations              |       | 596,190     |       | 9,021            |       | —            |       | —            |       | 605,211          |       |
| Advances  and notes between Parent and Subsidiaries        |       | 807,107     |       | 1,354,940        |       | 9,576             |       | (2,171,623        | )          | —           |       |
| Other                                                      |       | —      |       | 13,788           |       | 1,112             |       | —            |       | 14,900           |       |
| Total liabilities                                          |       | 1,423,964   |       | 1,621,979        |       | 111,764           |       | (2,304,025        | )          | 853,682          |       |
| Stockholders’ equity  (deficit)                       |       | 637,030     |       | 706,054          |       | (28,168           | )          | (677,886          | )          | 637,030          |       |
| Total  liabilities and stockholders’ equity (deficit) |       | $           | 2,060,994  |             | $          | 2,328,033         |       | $                 | 83,596     |             | $          | (2,981,911 | ) | $ | 1,490,712 |   |

 

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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, net                                     |       | —      |       | 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 March 31, 2010**

 
| ** **                                  | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                  | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| Net revenue                                 |       | $           | —     |             | $          | 340,585           |       | $                 | 40,376     |             | $          | — |   | $ | 380,961 |   |
| Cost of goods sold                          |       | —      |       | 185,750          |       | 31,601            |       | —            |       | 217,351          |       |
| Gross profit                                |       | —      |       | 154,835          |       | 8,775             |       | —            |       | 163,610          |       |
| Operating expenses                          |       | —      |       | 75,420           |       | 8,471             |       | —            |       | 83,891           |       |
| Income from operations                      |       | —      |       | 79,415           |       | 304               |       | —            |       | 79,719           |       |
| Equity in earnings (losses) of Subsidiaries |       | 45,339      |       | 306              |       | —            |       | (45,645           | )          | —           |       |
| Other non-operating (expense) income, net   |       | —      |       | (11,118          | )          | 2                 |       | —            |       | (11,116          | )          |
| Income (loss) before income taxes           |       | 45,339      |       | 68,603           |       | 306               |       | (45,645           | )          | 68,603           |       |
| Provision for income taxes                  |       | —      |       | (23,264          | )          | —            |       | —            |       | (23,264          | )          |
| Net income (loss)                           |       | $           | 45,339     |             | $          | 45,339            |       | $                 | 306        |             | $          | (45,645 | ) | $ | 45,339 |   |

 

**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Three Months Ended March 31, 2009**

 
| ** **                                  | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                  | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| Net revenue                                 |       | $           | —     |             | $          | 338,499           |       | $                 | 33,296     |             | $          | — |   | $ | 371,795 |   |
| Cost of goods sold                          |       | —      |       | 182,839          |       | 26,362            |       | —            |       | 209,201          |       |
| Gross profit                                |       | —      |       | 155,660          |       | 6,934             |       | —            |       | 162,594          |       |
| Operating expenses                          |       | 1,859       |       | 79,472           |       | 7,632             |       | —            |       | 88,963           |       |
| Income (loss) from operations               |       | (1,859      | )          | 76,188           |       | (698              | )          | —            |       | 73,631           |       |
| Equity in earnings (losses) of Subsidiaries |       | 34,643      |       | (691             | )          | —            |       | (33,952           | )          | —           |       |
| Other non-operating (expense) income, net   |       | —      |       | (21,263          | )          | 7                 |       | —            |       | (21,256          | )          |
| Income (loss) before income taxes           |       | 32,784      |       | 54,234           |       | (691              | )          | (33,952           | )          | 52,375           |       |
| Provision (benefit) for income taxes        |       | 651         |       | (19,591          | )          | —            |       | —            |       | (18,940          | )          |
| Net income (loss)                           |       | $           | 33,435     |             | $          | 34,643            |       | $                 | (691       | )                | $          | (33,952 | ) | $ | 33,435 |   |

 

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**Talecris Biotherapeutics HoldingsCorp.**

**Condensed ConsolidatingStatements of Cash Flows**

**Three Months Ended March 31, 2010**

 
| ** **                                                                                                | ** ** | **Parent/  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|------------------|------------|
| **Cash flows  from operating activities:**                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| Net income (loss)                                                                                         |       | $                   | 45,339     |                        | $          | 45,339                          |       | $                              | 306        |             | $          | (45,645 | ) | $ | 45,339 |   |
| Undistributed equity in  (earnings) losses of Subsidiaries                                                |       | (45,339             | )          | (306                        | )          | —                          |       | 45,645                         |       | —           |       |
| Adjustments to reconcile  net income (loss) to net cash flows provided by (used in) operating  activities |       | 28,283              |       | (68,783                     | )          | 6,087                           |       | 19,744                         |       | (14,669          | )          |
| **Net cash  provided by (used in) operating activities**                                                  |       | 28,283              |       | (23,750                     | )          | 6,393                           |       | 19,744                         |       | 30,670           |       |
| ** **                                                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| **Cash flows  from investing activities:**                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| Purchases of property,  plant, and equipment                                                              |       | —              |       | (17,368                     | )          | (322                            | )          | —                         |       | (17,690          | )          |
| Business acquisitions, net  of cash acquired                                                              |       | —              |       | —                      |       | —                          |       | —                         |       | —           |       |
| Net advances and notes  between Parent and Subsidiaries                                                   |       | (30,893             | )          | —                      |       | —                          |       | 30,893                         |       | —           |       |
| Other                                                                                                     |       | —              |       | 4,230                       |       | (4,056                          | )          | —                         |       | 174              |       |
| **Net cash  (used in) provided by investing activities**                                                  |       | (30,893             | )          | (13,138                     | )          | (4,378                          | )          | 30,893                         |       | (17,516          | )          |
| ** **                                                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| **Cash flows  from financing activities:**                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| Net repayments of  borrowings                                                                             |       | —              |       | —                      |       | —                          |       | —                         |       | —           |       |
| Net advances and notes  between Parent and Subsidiaries                                                   |       | —              |       | 50,637                      |       | —                          |       | (50,637                        | )          | —           |       |
| Other                                                                                                     |       | 2,610               |       | (254                        | )          | —                          |       | —                         |       | 2,356            |       |
| **Net cash  provided by (used in) financing activities**                                                  |       | 2,610               |       | 50,383                      |       | —                          |       | (50,637                        | )          | 2,356            |       |
| Effect of exchange rate  changes on cash and cash equivalents                                             |       | —              |       | —                      |       | (484                            | )          | —                         |       | (484             | )          |
| Net increase in cash and  cash equivalents                                                                |       | —              |       | 13,495                      |       | 1,531                           |       | —                         |       | 15,026           |       |
| Cash and cash equivalents  at beginning of period                                                         |       | —              |       | 58,320                      |       | 6,919                           |       | —                         |       | 65,239           |       |
| Cash and cash equivalents  at end of period                                                               |       | $                   | —     |                        | $          | 71,815                          |       | $                              | 8,450      |             | $          | — |   | $ | 80,265 |   |

 

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**Talecris Biotherapeutics HoldingsCorp.**

**Condensed ConsolidatingStatements of Cash Flows**

**Three Months Ended March 31, 2009**

 
| ** **                                                                                                | ** ** | **Parent/  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|------------------|------------|
| **Cash flows  from operating activities:**                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| Net income (loss)                                                                                         |       | $                   | 33,435     |                        | $          | 34,643                          |       | $                              | (691       | )                | $          | (33,952 | ) | $ | 33,435 |   |
| Undistributed equity in  (earnings) losses of Subsidiaries                                                |       | (34,643             | )          | 691                         |       | —                          |       | 33,952                         |       | —           |       |
| Adjustments to reconcile  net income (loss) to net cash flows provided by (used in) operating  activities |       | 10,627              |       | (14,771                     | )          | (8,000                          | )          | 13,501                         |       | 1,357            |       |
| **Net cash  provided by (used in) operating****activities**                                               |       | 9,419               |       | 20,563                      |       | (8,691                          | )          | 13,501                         |       | 34,792           |       |
|                                                                                                      |       |                |       |                        |       |                            |       |                           |       |             |       |
| **Cash flows  from investing activities:**                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| Purchases of property,  plant, and equipment                                                              |       | —              |       | (8,073                      | )          | (58                             | )          | —                         |       | (8,131           | )          |
| Business acquisitions, net  of cash acquired                                                              |       | —              |       | (7,512                      | )          | —                          |       | —                         |       | (7,512           | )          |
| Net advances and notes  between Parent and Subsidiaries                                                   |       | (6,954              | )          | —                      |       | —                          |       | 6,954                          |       | —           |       |
| Other                                                                                                     |       | —              |       | (8,829                      | )          | 8,832                           |       | —                         |       | 3                |       |
| **Net cash  (used in) provided by investing activities**                                                  |       | (6,954              | )          | (24,414                     | )          | 8,774                           |       | 6,954                          |       | (15,640          | )          |
| ** **                                                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| **Cash flows  from financing activities:**                                                                |       |                |       |                        |       |                            |       |                           |       |             |       |
| Net repayments of  borrowings                                                                             |       | —              |       | (20,630                     | )          | —                          |       | —                         |       | (20,630          | )          |
| Net advances and notes  between Parent and Subsidiaries                                                   |       | —              |       | 20,455                      |       | —                          |       | (20,455                        | )          | —           |       |
| Other                                                                                                     |       | (2,465              | )          | (113                        | )          | —                          |       | —                         |       | (2,578           | )          |
| **Net cash  provided by (used in) financing activities**                                                  |       | (2,465              | )          | (288                        | )          | —                          |       | (20,455                        | )          | (23,208          | )          |
| Effect of exchange rate  changes on cash and cash equivalents                                             |       | —              |       | —                      |       | (324                            | )          | —                         |       | (324             | )          |
| Net increase in cash and  cash equivalents                                                                |       | —              |       | (4,139                      | )          | (241                            | )          | —                         |       | (4,380           | )          |
| Cash and cash equivalents  at beginning of period                                                         |       | —              |       | 10,727                      |       | 6,252                           |       | —                         |       | 16,979           |       |
| Cash and cash equivalents  at end of period                                                               |       | $                   | —     |                        | $          | 6,588                           |       | $                              | 6,011      |             | $          | — |   | $ | 12,599 |   |

 

**14.****           ****SubsequentEvents**

 

We evaluated all events and transactions that occurred after March 31,2010 through the date that we filed these unaudited interim consolidatedfinancial statements with the SEC.

 

***EquityTransactions***

 

On April 1, 2010, 14,464 shares of our restricted stock vested and2,819,887 stock options vested. On April 1, 2010, we granted 50,048 stockoptions with an exercise price of $19.87 per share and 24,152 RSU’s to membersof our board of directors, pursuant to the director compensation program.

 

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q (Quarterly Report) containsforward-looking statements that involve substantial risks and uncertainties.All statements, other than statements of historical facts, included in thisQuarterly Report, regarding our strategy, future operations, future financial position,future revenue, projected costs, prospects, plans and objectives of managementare forward-looking statements. Forward-looking statements may be identified bythe use of forward-looking terms such as “may,” “will,” “would,” “expects,” “intends,”“believes,” “anticipates,” “plans,” “predicts,” “estimates,” “projects,” “targets,”“forecasts,” “seeks,” or the negative of such terms or other variations on 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 ofcompetitive products and pricing;

 

·                  recently enactedU.S. healthcare legislation, regulatory action or legal proceedings affecting,among other things, the U.S. healthcare system, pharmaceutical pricing andreimbursement, including Medicaid, Medicare and the Public Health ServiceProgram;

 

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

 

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

 

·                  our ability toidentify growth opportunities for existing products and our ability to identifyand develop new product candidates through our research and developmentactivities;

 

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

 

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

 

·                  our and oursuppliers’ ability to adhere to cGMP;

 

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

 

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

 

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

 

·                  availability andcost of financing opportunities;

 

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

 

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

 

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

 

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

 

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

 

No assurances can be provided as to any future financial results. Ourforward-looking statements do not reflect the potential impact of any futureacquisitions, mergers, dispositions, joint ventures, or investments we maymake. Unless legally required, we do

 

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not undertake toupdate or revise any forward-looking statements, even if events make it clearthat any projected results, expressed or 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 and analysis contains forward-looking statementsthat involve risks and uncertainties. You are encouraged to read the following discussion and analysis of ourfinancial condition and results of operations together with our unauditedinterim consolidated financial statements and related footnotes includedelsewhere in this Quarterly Report.  Inaddition, you are encouraged to refer to a discussion of risk factors includedelsewhere in this Quarterly Report and in our 2009 Form 10-K that couldcause actual results to differ materially from those described or implied bythe forward-looking statements contained in the following discussion andanalysis. You are also encouraged to refer to our 2009 Form 10-K, whichincludes additional information regarding our business and industry.  See “Special Note Regarding Forward-LookingStatements” included elsewhere in this Quarterly Report.

 

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

 

A seven-for-oneshare dividend on our common stock was paid on September 10, 2009.  All share and per-share amounts have beenretroactively adjusted to reflect the share dividend.

 

**BUSINESSOVERVIEW**

 

We are a biopharmaceutical company that researches, develops,manufactures, markets, and sells protein-based therapies that extend andenhance the lives of individuals who suffer from chronic and acute, oftenlife-threatening, conditions, such as primary immune deficiencies, chronicinflammatory demyelinating polyneuropathy (CIDP), alpha-1 antitrypsindeficiency, bleeding disorders, infectious diseases, and severe trauma.  Our primary products have orphan drugdesignation to serve populations with rare, chronic diseases.  Our products are derived from human plasma,the liquid component of blood, which is sourced from our plasma collectioncenters or purchased from third parties, located in the United States.  Plasma contains many therapeutic proteins,which we extract through the process of fractionation at our Clayton, NorthCarolina and Melville, New York facilities. The fractionated intermediates are then purified, formulated into finalbulk, and aseptically filled into final containers for distribution.  We also sell the fractionated intermediateproducts.

 

The majority of our sales are concentrated in the therapeutic areas ofImmunology/Neurology and Pulmonology. Our largest product, representing 55.9% of our net revenue for the threemonths ended March 31, 2010, Gamunex, Immune Globulin Intravenous (Human),10% Caprylate/Chromatography Purified (Gamunex or Gamunex IGIV), provides atreatment for primary immune deficiency and autoimmune diseases, as well asCIDP.  Our second largest product,representing 21.0% of our net revenue for the three months ended March 31,2010, Prolastin Alpha-1 Proteinase Inhibitor (Human) (Prolastin or ProlastinA1PI), provides a treatment for alpha-1 antitrypsin deficiency-relatedemphysema.  In March 2010, welaunched Prolastin-C A1PI, our next generation A1PI product, in the UnitedStates.

 

We believe worldwide unit volume demand for plasma-derived products,including IGIV, will grow over the long-term at a compound annual rate ofapproximately 6% to 8%.  For the threemonths ended March 31, 2010, we believe that U.S. and international unitvolume demand grew below this rate.  Evenwith the lower current demand growth, we believe that we are well positioned inthe IGIV market given the features and benefits of Gamunex including that it isa sugar-free, 10% liquid that is produced with a patented caprylateprocess.  As a result of eliminating ourplasma supply constraints, the attributes of Gamunex and its approval for CIDPhave resulted in significant increases in our share of sales.  Despite the current IGIV market with reduceddemand growth, we anticipate that we will reach our fractionation capacity inthe near term depending upon the demand for our products, the availability ofsource plasma and the impact of variability in yield, among other factors.  We plan to utilize available fractionationcapacity in the near term, which will result in increased inventory levels inorder to maintain pace with projected growth in product demand.

 

Our integrated plasma collection center platform, Talecris PlasmaResources, Inc. (TPR), consisted of 69 operating centers, of which 64 werelicensed and 5 were unlicensed as of March 31, 2010 and providedapproximately 69% of our plasma during the 2010 period.  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 fractionationto meet anticipated demand.  We havenotified our largest third party plasma supplier, CSL Plasma, Inc., asubsidiary of CSL Limited (CSL), that we will not elect to take optionalvolumes under the contract in 2011.  Tomeet our plasma requirements, we may increase donor fees, increase marketingexpense, and expand plasma center hours of operation, among other initiatives, whichmay result in an increase to our cost per liter of plasma.

 

We have substantially reduced 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 gross margin.  Our cost of goods sold reflects $2.0 millionand $14.4 million for the three months ended March 31, 2010 and 2009,respectively, related to excess period costs associated with TPR.  We expect that unabsorbed TPR infrastructureand start-up

 

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costs willcontinue to decline in 2010 as compared to prior periods.  This benefit will be partially offset by highercost of goods sold due to yield variability, less efficient utilization of eachincremental liter of plasma fractionated as we increase Gamunex production, andnon-capitalizable costs associated with our capital projects, particularly theconstruction of our new fractionation facility.

 

Although in the near term, we plan to continue to increase the volumeof liters fractionated and the production of our plasma-derived therapies,particularly Gamunex IGIV, we will continue to encounter manufacturing capacityconstraints for plasma-derived Factor VIII and albumin.  Consequently, as we increase production ofGamunex IGIV, we expect to be less efficient in the utilization of eachincremental liter fractionated, which will negatively impact gross margin.  In response to our capacity constraints, wehave embarked on a substantial capital plan which we anticipate to be in therange of $750 million to $800 million on a cumulative basis over the next fiveyears.  The successful execution of thiscapital plan, which is discussed further in the section titled “Management’sDiscussion 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.

 

**2010FIRST QUARTER HIGHLIGHTS**

 

Our 2010 firstquarter financial and business highlights are included below.

 

***FinancialHighlights***

 

·                  Total netrevenue increased $9.2 million to $381.0 million for the three months ended March 31,2010 as compared to $371.8 million for the three months ended March 31,2009.

 

·                  Gross margin was42.9% and 43.7% for the three months ended March 31, 2010 and 2009,respectively.

 

·                  Operating marginimproved 112 basis points to 20.9% for the three months ended March 31,2010 as compared to 19.8% for the three months ended March 31, 2009.

 

·                  Net incomeimproved to $45.3 million, an increase of 35.6%, for the three months ended March 31,2010 as compared to $33.4 million for the three months ended March 31,2009.

 

·                  Diluted earningsper common share were $0.35 and $0.36 for the three months ended March 31,2010 and 2009, respectively. On a pro forma basis, our diluted earnings percommon share were $0.28 for the three months ended March 31, 2009.  Additional information regarding pro formadiluted earnings per common share is included in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Matters AffectingComparability.”

 

·                  Operating cashflows were $30.7 million and $34.8 million for the three months ended March 31,2010 and 2009, respectively.  Capitalexpenditures were $17.7 million and $8.1 million for the three months ended March 31,2010 and 2009, respectively.

 

***BusinessHighlights***

 

·****                 ********In March 2010, webegan construction of our new fractionation facility located in Clayton, NorthCarolina.  The new fractionationfacility, which is expected to be operational in 2015, will have the capacityto fractionate 6.0 million liters of human plasma annually.****

 

·****                 ********In March 2010, welaunched Prolastin-C A1PI, our next generation A1PI product, in the UnitedStates.  Through March 31, 2010, wehave successfully converted approximately 44% of our U.S. Prolastin patients toProlastin-C A1PI.  We anticipate that theconversion of all remaining U.S. Prolastin patients to Prolastin-C A1PI will becompleted by the end of the 2010 second quarter.****

 

·****                 ********During the firstquarter of 2010, we completed our Phase I clinical trial related to ourinvestigation of Direct Acting Thrombolytic (DAT) Plasmin to assess its abilityto treat aPAO, a condition in which arterial blood flow to the extremities,usually the legs, is blocked by a clot. We are currently finalizing the design of our Phase II clinical trial,which we plan to initiate in the second half of 2010 in several countriesoutside of the U.S.  During the firstquarter of 2010, we also received approval to proceed with the proof of concepttrial for plasma-derived Plasmin to treat ischemic stroke in six countriesoutside of the U.S.****

 

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**HEALTHCAREREFORM**

 

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

 

Although manyprovisions of the new legislation do not take effect immediately, severalprovisions became effective in the first quarter of 2010. These include (1) anincrease in the minimum Medicaid rebate to states participating in the Medicaidprogram from 15.1% to 23.1% of the Average Manufacturer Price (AMP) on ourbranded prescription drugs, with a limitation of this increase on clottingfactors to 17.1% of AMP; (2) the extension of the Medicaid rebate toManaged Care Organizations that dispense drugs to Medicaid beneficiaries; and (3) theexpansion of the 340(B) Public Health Services (PHS) drug pricing program,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.

 

Beginning in 2011,the new law requires that drug manufacturers provide a 50% discount to Medicarebeneficiaries whose prescription drug costs cause them to be subject to theMedicare Part D coverage gap (i.e. the “donut hole”). Also, beginning in2011, we will be assessed our share of a new fee assessed on all brandedprescription drug manufacturers and importers. This fee will be calculatedbased upon each organization’s percentage share of total branded prescriptiondrug sales to U.S. government programs (such as Medicare, Medicaid and VAand PHS discount programs) made during the previous year. The aggregatedindustry wide fee is expected to range from $2.5 billion to $4.1 billionannually between 2011 and 2018 and remain at $2.8 billion in 2019 andsubsequent years.

 

Beginning in 2012,the new law may require us to issue Internal Revenue Service Form 1099’sto plasma donors.  The cost ofimplementing this requirement, as well as its potential impact on the behaviorof donors, is unknown at this time.

 

Presently,uncertainty exists as many of the specific determinations of the healthcarereform legislation will be developed as regulatory bodies interpret the law andenact new regulations.  For example,determinations as to how the Medicare Part D coverage gap will operate andhow the annual fee on branded prescription drugs will be calculated andallocated remain to be clarified.  Asnoted above, these programs will not be effective until 2011.

 

**CUSTOMER CONCENTRATION**

 

Our accountsreceivable, net, includes amounts due from pharmaceutical wholesalers anddistributors, buying groups, hospitals, physicians’ offices, patients, andothers.  The following table summarizesour concentrations with customers that represented more than 10% of ouraccounts receivable, net:

 
| ** ** | ** ** | **March 31,** | ** ** | **December  31,** | ** ** |
|------------|------------|--------------------|------------|-------------------|------------|
| ** ** | ** ** | **2010**           | ** ** | **2009**          | ** ** |
| Customer A |       | 12.8               | %          | 14.6              | %          |
| Customer B |       | 10.5               | %          | <10            | %          |
| Customer C |       | 10.4               | %          | <10            | %          |

 

The followingtable summarizes our concentrations with customers that represented more than10% of our total net revenue:

 
| ** ** | ** ** | **Three  Months Ended** | ** ** |
|------------|------------|-------------------------|------------|
| ** ** | ** ** | **March 31,**      | ** ** |
| ** ** | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Customer A |       | 15.7                    | %          | 14.0 | % |
| Customer B |       | 12.1                    | %          | 12.8 | % |

 

In the event thatany of these customers were to suffer an adverse downturn in their business ora downturn in their supply needs, our business could be materially adverselyaffected.

 

**BASIS OF PRESENTATION**

 

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

 

The comparabilityof our financial results is impacted by significant events and transactionsduring the periods presented as described in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations——Matters Affecting

 

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Comparability.”

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

The preparation ofconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America (U.S. GAAP) requires us tomake estimates and judgments in certain circumstances that affect the reportedamounts of assets, liabilities, revenue, expenses, and the related disclosuresof contingent assets and liabilities.  Adetailed description of our significant accounting policies is included in thefootnotes to our audited consolidated financial statements included in our 2009Form 10-K.

 

There have been nosignificant changes in our application of our critical accounting policies andestimates during the three months ended March 31, 2010 as compared to theprior year.  We periodically review ourcritical accounting policies and estimates with the audit committee of ourboard of directors.

 

***Gross-to-NetRevenue Adjustments***

 

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

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **March 31,**          | ** ** |
| ** **               | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Gross  product revenue   |       | $                      | 399,501    |   | $ | 383,199 |   |
| Chargebacks              |       | (6,637                 | )          | (4,456 | ) |
| Cash  discounts          |       | (4,921                 | )          | (4,579 | ) |
| Rebates  and other       |       | (12,958                | )          | (9,300 | ) |
| SG&A  reimbursements |       | (370                   | )          | (1 | ) |
| Product  net revenue     |       | $                      | 374,615    |   | $ | 364,863 |   |

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **March 31,**          | ** ** |
| ** **               | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Gross  product revenue   |       | 100.0                  | %          | 100.0 | % |
| Chargebacks              |       | (1.7                   | )%         | (1.2 | )% |
| Cash  discounts          |       | (1.2                   | )%         | (1.2 | )% |
| Rebates  and other       |       | (3.2                   | )%         | (2.4 | )% |
| SG&A  reimbursements |       | (0.1                   | )%         | — |   |
| Product  net revenue     |       | 93.8                   | %          | 95.2 | % |

 

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

 
| ** **                    | ** ** | ** **      | ** ** | **Cash**      | ** ** | **Rebates and** | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                    | ** ** | **Chargebacks** | ** ** | **Discounts** | ** ** | **Other**       | ** ** | **Total**  | ** ** |
| Balance  at December 31, 2009 |       | $               | 4,262      |          | $          | 1,274           |       | $          | 26,427     |   | $ | 31,963 |   |
| Provision                     |       | 6,637           |       | 4,921         |       | 12,958          |       | 24,516     |       |
| Credits  issued               |       | (6,855          | )          | (4,543        | )          | (8,840          | )          | (20,238    | )          |
| Balance  at March 31, 2010    |       | $               | 4,044      |          | $          | 1,652           |       | $          | 30,545     |   | $ | 36,241 |   |

 

The increase in our provision for rebates and other during the threemonths ended March 31, 2010 as compared to the prior year period resultedprimarily from the recently enacted healthcare reform legislation, whichincreased the size of the Medicaid rebates paid by drug manufacturers from15.1% to 23.1% of the AMP with a limitation of this increase on clottingfactors to 17.1% of the AMP, as well as higher Medicaid utilization and higherGPO administrative fees.  The increase inthe provision for chargebacks during the three months ended March 31, 2010as compared to the prior year period was largely due to increased sales relatedto government contracts.

 

**MATTERS AFFECTING COMPARABILITY**

 

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

 

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***FinancialImpact of IPO and Refinancing Transactions***

 

As discussed in our 2009 Form 10-K, we completed our IPO andrefinancing transactions during the fourth quarter of 2009, which has resultedin lower average borrowings during the three months ended March 31, 2010as compared to the three months ended March 31, 2009, and correspondinglylower interest expense during the 2010 period. For the three months ended March 31, 2010 and 2009, our interestexpense was $12.1 million and $20.7 million, respectively.

 

***Comparabilityof Outstanding Common Shares and Pro Forma Diluted Earnings Per Common Share***

 

As discussed in our 2009 Form 10-K, we completed our IPO andrefinancing transactions during the fourth quarter of 2009.  Our IPO consisted of 56,000,000 shares of ourcommon stock of which 28,947,368 shares were newly issued and sold by us and27,052,632 shares were sold by the selling stockholder, Talecris Holdings,LLC.  We used the net primary proceeds tous of $519.7 million to repay amounts outstanding under our then existing Firstand Second Lien Term Loans.  Inconnection 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 common share.  The application of the net primary proceedsto us from our IPO to repay our then existing indebtedness has resulted in asignificant reduction in interest expense during the three months ended March 31,2010 as compared to the three months ended March 31, 2009.

 

We believe that the comparability of our financial results for theperiods presented is enhanced by the following pro forma presentation of ourdiluted earnings per common share.  Inthe table below, the pro forma diluted earnings per common share computationfor the three months ended March 31, 2009 reflects an adjustment to netincome for reduced interest expense as if the net primary proceeds to us fromour IPO of $519.7 million had been applied to repay our debt at the beginningof 2009, net of interest rate differences from our 7.75% Notes issuance. Thepro forma adjustment to the denominator reflects the impacts for the issuanceof common shares to convert preferred stock, settle accrued dividends on thepreferred stock, and complete the IPO as if these events occurred at thebeginning of 2009.

 
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2010**                         | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                        | ** ** | **Actual**                       | ** ** | **Actual** | ** ** | **Pro forma** | ** ** |
|                                              |       |                             |       |   |   |   |   |
| Net  income                                       |       | $                                | 45,339     |   | $ | 33,435 |   | $ | 33,435 |   |
| Interest  expense reduction due to debt repayment |       | —                           |       | — |   | 1,923 |   |
| Numerator                                         |       | $                                | 45,339     |   | $ | 33,435 |   | $ | 35,358 |   |
|                                              |       |                             |       |   |   |   |   |
| Weighted  average common shares outstanding       |       | 121,638,867                      |       | 1,180,584 |   | 1,180,584 |   |
| Adjustments:                                      |       |                             |       |   |   |   |   |
| Stock  options and restricted shares              |       | 6,544,322                        |       | 6,330,664 |   | 6,330,664 |   |
| 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                 |       | 128,183,189                      |       | 93,357,568 |   | 124,686,484 |   |
|                                              |       |                             |       |   |   |   |   |
| Diluted  net income per common share              |       | $                                | 0.35       |   | $ | 0.36 |   | $ | 0.28 |   |

 

***DefinitiveMerger Agreement with CSL***

 

We entered into a definitive merger agreement with CSL on August 12,2008, which was subject to the receipt of certain regulatory approvals as wellas 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 $3.7 million, and legal costs associated with theregulatory review process of $5.7 million during the three months ended March 31,2009. No amounts were incurred during 2010. All retention amounts were paid during 2009.

 

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

 

Our cost of goods sold includes $2.0 million and $14.4million for the three months ended March 31, 2010 and 2009, respectively,related to unabsorbed TPR infrastructure and start-up costs associated with thedevelopment of our plasma collection center platform.   The reduction in unabsorbed TPRinfrastructure and start-up costs resulted primarily from the maturation of ourplasma collection center platform.  Weanticipate that we will continue to experience declining levels of unabsorbedTPR infrastructure and start-up costs as TPR further matures.

 

***Share-BasedCompensation Awards***

*** ***

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

*** ***

***Share-based compensation expense for the three months endedMarch 31, 2010 and 2009 was as follows:***

*** ***
| ** **          | ** ** | **Three  Months Ended  March 31,** | ** ** |
|---------------------|------------|-----------------------------------------|------------|
| ** **          | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| SG&A            |       | $                                       | 5,680      |   | $ | 8,973 |   |
| R&D             |       | 538                                     |       | 667 |   |
| Cost  of goods sold |       | 1,009                                   |       | 1,422 |   |
| Total  expense      |       | $                                       | 7,227      |   | $ | 11,062 |   |

*** ***

The following table summarizes the remainingunrecognized compensation cost related to our long-term equity incentive awardsas of March 31, 2010 and the weighted-average period over which thenon-cash compensation cost is expected to be recognized:

 
| ** **                | ** ** | ** **       | ** ** | **Weighted-** | ** ** |
|---------------------------|------------|------------------|------------|---------------|------------|
| ** **                | ** ** | **Unrecognized** | ** ** | **Average**   | ** ** |
| ** **                | ** ** | **Compensation** | ** ** | **Period**    | ** ** |
| ** **                | ** ** | **Cost**         | ** ** | **(Years)**   | ** ** |
| Stock  options            |       | $                | 4,866      |          | 3.00       |   |
| Restricted  share awards  |       | 3,965            |       | 1.00          |       |
| RSU’s                |       | 7,559            |       | 3.00          |       |
| Performance  share awards |       | 4,999            |       | 3.00          |       |
| Total                     |       | $                | 21,389     |          |       |   |

 

In addition to theunrecognized compensation cost included in the table above, at March 31,2010, $2.6 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.

 

We expect that ourshare-based compensation expense will decline in subsequent periods as theremaining grants under our 2005 Stock Option and Incentive Plan vested onApril 1, 2010, the remaining awards under our Special Recognition Planvested in March 2010, and remaining awards under our 2006 Restricted StockPlan primarily vested in March 2010.

 

**RESULTSOF OPERATIONS**

 

The following discussion and analysis containsinformation regarding our results of operations for the three months endedMarch 31, 2010 as compared to the three months ended March 31, 2009:

 

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| ** **                             | ** ** | **Three  Months Ended  March 31,** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2010**                                | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| Net  revenue:                          |       |                                    |       |       |       |   |   |   |   |
| Product                                |       | $                                       | 374,615    |       | $          | 364,863 |   | $ | 9,752 |   | 2.7 | % |
| Other                                  |       | 6,346                                   |       | 6,932      |       | (586 | ) | (8.5 | )% |
| Total                                  |       | 380,961                                 |       | 371,795    |       | 9,166 |   | 2.5 | % |
| Cost  of goods sold                    |       | 217,351                                 |       | 209,201    |       | (8,150 | ) | (3.9 | )% |
| Gross  profit                          |       | 163,610                                 |       | 162,594    |       | 1,016 |   | 0.6 | % |
| Operating  expenses:                   |       |                                    |       |       |       |   |   |   |   |
| SG&A                               |       | 67,620                                  |       | 72,422     |       | 4,802 |   | 6.6 | % |
| R&D                                |       | 16,271                                  |       | 16,541     |       | 270 |   | 1.6 | % |
| Total                                  |       | 83,891                                  |       | 88,963     |       | 5,072 |   | 5.7 | % |
| Income  from operations                |       | 79,719                                  |       | 73,631     |       | 6,088 |   | 8.3 | % |
| Other  non-operating (expense) income: |       |                                    |       |       |       |   |   |   |   |
| Interest  expense, net                 |       | (11,263                                 | )          | (21,345    | )          | 10,082 |   | 47.2 | % |
| Equity  in earnings of affiliate       |       | 147                                     |       | 89         |       | 58 |   | 65.2 | % |
| Total                                  |       | (11,116                                 | )          | (21,256    | )          | 10,140 |   | 47.7 | % |
| Income  before income taxes            |       | 68,603                                  |       | 52,375     |       | 16,228 |   | 31.0 | % |
| Provision  for income taxes            |       | (23,264                                 | )          | (18,940    | )          | (4,324 | ) | (22.8 | )% |
| Net  income                            |       | $                                       | 45,339     |       | $          | 33,435 |   | $ | 11,904 |   | 35.6 | % |
|                                   |       |                                    |       |       |       |   |   |   |   |
| Earnings  per common share:            |       |                                    |       |       |       |   |   |   |   |
| Basic                                  |       | $                                       | 0.37       |       | $          | 25.09 |   | $ | (24.72 | ) | (98.5 | )% |
| Diluted                                |       | $                                       | 0.35       |       | $          | 0.36 |   | $ | (0.01 | ) | (2.8 | )% |
|                                   |       |                                    |       |       |       |   |   |   |   |
| Financial  measures:                   |       |                                    |       |       |       |   |   |   |   |
| Gross  profit margin                   |       | 42.9                                    | %          | 43.7       | %          |   |   |   |   |
| Operating  margin                      |       | 20.9                                    | %          | 19.8       | %          |   |   |   |   |
| Effective  income tax rate             |       | 33.9                                    | %          | 36.2       | %          |   |   |   |   |

 

***Net Revenue***

 

The following table contains information regarding ournet revenue:

 
| ** **                           | ** ** | **Three  Months Ended  March 31,** | ** ** | **Change** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2010**                                | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| Product  net revenue:                |       |                                    |       |       |       |   |   |   |   |
| Gamunex  IGIV                        |       | $                                       | 212,795    |       | $          | 207,306 |   | $ | 5,489 |   | 2.6 | % |
| Prolastin  A1PI                      |       | 80,184                                  |       | 72,559     |       | 7,625 |   | 10.5 | % |
| Fraction  V (Albumin and Plasmanate) |       | 21,217                                  |       | 17,872     |       | 3,345 |   | 18.7 | % |
| Factor  VIII (Koate DVI)             |       | 8,571                                   |       | 10,610     |       | (2,039 | ) | (19.2 | )% |
| Hyperimmunes                         |       | 14,951                                  |       | 15,843     |       | (892 | ) | (5.6 | )% |
| Other                                |       | 36,897                                  |       | 40,673     |       | (3,776 | ) | (9.3 | )% |
| Total  product net revenue           |       | 374,615                                 |       | 364,863    |       | 9,752 |   | 2.7 | % |
| Other  net revenue                   |       | 6,346                                   |       | 6,932      |       | (586 | ) | (8.5 | )% |
| Total  net revenue                   |       | $                                       | 380,961    |       | $          | 371,795 |   | $ | 9,166 |   | 2.5 | % |

 

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| ** **                               | ** ** | **Three  Months Ended  March 31,** | ** ** | **Change** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                               | ** ** | **2010**                                | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| U.S.  product net revenue:               |       |                                    |       |       |       |   |   |   |   |
| Gamunex  IGIV                            |       | $                                       | 161,484    |       | $          | 153,572 |   | $ | 7,912 |   | 5.2 | % |
| Prolastin  A1PI                          |       | 50,845                                  |       | 47,806     |       | 3,039 |   | 6.4 | % |
| Factor  V (Albumin and Plasmanate)       |       | 12,368                                  |       | 10,199     |       | 2,169 |   | 21.3 | % |
| Factor  VIII (Koate DVI)                 |       | 3,799                                   |       | 2,724      |       | 1,075 |   | 39.5 | % |
| Hyperimmunes                             |       | 9,880                                   |       | 11,453     |       | (1,573 | ) | (13.7 | )% |
| Other                                    |       | 17,162                                  |       | 15,341     |       | 1,821 |   | 11.9 | % |
| Total  U.S. product net revenue          |       | $                                       | 255,538    |       | $          | 241,095 |   | $ | 14,443 |   | 6.0 | % |
|                                     |       |                                    |       |       |       |   |   |   |   |
| International  product net revenue:      |       |                                    |       |       |       |   |   |   |   |
| Gamunex  IGIV                            |       | $                                       | 51,311     |       | $          | 53,734 |   | $ | (2,423 | ) | (4.5 | )% |
| Prolastin  A1PI                          |       | 29,339                                  |       | 24,753     |       | 4,586 |   | 18.5 | % |
| Factor  V (Albumin and Plasmanate)       |       | 8,849                                   |       | 7,673      |       | 1,176 |   | 15.3 | % |
| Factor  VIII (Koate DVI)                 |       | 4,772                                   |       | 7,886      |       | (3,114 | ) | (39.5 | )% |
| Hyperimmunes                             |       | 5,071                                   |       | 4,390      |       | 681 |   | 15.5 | % |
| Other                                    |       | 19,735                                  |       | 25,332     |       | (5,597 | ) | (22.1 | )% |
| Total  international product net revenue |       | $                                       | 119,077    |       | $          | 123,768 |   | $ | (4,691 | ) | (3.8 | )% |

 

Our product net revenue was $374.6 million and $364.9million for the three months ended March 31, 2010 and 2009, respectively,representing an increase of $9.8 million, or 2.7%.  The increase consisted of higher volumes of$5.7 million and improved pricing of $4.1 million, including the effects offavorable foreign exchange of $3.0 million.

 

The $5.5 million increase in our Gamunex net revenueconsisted of higher volumes of $8.6 million, partially offset by lower pricingof $3.1 million, net of the effects of favorable foreign exchange of $0.7million.  We experienced higher Gamunexvolumes of $15.5 million in the U.S. and Europe, which were partially offset bylower volumes of $6.9 million in Canada and other international regions.  During the first quarter 2009, we experiencedcompetitive pressures in Europe, which negatively impacted our Gamunex volumesduring the 2009 period.  During 2010, ourEuropean Gamunex net revenue improved as compared to the prior period.  Our Canadian volumes were negatively impactedby lower commercial sales of Gamunex to Canadian Blood Services (CBS) as aresult of their IGIV multi-source strategy. Gamunex volumes in other international regions were negatively impactedby our ongoing internal investigation related to potential FCPA violations,which is discussed elsewhere in this Quarterly Report.  On a period over period comparison, Gamunexpricing was lower by $3.9 million in the U.S., Europe, and other internationalregions, net of $0.7 million of favorable foreign exchange, partially offset byimproved pricing in Canada of $0.8 million.  The lower pricing is primarily attributableto higher Medicaid rebates in the U.S. as a result of the recently enactedhealthcare reform legislation, which increased the size of the Medicaid rebatespaid by drug manufacturers from 15.1% to 23.1% of the AMP, as well as higherMedicaid utilization and GPO administrative fees.  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 $7.6 million increase in our Prolastin net revenueconsisted of improved pricing of $6.4 million, including $2.0 million offavorable foreign exchange, and higher volumes of $1.2 million.  Our U.S. pricing was favorably impacted by aprice increase implemented in the third quarter of 2009, partially offset byhigher Medicaid utilization, and our European pricing was favorably impacted by$1.7 million of foreign exchange. During the three months ended March 31,2009, we experienced a pricing adjustment of $2.3 million in Canada related to apricing dispute.  The increase in volumeswas primarily driven by the U.S. market, partially offset by lower volumes inEurope.  Prolastin volumes are largely afunction of our ability to identify and enroll new patients as compared to thenumber of patients lost due to attrition and competition.  Our ability to grow our European volumes willalso depend on our ability to obtain appropriate reimbursement on a country bycountry basis.

 

Our Fraction V product category consists of albuminand Plasmanate, with albumin representing the majority of sales in thecategory.  The $3.3 million increase inour Fraction V net revenue consisted of higher volumes of $3.5 million,partially offset by lower pricing of $0.2 million.  We experienced higher Fraction V volumes inthe U.S., Canada, Europe, and other international regions as a result of supplyavailability.

 

Our other product net revenue consists primarily ofrevenue related to our contract manufacturing agreements for IGIV and FractionV with the two Canadian blood system operators, CBS and Hema Quebec,intermediate products, Thrombate III (human), and contracted PPF powder.  The $3.8 million decrease in our otherproduct net revenue was driven by lower contract manufacturing of IGIV andFraction V.

 

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As a result of a customer systems issue, we mayexperience a shortfall in hyperimmune revenues in 2010 in the range of $10million to $15 million as compared to 2009. We are also in the process of resolving an advisory banking issuerelated to the administration of Iranian letters of credit.  If we are unable to resolve this issue wewould be limited in our ability to sell an estimated $25 million in product toIran.  We believe that the potentialrevenue shortfall in 2010 from these matters may be partially offset by higherintermediate product sales.

 

***Cost of Goods Sold and Gross Profit***

 

Our gross profit was $163.6 million and $162.6 millionfor the three months ended March 31, 2010 and 2009, respectively,representing gross margin of 42.9% and 43.7%, respectively.  In general, our gross margin and cost ofgoods sold are impacted by the volume and pricing of our finished products, ourraw material costs, production mix, yield, and cycle times, as well as ourproduction capacities and normal production shut-downs, and the timing andamount of release of finished product.

 

Our cost of goods sold was $217.4 million, or 57.1% ofnet revenue, for the three months ended March 31, 2010, as compared to$209.2 million, or 56.3% of net revenue, for the three months endedMarch 31, 2009.  Our cost of goodssold benefited from lower TPR unabsorbed infrastructure and start-up costs of$12.4 million which declined to $2.0 million from $14.4 million in the firstquarter 2010 compared to the first quarter 2009, respectively.  Our cost of goods sold was negativelyimpacted by $12.3 million in inventory impairment provisions in the firstquarter 2010, an increase of $7.7 million which was primarily due to recoveriesof $4.4 million in the 2009 first quarter; first quarter 2010 project spendingof $11.7 million, an increase of $5.6 million versus first quarter 2009; andhigher costs of production, which aggregated $7.3 million.

 

The largest component of our cost of goods sold is thecost of source plasma, which represented greater than 50% of our cost of goodssold for the periods presented.  Theoverall cost of source plasma is impacted by the fully-loaded collection costper liter, including donor fees, labor, soft goods, facility costs, testing,and unabsorbed TPR infrastructure and start-up costs, the cost of plasmapurchased from third parties, and variability in protein yields, among otherfactors.  Our internal cost per liter ofplasma, including unabsorbed TPR infrastructure and start-up costs, declined5.0% for the three months ended March 31, 2010 as compared to the prioryear period, primarily driven by lower unabsorbed TPR infrastructure and start-upcosts and higher TPR plasma collections. Our acquisition cost per liter of third party plasma increased 2.3%during the three months ended March 31, 2010 as compared to the prior yearperiod.  Due to our long manufacturingcycle times, which range from 100 days to in excess of 400 days, the cost ofplasma is not expensed through cost of goods sold until a significant period oftime subsequent to its acquisition.

 

We expect that unabsorbed TPR infrastructure andstart-up costs will continue to decrease in 2010 as compared to priorperiods.  The benefit will be partiallyoffset by higher cost of goods sold due to yield variability, less efficientutilization of each incremental liter of plasma fractionated as we increaseGamunex production, and non-capitalizable costs associated with our capitalprojects, particularly the construction of our new fractionation facility.

 

***Operating Expenses***

 

Our SG&A was $67.6 million and $72.4 million forthe three months ended March 31, 2010 and 2009, respectively, a decline of$4.8 million or 6.6%.  The first quarter2010 benefited from the absence of costs related to our terminated mergeragreement with CSL, for which we incurred legal and retention expenses of $5.7million and $2.2 million, respectively, during the prior year period, withinSG&A.  Our share-based compensationexpense recorded in SG&A decreased $3.3 million during the three monthsended March 31, 2010 as compared to the prior year period, drivenprimarily by a cumulative adjustment as a result of actual award forfeituresbeing higher than initially estimated as well as the acceleration of certainoption awards to our Chief Executive Officer during the 2009 thirdquarter.  We experienced lower charitabledonations of $4.7 million during the three months ended March 31, 2010 ascompared to the prior year period.  Theseitems were partially offset by higher sales and marketing expenses during thethree months ended March 31, 2010 of $6.1 million primarily driven by theexpansion of our sales force, marketing of our Gamunex CIDP indication,Prolastin patient identification efforts, the launch of Prolastin-C A1PI, aswell as support for other products.  Thefirst quarter 2010 SG&A also reflected new public company expenses as wellas other items.

 

Our R&D was $16.3 million and $16.5 million forthe three months ended March 31, 2010 and 2009, respectively.  As a percentage of net revenue, R&D was4.3% and 4.4% for the three months ended March 31, 2010 and 2009,respectively.  R&D expenses areinfluenced by the timing of in-process projects and the nature and extent ofexpenses associated with these projects. Additional information regarding our research and development projectsis included in our 2009 Form 10K. Projects related to our product life-cycle management and new productcandidates have not changed materially since December 31, 2009.  We anticipate that R&D will increase insubsequent periods primarily as a result of increased Plasmin clinical trialsrelated to aPAO and ischemic stroke as well as increased spending related toour development of recombinant A1PI and Factor VIII.  We previously disclosed that we

 

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intendedto make a submission with the FDA to begin a clinical trial of Prolastin A1PIAerosol (Alpha-1 Aerosol) for a clinical trial in the United States.  This proposed trial was a safety study involvinga limited number of participants using plasma-derived Prolastin A1PI.  We have decided not to initiate an aerosoltrial with plasma derived Prolastin A1PI. We may resume development in the future of an aerosol formulation ofA1PI if warranted with recombinant A1PI.

 

Our operating margin increased 112 basis points to20.9% for the three months ended March 31, 2010 as compared to the 19.8%for the three months ended March 31, 2009, the increase of which wasprimarily attributable to lower SG&A.

 

***Total Other Non-Operating Expense, net***

 

The primary component of our other non-operatingexpense, net, is interest expense, which amounted to $12.1 million and $20.7million for the three months ended March 31, 2010 and 2009,respectively.  Our weighted averageinterest rates on our outstanding debt, excluding amortization of deferred debtissuance costs and debt discount, were 7.9% and 5.7% for the three months endedMarch 31, 2010 and 2009, respectively. The reduction in interest expense was driven by lower weighted averagedebt levels during the 2010 period.

 

***Provision for Income Taxes***

 

Our income tax provision was $23.3 million and $18.9million for the three months ended March 31, 2010 and 2009, respectively,resulting in effective income tax rates of 33.9% and 36.2%, respectively.

 

For the three months ended March 31, 2010, oureffective income tax rate is lower than the U.S. statutory Federal income taxrate, primarily due to a domestic production deduction, which was statutorilyincreased to 9% for 2010 and orphan drug clinical testing tax credits for qualifyingexpenditures, partially offset by state tax expense.  For the three months ended March 31,2009, our effective income tax rate is higher than the U.S. statutory Federalincome tax rate, primarily due to state tax expense, net of Federal benefit.

 

***Net Income***

 

Our net income was $45.3 million and $33.4 million forthe three months ended March 31, 2010 and 2009, respectively.  The significant factors and eventscontributing to the change in our net income are discussed above.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

***CashFlow Analysis***

 

The following table andsubsequent discussion and analysis contain information regarding our cash flowsfor the three months ended March 31, 2010 and 2009:

 

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| ** **                                                                                    | ** ** | **Three  Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                    | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Operating activities:**                                                                     |       |                               |       |   |   |
| Net  income                                                                                   |       | $                                  | 45,339     |   | $ | 33,435 |   |
| Non-cash  items                                                                               |       | 16,400                             |       | 20,516 |   |
| Changes  in operating assets and liabilities, excluding the effects of business  acquisitions |       | (31,069                            | )          | (19,159 | ) |
| **Net cash provided by operating activities**                                                 |       | $                                  | 30,670     |   | $ | 34,792 |   |
|                                                                                          |       |                               |       |   |   |
| **Investing activities:**                                                                     |       |                               |       |   |   |
| Purchases  of property, plant, and equipment                                                  |       | $                                  | (17,690    | ) | $ | (8,131 | ) |
| Business  acquisitions, net of cash acquired                                                  |       | —                             |       | (7,512 | ) |
| Other                                                                                         |       | 174                                |       | 3 |   |
| **Net cash used in investing activities**                                                     |       | $                                  | (17,516    | ) | $ | (15,640 | ) |
|                                                                                          |       |                               |       |   |   |
| **Financing activities:**                                                                     |       |                               |       |   |   |
| Repayments  under Revolving Credit Facility, net                                              |       | $                                  | —     |   | $ | (18,880 | ) |
| Repayment  of borrowings under term loan                                                      |       | —                             |       | (1,750 | ) |
| Repayments  of capital lease obligations                                                      |       | (176                               | )          | (113 | ) |
| Financing  transaction costs                                                                  |       | (78                                | )          | — |   |
| Proceeds  from exercises of stock options                                                     |       | 2,937                              |       | — |   |
| Excess  tax benefits from share-based payment arrangements                                    |       | 4,590                              |       | 1,437 |   |
| Repurchases  of common stock from employees                                                   |       | (4,917                             | )          | (3,902 | ) |
| **Net cash provided by (used in) financing activities**                                       |       | $                                  | 2,356      |   | $ | (23,208 | ) |

 

At March 31,2010, our cash and cash equivalents totaled $80.3 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 March 31, 2010, we had unusedavailable borrowing capacity of $322.9 million under our Revolving CreditFacility.

 

We have financedour operations 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 net cash flows from operatingactivities of $30.7 million for the three months ended March 31, 2010 ascompared to $34.8 million for the three months ended March 31, 2009.  Our net income was $45.3 million and $33.4million for the three months ended March 31, 2010 and 2009,respectively.  Our non-cash operatingitems were $16.4 million and $20.5 million for the three months endedMarch 31, 2010 and 2009, respectively. The following significant non-cash items impacted the comparability ofthe net cash provided by our operating activities during the periods presented.

 

·                  Our depreciation and amortization expense for the three months endedMarch 31, 2010 and 2009 was $8.1 million and $6.7 million,respectively.  The increase indepreciation and amortization expense during the periods presented reflects ourcumulative capital investments, primarily related to our manufacturingfacilities and TPR.

 

·                  Our share-based compensation expense for the three months endedMarch 31, 2010 and 2009 was $7.2 million and $11.1 million,respectively.  The decrease inshare-based compensation expense was driven by a combination of an adjustment as a resultof actual award forfeitures being higher than initially estimated as well asthe acceleration of certain option awards to our Chief Executive Officer duringthe 2009 third quarter.

 

·                  During the three months ended March 31, 2010 and 2009, ourdeferred income taxes decreased $2.9 million and $0.9 million,respectively.  During the three monthsended March 31, 2010 and 2009, we recognized excess tax benefits relatedto share-based compensation of $4.6 million and $1.4 million, respectively.

 

The changes in our operating assets andliabilities, net of effects from business acquisitions, were driven by thefollowing items:

 

·                  Our accounts receivable, net, (increased) decreased $(31.3) million and$5.1 million during the three months ended March 31, 2010 and 2009,respectively.  Accounts receivable, net,balances are influenced by the timing of net revenue 

 

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and customer collections.  Our days sales outstanding (DSO) were 40 daysand 35 days for the three months ended March 31, 2010 and 2009,respectively, primarily driven by an increase in international accountsreceivable and timing of payments.  Ourinternational sales terms generally range from 30 to 150 days due to industryand national practices outside of the U.S., which can impact our DSOresults.  We calculate DSO as our periodend accounts receivable, net, divided by our prior three months’ net sales,multiplied by 90 days.  Our calculationof DSO may not be consistent with similar calculations performed by othercompanies.

 

·                  Our inventories increased $3.1 million and $6.5 million during thethree months ended March 31, 2010 and 2009, respectively.  Our inventories fluctuate based upon ourplasma collections, production mix and cycle times, production capacities,normal production shut-downs, finished product releases, targeted safety stocklevels, and demand for our products.  Ourbiological manufacturing processes result in relatively long inventory cycletimes ranging from 100 days to in excess of 400 days for some specialty plasmain addition to a required 60 day pre-production holding period for plasma.  Consequently, we have significant investmentin raw material and work-in-process inventories for extended periods, andcorrespondingly, lower levels of finished goods inventories on hand.

 

·                  Our prepaid expenses and other assets decreased $7.8 million and $11.6million during the three months ended March 31, 2010 and 2009,respectively.  The decreases for thethree months ended March 31, 2010 and 2009 were primarily driven bydecreases in prepaid income taxes of $7.4 million and $8.2 million,respectively.  In addition, during thethree months ended March 31, 2009, we reclassified $4.5 million of prepaidplasma to raw material inventories as a result of plasma deliveries fromInternational BioResources, L.L.C. and affiliated entities (IBR) upon centerlicensure, for which we subsequently acquired the plasma collection centers.

 

·                  Our operating liabilities decreased $4.5 million and $29.4 millionduring the three months ended March 31, 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 three months ended March 31, 2010 wasprimarily driven by lower accounts payable obligations of $12.4 million andlower accrued payroll, bonuses, and employee benefits of $23.1 million primarilydue to the payment of accrued 2009 corporate performance bonuses.  These items were partially offset by anincrease in interest payable obligations of $11.6 million associated with our7.75% Notes due to the timing of contractual payments, as well as higher taxespayable obligations of $5.4 million. Further, our Medicaid, commercial rebates, and chargeback obligationsincreased $4.0 million during the three months ended March 31, 2010primarily as a result of the recently enacted healthcare reform legislation which increased the rate of AMP used tocompute Medicaid rebates charged to drug manufacturers and higher Medicaidutilization.  The decrease for the threemonths ended March 31, 2009 was primarily driven by lower accounts payableobligations of $9.9 million and lower accrued payroll, bonuses, and employeebenefits of $22.8 million primarily due to the payment of accrued 2008corporate performance bonuses.  Theseitems were partially offset by higher taxes payable of $8.9 million.

 

***Cash Flows from Investing Activities***

 

Ourcapital expenditures were $17.7 million and $8.1 million for the three monthsended March 31, 2010 and 2009, respectively.  Our capital expenditures reflect investmentsin our facilities to support a platform for future growth and efficiencyimprovements, including compliance enhancements, general infrastructureupgrades, capacity expansions, and new facilities.  Our capital expenditures also reflectinvestments in our TPR infrastructure to support our plasma collectionefforts.  The increase in our capitalspending 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’sDiscussion and Analysis of Financial Condition and Results ofOperations——Liquidity and Capital Resources” in our 2009 Form 10-K.

 

Ourcash flows used in investing activities for the three months ended March 31,2009 also included the purchase price of three plasma collection centersacquired from IBR.  The IBR centeracquisition program was completed during the fourth quarter of 2009.

 

***Cash Flows from Financing Activities***

 

During the three months ended March 31, 2010, wereceived proceeds of $2.9 million from the exercise of 667,043 stockoptions.  In addition, we repurchased246,823 shares of our common stock from employees for $4.9 million to settletheir withholding tax obligations upon vesting of restricted stock.  During the three months ended March 31,2010, we recognized excess tax benefits related to share-based compensation of$4.6 million.

 

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During the three months ended March 31, 2009, werepurchased 234,704 shares of our common stock from employees for $3.9 millionto 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 three months ended March 31,2009, we made contractual principal payments of $1.8 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 under our Revolving CreditFacility fluctuate based upon our business needs.

 

***Credit Ratings***

 

There were no changes to our credit ratings during thefirst quarter of 2010.  Our creditratings as of March 31, 2010 were as follows:

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

 

Factors that can affect our credit ratings and outlookinclude changes in our operating performance, financial position, businessstrategy, and the overall economic environment for the plasma-derived productsbusiness.  If a downgrade of our creditratings or outlook were to occur, it could adversely impact, among otherthings, our future borrowing costs and access to capital markets.

 

**OffBalance Sheet Arrangements**

 

As of March 31, 2010, we do not have anyoff-balance sheet arrangements that are material or reasonably likely to bematerial to our consolidated financial position or results of operations.

 

**Related Party Transactions**

 

We consider Cerberus,Ampersand, and Centric to be related parties during the periods presented.  Additional information regarding transactionswith our related parties is included in Note 7, “Related Party Transactions,”included elsewhere in this Quarterly Report.

 

**NON-GAAPFINANCIAL MEASURES**

 

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

 

Both adjusted EBITDA and Consolidated Cash Flow arefinancial measures that are not defined by U.S. GAAP.  A non-GAAP financial measure is a numericalmeasure of a company’s financial performance that (i) excludes amounts, oris subject to adjustments that have the effect of excluding amounts, that areincluded in a comparable measure calculated and presented in accordance withU.S. GAAP in the statement of operations, such as net income, or the statementof cash flows, such as operating cash flow, or (ii) includes amounts, oris subject to adjustments that have the effect of including amounts, that areexcluded from the comparable measures so calculated and presented.  The non-GAAP measures that we use should notbe considered a substitute for any performance measure determined in accordancewith U.S. GAAP.  We do not rely solely onthese non-GAAP financial 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 have materiallimitations as analytical tools and you should not consider these measures inisolation, or as a substitute for analysis of our results as reported underU.S. GAAP.  Additional informationregarding our use of non-GAAP financial measures is included in our 2009Form 10-K.

 

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

 

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

 
| ** **                                                | ** ** | **Three  Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| **Net income**                                            |       | $                                       | 45,339     |   | $ | 33,435 |   |
| Interest  expense, net (a)                                |       | 11,263                                  |       | 21,345 |   |
| Income  tax provision (b)                                 |       | 23,264                                  |       | 18,940 |   |
| Depreciation  and amortization (c)                        |       | 8,051                                   |       | 6,744 |   |
| **EBITDA**                                                |       | 87,917                                  |       | 80,464 |   |
| Management  fees (d)                                      |       | —                                  |       | 1,859 |   |
| Non-cash  share-based compensation expense (e)            |       | 7,227                                   |       | 11,062 |   |
| Special  recognition bonus expense (f)                    |       | 1,614                                   |       | 1,798 |   |
| Equity  in earnings of affiliate (g)                      |       | (147                                    | )          | (89 | ) |
| Retention  bonus awards (h)                               |       | —                                  |       | 3,717 |   |
| Other  (i)                                                |       | 47                                      |       | (119 | ) |
| **Adjusted EBITDA/Consolidated Cash Flow as defined (j)** |       | $                                       | 96,658     |   | $ | 98,692 |   |

 

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(a)          Represents interest expense associatedwith our debt structure.  During thethree months ended March 31, 2010, our debt structure consisted of our$600.0 million 7.75% Notes and $325.0 million Revolving Credit Facility.  During the three months ended March 31,2009, 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 our interestrate cap and swap contracts.

 

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

 

(c)          Represents depreciation and amortizationexpense associated with our property, plant, and equipment, and all otherintangible assets.

 

(d)         Represents the advisory fees paid toTalecris Holdings, LLC, under the Management Agreement, as amended.  This agreement was terminated in connectionwith our IPO.

 

(e)          Represents our non-cash share-basedcompensation expense associated with stock options, restricted stock, RSU’s,and performance share units.

 

(f)            Represents compensation expenseassociated with special recognition bonus awards granted to certain of ouremployees 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-operating incomeassociated with our investment in Centric, which we believe are not part of ourcore operations.

 

(h)         Represents merger related retentionexpense, including fringe benefits, related to our terminated merger agreementwith CSL.  All retention amounts werepaid during 2009.

 

(i)             For the three months ended March 31,2010, the amount represents losses on disposals of equipment.  For the three months ended March 31,2009, the amount includes long-lived asset impairment charges of $0.1 millionand losses on disposals of equipment of $0.3 million, offset by inventoryrecoveries of $0.5 million.

 

(j)             The computation of Consolidated Cash Flowis not applicable prior to the issuance of the 7.75% Notes.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We operate on a global basis and are exposed to therisk that our earnings and cash flows could be adversely impacted byfluctuations in interest rates, foreign exchange, and commodity prices.  The overall objective of our financial riskmanagement

 

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programhas historically been to minimize the impact of these risks through operationalmeans and by using various financial instruments.  These practices may change as economic conditionschange.  At March 31, 2010, we werenot a party to any derivative financial instruments.

 

***InterestRate Risk***

 

At March 31, 2010,our long-term debt consisted of our 7.75% Notes ($600.0 million outstanding),which bears a fixed interest rate, and our $325.0 million Revolving CreditFacility, which bears interest at a rate based upon either ABR or LIBOR, at ouroption, plus applicable margins based upon borrowing availability.  Our exposure to adverse movements in ABR orLIBOR during the three months ended March 31, 2010 was not significant asa result of minimal average borrowings outstanding under the Revolving CreditFacility during the period.  Assuming afully drawn Revolving Credit Facility and a 100 basis point increase inapplicable interest rates, our interest expense, net, would increase by $3.25million on an annual basis.

 

At March 31, 2010,we had cash and cash equivalents of $80.3 million.  We use our available cash balances to repayamounts outstanding under our Revolving Credit Facility. We deposit any excessamounts into an overnight investment account, which earns minimalinterest.  Because our cash and cashequivalents are short-term in duration, we believe that our exposure tointerest rate risk is not significant and a 100 basis point movement in marketinterest rates would not have a significant impact on the carrying value of ourcash and cash equivalents.  We activelymonitor changes in interest rates.

 

***ForeignCurrency Risk***

 

We operateinternationally and enter into transactions denominated in foreigncurrencies.  As such, our financialposition, results of operations, cash flows, and competitive position aresubject to the variability that arises from exchange rate movements in relationto the U.S. dollar.  Our foreign currencyexposures are primarily limited to the impact that fluctuations in the euro andthe Canadian dollar have on our net revenue and the remeasurement of oureuro-denominated accounts receivable.

 

Approximately31.4% of our net revenue for the three months ended March 31, 2010 wasgenerated outside of the United States.  Our product net revenue was favorably impacted by $3.0 million, or 0.8%,as a result of foreign currency exchange rate fluctuations in relation to theU.S. dollar during the three months ended March 31, 2010.  In addition, we incurred transaction losses,net, of $3.9 million during the three months ended March 31, 2010,primarily related to the remeasurement of euro denominated accounts receivable,which we recorded within SG&A in our unaudited consolidated incomestatement.

 

For the purpose ofspecific risk analysis, we used a sensitivity analysis to measure the potentialimpact to our unaudited consolidated income statement for a hypothetical 10%strengthening of the U.S. dollar compared with the euro and Canadian dollar forthe three months ended March 31, 2010. Assuming a 10% strengthening of the U.S. dollar, our product net revenuewould have been negatively impacted by approximately $4.3 million.  There would have been minimal impact to the transactionlosses recorded within SG&A in our unaudited consolidated incomestatement.  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.

 

***CommodityRisk***

 

Plasma is the key rawmaterial used in the production of our products, which we obtain from ourplasma collection centers, as well as third party plasma suppliers.  As of March 31, 2010, our plasmacollection center platform consisted of 69 operating centers, of which 64 werelicensed and 5 were unlicensed.  Theselicensed centers collected approximately 69% of our plasma during the threemonths ended March 31, 2010.

 

For purposes of specificrisk analysis, we used a sensitivity analysis to measure the potential impactto our unaudited consolidated income statements for a hypothetical 10% increasein the cost of plasma used to produce the products sold during the three monthsended March 31, 2010.  Assuming this10% increase in the cost of plasma, our cost of goods sold would have increasedby $13.6 million and our gross margin would have been negatively impacted by358 basis points for the three months ended March 31, 2010.  This sensitivity analysis assumes that wewould not be able to pass the hypothetical cost increase to our customers inthe form of pricing increases.  Thissensitivity analysis does not consider the fixed pricing of plasma purchasedfrom our third-party plasma suppliers.

 

We have embarked on asubstantial capital plan as discussed further in our 2009 Form 10-K toaddress our fractionation capacity constraints. As such, we anticipate that we could be subject to market risk fromfluctuating prices of certain purchased commodities, such as steel.  While these materials will come from multiplesources, commodities are subject to market price

 

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fluctuations.  We will purchase these commodities based uponmarket prices established with various suppliers as part of the purchasingprocess.  To the extent that commodityprices increase and we do not have firm pricing commitments, or if thesuppliers are not able to honor such prices, we may experience unplanned costsin order to continue with our capital programs. We currently do not anticipate hedging our exposures to market risksassociated with our commodities.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

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

 

Our management, with the participation of our ChiefExecutive Officer and our Chief Financial Officer, evaluated the effectivenessof our disclosure controls and procedures as of March 31, 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 are designedto ensure that information required to be disclosed by a company in reportsthat 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 March 31, 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 Financial Reporting***

 

There was no change in our internal control overfinancial reporting identified in connection with the evaluation required byRule 13a-15(d) and 15d-15(d) of the Exchange Act that occurredduring the period covered by this report that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1A.RISK FACTORS**

 

There have been nomaterial changes in our risk factors from those disclosed in our 2009Form 10-K, except as noted below.

 

**RisksRelated to Healthcare Reform and Reimbursement**

 

***We could be adversely affected if the implementation ofrecently passed healthcare reform legislation substantially changes the marketfor medical care or healthcare coverage in the United States.***

 

Substantialchanges could be made to the current system for paying for healthcare in theU.S., including changes made in order to extend medical benefits to those whocurrently lack insurance coverage. Approximately 47 million Americanscurrently lack health insurance of any kind. Extending coverage to such a largepopulation could substantially change the structure of the health insurancesystem and the methodology for reimbursing medical services, drugs and devices.These structural changes could entail modifications to the existing system ofprivate payors and government programs (Medicare, Medicaid and State Children’sHealth Insurance Program), creation of state-based healthcare insuranceexchanges, as well as other changes. Restructuring the coverage of medical carein the U.S. could impact the reimbursement for prescribed drugs andbiopharmaceuticals, such as those produced and marketed by us. If reimbursementfor these products is substantially reduced in the future, or rebateobligations associated with them are substantially increased (discussed in moredetail below), our business could be materially impacted.  In addition, beginning in 2012, the new lawmay require us to issue Internal Revenue Service Form 1099’s to plasmadonors.  The cost of implementing thisrequirement, as well as its potential impact on the behavior of donors, isunknown at this time.

 

Extending medicalbenefits to those who currently lack coverage will likely result in substantialcost to the 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 changesdiscussed above, and others, passed in this legislation are subject torule-making and implementation timelines that extend for several years. Thisuncertainty limits our ability to forecast changes that may occur in the futureand to manage our business accordingly.

 

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

 

Independent ofhealthcare reform initiatives, we have experienced and expect to experiencepricing pressures on our current products and pipeline products frominitiatives aimed at reducing healthcare costs by governmental and privatethird-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. In addition, prices inmany European countries are subject to local regulation. If payors reduce theamount of reimbursement for a product, it may cause groups or individualsdispensing the product to discontinue administration of the product, toadminister lower doses, to substitute lower cost products or to seek additionalprice related concessions. These actions could have a negative effect on ourfinancial results, particularly in cases where we have a product that commandsa premium price in the marketplace, or where changes in reimbursement induce ashift in the site of treatment. For example, beginning in 2005, the Medicaredrug reimbursement methodology for physician and hospital outpatient paymentschedules changed to Average Sales Price (ASP) +6%. This payment was based on avolume-weighted average of all brands under a common billing code. Medicarepayments to physicians between the fourth quarter of 2004 and the first quarterof 2005 dropped 14% for both the powder and liquid forms of IGIV. Medicarepayments to hospitals fell 45% for powder IGIV and 30% for liquid IGIV betweenthe fourth quarter of 2005 and the first quarter of 2006. The Medicarereimbursement changes resulted in the shift of a significant number of MedicareIGIV patients to hospitals from physicians’ offices beginning in 2005 as manyphysicians could no longer recover their costs of obtaining and administeringIGIV in their offices and clinics. After 2006, some hospitals reportedly beganto refuse providing IGIV to Medicare patients due to reimbursement rates thatwere below their acquisition costs. While subsequent changes have improved someof these Medicare reimbursement issues, on January 1, 2008, the Centersfor Medicare & Medicaid Services (CMS) 

 

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

 

Additionally,physicians frequently prescribe legally available therapies for uses that arenot described in the product’s labeling and that differ from those tested inclinical studies and approved by the FDA or similar regulatory authorities in othercountries. These unapproved, or “off-label,” uses are common across medicalspecialties, and physicians may believe such off-label uses constitute thepreferred treatment or treatment of last resort for many patients in variedcircumstances. We believe that a significant portion of our IGIV volume may beused to fill physician prescriptions for indications not approved by the FDA orsimilar regulatory authorities. If reimbursement for off-label uses of ourproducts, including IGIV, is reduced or eliminated by Medicare or otherthird-party payors, including those in the United States or the European Union,we could be adversely affected.

 

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

 

The U.S. economicstimulus legislation enacted in February 2009 provided significant fundingfor the federal government to conduct Comparative Effectiveness Research (CER).While the stated intent of CER is to develop information to guide providers tothe most efficacious therapies, outcomes of CER could influence thereimbursement or coverage for therapies that are determined to be lesscost-effective than others. Should any of our products be determined to be lesscost-effective than alternative therapies, the levels of reimbursement forthese products, or the willingness to reimburse at all, could be impacted,which could materially impact our financial results.

 

Additionally, thesettlement of class action litigation against First DataBank and others willresult in the downward revision and possible eventual elimination of thepublished Average Wholesale Prices (AWPs) which are an important basis forreimbursement used by many third-party payors for our products. Under the settlement,the revision became effective in September 2009. First DataBank and otherpricing compendia have stated that they will or may discontinue publishing AWPwithin two years. Consequently, given the nature of our Prolastin Direct modelin the U.S., we anticipate a decrease in Prolastin/Prolastin-C A1PI AWPsresulting in a decrease in our net price subsequent to the settlement. Wecurrently estimate the annual impact of the First DataBank settlement to be areduction in the net revenue between $3 million and $6 million.

 

Some payors,including Medicare Part D plans and some state Medicaid programs,reimburse providers for drugs based upon a discount off of the AWP. AWP is alist price determined by third party publishers, which does not 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.

 

**RisksRelated to Our Business**

 

***Ourability to export products to Iran requires annual export licenses and the useof intermediate or advisory banks.***

 

In 2009, we had sales of$22.2 million, or approximately 1.4% of our net revenue, to customers locatedin Iran pursuant to an export license which must be renewed annually. While our license has been renewed for 2010, should political tensions betweenthe U.S. and Iran escalate, the export license might be revoked, resulting inthe loss of sales.  In addition, an advisory bank through whom we havepreviously conducted business in Iran has decided no longer to conduct thisbusiness and we will not be able to resume shipments to Iran until we findanother advisory bank, which may or may not be possible.

 

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**RisksRelated to Our Common Stock**

 

***Lock-up Agreements with our directors, executive officersand Talecris Holdings, LLC have recently expired, which may result inincreased sales of our common stock.***

 

Lock-up Agreementswith our directors, executive officers, and Talecris Holdings, LLC expired onMarch 29, 2010, which may result in increased sales of our common stock.  As of April 26, 2010, we had outstanding122,875,752 shares of common stock.  Ofthese shares, 61,175,236 shares are held by Talecris Holdings, LLC and2,603,276 shares are held by our directors and employees, including 186,600unvested shares. In addition, as of April 26, 2010, we had exercisableoptions to purchase 10,582,424 shares of our common stock.  Sales of a substantial number of shares ofour common stock in the public market could occur at any time.  These sales, or the perception in the marketthat the holders of a large number of shares intend to sell shares, couldreduce the market price of our common stock. If sales activity increases, the price of our common stock may decline,resulting in losses to our investors.

 

**ITEM 6. EXHIBITS**

 
| **Exhibit Number** | ** ** | **Exhibit Description**                                                                                                                                                                                      |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **              | ** ** | ** **                                                                                                                                                                                                        |
| 10.1                    |       | Letter Agreement, dated  February 24, 2010, amending the terms of an amended and restated Employment  Agreement, dated November 26, 2008, by and between Talecris Biotherapeutics  Holdings Corp. and Kari Heerdt |
|                    |       |                                                                                                                                                                                                              |
| 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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#### *** Thiscertification shall not be deemed filed for purposes of Section 18 of theExchange Act, or incorporated by reference in any filing under the SecuritiesAct of 1933, as amended, or the Exchange Act, except as may be expressly setforth by specific reference in such filing.**

 

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#### **SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, in the city of Research Triangle Park, State of NorthCarolina, on April 28, 2010.

 
|   | **Talecris Biotherapeutics Holdings Corp.**          |
|--------|------------------------------------------------------|
|   |                                                 |
|   |                                                 |
|   | By:                                                  | /s/ Lawrence D. Stern |
|   |                                                 |   |
|   | Lawrence D. Stern                                    |
|   | Chairman and Chief Executive Officer                 |
|   |                                                 |   |
|   |                                                 |   |
|   | By:                                                  | /s/ John M. Hanson |
|   | John M. Hanson                                       |
|   | Executive Vice President and Chief Financial Officer |

 

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