Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C.  20549**

 

**Form 10-Q**

 

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

 

**For the quarterly period ended September 30, 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) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes x  No o

 

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

 

 

 

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Table of Contents

 

**TalecrisBiotherapeutics Holdings Corp.**

**Form 10-Q**

**Table of Contents**

 
| ** **                             | ** **                                                                                       | **Page**   |
|----------------------------------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** **                                                                                       | ** ** |
| **Part I- Financial Information** |                                                                                             |
| ** **                             |                                                                                             |       |
| Item 1.                                | Unaudited Interim Consolidated  Financial Statements:                                            | 1          |
|                                   |                                                                                             |       |
|                                   | Consolidated  Balance Sheets as of September 30, 2010 and December 31, 2009            | 1          |
|                                   |                                                                                             |       |
|                                   | Consolidated  Income Statements for the Three and Nine Months Ended September 30, 2010 and  2009 | 2          |
|                                   |                                                                                             |       |
|                                   | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2010 and  2009    | 3          |
|                                   |                                                                                             |       |
|                                   | Notes to Consolidated Financial Statements                                                       | 4          |
|                                   |                                                                                             |       |
| Item 2.                                | Management’s Discussion and Analysis  of Financial Condition and Results of Operations      | 23         |
|                                   |                                                                                             |       |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                      | 47         |
|                                   |                                                                                             |       |
| Item 4.                                | Controls and  Procedures                                                                         | 48         |
|                                   |                                                                                             |       |
| **Part II-  Other Information**   |                                                                                             |
| Item 1.                                | Legal Proceedings                                                                                | 49         |
|                                   |                                                                                             |       |
| Item 1A.                               | Risk Factors                                                                                     | 50         |
|                                   |                                                                                             |       |
| Item 6.                                | Exhibits                                                                                         | 54         |
|                                   |                                                                                             |       |
|                                   | Signatures                                                                                       | 55         |

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Balance Sheets**

(inthousands, except share and per share amounts)

(Unaudited)

 
| ** **                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                              |       |                   |       |                  |       |
| Current  assets:                                                                                                                        |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                              |       | $                      | 150,530    |                  | $          | 65,239 |   |
| Accounts  receivable, net of allowances of $2,613 and $3,461, respectively                                                              |       | 170,872                |       | 136,978               |       |
| Inventories                                                                                                                             |       | 672,728                |       | 644,054               |       |
| Deferred  income taxes                                                                                                                  |       | 88,076                 |       | 88,652                |       |
| Prepaid  expenses and other                                                                                                             |       | 31,969                 |       | 31,466                |       |
| Total  current assets                                                                                                                   |       | 1,114,175              |       | 966,389               |       |
|                                                                                                                                    |       |                   |       |                  |       |
| Property,  plant, and equipment, net                                                                                                    |       | 331,490                |       | 267,199               |       |
| Investment  in affiliate                                                                                                                |       | 2,534                  |       | 1,935                 |       |
| Intangible  assets                                                                                                                      |       | 10,880                 |       | 10,880                |       |
| Goodwill                                                                                                                                |       | 172,860                |       | 172,860               |       |
| Deferred  income taxes                                                                                                                  |       | —                 |       | 5,848                 |       |
| Other                                                                                                                                   |       | 16,804                 |       | 19,894                |       |
| Total  assets                                                                                                                           |       | $                      | 1,648,743  |                  | $          | 1,445,005 |   |
|                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                          |       |                   |       |                  |       |
|                                                                                                                                    |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                   |       |                   |       |                  |       |
| Accounts  payable                                                                                                                       |       | $                      | 39,715     |                  | $          | 71,046 |   |
| Accrued  expenses and other liabilities                                                                                                 |       | 198,572                |       | 170,533               |       |
| Current  portion of capital lease obligations                                                                                           |       | 832                    |       | 740                   |       |
| Total  current liabilities                                                                                                              |       | 239,119                |       | 242,319               |       |
|                                                                                                                                    |       |                   |       |                  |       |
| Long-term  debt and capital lease obligations                                                                                           |       | 605,383                |       | 605,267               |       |
| Deferred  income taxes                                                                                                                  |       | 19,552                 |       | —                |       |
| Other                                                                                                                                   |       | 15,348                 |       | 15,265                |       |
| Total  liabilities                                                                                                                      |       | 879,402                |       | 862,851               |       |
|                                                                                                                                    |       |                   |       |                  |       |
| Commitments  and contingencies                                                                                                          |       |                   |       |                  |       |
|                                                                                                                                    |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                                             |       |                   |       |                  |       |
| Common  stock, $0.01 par value; 400,000,000 shares authorized; 124,915,474 and  122,173,274 shares issued and outstanding, respectively |       | 1,246                  |       | 1,212                 |       |
| Additional  paid-in capital                                                                                                             |       | 805,473                |       | 767,032               |       |
| Accumulated  deficit                                                                                                                    |       | (37,432                | )          | (186,446              | )          |
| Accumulated  other comprehensive income, net of tax                                                                                     |       | 54                     |       | 356                   |       |
| Total  stockholders’ equity                                                                                                        |       | 769,341                |       | 582,154               |       |
| Total  liabilities and stockholders’ equity                                                                                        |       | $                      | 1,648,743  |                  | $          | 1,445,005 |   |

 

The accompanying notes arean integral part of these unaudited interim consolidated financialstatements.  

 

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**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Income Statements**

(inthousands, except per share amounts)

(Unaudited)

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net revenue:**                                |       |                             |       |                            |       |   |   |   |   |
| Product                                         |       | $                                | 400,561    |                            | $          | 387,898 |   | $ | 1,172,278 |   | $ | 1,122,877 |   |
| Other                                           |       | 6,440                            |       | 7,833                           |       | 18,510 |   | 20,219 |   |
| Total                                           |       | 407,001                          |       | 395,731                         |       | 1,190,788 |   | 1,143,096 |   |
| Cost  of goods sold                             |       | 229,908                          |       | 230,666                         |       | 670,476 |   | 663,875 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| **Gross profit**                                |       | 177,093                          |       | 165,065                         |       | 520,312 |   | 479,221 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                            |       |                             |       |                            |       |   |   |   |   |
| Selling,  general, and administrative           |       | 61,383                           |       | 79,488                          |       | 205,007 |   | 213,913 |   |
| Research  and development                       |       | 18,673                           |       | 16,167                          |       | 50,832 |   | 51,728 |   |
| Total                                           |       | 80,056                           |       | 95,655                          |       | 255,839 |   | 265,641 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| **Income from operations**                      |       | 97,037                           |       | 69,410                          |       | 264,473 |   | 213,580 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Other  non-operating (expense) income:          |       |                             |       |                            |       |   |   |   |   |
| Interest  expense, net                          |       | (11,529                          | )          | (19,587                         | )          | (34,915 | ) | (61,445 | ) |
| Merger  termination fee                         |       | —                           |       | —                          |       | — |   | 75,000 |   |
| Equity  in earnings of affiliate                |       | 273                              |       | 112                             |       | 599 |   | 296 |   |
| Total                                           |       | (11,256                          | )          | (19,475                         | )          | (34,316 | ) | 13,851 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Income  before income taxes                     |       | 85,781                           |       | 49,935                          |       | 230,157 |   | 227,431 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Provision  for income taxes                     |       | (29,729                          | )          | (14,125                         | )          | (81,143 | ) | (74,914 | ) |
|                                            |       |                             |       |                            |       |   |   |   |   |
| **Net income**                                  |       | 56,052                           |       | 35,810                          |       | 149,014 |   | 152,517 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Less  dividends to preferred stockholders       |       | —                           |       | (4,012                          | )          | — |   | (11,744 | ) |
| **Net income available to common stockholders** |       | $                                | 56,052     |                            | $          | 31,798 |   | $ | 149,014 |   | $ | 140,773 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| **Net income per common share:**                |       |                             |       |                            |       |   |   |   |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Basic                                           |       | $                                | 0.45       |                            | $          | 12.01 |   | $ | 1.21 |   | $ | 76.21 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Diluted                                         |       | $                                | 0.43       |                            | $          | 0.38 |   | $ | 1.16 |   | $ | 1.62 |   |

 

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Statements of Cash Flows**

(inthousands)

(Unaudited)

 
| ** **                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **September 30,**          | ** ** |
| ** **                                                                          | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                           |       | $                               | 149,014    |   | $ | 152,517 |   |
| Net  income                                                                         |       |                            |       |   |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:  |       |                            |       |   |   |
| Depreciation  and amortization                                                      |       | 26,482                          |       | 21,403 |   |
| Amortization  of deferred loan fees and debt discount                               |       | 3,163                           |       | 2,823 |   |
| Share-based  compensation expense                                                   |       | 14,203                          |       | 39,625 |   |
| Change  in allowance for doubtful receivables                                       |       | 2,629                           |       | 3,203 |   |
| Amortization  of deferred compensation                                              |       | 1,911                           |       | 4,407 |   |
| Equity  in earnings of affiliate                                                    |       | (599                            | )          | (296 | ) |
| Asset  impairment                                                                   |       | 563                             |       | 1,010 |   |
| Decrease  in deferred tax assets                                                    |       | 25,976                          |       | 8,409 |   |
| Excess  tax benefits from share-based payment arrangements                          |       | (10,836                         | )          | (1,437 | ) |
| Other                                                                               |       | 478                             |       | 710 |   |
| Changes  in assets and liabilities, excluding the effects of business acquisitions: |       |                            |       |   |   |
| Accounts  receivable                                                                |       | (36,515                         | )          | (17,289 | ) |
| Inventories                                                                         |       | (30,018                         | )          | (52,112 | ) |
| Prepaid  expenses and other assets                                                  |       | (1,723                          | )          | 16,775 |   |
| Accounts  payable                                                                   |       | (31,331                         | )          | 4,825 |   |
| Accrued  expenses and other liabilities                                             |       | 30,600                          |       | 15,827 |   |
| Interest  payable                                                                   |       | 8,523                           |       | (1,676 | ) |
| Net  cash provided by operating activities                                          |       | 152,520                         |       | 198,724 |   |
|                                                                                |       |                            |       |   |   |
| **Cash flows from investing activities:**                                           |       |                            |       |   |   |
| Purchases  of property, plant, and equipment                                        |       | (91,691                         | )          | (36,291 | ) |
| Business  acquisitions, net of cash acquired                                        |       | —                          |       | (27,113 | ) |
| Other                                                                               |       | 507                             |       | 634 |   |
| Net  cash used in investing activities                                              |       | (91,184                         | )          | (62,770 | ) |
|                                                                                |       |                            |       |   |   |
| **Cash flows from financing activities:**                                           |       |                            |       |   |   |
| Borrowings  under Revolving Credit Facility                                         |       | 645                             |       | 1,090,222 |   |
| Repayments  of borrowings under Revolving Credit Facility                           |       | (645                            | )          | (1,202,319 | ) |
| Repayments  of borrowings under term loan                                           |       | —                          |       | (5,250 | ) |
| Financing  transaction costs                                                        |       | (394                            | )          | — |   |
| Repayments  of capital lease obligations                                            |       | (553                            | )          | (407 | ) |
| Proceeds  from exercises of stock options                                           |       | 19,251                          |       | — |   |
| Repurchases  of common stock from employees                                         |       | (4,917                          | )          | (4,132 | ) |
| Excess  tax benefits from share-based payment arrangements                          |       | 10,836                          |       | 1,437 |   |
| Net  cash provided by (used in) financing activities                                |       | 24,223                          |       | (120,449 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                       |       | (268                            | )          | 465 |   |
| **Net increase in cash and cash equivalents**                                       |       | 85,291                          |       | 15,970 |   |
| **Cash and cash equivalents at beginning of period**                                |       | 65,239                          |       | 16,979 |   |
| **Cash and cash equivalents at end of period**                                      |       | $                               | 150,530    |   | $ | 32,949 |   |

 

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

 

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**Talecris BiotherapeuticsHoldings Corp.**

**Notesto Unaudited Consolidated Financial Statements**

 

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

 

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-related emphysema, bleeding disorders, infectious diseases, andsevere trauma.  Our primary products have orphan drug designation to servepopulations with rare, chronic diseases. Our products are derived from humanplasma, the liquid component of blood, which is sourced from our plasmacollection centers or purchased from third parties with plasma collectioncenters 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 arethen purified, formulated into final bulk, and aseptically filled into finalcontainers for sale. We also sell the fractionated intermediate products.

 

The majority of our sales are concentrated in two key therapeutic areasof the plasma business: Immunology/Neurology, through our intravenous immuneglobulin (IGIV) product for the treatment of primary immune deficiency andautoimmune diseases, such as CIDP, and Pulmonology, through our alpha-1proteinase inhibitor (A1PI) product for the treatment of alpha-1 antitrypsindeficiency-related emphysema. These therapeutic areas are served by our brandedproducts: Gamunex, Immune Globulin Intravenous (Human), 10%Caprylate/Chromatography Purified (Gamunex, Gamunex IGIV) and Prolastin Alpha-1Proteinase Inhibitor (Human) (Prolastin, Prolastin A1PI, Prolastin-CA1PI).  In March 2010, we launchedProlastin-C A1PI, our next generation A1PI product, in the United States.  During the third quarter of 2010, wecompleted the conversion of our existing U.S. Prolastin patients to Prolastin-CA1PI.  During the third quarter of 2010,we launched Prolastin-C A1PI in Canada and anticipate full conversion of ourexisting Canadian Prolastin A1PI patients to Prolastin-C A1PI in the 2010fourth quarter. Sales of Gamunex and Prolastin/Prolastin-C A1PI togethercomprised 75.2% and 72.8% of our net revenue for the three months ended September 30,2010 and 2009, respectively, and 75.7% and 74.3% of our net revenue for thenine months ended September 30, 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, North Carolina and ourprimary manufacturing facilities are a short distance away in Clayton, NorthCarolina.  Our Clayton site is one of theworld’s largest plasma protein processing facilities whose operations includefractionation, purification, filling, and finishing.  We have an integrated plasma collectioncenter platform, which as of September 30, 2010, consisted of 69 operatingcenters, of which 66 were FDA licensed and 3 were unlicensed.  Subsequent to September 30, 2010, wereceived FDA licensure for one of the unlicensed plasma collectioncenters.  In addition to our U.S. operations,we have operations located in Germany and Canada, as well as a team dedicatedto the development of our international markets.

 

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

 

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

 

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

 

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

 

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“Talecris,”“the Company,” “we,” “us,” and “our” are references to Talecris BiotherapeuticsHoldings Corp. and its wholly-owned subsidiaries.

 

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

 

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

 

***Interim Financial Statements***

 

We have prepared the accompanying unaudited interim consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States of America (U.S. GAAP) for interim financialstatements and with the instructions to Form 10-Q and Article 10 ofRegulation 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.

 

***Significant Accounting Policies***

 

A detailed description of our significant accounting policies ispresented in the footnotes to our annual audited consolidated financialstatements included in our 2009 Form 10-K. Our significant accountingpolicies, estimates, and assumptions have not changed materially since December 31,2009.

 

***Recent Accounting Pronouncements***

 

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

 

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

 

We entered into a definitive merger agreement with Grifols onJune 6, 2010. Under the terms of the agreement, Grifols will acquire,through merger transactions, all of the common stock of Talecris for acombination of $19.00 in cash and 0.641 of a newly-issued non-voting Grifols’(Class B) ordinary share for each outstanding Talecris share (the mergerconsideration).  Under the terms of theagreement, completion of the transaction is subject to obtaining certainregulatory approvals, shareholder approvals, as well as other customaryconditions. The 0.641 exchange ratio is generally fixed but is subject toadjustment to a lower exchange ratio to the extent that application of 0.641exchange ratio would result in Grifols issuing in excess of 86.5 millionGrifols non-voting shares in the transaction. The Grifols non-voting shareswill be listed on NASDAQ in the form of American Depositary Shares and theMadrid, Barcelona, Bilbao and Valencia stock exchanges and quoted on theAutomated Quotation System of the Spanish Stock Exchanges.  Grifols non-voting shares will carry the sameeconomic rights as Grifols ordinary shares. Additionally, Talecris share-basedcompensation, whether vested or unvested, generally will be converted into theright to receive or acquire the merger consideration, or, in the case ofemployee stock options, the right to acquire the merger consideration, asdescribed in the merger agreement in lieu of Talecris common stock.  The merger agreement provides that if themerger agreement is terminated under specified circumstances Grifols will berequired to pay Talecris a termination fee of either $100 million or $375million, depending on the specified circumstances. If the merger agreement isterminated under other specified circumstances, Talecris will be required topay Grifols a termination fee of $100 million. Generally, except as noted above,all fees and expenses incurred in connection with the merger agreement and thetransactions contemplated by the merger agreement will be paid by the partyincurring those expenses.  We haveincurred and will continue to incur significant costs related to investmentbanking, legal, and accounting activities, as well as retention expenses,related to this merger transaction. The leading shareholders of Grifols have entered into an agreement withus, subject to conditions, to vote their Grifols shares in favor of thetransaction and, separately, an affiliate of Cerberus Capital Management,L.P., which owns approximately 49% of the outstanding Talecris common stock,has entered into an agreement with Grifols, subject to conditions, to vote itsTalecris shares in favor of the transaction.

 

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

 

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

 

**4.****                  ****TerminatedDefinitive Merger Agreement with CSL Limited (CSL)**

 

We entered into a definitive merger agreement with CSL on August 12,2008, which was subject to the receipt of certain regulatory approvals as 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 courtseeking to enjoin the merger during the administrative process.  On June 8, 2009, the merger partiesagreed to terminate the definitive merger agreement, and as a result, CSL paidus a merger termination fee of $75.0 million during the 2009 secondquarter.  The U.S. Federal TradeCommission’s complaints were subsequently dismissed.  We incurred retention expenses, includingfringe benefits, of $1.6 million and $8.3 million for the three and nine monthsended September 30, 2009, respectively, and legal costs associated withthe regulatory review process of $6.0 million during the nine months ended September 30,2009.  No amounts were incurred during2010. All retention amounts were paid during 2009.

 

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

 

Inventories consisted of the following:

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

 

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

 

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

 

Thefollowing table includes the components of our comprehensive income:

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

 

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

 

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

 

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

 

Forthe three months ended September 30, 2010, our effective income tax rateis lower than the U.S. statutory Federal income tax rate of 35% primarily dueto a deduction for domestic production activities which, pursuant to theInternal Revenue Code, increased to 9% of qualified production activitiesincome for taxable years beginning in 2010 from 6% in 2009, and to tax creditsfor orphan drug clinical testing expenditures.

 

Forthe nine months ended September 30, 2010, our effective income tax rate ishigher than the U.S. statutory federal income tax rate, primarily due to therequirement to capitalize transaction costs related to our definitive mergeragreement with Grifols and the effects of state taxes.  These items were partially offset by theincreased deduction allowed with respect to domestic production activities andtax credits for orphan drug clinical testing expenditures.  The difference in the effective income taxrates for the three months and nine months ended September 30, 2010 isattributable to a benefit recognized in the third quarter from higher orphandrug tax credits and domestic production activity deductions reported on the 2009Federal tax return that exceeded levels estimated in the 2009 financialstatements.

 

For the three and nine months ended September 30, 2009, oureffective income tax rate is lower than the U.S. statutory Federal income taxrate, primarily due to credits for Federal Research and Experimentation andorphan drug clinical testing expenditures. For the nine months ended September 30, 2009, our effective incometax rate was also impacted by the deduction of previously capitalizedtransaction costs related to our terminated merger agreement with CSL.  These factors offset the effects of statetaxes.

 

Following the completion of field work by the Internal Revenue Serviceexamination team (IRS Exam) in connection with the audit of our 2005, 2006, and2007 Federal income tax returns, the audit file was sent to the Joint Committeeon Taxation (JCT) in accordance with requirements that the JCT review anyrefunds in excess of $2 million. The refund was attributable to additional taxcredits for research and experimental expenditures and orphan drug expendituresclaimed during the course of the audit. The JCT subsequently returned the auditfile to the IRS Exam for additional fact finding.  In lieu of engaging with the company infact-finding efforts, IRS Exam issued a new audit report disallowing thetax credits for research and experimental expenditures and orphan drug clinicaltesting expenditures and issued a 30 Day Letter indicating that IRS Exam andthe company could not reach agreement on the issue.  The company has filed a timely protest to theadjustments proposed by IRS Exam and expects to favorably resolve this matterat the IRS Appeals level.  We do notbelieve the outcome of this matter will have a material adverse impact on ourconsolidated financial condition or results of operation. It is reasonablypossible that, within the next twelve months, we will resolve this matter withthe IRS and JCT, which may increase or decrease the unrecognized tax benefitsfor all open tax years.  The favorableresolution of this matter would increase earnings by approximately $4.7 millionbased on current estimates. Audit outcomes and the timing of audit settlementsare subject to significant uncertainty.

 

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

 

Until January 21, 2010, a majority of our outstanding common stockwas owned by Talecris Holdings, LLC. Talecris Holdings, LLC is owned by (i) Cerberus-Plasma HoldingsLLC, the managing member of which is Cerberus Partners, L.P., and(ii) limited partnerships affiliated with Ampersand Ventures.Substantially all rights of management and control of Talecris Holdings, LLCare held by Cerberus-Plasma Holdings LLC. As of September 30, 2010,Talecris Holdings, LLC owned approximately 49% of our outstanding commonstock.  We had a management agreementwith 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, for which we incurred no significant costs for theperiods presented.

 

Wehave an equity investment in Centric Health Resources, Inc. (Centric);therefore, we consider Centric to be a related party during the periodspresented.  Centric provides services inthe management of our Prolastin and Gamunex Direct programs.  In this capacity, Centric provideswarehousing, order fulfillment, distribution, home infusion, and customerrelationship services for us primarily related to our U.S. sales ofProlastin/Prolastin-C A1PI.  Centricmaintains inventory on our behalf which it utilizes to fill customerorders.  Centric also provides services to us in collecting accountsreceivable for sales made under the Prolastin and Gamunex Direct programs. Weprovide Centric with a fee for each unit of product provided to patients whichescalates with volume.

 

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Thefollowing table summarizes our related party expenses for the periodspresented:

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

 

The following table summarizes our related party accounts payablebalances:

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

 

**9.****                  ****7.75%Notes Exchange**

 

On July 19, 2010, we exchanged all of our then outstanding 7.75%Senior Notes due 2016 for 7.75% Senior Notes due 2016 that have been registeredunder the Securities Act of 1933, as amended (Exchange Notes). The exchangeoffer was made pursuant to the registration rights agreement that we enteredinto with the initial purchasers in connection with the issuance of thepreviously outstanding notes.  TheExchange Notes are substantially identical to the previously outstanding notes,except that the transfer restrictions, registration rights, and additionalinterest provisions relating to the previously outstanding notes will not applyto the Exchange Notes.  This exchange didnot impact our capitalization.  Unlessstated otherwise in the context of discussion, we use the term “7.75% Notes” todescribe our previously outstanding notes and the Exchange Notes.

 

**10.****           ****Commitmentsand Contingencies**

 

We have disclosed information regarding our commercial commitments inour 2009 Form 10-K.  The followingsummarizes our significant changes in material commitments and contingencies asof September 30, 2010.

 

***Capital Commitments***

 

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

 

***Litigation***

 

We are involved in various legal and regulatory proceedings that arisein the ordinary course of business.  Werecord accruals for such contingencies to the extent that we conclude thattheir occurrence is both probable and estimable.  We consider many factors in making theseassessments, including the professional judgment of experienced members ofmanagement and our legal counsel.  Wehave estimated the likelihood of settlement, unfavorable outcomes, and theamounts of such potential losses.  In ouropinion, the ultimate outcome of these proceedings and claims is notanticipated to have a material adverse effect on our consolidated financialposition, results of operations, or cash flows. However, the ultimate outcome of litigation is unpredictable and actualresults could be materially different from our estimates.  We record anticipated recoveries underapplicable insurance contracts when we are assured of recovery.

 

***Grifols Transaction***

 

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

 

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Talecris. The two NorthCarolina actions have been stayed.

 

Allof the lawsuits allege that the individual defendants (and, in the consolidatedDelaware action, Talecris Holdings LLC) breached their fiduciary duties to ourstockholders in connection with the proposed transaction with Grifols, and thatGrifols (and, in one of the North Carolina cases, Talecris, and in the Delawareaction, Grifols, Inc.) aided and abetted those breaches. The Delawarecomplaint alleges, among other things, that the consideration offered to ourstockholders pursuant to the proposed transaction is inadequate; that our boardof directors failed to take steps to maximize stockholder value; that our IPOand debt refinancing in 2009 were intended to facilitate a sale of Talecris;that Cerberus and Talecris Holdings LLC arranged the proposed merger for thebenefit of affiliates of Cerberus Associates, LLC, without regard to theinterests of other stockholders; that the voting agreements impermissibly lockup the transaction; that the merger agreement contains terms, including atermination fee, that favor Grifols and deter alternative bids; and that thepreliminary Form F-4 filed on August 10, 2010 contains materialmisstatements and/or omissions, including with respect to the availability ofappraisal rights in the merger; the purpose and effects of the Virginia reincorporationmerger; the antitrust risks of the proposed transaction; the financial advisors’analyses regarding the Grifols’ non-voting stock to be issued in connectionwith the transaction; and the fees to be paid to Morgan Stanley by us andGrifols in connection with the proposed transaction. The Delaware complaintalso alleges that our stockholders are entitled to appraisal rights inconnection with the transaction pursuant to Section 262 of the DelawareGeneral Corporation Law, and that the transaction violates the Delaware GeneralCorporation Law by failing to provide such rights. The Delaware action seeksequitable and injunctive relief, including a determination that thestockholders have appraisal rights in connection with the merger, and damages. Plaintiffshave filed a motion for a preliminary injunction, which has been scheduled tobe heard on November 8, 2010.

 

Webelieve that these lawsuits are without merit and intend to defend themvigorously.

 

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

 

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

 

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

 

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

 

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

 

***Foreign Corrupt Practices Act Investigation***

 

Weare conducting an internal investigation into potential violations of theForeign Corrupt Practices Act (FCPA) that we became aware of during the conductof an unrelated review.  The FCPAinvestigation is being conducted by outside counsel under the direction of aspecial committee of our board of directors. The investigation initially focused on sales to certain Eastern Europeanand Middle Eastern countries, primarily Belarus, Russia and Iran, but we arealso reviewing sales practices in Brazil, China, Georgia, Turkey and othercountries as deemed appropriate.

 

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InJuly 2009, we voluntarily contacted the U.S. Department of Justice (DOJ)to advise them of the investigation and to offer our cooperation in anyinvestigation that they want to conduct or they want us to conduct. The DOJ hasnot indicated what action it may take, if any, against us or any individual, orthe extent to which it may conduct its own investigation. The DOJ or otherfederal agencies may seek to impose sanctions on us that may include, amongother things, injunctive relief, disgorgement, fines, penalties, appointment ofa monitor, appointment of new control staff, or enhancement of existingcompliance and training programs. Other countries in which we do business mayinitiate their own investigations and impose similar penalties. As a result ofthis investigation, we have suspended shipments to some of these countrieswhile we put additional safeguards in place. In some cases, safeguards involvedterminating consultants and suspending relations with or terminatingdistributors in countries under investigation as circumstances warranted. Theseactions unfavorably affected revenue from these countries in 2009 and have anongoing unfavorable impact on revenue in 2010. We have resumed sales incountries where we have appropriate safeguards in place and are reallocatingproduct to other countries as necessary. To the extent that we conclude, or the DOJ concludes, that we cannotimplement adequate safeguards or otherwise need to change our businesspractices, distributors, or consultants in affected countries or othercountries, this may result in a permanent loss of business from thosecountries. These sanctions or the loss of business could have a materialadverse effect on us or our results of operations. Based on the informationobtained to date, we have not determined that any potential liability that mayresult is probable or can be reasonably estimated. Therefore, we have not madeany accrual in our unaudited interim consolidated financial statements as of September 30,2010.

 

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

 

InNovember 2009, we received a letter from the United States Attorney’sOffice for the Eastern District of Pennsylvania (USAO). The USAO requested ameeting to review our compliance with the terms of the Pharmaceutical PricingAgreement (PPA) under the Public Health Service program. Specifically, the USAOasked for information related to the sale of our IGIV product, Gamunex, underthat program.  In order to have federalfinancial participation apply to their products under the Medicaid program andto obtain Medicare Part B coverage, manufacturers are required to enterinto a PPA. The PPA obligates manufacturers to charge covered entities thePublic Health Service price for drugs intended for outpatient use. The PublicHealth Service price is based on the Medicaid rebate amount. We believe that wehave complied with the terms of the PPA and federal law.  If the USAO determines that our practices areinconsistent with the terms of the PPA, the USAO has stated that it may file acivil action against us under the Anti-fraud Injunction Act and seek a courtorder directing the company to comply with the PPA or, potentially, proceed undersome other legal theory.   We could alsobe subject to fines, damages, penalties, appointment of a monitor, orenhancement of existing compliance and training programs as a result ofgovernment action. We are cooperating with the investigation and intend torespond to information requests from the USAO. Based on the informationobtained to date, we have not determined that any potential liability that mayresult is probable or can be reasonably estimated. Therefore, we have not madeany accrual in our unaudited interim consolidated financial statements as of September 30,2010.

 

**11.****           ****Share-BasedCompensation**

 

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

 

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

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| SG&A                  |       | $                                | 2,530      |                            | $          | 17,929 |   | $ | 10,480 |   | $ | 34,379 |   |
| R&D                   |       | 181                              |       | 513                             |       | 896 |   | 1,692 |   |
| Cost  of goods sold       |       | 908                              |       | 1,012                           |       | 2,827 |   | 3,554 |   |
| Total  expense            |       | $                                | 3,619      |                            | $          | 19,454 |   | $ | 14,203 |   | $ | 39,625 |   |
|                      |       |                             |       |                            |       |   |   |   |   |
| Capitalized  in inventory |       | $                                | 483        |                            | $          | 868 |   | $ | 1,928 |   | $ | 2,874 |   |

 

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

 

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

 

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

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

 

Inaddition to the unrecognized compensation cost included in the table above, at September 30,2010, $1.9 million of compensation cost was included in inventory on 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.

 

***Stock Options***

 

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

 
| ** **                                              | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|---------------------------------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **   | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining**   | ** ** | ** **    | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Average**  | ** ** | **Contractual** | ** ** | **Aggregate** | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term**        | ** ** | **Intrinsic** | ** ** |
| ** **                                              | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(Years)**     | ** ** | **Value**     | ** ** |
| Outstanding  at December 31, 2009                  |       | 12,129,438 |       | $            | 8.40       |            |       |          |       |   |
| Granted                                                 |       | 73,593     |       | $            | 20.39      |            |       |          |       |   |
| Forfeited                                               |       | (18,805    | )          | $            | 19.00      |            |       |          |       |   |
| Exercised                                               |       | (2,989,023 | )          | $            | 6.44       |            |       |          |       |   |
| Outstanding  at September 30, 2010                 |       | 9,195,203  |       | $            | 9.11       |            | 6.0        |          | $          | 126,587 |   |
|                                                    |       |       |       |         |       |            |       |          |       |
| Exercisable  at September 30, 2010                 |       | 8,542,702  |       | $            | 8.35       |            | 5.1        |          | $          | 124,157 |   |
|                                                    |       |       |       |         |       |            |       |          |       |
| Vested  and expected to vest at September 30, 2010 |       | 9,142,593  |       | $            | 9.00       |            | 6.0        |          | $          | 126,862 |   |

 

Theaggregate intrinsic value in the table above represents the difference betweenthe $22.88 closing price of our common stock as reported by The NASDAQ GlobalSelect Market on September 30, 2010 and the weighted average exerciseprice, multiplied by the number of options outstanding or exercisable.  The total cash proceeds to us from stockoption exercises during the nine months ended September 30, 2010 were$19.3 million for shares with an estimated intrinsic value of $68.4million.    We do not record theaggregate intrinsic value for financial accounting purposes and the valuechanges based upon changes in the fair value of our common stock.

 

Thefollowing weighted-average assumptions were used to estimate the fair value ofstock options granted:

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

 

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

 

***Restricted Stock***

 

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

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

 

During the nine months ended September 30, 2010, we repurchased246,823 shares of our common stock from employees for $4.9 million to settletheir withholding tax obligations upon vesting of 727,256 shares of restrictedstock.  During the nine months ended September 30,2009, we repurchased 248,512 shares of our common stock from employees for $4.1million to settle their withholding tax obligations upon vesting of 771,744shares of restricted stock.  The totalfair value of the restricted stock that vested during the nine months ended September 30,2010 and 2009 was $14.5 million and $12.8 million, respectively.

 

***Restricted Stock Units (RSU’s)***

 

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

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

 

***Performance Share Units (PSU’s)***

 

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

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

 

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

 

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***Income Taxes***

 

Inconnection with stock option exercises and restricted stock vesting, werecognized net tax benefits of $12.4 million and

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

 

**12.****           ****SegmentReporting**

 

We operate our plasma-derived protein therapeutics business as a singlereportable business segment since all operating activities are directed fromour North Carolina headquarters and all of our products are derived from asingle source and result from a common manufacturing process. All products aremanufactured from a single raw material source, human plasma, and are processedin whole, or in part, at our principal manufacturing facilities located inClayton, North Carolina. Our Melville, New York, facility primarily suppliesintermediate plasma fractions to our Clayton facilities. Gamunex andProlastin/Prolastin-C A1PI constitute the majority of our net revenue. Althoughwe sell our products worldwide, the majority of our net revenue wasconcentrated in the United States and Canada for the periods presented.

 

In the following table, we have presented our net revenue bysignificant product category. Our Immunology/Neurology product categoryincludes the products that are used to provide antibodies to patients who havea genetic or acquired inability to produce these antibodies, as well as atreatment for CIDP, and also products that provide antibodies to counterspecific antigens such as rabies. Our Pulmonology product category is comprisedof our Prolastin/Prolastin-C A1PI product, which is used to treat patients witha genetic alpha-1 antitrypsin deficiency. Our Critical Care/Hemostasis product category includes products that areused to supplement, restore, or maintain normal plasma parameters such asvolume or coagulation values.  Otherproduct net revenue primarily consists of sales of PPF powder and intermediateproducts, such as cryoprecipitate.  Othernet revenue consists of royalties and licensing fees, milestones, and revenuesrelated to contracted services performed for third parties at our Melville, NewYork facility.

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

 

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

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

 

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

 

**13.****           ****Earningsper Share**

 

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

 

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| **.**                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income                                                     |       | $                                | 56,052     |                            | $          | 35,810 |   | $ | 149,014 |   | $ | 152,517 |   |
| Less:                                                           |       |                             |       |                            |       |   |   |   |   |
| Series A  convertible preferred stock undeclared dividends |       | —                           |       | (3,280                          | )          | — |   | (9,602 | ) |
| Series B  convertible preferred stock undeclared dividends |       | —                           |       | (732                            | )          | — |   | (2,142 | ) |
| Net  income available to common stockholders                    |       | $                                | 56,052     |                            | $          | 31,798 |   | $ | 149,014 |   | $ | 140,773 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Weighted  average common shares outstanding                     |       | 123,668,072                      |       | 2,647,178                       |       | 122,669,724 |   | 1,847,235 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Basic  net income per common share                              |       | $                                | 0.45       |                            | $          | 12.01 |   | $ | 1.21 |   | $ | 76.21 |   |

 

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

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                         | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                        |       | $                                | 56,052     |                            | $          | 35,810 |   | $ | 149,014 |   | $ | 152,517 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Weighted  average common shares outstanding        |       | 123,668,072                      |       | 2,647,178                       |       | 122,669,724 |   | 1,847,235 |   |
| Plus  incremental shares from assumed conversions: |       |                             |       |                            |       |   |   |   |   |
| Series A  preferred stock                     |       | —                           |       | 71,217,391                      |       | — |   | 71,736,264 |   |
| Series B  preferred stock                     |       | —                           |       | 13,695,817                      |       | — |   | 13,795,601 |   |
| Stock  options and restricted shares               |       | 5,266,418                        |       | 6,350,815                       |       | 5,844,003 |   | 6,540,453 |   |
| Dilutive  potential common shares                  |       | 128,934,490                      |       | 93,911,201                      |       | 128,513,727 |   | 93,919,553 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Diluted  net income per common share               |       | $                                | 0.43       |                            | $          | 0.38 |   | $ | 1.16 |   | $ | 1.62 |   |

 

Optionsat the weighted average exercise prices indicated below were outstanding butexcluded from the computation of diluted earnings per common share becausetheir exercise prices and assumed tax benefits upon exercise were greater than theaverage market price for the common shares during the periods presented, soincluding those options would be anti-dilutive.

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

 

**14.****           ****FairValue of Financial Instruments**

 

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

 

AtSeptember 30, 2010 and December 31, 2009, the estimated fair value ofour 7.75% Notes was $657.8 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 September 30, 2010 and December 31,2009.  At September 30, 2010 and December 31,2009, we have notes receivable outstanding, which bear interest at marketrates, and consequently, the recorded amounts approximate fair value.  The recorded amounts of all other financialinstruments, which consists of cash and cash equivalents, accounts receivable,net, accounts payable, accrued expenses and other liabilities, approximate fairvalue due to the short duration of the instruments.

 

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**15.****           ****CondensedConsolidating Financial Information**

 

In October 2009, we completed the issuance of our 7.75%Notes.  The 7.75% Notes are guaranteed ona senior unsecured basis by our existing and future domestic subsidiaries.  The accompanying condensed consolidatingfinancial information has been prepared and presented pursuant to SECRegulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuersof 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**

**September 30, 2010**

 
| ** **                                                 | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating**  | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|--------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**    | ** ** | **Consolidated** | ** ** |
| **Assets:**                                                |       |        |       |             |       |              |       |               |       |             |       |
| Current  assets:                                           |       |        |       |             |       |              |       |               |       |             |       |
| Cash                                                       |       | $           | —     |             | $          | 143,327           |       | $                  | 7,203      |             | $          | — |   | $ | 150,530 |   |
| Accounts  receivable, net                                  |       | —      |       | 287,799          |       | 38,502            |       | (155,429           | )          | 170,872          |       |
| Inventories                                                |       | —      |       | 626,319          |       | 46,409            |       | —             |       | 672,728          |       |
| Other                                                      |       | —      |       | 119,158          |       | 887               |       | —             |       | 120,045          |       |
| Total  current assets                                      |       | —      |       | 1,176,603        |       | 93,001            |       | (155,429           | )          | 1,114,175        |       |
| Property,  plant, and equipment, net                       |       | —      |       | 330,355          |       | 1,135             |       | —             |       | 331,490          |       |
| Intangible  assets                                         |       | —      |       | 10,880           |       | —            |       | —             |       | 10,880           |       |
| Goodwill                                                   |       | —      |       | 172,860          |       | —            |       | —             |       | 172,860          |       |
| Investment  in Subsidiaries                                |       | 809,729     |       | (33,839          | )          | —            |       | (775,890           | )          | —           |       |
| Advances  and notes between Parent and Subsidiaries        |       | 1,400,295   |       | 826,572          |       | —            |       | (2,226,867         | )          | —           |       |
| Other                                                      |       | —      |       | 19,029           |       | 309               |       | —             |       | 19,338           |       |
| Total  assets                                              |       | $           | 2,210,024  |             | $          | 2,502,460         |       | $                  | 94,445     |             | $          | (3,158,186 | ) | $ | 1,648,743 |   |
|                                                       |       |        |       |             |       |              |       |               |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit):**   |       |        |       |             |       |              |       |               |       |             |       |
| Current  liabilities:                                      |       |        |       |             |       |              |       |               |       |             |       |
| Accounts  payable                                          |       | $           | —     |             | $          | 75,963            |       | $                  | 119,181    |             | $          | (155,429 | ) | $ | 39,715 |   |
| Accrued  expenses and other liabilities                    |       | 17,634      |       | 172,558          |       | 8,380             |       | —             |       | 198,572          |       |
| Current  portion of capital lease obligations              |       | —      |       | 832              |       | —            |       | —             |       | 832              |       |
| Total  current liabilities                                 |       | 17,634      |       | 249,353          |       | 127,561           |       | (155,429           | )          | 239,119          |       |
| Long-term  debt and capital lease obligations              |       | 596,477     |       | 8,906            |       | —            |       | —             |       | 605,383          |       |
| Advances  and notes between Parent and Subsidiaries        |       | 826,572     |       | 1,400,295        |       | —            |       | —  (2,226,867 | )          | —           |       |
| Other                                                      |       | —      |       | 34,177           |       | 723               |       | —             |       | 34,900           |       |
| Total  liabilities                                         |       | 1,440,683   |       | 1,692,731        |       | 128,284           |       | (2,382,296         | )          | 879,402          |       |
| Stockholders’  equity (deficit)                       |       | 769,341     |       | 809,729          |       | (33,839           | )          | (775,890           | )          | 769,341          |       |
| Total  liabilities and stockholders’ equity (deficit) |       | $           | 2,210,024  |             | $          | 2,502,460         |       | $                  | 94,445     |             | $          | (3,158,186 | ) | $ | 1,648,743 |   |

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Balance Sheets**

**December 31, 2009**

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Three Months Ended September 30, 2010**

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

 

**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Three Months Ended September 30, 2009**

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Nine Months Ended September 30, 2010**

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

 

**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Income Statements**

**Nine Months Ended September 30, 2009**

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Statements of Cash Flows**

**Nine Months Ended September 30, 2010**

 
| ** **                                                                                      | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                      | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **Cash flows from operating activities:**                                                       |       |        |       |             |       |              |       |              |       |             |       |
| Net  income (loss)                                                                              |       | $           | 149,014    |             | $          | 149,014           |       | $                 | (5,613     | )                | $          | (143,401 | ) | $ | 149,014 |   |
| Undistributed  equity in (earnings) losses of Subsidiaries                                      |       | (149,014    | )          | 5,613            |       | —            |       | 143,401           |       | —           |       |
| Adjustments  to reconcile net income (loss) to net cash flows provided by operating  activities |       | —      |       | (36,329          | )          | 20,096            |       | 19,739            |       | 3,506            |       |
| **Net cash provided by operating activities**                                                   |       | —      |       | 118,298          |       | 14,483            |       | 19,739            |       | 152,520          |       |
|                                                                                            |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from investing activities:**                                                       |       |        |       |             |       |              |       |              |       |             |       |
| Purchases  of property, plant, and equipment                                                    |       | —      |       | (91,392          | )          | (299              | )          | —            |       | (91,691          | )          |
| Net  advances and notes between Parent and Subsidiaries                                         |       | (25,170     | )          | —           |       | —            |       | 25,170            |       | —           |       |
| Other                                                                                           |       | —      |       | 14,139           |       | (13,632           | )          | —            |       | 507              |       |
| **Net cash (used in) provided by investing activities**                                         |       | (25,170     | )          | (77,253          | )          | (13,931           | )          | 25,170            |       | (91,184          | )          |
|                                                                                            |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from financing activities:**                                                       |       |        |       |             |       |              |       |              |       |             |       |
| Net  advances and notes between Parent and Subsidiaries                                         |       | —      |       | 44,909           |       | —            |       | (44,909           | )          | —           |       |
| Other                                                                                           |       | 25,170      |       | (947             | )          | —            |       | —            |       | 24,223           |       |
| **Net cash provided by (used in) financing activities**                                         |       | 25,170      |       | 43,962           |       | —            |       | (44,909           | )          | 24,223           |       |
| Effect  of exchange rate changes on cash and cash equivalents                                   |       | —      |       | —           |       | (268              | )          | —            |       | (268             | )          |
| Net  increase in cash and cash equivalents                                                      |       | —      |       | 85,007           |       | 284               |       | —            |       | 85,291           |       |
| Cash  and cash equivalents at beginning of period                                               |       | —      |       | 58,320           |       | 6,919             |       | —            |       | 65,239           |       |
| Cash  and cash equivalents at end of period                                                     |       | $           | —     |             | $          | 143,327           |       | $                 | 7,203      |             | $          | — |   | $ | 150,530 |   |

 

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**Talecris Biotherapeutics Holdings Corp.**

**Condensed Consolidating Statements of Cash Flows**

**Nine Months Ended September 30, 2009**

 
| ** **                                                                                                | ** ** | **Parent/** | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                | ** ** | **Issuer**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **Cash flows from operating activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Net  income (loss)                                                                                        |       | $           | 152,517    |             | $          | 107,482           |       | $                 | (3,659     | )                | $          | (103,823 | ) | $ | 152,517 |   |
| Undistributed  equity in (earnings) losses of Subsidiaries                                                |       | (107,482    | )          | 3,659            |       | —            |       | 103,823           |       | —           |       |
| Adjustments  to reconcile net income (loss) to net cash flows provided by (used in) operating  activities |       | (29         | )          | 36,002           |       | (3,266            | )          | 13,500            |       | 46,207           |       |
| **Net cash provided by (used in) operating activities**                                                   |       | 45,006      |       | 147,143          |       | (6,925            | )          | 13,500            |       | 198,724          |       |
|                                                                                                      |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from investing activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Purchases  of property, plant, and equipment                                                              |       | —      |       | (36,171          | )          | (120              | )          | —            |       | (36,291          | )          |
| Business  acquisitions, net of cash acquired                                                              |       | —      |       | (25,510          | )          | —            |       | —            |       | (25,510          | )          |
| Net  advances and notes between Parent and Subsidiaries                                                   |       | (42,311     | )          | —           |       | —            |       | 42,311            |       | —           |       |
| Other                                                                                                     |       | —      |       | (7,961           | )          | 6,992             |       | —            |       | (969             | )          |
| **Net cash (used in) provided by investing activities**                                                   |       | (42,311     | )          | (69,642          | )          | 6,872             |       | 42,311            |       | (62,770          | )          |
|                                                                                                      |       |        |       |             |       |              |       |              |       |             |       |
| **Cash flows from financing activities:**                                                                 |       |        |       |             |       |              |       |              |       |             |       |
| Net  repayments of borrowings                                                                             |       | —      |       | (117,347         | )          | —            |       | —            |       | (117,347         | )          |
| Net  advances and notes between Parent and Subsidiaries                                                   |       | —      |       | 55,811           |       | —            |       | (55,811           | )          | —           |       |
| Other                                                                                                     |       | (2,695      | )          | (407             | )          | —            |       | —            |       | (3,102           | )          |
| **Net cash used in financing activities**                                                                 |       | (2,695      | )          | (61,943          | )          | —            |       | (55,811           | )          | (120,449         | )          |
| Effect  of exchange rate changes on cash and cash equivalents                                             |       | —      |       | —           |       | 465               |       | —            |       | 465              |       |
| Net  increase in cash and cash equivalents                                                                |       | —      |       | 15,558           |       | 412               |       | —            |       | 15,970           |       |
| Cash  and cash equivalents at beginning of period                                                         |       | —      |       | 10,727           |       | 6,252             |       | —            |       | 16,979           |       |
| Cash  and cash equivalents at end of period                                                               |       | $           | —     |             | $          | 26,285            |       | $                 | 6,664      |             | $          | — |   | $ | 32,949 |   |

 

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**SPECIAL NOTE REGARDINGFORWARD-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 financialposition, future revenue, projected costs, prospects, plans and objectives ofmanagement are forward-looking statements. Forward-looking statements may beidentified by the use of forward-looking terms such as “may,” “will,” “would,” “expects,”“intends,” “believes,” “anticipates,” “plans,” “predicts,” “estimates,” “projects,”“targets,” “forecasts,” “seeks,” or the negative of such terms or othervariations on such terms or comparable terminology. The forward-lookingstatements that we make are based upon assumptions about many important riskfactors, many of which are beyond our control. Among the factors that couldcause actual results to differ materially are the following:

 

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

 

·                  the unprecedented volatility in the globaleconomy and fluctuations in financial markets;

 

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

 

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

 

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

 

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

 

·                  legislation or regulations in markets outsideof the U.S. affecting product pricing, reimbursement, access, or distributionchannels;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  availability and cost offinancing opportunities;

 

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

 

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

 

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

 

·                  other factors identifiedelsewhere in this Quarterly Report and in our Annual Report on Form 10-Kfor the year ended 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 not undertake to update or revise anyforward-looking statements, even if events make it clear that any projectedresults, expressed or implied, will not be realized.

 

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

 

The following discussion and analysis contains forward-lookingstatements that involve risks and uncertainties.  You are encouraged to read the followingdiscussion and analysis of our financial condition and results of operationstogether with our unaudited interim consolidated financial statements andrelated footnotes included elsewhere in this Quarterly Report.  In addition, you are encouraged to refer to adiscussion of risk factors included elsewhere in this Quarterly Report, as wellas in our 2009 Form 10-K, that could cause actual results to differmaterially from those described or implied by the forward-looking statementscontained in the following discussion and analysis. You are also encouraged torefer to our 2009 Form 10-K, which includes additional informationregarding our business and industry.  See“Special Note Regarding Forward-Looking Statements” included elsewhere in thisQuarterly 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.

 

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

 

**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-related emphysema, bleeding disorders, infectious diseases, andsevere trauma.  Our primary products haveorphan drug designation to serve populations with rare, chronic diseases.  Our products are derived from human plasma,the liquid component of blood, which is sourced from our plasma collectioncenters or purchased from third parties with plasma collection centers locatedin the United States.  Plasma containsmany therapeutic proteins, which we extract through the process offractionation at our Clayton, North Carolina and Melville, New Yorkfacilities.  The fractionatedintermediates are then purified, formulated into final bulk, and aseptically filledinto final containers for sale.  We alsosell the fractionated intermediate products.

 

The majority of our sales are concentrated in the therapeutic areas ofImmunology/Neurology and Pulmonology. Our largest product, representing 53.1% and 54.0% of our net revenue forthe three and nine months ended September 30, 2010, Gamunex, ImmuneGlobulin Intravenous (Human), 10% Caprylate/Chromatography Purified (Gamunex,Gamunex IGIV), provides a treatment for primary immune deficiency andautoimmune diseases, such as CIDP.  Oursecond largest product, representing 22.1% and 21.7% of our net revenue for thethree and nine months ended September 30, 2010, Prolastin Alpha-1Proteinase Inhibitor (Human) (Prolastin, Prolastin A1PI, Prolastin-C A1PI),provides a treatment for alpha-1 antitrypsin deficiency-related emphysema.  During the third quarter of 2010, wecompleted the conversion of our existing U.S. Prolastin patients to Prolastin-CA1PI, our next generation A1PI product. During the third quarter of 2010, we launched Prolastin-C A1PI in Canadaand anticipate full conversion of our existing Canadian Prolastin A1PI patientsto Prolastin-C A1PI in the 2010 fourth quarter.

 

U.S. IGIV distribution increased between 6% and 8% during the ninemonths ended September 30, 2010. This growth represents a recovery in demand in the second and thirdquarters of 2010 after a slight decline in growth in the first quarter of2010.  Despite solid demand growth forIGIV, there has been increased scrutiny and price sensitivity in the hospitalsegment.  In addition, the increase inthe number of hospitals qualifying for the 340B discounts has effectivelyreduced demand from GPO’s who are not permitted to service this discountedchannel, which among other factors, has led us to accept reduced volume tiersunder certain of our GPO contracts.  Wehave seen solid demand growth for Gamunex with most customer segments. Webelieve that U.S. and international IGIV demand will grow approximately 6% to8% over the long-term, which is consistent with demand growth during the ninemonths ended September 30, 2010. However, IGIV demand can vary significantly on a quarter-to-quarterbasis.

 

Our ability to expand our international business has been hampered bythe effects of our internal Foreign Corrupt Practices Act (FCPA) investigationand increased price sensitivities of our customers, which has resulted inpricing pressures for plasma-derived products. Our business with Iran, one of our major international customers, hasbeen in decline, which is likely to continue. Our profitability has and may continue to be negatively impacted byunfavorable euro/U.S. dollar exchange rates. We have experienced, and expect to continue to experience, annual volumedeclines in Canada due to Canadian Blood Services (CBS) objective to havemultiple sources of supply, which has impacted and will continue to impact ouroverall IGIV growth.  CBS may furtherreduce volumes to contract minimums and Hema Quebec may adopt a similarstrategy.

 

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

 

Our integrated plasma collection center platform, Talecris PlasmaResources, Inc. (TPR), consisted of 69 operating centers, of which 66 wereFDA licensed and 3 were unlicensed as of September 30, 2010 and providedapproximately 73.9% and 69.4% of our plasma during the three and nine monthsended September 30, 2010.  We willneed to significantly increase plasma collections generated from TPR in thenear term to offset the expected decrease in plasma supplied by third partiesand planned increases in our fractionation to meet anticipated demand.  To meet our plasma requirements, we may increasedonor fees, increase marketing expense, and expand plasma collection centerdays and hours of operation, among other initiatives, which may limit ourability to reduce our cost per liter of plasma. Consequently, we expect to continue to produce plasma at a cost perliter which we believe is significantly higher than our competitors.  Subsequent to September 30, 2010, wereceived FDA licensure for one of the unlicensed plasma collection centers.

 

Our historical comparisons illustrate the substantial reduction in boththe collection cost per liter and the amount of excess period costs chargeddirectly to cost of goods sold as a result of the maturation of our plasmacollection center platform.  Decreasingcollection costs and the reduction of excess period costs, combined withleveraging our manufacturing facilities as a result of higher volumes, havecontributed to improving our gross margins. Our cost of goods sold reflects $1.5 million and $8.7 million for thethree months ended September 30, 2010 and 2009, respectively, and $5.2million and $34.1 million for the nine months ended September 30, 2010 and2009, respectively, related to excess period costs associated with TPR.  We believe that we have substantiallyeliminated unabsorbed TPR infrastructure and start-up costs. Consequently,future margin improvements will need to be derived from increases in productpricing and volumes, product mix, improvements in the cost per liter of plasma,manufacturing efficiencies, yield improvements or some combination thereof. Webelieve that the current environment does not favor near-term price increasesand we have limited opportunities to enhance product mix.  We have recently experienced and expect tocontinue to experience higher cost of goods sold due to yield variability, lessefficient utilization of each incremental liter of plasma fractionated as weincrease Gamunex production, and higher non-capitalizable costs associated withour capital projects, particularly the construction of our new fractionationfacility.

 

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

 

**2010HIGHLIGHTS**

 

Our2010 financial and business highlights are included below.

 

***2010 Financial Highlights***

 

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

 

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

 

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·                  Operating margin improved 630 basis points to23.8% for the three months ended September 30, 2010 as compared to 17.5%for the three months ended September 30, 2009.  Operating margin improved 350 basis points to22.2% for the nine months ended September 30, 2010 as compared to 18.7%for the nine months ended September 30, 2009.

 

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

 

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

 

The adjusted net income and diluted earnings per share amounts in thetable below are non-GAAP financial measures and should not be considered asubstitute for any performance measure determined in accordance with U.S.GAAP.  Additional information regardingthe use of non-GAAP financial measures and their limitations is included in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Non-GAAP Financial Measures.”

 

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

 
| ** **                                                       | ** ** | ** **  | ** ** | ** **          | ** ** | ** **          | ** ** | **Diluted Earnings** | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|---------------------|------------|---------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | **Pre-Tax** | ** ** | **Income Tax** | ** ** | ** **          | ** ** | **Per Common**       | ** ** |
| ** **                                                       | ** ** | **Amount**  | ** ** | **Effect**          | ** ** | **Net Income** | ** ** | **Share**                 | ** ** |
| *Three Months Ended September 30, 2010*                     | ** ** | ** **  | ** ** | ** **          | ** ** | ** **          | ** ** | ** **                | ** ** |
| U.S.  GAAP                                                       |       | $           | 85,781     |                | $          | (29,729             | )          | $                         | 56,052     |   | $ | 0.43 |   |
| Grifols  merger-related expenses                                 |       | 9,485       |       | (3,680              | )          | 5,805               |       | 0.05                      |       |
| Excluding  merger-related items                                  |       | $           | 95,266     |                | $          | (33,409             | )          | $                         | 61,857     |   | $ | 0.48 |   |
|                                                             |       |        |       |                |       |                |       |                      |       |
| *Three Months Ended September 30, 2009*                     | ** ** | ** **  | ** ** | ** **          | ** ** | ** **          | ** ** | ** **                | ** ** |
| U.S.  GAAP                                                       |       | $           | 49,935     |                | $          | (14,125             | )          | $                         | 35,810     |   | $ | 0.38 |   |
| CSL  merger-related expenses                                     |       | 1,528       |       | (593                | )          | 935                 |       | 0.01                      |       |
| Excluding  merger-related items                                  |       | $           | 51,463     |                | $          | (14,718             | )          | $                         | 36,745     |   | $ | 0.39 |   |
|                                                             |       |        |       |                |       |                |       |                      |       |
| As  adjusted for pro forma weighted average number of shares (1) |       |        |       |                |       |                |       | $                         | 0.29       |   |
|                                                             |       |        |       |                |       |                |       |                      |       |
| *Nine Months Ended September 30, 2010*                      |       |        |       |                |       |                |       |                      |       |
| U.S.  GAAP                                                       |       | $           | 230,157    |                | $          | (81,143             | )          | $                         | 149,014    |   | $ | 1.16 |   |
| Grifols  merger-related expenses                                 |       | 17,908      |       | (6,948              | )          | 10,960              |       | 0.08                      |       |
| Excluding  merger-related items                                  |       | $           | 248,065    |                | $          | (88,091             | )          | $                         | 159,974    |   | $ | 1.24 |   |
|                                                             |       |        |       |                |       |                |       |                      |       |
| *Nine Months Ended September 30, 2009*                      |       |        |       |                |       |                |       |                      |       |
| U.S.  GAAP                                                       |       | $           | 227,431    |                | $          | (74,914             | )          | $                         | 152,517    |   | $ | 1.62 |   |
| CSL  merger termination fee                                      |       | (75,000     | )          | 26,250              |       | (48,750             | )          | (0.52                     | )          |
| CSL  merger-related expenses                                     |       | 14,282      |       | (5,541              | )          | 8,741               |       | 0.10                      |       |
| Excluding  merger-related items                                  |       | $           | 166,713    |                | $          | (54,205             | )          | $                         | 112,508    |   | $ | 1.20 |   |
|                                                             |       |        |       |                |       |                |       |                      |       |
| As  adjusted for pro forma weighted average number of shares (1) |       |        |       |                |       |                |       | $                         | 0.90       |   |

 

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(1) As discussed further in “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Matters AffectingComparability,” we believe the comparability of our diluted earnings per sharebetween the periods 

 

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

 

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

 

***2010 Third Quarter and Subsequent Business Highlights***

 

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

 

·                  In September 2010, we launched our nextgeneration A1PI product, Prolastin-C, in Canada.  We anticipate full conversion of existingCanadian Prolastin A1PI patients to Prolastin-C A1PI during the 2010 fourthquarter.

 

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

 

**HEALTHCARE REFORM**

 

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

 

Althoughmany provisions of the new legislation do not take effect immediately, severalprovisions became effective during 2010. These include (1) an increase inthe minimum Medicaid rebate to states participating in the Medicaid programfrom 15.1% to 23.1% of the Average Manufacturer Price (AMP) on our brandedprescription drugs, with a limitation of this increase on clotting factors to17.1% of AMP; (2) the extension of the Medicaid rebate to managed careorganizations that dispense drugs to Medicaid beneficiaries; and (3) theexpansion of the 340B Public Health Services drug pricing program, which provideshospital outpatient drugs at reduced rates, to include additional hospitals,clinics, and healthcare centers.  We donot believe that these new provisions will have a material impact on our 2010financial results.

 

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

 

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

 

Presently,uncertainty exists as many of the specific determinations will be developed asregulatory bodies interpret the law and enact new regulations.  For example, determinations as to how theMedicare Part D coverage gap will operate and how the annual fee onbranded prescription drugs will be calculated and allocated remain to beclarified.  As noted above, theseprograms will become effective in 2011.

 

**CUSTOMERCONCENTRATION**

 

Ouraccounts receivable, net, includes amounts due from pharmaceutical wholesalersand distributors, buying groups, 

 

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hospitals, physicians’offices, patients, and others.  Our concentrationswith customers that represented more than 10% of our accounts receivable, netwere:

 

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

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

 

Thefollowing table summarizes our concentrations with customers that representedmore than 10% of our total net revenue:

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

 

Inthe event that any of these customers were to suffer an adverse downturn intheir business or a downturn in their supply needs, our business could bematerially adversely affected.

 

**BASISOF PRESENTATION**

 

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

 

Thecomparability of our financial results is impacted by significant events andtransactions during the periods presented as described in “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Matters Affecting Comparability.”

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Thepreparation of consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America (U.S. GAAP)requires us to make estimates and judgments in certain circumstances thataffect the reported amounts of assets, liabilities, revenue, expenses, and therelated disclosures of contingent assets and liabilities.  A detailed description of our significantaccounting policies is included in the footnotes to our audited consolidatedfinancial statements included in our 2009 Form 10-K.

 

Therehave been no significant changes in our application of our critical accountingpolicies and estimates during the nine months ended September 30, 2010 ascompared to the prior year.  Weperiodically review our critical accounting policies and estimates with theaudit committee of our board of directors.

 

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

 

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

 

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

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

 

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

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

 

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

 

**MATTERSAFFECTING COMPARABILITY**

 

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

 

***Definitive Merger Agreement with Grifols***

 

We have entered into agreements with investment bankers related to ourdefinitive merger agreement with Grifols. We incurred fees totaling $2.5 million under these agreements during2010 and are obligated to pay additional fees totaling $21.3 million uponsuccessful closing of the merger transaction. During the three and nine months ended September 30, 2010, we alsoincurred legal, accounting, and other fees of $5.7 million and $11.6 million,respectively, associated with the definitive merger agreement.

 

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

 

***Financial Impact 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 and nine months ended September 30,2010 as compared to the three and nine months ended September 30, 2009, andcorrespondingly lower interest expense during the 2010 periods.  For the three months ended September 30,2010 and 2009, our interest expense was $12.0 million and $19.0 million,respectively, and for the nine months ended September 30, 2010 and 2009, ourinterest expense was $35.9 million and $59.5 million, respectively.

 

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***Comparability of Outstanding Common Shares and Pro Forma DilutedEarnings 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 commonshare.  The application of the netprimary proceeds to us from our IPO to repay our then existing indebtedness hasresulted in a significant reduction in interest expense during the three andnine months ended September 30, 2010 as compared to the prior yearperiods.

 

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 tables below, the pro forma diluted earnings per common share computationsfor the three and nine months ended September 30, 2009 reflect anadjustment to net income for reduced interest expense as if the net primaryproceeds to us from our IPO of $519.7 million had been applied to repay ourdebt at the beginning of 2009, net of interest rate differences from our 7.75%Notes issuance. The pro forma adjustment to the denominator reflects theimpacts for the issuance of common shares to convert preferred stock, settleaccrued dividends on the preferred stock, and complete the IPO as if theseevents occurred at the beginning of 2009.

 
| ** **                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                        | ** ** | **2010**                                                 | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                        | ** ** | **Actual**                                               | ** ** | **Actual** | ** ** | **Pro forma** | ** ** |
|                                              |       |                                                     |       |   |   |   |   |
| Net  income                                       |       | $                                                        | 56,052     |   | $ | 35,810 |   | $ | 35,810 |   |
| Interest  expense reduction due to debt repayment |       | —                                                   |       | — |   | 1,966 |   |
| Numerator                                         |       | $                                                        | 56,052     |   | $ | 35,810 |   | $ | 37,776 |   |
|                                              |       |                                                     |       |   |   |   |   |
| Weighted  average common shares outstanding       |       | 123,668,072                                              |       | 2,647,178 |   | 2,647,178 |   |
| Adjustments:                                      |       |                                                     |       |   |   |   |   |
| Stock  options and restricted shares              |       | 5,266,418                                                |       | 6,350,815 |   | 6,350,815 |   |
| Series A  preferred stock                    |       | —                                                   |       | 71,217,391 |   | 71,217,391 |   |
| Series B  preferred stock                    |       | —                                                   |       | 13,695,817 |   | 13,695,817 |   |
| Shares  issued for preferred stock dividend       |       | —                                                   |       | — |   | 2,355,662 |   |
| Newly  issued shares for IPO                      |       | —                                                   |       | — |   | 28,947,368 |   |
| Dilutive  potential common shares                 |       | 128,934,490                                              |       | 93,911,201 |   | 125,214,231 |   |
|                                              |       |                                                     |       |   |   |   |   |
| Diluted  net income per common share              |       | $                                                        | 0.43       |   | $ | 0.38 |   | $ | 0.30 |   |

 

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| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **2010**                                                | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                        | ** ** | **Actual**                                              | ** ** | **Actual** | ** ** | **Pro forma** | ** ** |
|                                              |       |                                                    |       |   |   |   |   |
| Net  income                                       |       | $                                                       | 149,014    |   | $ | 152,517 |   | $ | 152,517 |   |
| Interest  expense reduction due to debt repayment |       | —                                                  |       | — |   | 5,833 |   |
| Numerator                                         |       | $                                                       | 149,014    |   | $ | 152,517 |   | $ | 158,350 |   |
|                                              |       |                                                    |       |   |   |   |   |
| Weighted  average common shares outstanding       |       | 122,669,724                                             |       | 1,847,235 |   | 1,847,235 |   |
| Adjustments:                                      |       |                                                    |       |   |   |   |   |
| Stock  options and restricted shares              |       | 5,844,003                                               |       | 6,540,453 |   | 6,540,453 |   |
| Series A  preferred stock                    |       | —                                                  |       | 71,736,264 |   | 71,736,264 |   |
| Series B  preferred stock                    |       | —                                                  |       | 13,795,601 |   | 13,795,601 |   |
| Shares  issued for preferred stock dividend       |       | —                                                  |       | — |   | 2,372,824 |   |
| Newly  issued shares for IPO                      |       | —                                                  |       | — |   | 28,947,368 |   |
| Dilutive  potential common shares                 |       | 128,513,727                                             |       | 93,919,553 |   | 125,239,745 |   |
|                                              |       |                                                    |       |   |   |   |   |
| Diluted  net income per common share              |       | $                                                       | 1.16       |   | $ | 1.62 |   | $ | 1.26 |   |

 

***Definitive Merger Agreement with CSL***

 

We entered into a definitive merger agreement with CSL on August 12,2008, which was subject to the receipt of certain regulatory approvals as 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 $1.6 million and $8.3 million for the three and nine monthsended September 30, 2009, respectively, and legal costs associated withthe regulatory review process of $6.0 million during the nine months ended September 30,2009.  All retention amounts were paidduring 2009.

 

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

 

Our cost of goods sold includes $1.5 million and $8.7 million for thethree months ended September 30, 2010 and 2009, respectively, and $5.2million and $34.1 million for the nine months ended September 30, 2010 and2009, respectively, related to unabsorbed TPR infrastructure and start-up costsassociated with the development 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.  Webelieve we have substantially eliminated unabsorbed TPR infrastructure andstart-up costs and as a result, we expect that the TPR excess period costs willcontinue to decline in 2010 as compared to prior periods.

 

***Share-Based Compensation Awards***

 

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

 

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

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| SG&A                  |       | $                                | 2,530      |                            | $          | 17,929 |   | $ | 10,480 |   | $ | 34,379 |   |
| R&D                   |       | 181                              |       | 513                             |       | 896 |   | 1,692 |   |
| Cost  of goods sold       |       | 908                              |       | 1,012                           |       | 2,827 |   | 3,554 |   |
| Total  expense            |       | $                                | 3,619      |                            | $          | 19,454 |   | $ | 14,203 |   | $ | 39,625 |   |
|                      |       |                             |       |                            |       |   |   |   |   |
| Capitalized  in inventory |       | $                                | 483        |                            | $          | 868 |   | $ | 1,928 |   | $ | 2,874 |   |

 

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The decrease in share-based compensation expense during 2010 wasprimarily driven by the final vesting of awards under the 2005 Stock Option andIncentive Plan on April 1, 2010 and the majority of the awards under our2006 Restricted Stock Plan on March 31, 2010.  In addition, a combination of an adjustmentduring the 2010 first quarter as a result of actual award forfeitures beinghigher than initially estimated as well as the acceleration of certain optionawards to our Chairman and Chief Executive Officer during the 2009 thirdquarter further impacted the comparability of share-based compensation expensebetween the 2010 and 2009 periods.

 

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

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

 

In addition to the unrecognized compensation cost included in the tableabove, at September 30, 2010, $1.9 million of compensation cost wasincluded in inventory on our unaudited interim consolidated balance sheet,which we expect to be recognized as non-cash compensation expense in ourconsolidated income statement primarily within the next twelve months.  The amount of share-based compensationexpense that we will ultimately be required to record could change in thefuture as a result of additional grants, changes in the fair value of sharesfor performance-based awards, differences between our anticipated forfeiturerate and the actual forfeiture rate, the probability of achieving targetsestablished for performance award vesting, and other actions by our board ofdirectors or its compensation committee.

 

**RESULTSOF OPERATIONS**

 

We have included information regarding our results of operations in thefollowing table.  The subsequentdiscussion provides an analysis of our results of operations for the three andnine months ended September 30, 2010 as compared to the three and ninemonths ended September 30, 2009.

 

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| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                             | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  revenue:                          |       |                             |       |                            |       |   |   |   |   |
| Product                                |       | $                                | 400,561    |                            | $          | 387,898 |   | $ | 1,172,278 |   | $ | 1,122,877 |   |
| Other                                  |       | 6,440                            |       | 7,833                           |       | 18,510 |   | 20,219 |   |
| Total                                  |       | 407,001                          |       | 395,731                         |       | 1,190,788 |   | 1,143,096 |   |
| Cost  of goods sold                    |       | 229,908                          |       | 230,666                         |       | 670,476 |   | 663,875 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Gross  profit                          |       | 177,093                          |       | 165,065                         |       | 520,312 |   | 479,221 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                   |       |                             |       |                            |       |   |   |   |   |
| SG&A                               |       | 61,383                           |       | 79,488                          |       | 205,007 |   | 213,913 |   |
| R&D                                |       | 18,673                           |       | 16,167                          |       | 50,832 |   | 51,728 |   |
| Total                                  |       | 80,056                           |       | 95,655                          |       | 255,839 |   | 265,641 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Income  from operations                |       | 97,037                           |       | 69,410                          |       | 264,473 |   | 213,580 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Other  non-operating (expense) income: |       |                             |       |                            |       |   |   |   |   |
| Interest  expense, net                 |       | (11,529                          | )          | (19,587                         | )          | (34,915 | ) | (61,445 | ) |
| Merger  termination fee                |       | —                           |       | —                          |       | — |   | 75,000 |   |
| Equity  in earnings of affiliate       |       | 273                              |       | 112                             |       | 599 |   | 296 |   |
| Total                                  |       | (11,256                          | )          | (19,475                         | )          | (34,316 | ) | 13,851 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Income  before income taxes            |       | 85,781                           |       | 49,935                          |       | 230,157 |   | 227,431 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Provision  for income taxes            |       | (29,729                          | )          | (14,125                         | )          | (81,143 | ) | (74,914 | ) |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Net  income                            |       | $                                | 56,052     |                            | $          | 35,810 |   | $ | 149,014 |   | $ | 152,517 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Earnings  per common share:            |       |                             |       |                            |       |   |   |   |   |
| Basic                                  |       | $                                | 0.45       |                            | $          | 12.01 |   | $ | 1.21 |   | $ | 76.21 |   |
| Diluted                                |       | $                                | 0.43       |                            | $          | 0.38 |   | $ | 1.16 |   | $ | 1.62 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Financial  measures:                   |       |                             |       |                            |       |   |   |   |   |
| Gross  margin                          |       | 43.5                             | %          | 41.7                            | %          | 43.7 | % | 41.9 | % |
| Operating  margin                      |       | 23.8                             | %          | 17.5                            | %          | 22.2 | % | 18.7 | % |
| Effective  income tax rate             |       | 34.7                             | %          | 28.3                            | %          | 35.3 | % | 32.9 | % |

 

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

 

The following discussion and analysis contains information regardingour results of operations for the three months ended September 30, 2010 ascompared to the three months ended September 30, 2009:

 

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| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| Net  revenue:                          |       |                             |       |       |       |   |   |   |   |
| Product                                |       | $                                | 400,561    |       | $          | 387,898 |   | $ | 12,663 |   | 3.3 | % |
| Other                                  |       | 6,440                            |       | 7,833      |       | (1,393 | ) | (17.8 | )% |
| Total                                  |       | 407,001                          |       | 395,731    |       | 11,270 |   | 2.8 | % |
| Cost  of goods sold                    |       | 229,908                          |       | 230,666    |       | 758 |   | 0.3 | % |
|                                   |       |                             |       |       |       |   |   |   |   |
| Gross  profit                          |       | 177,093                          |       | 165,065    |       | 12,028 |   | 7.3 | % |
| Operating  expenses:                   |       |                             |       |       |       |   |   |   |   |
| SG&A                               |       | 61,383                           |       | 79,488     |       | 18,105 |   | 22.8 | % |
| R&D                                |       | 18,673                           |       | 16,167     |       | (2,506 | ) | (15.5 | )% |
| Total                                  |       | 80,056                           |       | 95,655     |       | 15,599 |   | 16.3 | % |
|                                   |       |                             |       |       |       |   |   |   |   |
| Income  from operations                |       | 97,037                           |       | 69,410     |       | 27,627 |   | 39.8 | % |
| Other  non-operating (expense) income: |       |                             |       |       |       |   |   |   |   |
| Interest  expense, net                 |       | (11,529                          | )          | (19,587    | )          | 8,058 |   | 41.1 | % |
| Equity  in earnings of affiliate       |       | 273                              |       | 112        |       | 161 |   | 143.8 | % |
| Total                                  |       | (11,256                          | )          | (19,475    | )          | 8,219 |   | 42.2 | % |
|                                   |       |                             |       |       |       |   |   |   |   |
| Income  before income taxes            |       | 85,781                           |       | 49,935     |       | 35,846 |   | 71.8 | % |
| Provision  for income taxes            |       | (29,729                          | )          | (14,125    | )          | (15,604 | ) | (110.5 | )% |
|                                   |       |                             |       |       |       |   |   |   |   |
| Net  income                            |       | $                                | 56,052     |       | $          | 35,810 |   | $ | 20,242 |   | 56.5 | % |
|                                   |       |                             |       |       |       |   |   |   |   |
| Earnings  per common share:            |       |                             |       |       |       |   |   |   |   |
| Basic                                  |       | $                                | 0.45       |       | $          | 12.01 |   | $ | (11.56 | ) | (96.3 | )% |
| Diluted                                |       | $                                | 0.43       |       | $          | 0.38 |   | $ | 0.05 |   | 13.2 | % |
|                                   |       |                             |       |       |       |   |   |   |   |
| Financial  measures:                   |       |                             |       |       |       |   |   |   |   |
| Gross  profit margin                   |       | 43.5                             | %          | 41.7       | %          |   |   |   |   |
| Operating  margin                      |       | 23.8                             | %          | 17.5       | %          |   |   |   |   |
| Effective  income tax rate             |       | 34.7                             | %          | 28.3       | %          |   |   |   |   |

 

**NetRevenue**

 

The following table contains information regarding our net revenue:

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

 

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| ** **                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| U.S.  product net revenue:               |       |                             |       |       |       |   |   |   |   |
| Gamunex  IGIV                            |       | $                                | 164,968    |       | $          | 151,066 |   | $ | 13,902 |   | 9.2 | % |
| Prolastin  A1PI                          |       | 60,478                           |       | 52,632     |       | 7,846 |   | 14.9 | % |
| Factor  V (Albumin and Plasmanate)       |       | 12,390                           |       | 11,231     |       | 1,159 |   | 10.3 | % |
| Factor  VIII (Koate DVI)                 |       | 4,418                            |       | 3,414      |       | 1,004 |   | 29.4 | % |
| Hyperimmunes                             |       | 21,561                           |       | 23,020     |       | (1,459 | ) | (6.3 | )% |
| Other  product net revenue               |       | 16,126                           |       | 18,707     |       | (2,581 | ) | (13.8 | )% |
| Total  U.S. product net revenue          |       | $                                | 279,941    |       | $          | 260,070 |   | $ | 19,871 |   | 7.6 | % |
|                                     |       |                             |       |       |       |   |   |   |   |
| International  product net revenue:      |       |                             |       |       |       |   |   |   |   |
| Gamunex  IGIV                            |       | $                                | 51,006     |       | $          | 56,113 |   | $ | (5,107 | ) | (9.1 | )% |
| Prolastin  A1PI                          |       | 29,502                           |       | 28,181     |       | 1,321 |   | 4.7 | % |
| Factor  V (Albumin and Plasmanate)       |       | 5,432                            |       | 11,615     |       | (6,183 | ) | (53.2 | )% |
| Factor  VIII (Koate DVI)                 |       | 12,070                           |       | 7,874      |       | 4,196 |   | 53.3 | % |
| Hyperimmunes                             |       | 3,232                            |       | 1,083      |       | 2,149 |   | 198.4 | % |
| Other  product net revenue               |       | 19,378                           |       | 22,962     |       | (3,584 | ) | (15.6 | )% |
| Total  international product net revenue |       | $                                | 120,620    |       | $          | 127,828 |   | $ | (7,208 | ) | (5.6 | )% |

 

Our product net revenue was $400.6 million and $387.9 million for thethree months ended September 30, 2010 and 2009, respectively, representingan increase of $12.7 million, or 3.3%. The increase consisted of higher volumes of $13.1 million, partiallyoffset by lower pricing of $0.4 million driven by the effects of unfavorableforeign exchange of $4.0 million.

 

The $8.8 million increase in our Gamunex net revenue was driven byhigher volumes of $9.2 million.  Weexperienced higher Gamunex volumes of $21.3 million in the U.S., Europe, andother international regions which were partially offset by lower volumes of$12.1 million in Canada.  Our 2010Canadian Gamunex volumes were negatively impacted by lower commercial sales toCBS as discussed below.  We experiencedcompetitive pressures in Europe during 2009, which negatively impacted ourGamunex volumes during the prior year period. U.S. and Canadian Gamunex pricing was higher by $2.6 million during the2010 period as compared to the prior year period.  The benefit of the higher pricing in the U.S.and Canada was offset by lower pricing of $3.0 million in Europe and otherinternational regions resulting from country mix as well as competitivepressures, including unfavorable foreign exchange of $1.0 million.  As indicated elsewhere in this QuarterlyReport, the recently enacted healthcare reform legislation increased the sizeof the Medicaid rebates paid by drug manufacturers from 15.1% to 23.1% of theAMP.  We have also experienced higherMedicaid utilization and GPO administrative fees during 2010.  Although we have experienced a favorablepricing environment in prior periods largely as a result of supply constraints,we expect product pricing to be relatively flat given the current balance ofsupply and demand.

 

The $9.2 million increase in our Prolastin net revenue consisted ofhigher volumes of $7.9 million and improved pricing of $1.3 million, includingthe effects of unfavorable foreign exchange of $2.9 million.  The increase in volumes was driven primarilyby higher volumes of $7.7 million in Europe and the U.S. where we experiencednet patient gains during 2010.  Prolastinvolumes are largely a function of our ability to identify and enroll newpatients as compared to the number of patients lost due to attrition andcompetition.  Our ability to grow ourEuropean volumes will also depend on our ability to obtain appropriatereimbursement on a country by country basis. The increase in pricing was driven by higher pricing of $4.6 million inthe U.S. as a result of a price increase implemented during the 2010 thirdquarter.  The benefit of the favorablepricing in the U.S. was partially offset by lower pricing in Europe primarilydue to unfavorable foreign exchange.

 

Effective August 1, 2010, legislation was enacted in Germany toincrease rebates paid by drug manufacturers from 6% to 16% in retailpharmacies, which impacts our Gamunex business. In addition, effective August 1, 2010, a price freeze on the basisof August 2009 prices became effective through 2013 for all products wesell in Germany.

 

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

 

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

 

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

 

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

 

U.S. IGIV distribution increased between 6% and 8% during the ninemonths ended September 30, 2010. This growth represents a recovery in demand in the second and thirdquarters of 2010 after a slight decline in growth in the first quarter of2010.  Despite solid demand growth forIGIV, there has been increased scrutiny and price sensitivity in the hospitalsegment.  In addition, the increase inthe number of hospitals qualifying for the 340B discounts has effectivelyreduced demand from GPO’s who are not permitted to service this discountedchannel, which among other factors, has led us to accept reduced volume tiersunder certain of our GPO contracts.  Wehave seen solid demand growth for Gamunex with most customer segments. Webelieve that U.S. and international IGIV demand will grow approximately 6% to8% over the long-term, which is consistent with demand growth during the ninemonths ended September 30, 2010. However, IGIV demand can vary significantly on a quarter-to-quarterbasis.

 

Our ability to expand our international business has been hampered bythe effects of our internal FCPA investigation and increased pricesensitivities of our customers which has resulted in pricing pressures forplasma-derived products.  Our businesswith Iran, one of our major international customers, has been in decline whichis likely to continue.  Our profitabilityhas been, and may continue to, be negatively impacted by unfavorableeuro/dollar exchange rates.  We haveexperienced, and expect to continue to experience, annual volume declines inCanada due to CBS’ objective to have multiple sources of supply, which hasimpacted and will continue to impact our overall IGIV growth.  CBS may further reduce volumes to contractminimums and Hema Quebec may adopt a similar strategy.  The combination of these factors, amongothers, may reduce our near term global IGIV growth, relative to our priorexpectations.

 

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

 

In the current IGIV market with reduced demand growth, we stillanticipate that we will operate near to or at our fractionation capacity overthe next few years depending upon the demand for our products, the availabilityof source plasma and the impact of variability in yield, among otherfactors.  We plan to utilize most of ouravailable fractionation capacity in the near term, which may result inincreased inventory levels in order to maintain pace with projected futuregrowth in product demand.

 

**Cost ofGoods Sold and Gross Profit**

 

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

 

Our cost of goods sold was $229.9 million, or 56.5% of net revenue, forthe three months ended September 30, 2010, as compared to $230.7 million,or 58.3% of net revenue, for the three months ended September 30,2009.  Our cost of goods sold benefitedfrom lower TPR unabsorbed infrastructure and start-up costs of $7.2 millionduring the three months ended September 30, 2010 as compared to the threemonths ended September 30, 2009. Our cost of goods sold also benefited from lower costs of production of$9.5 million during the 2010 period primarily driven by production mixassociated with the conversion to our next generation A1PI product, Prolastin-CA1PI, as well as source mix, and lower project spending of $0.9 million ascompared to the 2009 period.  During the2010 and 2009 periods, our non-capitalizable project spending was $8.2 millionand $9.1 million, respectively.  Weexperienced higher costs of $6.5 million associated with increased volumesduring the three months ended September 30, 2010 as compared to the sameprior year period.  Our cost of goodssold was negatively impacted by $17.5 million of inventory impairments duringthe three months ended September 30, 2010, an increase of $10.3 millioncompared to the same prior year period, primarily driven by higher provisionsfor work-in-process inventories.

 

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

 

We believe that we have substantially eliminated unabsorbed TPR infrastructureand start-up costs. Consequently, future margin improvements will need to bederived from increases in product pricing and volumes, product mix,improvements in the cost per liter of plasma, manufacturing efficiencies, yieldimprovements or some combination thereof. We believe that the currentenvironment does not favor near-term price increases and we have limitedopportunities to enhance product mix. We have recently experienced and expectto continue to experience higher cost of goods sold due to yield variability,less efficient utilization of each incremental liter of plasma fractionated aswe increase Gamunex production, and non-capitalizable costs associated with ourcapital projects, particularly the construction of our new fractionationfacility.

 

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

 

**OperatingExpenses**

 

Our SG&A was $61.4 million and $79.5 million for the three monthsended September 30, 2010 and 2009, respectively, a decrease of $18.1million, or 22.8%.  The decrease inSG&A was driven by lower share-based compensation expense of $15.4 millionas discussed previously, the absence of retention expense of $1.0 millionrelated to our terminated merger agreement with CSL, lower donations of $2.3million, lower legal expenses of $2.7 million related to our internal FCPAinvestigation, and the absence of $2.0 million of management fees to TalecrisHoldings LLC as a result of the termination of the management agreement at thetime of our initial public offering. During the three months ended September 30, 2010, our SG&Aincluded $7.4 million of favorable foreign exchange as compared to favorableforeign exchange of $3.1 million during the three months ended September 30,2009.  These items were partially offsetby higher sales and marketing expenses of $5.3 million during the 2010 periodas a result of our sales force expansion, marketing of our CIDP indication,Prolastin patient identification efforts, launch of Prolastin-C A1PI, as wellas support for other products.  Inaddition, within SG&A, we incurred transaction related expenses of $5.7million and retention expenses within SG&A of $2.8 million related to ourdefinitive merger agreement with Grifols.

 

SG&A in future periods will be impacted by additional Grifolsmerger related transaction expenses such as legal and accounting costs as wellas retention expenses as discussed further in the section titled, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Matters Affecting Comparability,” included elsewhere in thisQuarterly Report.

 

Our R&D was $18.7 million and $16.2 million for the three monthsended September 30, 2010 and 2009, respectively.  As a percentage of net revenue, R&D was4.6% and 4.1% for the three months ended September 30, 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 10-K. There have been no significant changes to our new product candidates orlife-cycle management projects since December 31, 2009, except that wehave decided not to initiate an aerosol trial with plasma-derived ProlastinA1PI.  We may resume development in thefuture of an aerosol formulation of A1PI if warranted with recombinantA1PI.  The increase in R&D periodover period was primarily driven by Plasmin aPAO Phase II start-up costs.  We anticipate that R&D will increase insubsequent periods primarily as a result of increased Plasmin clinical trialsrelated to aPAO and ischemic stroke.

 

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

 

**TotalOther Non-Operating Expense, net**

 

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

 

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

 

**Provisionfor Income Taxes**

 

Our income tax provision was $29.7 million and $14.1 million for thethree months ended September 30, 2010 and 2009, respectively, resulting ineffective income tax rates of 34.7% and 28.3%, respectively.

 

Forthe three months ended September 30, 2010, our effective income tax rateis lower than the U.S. statutory Federal income tax rate of 35% primarily dueto a deduction for domestic production activities which, pursuant to theInternal Revenue Code, increased to 9% of qualified production activitiesincome for taxable years beginning in 2010 from 6% in 2009, and to tax creditsfor orphan drug clinical testing expenditures. The effective income tax rate for the three months ended September 30,2010 also benefited from the recognition in the third quarter of higher orphandrug tax credits and domestic production activity deductions reported on the2009 Federal tax return than estimated in the 2009 financial statements.  These reductions are principally offset bystate income tax expense.

 

For the three months ended September 30, 2009, our effective incometax rate is lower than the U.S. statutory Federal income tax rate, primarilydue to credits for Federal Research and Experimentation and orphan drugclinical testing expenditures.  Thesefactors offset the effects of state taxes.

 

Following the completion of field work by the Internal Revenue Serviceexamination team (IRS Exam) in connection with the audit of our 2005, 2006, and2007 Federal income tax returns, the audit file was sent to the Joint Committeeon Taxation (JCT) in accordance with requirements that the JCT review anyrefunds in excess of $2 million. The refund was attributable to additional taxcredits for research and experimental expenditures and orphan drug expendituresclaimed during the course of the audit. The JCT subsequently returned the auditfile to the IRS Exam for additional fact finding.  In lieu of engaging with the company infact-finding efforts, IRS Exam issued a new audit report disallowing thetax credits for research and experimental expenditures and orphan drug clinicaltesting expenditures and issued a 30 Day Letter indicating that IRS Exam andthe company could not reach agreement on the issue.  The company has filed a timely protest to theadjustments proposed by IRS Exam and expects to favorably resolve this matterat the IRS Appeals level.  We do notbelieve the outcome of this matter will have a material adverse impact on ourconsolidated financial condition or results of operations. It is reasonablypossible that, within the next twelve months, we will resolve this matter withthe IRS and JCT, which may increase or decrease the unrecognized tax benefitsfor all open tax years.  The favorableresolution of this matter would increase earnings by approximately $4.7 millionbased on current estimates. Audit outcomes and the timing of audit settlementsare subject to significant uncertainty.

 

**Net Income**

 

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

 

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

 

The following discussion and analysis contains information regardingour results of operations for the nine months ended September 30, 2010 ascompared to the nine months ended September 30, 2009:

 

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| ** **                             | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                             | ** ** | **September 30,**          | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| Net  revenue:                          |       |                            |       |       |       |   |   |   |   |
| Product                                |       | $                               | 1,172,278  |       | $          | 1,122,877 |   | $ | 49,401 |   | 4.4 | % |
| Other                                  |       | 18,510                          |       | 20,219     |       | (1,709 | ) | (8.5 | )% |
| Total                                  |       | 1,190,788                       |       | 1,143,096  |       | 47,692 |   | 4.2 | % |
| Cost  of goods sold                    |       | 670,476                         |       | 663,875    |       | (6,601 | ) | (1.0 | )% |
| Gross  profit                          |       | 520,312                         |       | 479,221    |       | 41,091 |   | 8.6 | % |
| Operating  expenses:                   |       |                            |       |       |       |   |   |   |   |
| SG&A                               |       | 205,007                         |       | 213,913    |       | 8,906 |   | 4.2 | % |
| R&D                                |       | 50,832                          |       | 51,728     |       | 896 |   | 1.7 | % |
| Total                                  |       | 255,839                         |       | 265,641    |       | 9,802 |   | 3.7 | % |
| Income  from operations                |       | 264,473                         |       | 213,580    |       | 50,893 |   | 23.8 | % |
| Other  non-operating (expense) income: |       |                            |       |       |       |   |   |   |   |
| Interest  expense, net                 |       | (34,915                         | )          | (61,445    | )          | 26,530 |   | 43.2 | % |
| Merger  termination fee                |       | —                          |       | 75,000     |       | (75,000 | ) | 100.0 | % |
| Equity  in earnings of affiliate       |       | 599                             |       | 296        |       | 303 |   | 102.4 | % |
| Total                                  |       | (34,316                         | )          | 13,851     |       | (48,167 | ) | 347.8 | % |
| Income  before income taxes            |       | 230,157                         |       | 227,431    |       | 2,726 |   | 1.2 | % |
| Provision  for income taxes            |       | (81,143                         | )          | (74,914    | )          | (6,229 | ) | (8.3 | )% |
| Net  income                            |       | $                               | 149,014    |       | $          | 152,517 |   | $ | (3,503 | ) | (2.3 | )% |
|                                   |       |                            |       |       |       |   |   |   |   |
| Earnings  per common share:            |       |                            |       |       |       |   |   |   |   |
| Basic                                  |       | $                               | 1.21       |       | $          | 76.21 |   | $ | (75.00 | ) | (98.4 | )% |
| Diluted                                |       | $                               | 1.16       |       | $          | 1.62 |   | $ | (0.46 | ) | (28.4 | )% |
|                                   |       |                            |       |       |       |   |   |   |   |
| Financial  measures:                   |       |                            |       |       |       |   |   |   |   |
| Gross  profit margin                   |       | 43.7                            | %          | 41.9       | %          |   |   |   |   |
| Operating  margin                      |       | 22.2                            | %          | 18.7       | %          |   |   |   |   |
| Effective  income tax rate             |       | 35.3                            | %          | 32.9       | %          |   |   |   |   |

 

**NetRevenue**

 

The following table contains information regarding our net revenue:

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

 

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| ** **                               | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                               | ** ** | **September 30,**          | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| U.S.  product net revenue:               |       |                            |       |       |       |   |   |   |   |
| Gamunex  IGIV                            |       | $                               | 489,800    |       | $          | 450,786 |   | $ | 39,014 |   | 8.7 | % |
| Prolastin  A1PI                          |       | 168,747                         |       | 151,559    |       | 17,188 |   | 11.3 | % |
| Factor  V (Albumin and Plasmanate)       |       | 39,445                          |       | 32,547     |       | 6,898 |   | 21.2 | % |
| Factor  VIII (Koate DVI)                 |       | 12,629                          |       | 9,072      |       | 3,557 |   | 39.2 | % |
| Hyperimmunes                             |       | 45,588                          |       | 51,720     |       | (6,132 | ) | (11.9 | )% |
| Other  product net revenue               |       | 49,531                          |       | 50,237     |       | (706 | ) | (1.4 | )% |
| Total  U.S. product net revenue          |       | $                               | 805,740    |       | $          | 745,921 |   | $ | 59,819 |   | 8.0 | % |
|                                     |       |                            |       |       |       |   |   |   |   |
| International  product net revenue       |       |                            |       |       |       |   |   |   |   |
| Gamunex  IGIV                            |       | $                               | 152,893    |       | $          | 167,851 |   | $ | (14,958 | ) | (8.9 | )% |
| Prolastin  A1PI                          |       | 89,402                          |       | 78,634     |       | 10,768 |   | 13.7 | % |
| Factor  V (Albumin and Plasmanate)       |       | 22,730                          |       | 28,728     |       | (5,998 | ) | (20.9 | )% |
| Factor  VIII (Koate DVI)                 |       | 27,675                          |       | 22,393     |       | 5,282 |   | 23.6 | % |
| Hyperimmunes                             |       | 13,004                          |       | 9,985      |       | 3,019 |   | 30.2 | % |
| Other  product net revenue               |       | 60,834                          |       | 69,365     |       | (8,531 | ) | (12.3 | )% |
| Total  international product net revenue |       | $                               | 366,538    |       | $          | 376,956 |   | $ | (10,418 | ) | (2.8 | )% |

 

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

 

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

 

The $28.0 million increase in our Prolastin net revenue consisted ofhigher volumes of $19.3 million and improved pricing of $8.7 million, including$2.7 million of unfavorable foreign exchange. The increase in volumes was driven by higher volumes of $18.7 million inEurope and the U.S., where we experienced net patient gains during 2010.  The increase in pricing was driven by higherpricing of $12.8 million in the U.S. and Canada, partially offset by lowerpricing in Europe as a result of the effects of unfavorable foreignexchange.  Our U.S. pricing was favorablyimpacted by price increases implemented in both the third quarter of 2010 and2009.  Our 2009 Canadian pricing wasimpacted by a negative pricing adjustment of $2.3 million during the 2009 firstquarter related to a pricing dispute.  Prolastinvolumes are largely a function of our ability to identify and enroll newpatients as compared to the number of patients lost due to attrition andcompetition.  Our ability to grow ourEuropean volumes will also depend on our ability to obtain appropriatereimbursement on a country-by-country basis.

 

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

 

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

 

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

 

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

 

Additional information regarding our revenue expectations for theremainder of 2010 is included in our quarter over quarter discussion andanalysis and in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Business Overview,” included elsewhere in thisQuarterly Report.

 

**Cost ofGoods Sold and Gross Profit**

 

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

 

Our cost of goods sold was $670.5 million, or 56.3% of net revenue, forthe nine months ended September 30, 2010, as compared to $663.9 million,or 58.1% of net revenue, for the nine months ended September 30,2009.  Our cost of goods sold benefitedfrom lower TPR unabsorbed infrastructure and start-up costs of $28.9 millionduring the nine months ended September 30, 2010 as compared to the ninemonths ended September 30, 2009. Our cost of goods sold also benefited from lower costs of production of$18.0 million during the 2010 period primarily driven by production mixassociated with the conversion to our next generation A1PI product, Prolastin-CA1PI, as well as source mix.  Our cost ofgoods sold was negatively impacted by $40.4 million of inventory impairmentsduring the nine months ended September 30, 2010, an increase of $17.1million compared to the same prior year period, primarily driven by higherprovisions for work in process inventories. Project spending during the nine months ended September 30, 2010was $31.2 million as compared to $22.2 million during the same prior yearperiod, driven by spending related to our new fractionation facility, Koatereengineering, and Thrombate III projects. We experienced higher costs of $27.4 million associated with increasedvolumes during the nine months ended September 30, 2010 as compared to thesame prior year period.

 

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

 

Additional information regarding our gross margin expectations for theremainder of 2010 is included in our quarter over quarter discussion andanalysis and in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Business Overview,” included elsewhere in thisQuarterly Report.

 

**OperatingExpenses**

 

Our SG&A was $205.0 million and $213.9 million for the nine monthsended September 30, 2010 and 2009, respectively, a decrease of $8.9million, or 4.2%.  The decrease inSG&A was driven by lower share-based compensation expense of $23.9 millionas discussed previously, the absence of $11.0 million of legal and retentionexpenses related to our terminated merger agreement with CSL, lower donationsof $8.2 million, lower legal expenses of $2.5 million related to our internalFCPA investigation, and the absence of $5.7 million of management fees toTalecris Holdings LLC as a result of the termination of the managementagreement at the time of our initial public offering.  These items were partially offset by highersales and marketing expenses of $16.0 million during the 

 

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

 

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

 

Our R&D was $50.8 million and $51.7 million for the nine monthsended September 30, 2010 and 2009, respectively.  As a percentage of net revenue, R&D was4.3% and 4.5% for the nine months ended September 30, 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 10-K. There have been no significant changes to our new product candidates orlife-cycle management projects since December 31, 2009, except that wehave decided not to initiate an aerosol trial with plasma-derived ProlastinA1PI.  We may resume development in thefuture of an aerosol formulation of A1PI if warranted with recombinantA1PI.  We anticipate that R&D willincrease in subsequent periods primarily as a result of increased Plasminclinical trials related to aPAO and ischemic stroke.

 

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

 

**TotalOther Non-Operating (Expense) Income, net**

 

The primary recurring component of our other non-operating (expense)income, net, is interest expense, which amounted to $35.9 million and $59.5million for the nine months ended September 30, 2010 and 2009,respectively.  The reduction in interestexpense was driven by lower weighted average debt levels during the 2010period. Our weighted average interest rates on our outstanding debt, excludingamortization of deferred debt issuance costs and debt discount, were 7.8% and5.4% for the nine months ended September 30, 2010 and 2009,respectively.    During the nine monthsended September 30, 2010 and 2009, we capitalized interest costs relatedto the construction of plant and equipment of $3.7 million and $1.4 million,respectively.

 

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

 

**Provisionfor Income Taxes**

 

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

 

Forthe nine months ended September 30, 2010, our effective income tax rate ishigher than the U.S. statutory Federal income tax rate, primarily due to therequirement for income tax purposes to capitalize transaction costs related toour definitive merger agreement with Grifols and the effects of statetaxes.  These items were partially offsetby the increased deduction allowed with respect to domestic productionactivities and tax credits for orphan drug clinical testing expenditures and abenefit recognized in the third quarter from higher orphan drug tax credits anddomestic production activity deductions reported on the 2009 Federal tax returnthan estimated in the 2009 financial statements.

 

For the nine months ended September 30, 2009, our effective incometax rate is lower than the U.S. statutory Federal income tax rate, primarilydue to credits for Federal Research and Experimentation and orphan drugclinical testing expenditures and the deduction of previously capitalizedtransaction costs related to our terminated merger agreement with CSL.  These factors offset the effects of statetaxes.

 

**Net Income**

 

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

 

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changein our net income are discussed above.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

***Cash Flow Analysis***

 

Thefollowing table and subsequent discussion and analysis contain informationregarding our cash flows for the nine months ended September 30, 2010 and2009:

 
| ** **                                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                    | ** ** | **September 30,**          | ** ** |
| ** **                                                                                    | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| **Operating activities:**                                                                     |       |                            |       |   |   |
| Net  income                                                                                   |       | $                               | 149,014    |   | $ | 152,517 |   |
| Non-cash  items                                                                               |       | 63,970                          |       | 79,857 |   |
| Changes  in operating assets and liabilities, excluding the effects of business  acquisitions |       | (60,464                         | )          | (33,650 | ) |
| **Net cash provided by operating activities**                                                 |       | $                               | 152,520    |   | $ | 198,724 |   |
|                                                                                          |       |                            |       |   |   |
| **Investing activities:**                                                                     |       |                            |       |   |   |
| Purchases  of property, plant, and equipment                                                  |       | $                               | (91,691    | ) | $ | (36,291 | ) |
| Business  acquisitions, net of cash acquired                                                  |       | —                          |       | (27,113 | ) |
| Other                                                                                         |       | 507                             |       | 634 |   |
| **Net cash used in investing activities**                                                     |       | $                               | (91,184    | ) | $ | (62,770 | ) |
|                                                                                          |       |                            |       |   |   |
| **Financing activities:**                                                                     |       |                            |       |   |   |
| Repayments  under Revolving Credit Facility, net                                              |       | $                               | —     |   | $ | (112,097 | ) |
| Repayments  of borrowings under term loan                                                     |       | —                          |       | (5,250 | ) |
| Repayments  of capital lease obligations                                                      |       | (553                            | )          | (407 | ) |
| Financing  transaction costs                                                                  |       | (394                            | )          | — |   |
| Proceeds  from exercises of stock options                                                     |       | 19,251                          |       | — |   |
| Excess  tax benefits from share-based payment arrangements                                    |       | 10,836                          |       | 1,437 |   |
| Repurchases  of common stock from employees                                                   |       | (4,917                          | )          | (4,132 | ) |
| **Net cash provided by (used in) financing activities**                                       |       | $                               | 24,223     |   | $ | (120,449 | ) |

 

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

 

We have financed our operations through a combination of equity fundingand debt financing, and through internally generated funds. We expect our cashflows from operations combined with our cash balances and availability of ourRevolving Credit Facility to provide sufficient liquidity to fund our currentobligations, projected working capital requirements, and capital expendituresfor at least the next twelve months.

 

***Cash Flows from Operating Activities***

 

We generated net cashflows from operating activities of $152.5 million for the nine months endedSeptember 30, 2010 as compared to $198.7 million for the nine months endedSeptember 30, 2009.  Our net incomewas $149.0 million and $152.5 million for the nine months ended September 30,2010 and 2009, respectively.  The netcash generated from our operating activities during the nine months ended September 30,2009 includes the $75.0 million (approximately $48.8 million after tax) paymentwe received from CSL as a result of the termination of the definitive mergeragreement.

 

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

 

·                  Our depreciation and amortization expense forthe nine months ended September 30, 2010 and 2009 was $26.5 million and$21.4 million, respectively.  Theincrease in depreciation and amortization expense reflects our cumulativecapital investments, primarily related to our manufacturing facilities and TPR.

 

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

 

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$39.6 million,respectively.  The decrease inshare-based compensation expense during 2010 was primarily driven by the finalvesting of awards under the 2005 Stock Option and Incentive Plan on April 1,2010 and the majority of the awards under the 2006 Restricted Stock Plan on March 31,2010.  In addition, a combination of anadjustment during the 2010 first quarter as a result of actual awardforfeitures being higher than initially estimated as well as the accelerationof certain option awards to our Chairman and Chief Executive Officer during the2009 third quarter further impacted the comparability of share-basedcompensation expense between the two periods.

 

·                  Amortization ofdeferred compensation related to special recognition bonus awards was $1.9million and $4.4 million for the nine months ended September 30, 2010 and2009, respectively.  We made the finalspecial recognition bonus award payments during March 2010.

 

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

 

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

 

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

 

·                  Our inventories increased $30.0 million and$52.1 million during the nine months ended September 30, 2010 and 2009,respectively.  Our inventories fluctuatebased upon our plasma collections, production mix and cycle times, productioncapacities, normal production shut-downs, finished product releases, targetedsafety stock levels, and demand for our products.  Our biological manufacturing processes resultin relatively long inventory cycle times ranging from 100 days to in excess of400 days for some specialty plasma in addition to a required 60 daypre-production holding period for plasma. Consequently, we have significant investment in raw material and work-in-processinventories for extended periods.

 

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

 

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

 

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***Cash Flows from Investing Activities***

 

Our capitalexpenditures were $91.7 million and $36.3 million for the nine months ended September 30,2010 and 2009, respectively. Our capital expenditures reflect investments inour 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 fractionation strategicprogram, partially offset by lower TPR spending.  Information regarding our strategic capitalprograms is included in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” in our2009 Form 10-K.  We expect that ourcapital spending over the next five years, beginning in 2010, to be in therange of $800 million to $850 million on a cumulative basis, an increase of $50million as compared to the range of $750 million to $800 million disclosed inour 2009 Form 10-K.

 

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

 

***Cash Flows from Financing Activities***

 

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

 

During the nine months ended September 30, 2009, we repurchased248,512 shares of our common stock from employees for $4.1 million to settletheir withholding tax obligations upon vesting of restricted stock.  In addition, we recognized excess taxbenefits related to share-based compensation of $1.4 million.  During the nine months ended September 30,2009, we made contractual principal payments of $5.3 million under our 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 Credit Facility fluctuate basedupon our business needs.

 

***Credit Ratings***

 

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

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

 

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

 

***Off Balance Sheet Arrangements***

 

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

 

***Related Party Transactions***

 

Weconsider Cerberus, Ampersand, and Centric to be related parties during certainperiods presented.  Additionalinformation regarding transactions with our related parties is included in Note8, “Related Party Transactions,” included elsewhere in this Quarterly Report.

 

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**NON-GAAPFINANCIAL MEASURES**

 

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

 

Both adjusted EBITDA and Consolidated Cash Flow are financial measuresthat are not defined by U.S. GAAP.  Anon-GAAP financial measure is a numerical measure of a company’s financialperformance that (i) excludes amounts, or is subject to adjustments thathave the effect of excluding amounts, that are included in a comparable measurecalculated and presented in accordance with U.S. GAAP in the statement ofoperations, such as net income, or the statement of cash flows, such asoperating cash flow, or (ii) includes amounts, or is subject to adjustmentsthat have the effect of including amounts, that are excluded from thecomparable measures so calculated and presented.  The non-GAAP financial measures that we useshould not be considered a substitute for any performance measure determined inaccordance with U.S. GAAP.  We do notrely solely on these non-GAAP financial measures and also consider our U.S.GAAP results.  Because the non-GAAPfinancial measures that we use are not calculated in the same manner by allcompanies, they may not be comparable to similarly titled measures used byother companies.  To properly andprudently evaluate our business, we encourage you to also review our U.S. GAAPunaudited interim consolidated financial statements included elsewhere in thisQuarterly Report, and not to rely on any single financial measure to evaluateour business.  These non-GAAP financialmeasures have material limitations as analytical tools and you should notconsider these measures in isolation, or as a substitute for analysis of ourresults as reported under U.S. GAAP. Additional information regarding our use of non-GAAP financial measuresis included in our 2009 Form 10-K.

 

In addition to the adjustments we make in computing adjusted EBITDA andConsolidated Cash Flow, we also consider the impact of other items whenevaluating our operating performance. Certain of these items, which impact the comparability of our financialresults are included in the section titled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Matters AffectingComparability.”

 

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

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

 

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

 

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

 

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

 

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

 

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in connection with our IPO.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

***Interest Rate Risk***

 

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

 

AtSeptember 30, 2010, we had cash and cash equivalents of $150.5million.  We use our available cashbalances to repay amounts outstanding under our Revolving Credit Facility. We depositany excess amounts 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.

 

***Foreign Currency Risk***

 

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

 

Approximately 29.8% and 30.9% of our net revenue for the three and ninemonths ended September 30, 2010 was generated outside of the UnitedStates.  Foreign currency exchange ratefluctuations in relation to the U.S. dollar unfavorably impacted our productnet revenue by $4.0 million, or 1.0%, for the three months ended September 30,2010, and unfavorably impacted our product net revenue by $3.6 million, or0.3%, for nine months ended September 30, 2010. In addition, we incurredtransaction gains (losses), net, of $7.4 million and $(2.9) million during thethree and nine months ended September 30, 2010, respectively, primarilyrelated to the remeasurement of euro-denominated accounts receivable, which werecorded within SG&A in our unaudited consolidated income statement.

 

For the purpose of specific risk analysis, we used a sensitivityanalysis to measure the potential impact to our unaudited consolidated incomestatement for a hypothetical 10% strengthening of the U.S. dollar compared withthe euro and Canadian dollar for the three and nine months ended September 30,2010.  Assuming a 10% strengthening ofthe U.S. dollar, our product net revenue would have been negatively impacted byapproximately $4.2 million and $12.5 million for the three and nine monthsended September 30, 2010, respectively. At September 30, 2010, we had approximately €45.1 million inreceivables.  An adverse movement in thevalue of the euro in relation to the U.S. dollar could have a significantimpact on our profitability.     We havenot hedged our exposure to changes in foreign currency exchange rates.  Consequently, we could incur unanticipatedgains and losses as a result of changes in foreign currency exchange rates.

 

***Commodity Risk***

 

Plasmais the key raw material used in the production of our products, which we obtainfrom our plasma collection centers, as well as third party plasmasuppliers.  As of September 30,2010, our plasma collection center platform consisted of 69 operating centers,of which 66 were FDA licensed and 3 were unlicensed.  These licensed centers collectedapproximately 73.9% and 69.4% of our plasma during the three and nine monthsended September 30, 2010. Subsequent to September 30, 2010, we received FDA 

 

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licensure for one of theunlicensed plasma collection centers.

 

Forpurposes of specific risk analysis, we used a sensitivity analysis to measurethe potential impact to our unaudited consolidated income statements for ahypothetical 10% increase in the cost of plasma used to produce the productssold during the three and nine months ended September 30, 2010.  Assuming this 10% increase in the cost ofplasma, our cost of goods sold would have increased by $13.2 million and $40.9million for the three and nine months ended September 30, 2010,respectively, and our gross margin would have been negatively impacted by 325basis points and 344 basis points for the three and nine months ended September30, 2010, respectively.  This sensitivityanalysis assumes that we would not be able to pass the hypothetical costincrease to our customers in the form of pricing increases.  This sensitivity analysis does not considerthe fixed pricing of plasma purchased from our third-party plasma suppliers.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

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

 

Our management, with the participation of our Chief Executive Officerand our Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of September 30, 2010.  The term “disclosure controls and procedures,”as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct, means controls and other procedures of a company that are designed to ensurethat information required to be disclosed by a company in reports that it filesor submits under the Exchange Act is recorded, processed, summarized, andreported, within the time periods as specified in the SEC’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the company’s management, including its principal executive and principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure.  Management recognizes thatany controls and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving their objectives and managementnecessarily applies its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  Basedon the evaluation of our disclosure controls and procedures as of September 30,2010, our Chief Executive Officer and Chief Financial Officer concluded that,as of such date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

***Changes in Internal Control over Financial Reporting***

 

There was no change in our internal control over financial reportingidentified in connection with the evaluation required by Rule 13a-15(d) and15d-15(d) of the Exchange Act that occurred during the period covered bythis report that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

***Grifols Transaction***

 

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

 

Allof the lawsuits allege that the individual defendants (and, in the consolidatedDelaware action, Talecris Holdings LLC) breached their fiduciary duties to ourstockholders in connection with the proposed transaction with Grifols, and thatGrifols (and, in one of the North Carolina cases, Talecris, and in the Delawareaction, Grifols, Inc.) aided and abetted those breaches. The Delaware complaintalleges, among other things, that the consideration offered to our stockholderspursuant to the proposed transaction is inadequate; that our board of directorsfailed to take steps to maximize stockholder value; that our IPO and debtrefinancing in 2009 were intended to facilitate a sale of Talecris; thatCerberus and Talecris Holdings LLC arranged the proposed merger for the benefitof affiliates of Cerberus Associates, LLC, without regard to the interests ofother stockholders; that the voting agreements impermissibly lock up thetransaction; that the merger agreement contains terms, including a terminationfee, that favor Grifols and deter alternative bids; and that the preliminary Form F-4filed on August 10, 2010 contains material misstatements and/or omissions,including with respect to the availability of appraisal rights in the merger;the purpose and effects of the Virginia reincorporation merger; the antitrustrisks of the proposed transaction; the financial advisors’ analyses regardingthe Grifols’ non-voting stock to be issued in connection with the transaction;and the fees to be paid to Morgan Stanley by us and Grifols in connection withthe proposed transaction. The Delaware complaint also alleges that ourstockholders are entitled to appraisal rights in connection with thetransaction pursuant to Section 262 of the Delaware General CorporationLaw, and that the transaction violates the Delaware General Corporation Law byfailing to provide such rights. The Delaware action seeks equitable andinjunctive relief, including a determination that the stockholders haveappraisal rights in connection with the merger, and damages. Plaintiffs havefiled a motion for a preliminary injunction, which has been scheduled to beheard on November 8, 2010.

 

Webelieve that these lawsuits are without merit and intend to defend themvigorously.

 

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

 

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

 

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

 

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

 

InAugust 2008, we notified PCA that they were in breach of the Amended andRestated Plasma Sale/Purchase Agreement. We terminated the agreement in September 2008. In November 2008,TPR filed suit in federal court in Raleigh, North Carolina against the G&MCrandall Limited Family Partnership and its individual partners as guarantorsof obligations of PCA. We were served in 

 

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

 

**ITEM1A. RISK FACTORS**

 

Therehave been no material changes in our risk factors from those disclosed in our2009 Form 10-K, except as noted below.

 

**RisksRelated to Proposed Merger**

 

***Our proposed merger with Grifols may adversely affect our operationsand financial performance.***

 

Theannouncement of our proposed merger with Grifols may result in the loss of keyemployees, suppliers, and customers.  Thedemand on management’s time and our resources relating to regulatory approvalsand integration planning may interfere with management’s day—to-day oversightof operations.  As a result, ouroperations and financial performance could be adversely affected while we preparefor the merger or in future periods should the merger not occur.

 

***Lawsuits have been filed against us and certain of our officers anddirectors challenging the merger, and any adverse judgment for monetary damagescould have a material adverse effect on the combined company’s operations afterthe transaction.***

 

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

 

Allof the lawsuits allege that the individual defendants (and, in the consolidatedDelaware action, Talecris Holdings LLC) breached their fiduciary duties to ourstockholders in connection with the proposed transaction with Grifols, and thatGrifols (and, in one of the North Carolina cases, Talecris, and in the Delawareaction, Grifols, Inc.) aided and abetted those breaches. The Delawarecomplaint alleges, among other things, that the consideration offered to ourstockholders pursuant to the proposed transaction is inadequate; that our boardof directors failed to take steps to maximize stockholder value; that our IPOand debt refinancing in 2009 were intended to facilitate a sale of Talecris;that Cerberus and Talecris Holdings LLC arranged the proposed merger for thebenefit of affiliates of Cerberus Associates, LLC, without regard to theinterests of other stockholders; that the voting agreements impermissibly lockup the transaction; that the merger agreement contains terms, including atermination fee, that favor Grifols and deter alternative bids; and that thepreliminary Form F-4 filed on August 10, 2010 contains materialmisstatements and/or omissions, including with respect to the availability ofappraisal rights in the merger; the purpose and effects of the Virginiareincorporation merger; the antitrust risks of the proposed transaction; thefinancial advisors’ analyses regarding the Grifols’ non-voting stock to beissued in connection with the transaction; and the fees to be paid to Morgan Stanleyby us and Grifols in connection with the proposed transaction. The Delawarecomplaint also alleges that our stockholders are entitled to appraisal rightsin connection with the transaction pursuant to Section 262 of the DelawareGeneral Corporation Law, and that the transaction violates the Delaware GeneralCorporation Law by failing to provide such rights. The Delaware action seeksequitable and injunctive relief, including a determination that thestockholders have appraisal rights in connection with the merger, and damages.Plaintiffs have filed a motion for a preliminary injunction, which has beenscheduled to be heard on November 8, 2010.

 

Oneof the conditions to the completion of the transaction is that no temporaryrestraining order, or preliminary or permanent injunction, or other judgment ororder issued by a court or other governmental entity that prohibits or preventsthe completion of the Talecris-Grifols merger shall be in effect. A preliminaryinjunction could delay or jeopardize the completion of the transaction, and anadverse judgment granting permanent injunctive relief could indefinitely enjoincompletion of the transaction. An adverse judgment for monetary damages couldhave a material adverse effect on the operations of the combined company afterthe transaction.

 

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**Risks Related to Healthcare Reform and Reimbursement**

 

***We could be adversely affected ifthe implementation of recently passed healthcare reform legislation oradditional legislation under consideration substantially changes the market formedical care or healthcare coverage in the United States.***

 

Substantial changes could be made to the current system for paying forhealthcare in the U.S., including changes made in order to extend medicalbenefits to those who currently lack insurance coverage. Approximately47 million Americans currently lack health insurance of any kind. Extendingcoverage to such a large population could substantially change the structure ofthe health insurance system and the methodology for reimbursing medicalservices, drugs and devices. These structural changes could entailmodifications to the existing system of private payors and government programs(Medicare, Medicaid and State Children’s Health Insurance Program), creation ofstate-based healthcare insurance exchanges, as well as other changes.Restructuring the coverage of medical care in the U.S. could impact thereimbursement for prescribed drugs and biopharmaceuticals, such as thoseproduced and marketed by us. If reimbursement for these products issubstantially reduced in the future, or rebate obligations associated with themare substantially increased (discussed in more detail below), our businesscould be materially impacted.  Beginningin 2012, the new law may require us to issue Internal Revenue Service Forms1099 to plasma donors whose remuneration exceeds six hundred dollars.  The cost of implementing this requirement, aswell as its potential impact on plasma donations, is unknown at this time.

 

Extending medical benefits to those who currently lack coverage willlikely result in substantial cost to the federal government, which may forcesignificant changes to the U.S. healthcare system. Much of the funding forexpanded healthcare coverage will be sought through cost savings. While some ofthese savings may come from realizing greater efficiencies in delivering care,improving the effectiveness of preventive care and enhancing the overallquality of care, much of the cost savings may come from reducing the cost ofcare. Cost of care could be reduced by reducing the level of reimbursement formedical services or products (including those biopharmaceutical productsproduced and marketed by us), or by restricting coverage (and, thereby,utilization) of medical services or products. In either case, a reduction inthe utilization of, or reimbursement for, our products could have a materiallyadverse impact on our financial performance.

 

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

 

***We could be adversely affected ifgovernment or private third-party payors decrease or otherwise limit theamount, price, scope or other eligibility requirements for reimbursement forthe purchasers of our products.***

 

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

 

Ifpayors reduce the amount of reimbursement for a product, it may cause groups orindividuals dispensing the product to discontinue administration of theproduct, to administer lower doses, to substitute lower cost products or toseek additional price related concessions. These actions could have a negativeeffect on our financial results, particularly in cases where we have a productthat commands a premium price in the marketplace, or where changes inreimbursement induce a shift in the site of treatment. For example, beginningin 2005, the Medicare drug reimbursement methodology for physician and hospitaloutpatient payment schedules changed to Average Sales Price (ASP) +6%. Thispayment was based on a volume-weighted average of all brands under a commonbilling code. Medicare payments to physicians between the fourth quarter of2004 and the first quarter of 2005 dropped 14% for both the powder and liquidforms of IGIV. Medicare payments to hospitals fell 45% for powder IGIV and 30%for liquid IGIV between the fourth quarter of 2005 and the first quarter of2006. The Medicare reimbursement changes resulted in the shift of a significantnumber of Medicare IGIV patients to hospitals from physicians’ officesbeginning in 2005 as many physicians could no longer recover their costs ofobtaining and administering IGIV in their offices and clinics. After 2006, somehospitals reportedly began to refuse providing IGIV to Medicare patients due toreimbursement rates that were below their acquisition costs. While subsequentchanges have improved some of these Medicare reimbursement issues, onJanuary 1, 2008, the Centers for 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-onpayment.

 

Physiciansfrequently prescribe legally available therapies for uses that are notdescribed in the product’s labeling and that differ from those tested inclinical studies and approved by the FDA or similar regulatory authorities inother countries. These unapproved, or “off-label,” uses are common acrossmedical specialties, and physicians may believe such off-label uses constitutethe preferred 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.

 

Forexample, CMS could initiate an administrative procedure known as a NationalCoverage Determination (NCD) by which the agency determines which uses of atherapeutic product would be reimbursable under Medicare and which uses wouldnot. This determination process can be lengthy, thereby creating a long periodduring which the future reimbursement for a particular product may beuncertain. High levels of spending on IGIV products, along with increases inIGIV prices, increased IGIV utilization and the high proportion of off-labeluses, may increase the risk of regulation of IGIV reimbursement by CMS. On thestate level, similar limits could be proposed for therapeutic products coveredunder Medicaid. Moreover, the Deficit Reduction Act of 2005 incentivizes statesto take innovative steps to control healthcare costs, which could includeattempts to negotiate limits to, or reductions of, drug prices.

 

Healthcare reform established and provided significant funding for the federalgovernment to coordinate and fund 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.

 

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

 

Theuse of AWP and WAC as pricing benchmarks has been subject to legal challenge byboth government officials and private citizens, often based on claims that thebenchmarks were used in a misleading manner, thus defrauding consumers andthird-party payors. It is possible that we, as a reporter of WAC, could bechallenged on this basis. Additionally, the settlement of class actionlitigation against First DataBank and others has resulted in the downwardrevision of certain reported AWP listings (to a level of 20% over WAC). Issuesregarding AWP have contributed to suggestions to eliminate its use as a drugpricing benchmark.

 

***Talecris could be adversely affected by other provisions of recentlypassed United States healthcare reform legislation.***

 

Inthe United States, Talecris’ products are reimbursed or purchased under severalgovernment programs, including, Medicaid, Medicare Parts B and D, the 340B/PHSprogram, and pursuant to contracts with the Department of Veterans Affairs. Inorder for a drug manufacturer’s products to be reimbursed by federal fundingunder Medicaid, the manufacturer must enter into a Medicaid drug rebateagreement with the Secretary of the United States Department of Health andHuman Services, and pay certain rebates to the states based on utilization dataprovided by each state to the manufacturer and to the Centers for Medicare &Medicaid Services, which is referred to as CMS, and pricing data provided bythe manufacturer to the federal government. The states have been required toshare this savings with the federal government. The rebate amount for mostbranded drugs was previously equal to a minimum of 15.1% of the AverageManufacturer Price, which is referred to as AMP, or AMP less Best Price, whichis referred to as AMP less BP, whichever is greater. The recently enactedhealthcare reform legislation generally increases the size of the Medicaidrebates paid by drug manufacturers for single source and innovator multiplesource (brand name) drugs from a minimum of 15.1% to 23.1% of the AMP, subjectto certain exceptions, for example, for certain clotting factors the increaseis limited to a minimum of 

 

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17.1% of the AMP. Fornon-innovator multiple source (generic) drugs, the rebate percentage isincreased from a minimum of 11% of AMP to 13% of AMP. The legislation alsoextends the rebate obligation to prescription drugs covered by Medicaid managedcare organizations. The increase in required rebates, which became effective January 1,2010, may adversely affect financial performance.

 

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

 

Theavailability of federal funds to pay for Talecris’ products under the UnitedStates Medicaid and Medicare Part B programs requires that Talecris extenddiscounts under the 340B/PHS program. The 340B/PHS program extends discounts toa variety of community health clinics and other entities that receive healthservices grants from the PHS, as well as hospitals that serve adisproportionate share of certain low income individuals. The PHS price (or “ceilingprice”) cannot exceed the AMP (as reported to CMS under the Medicaid drugrebate program) less the Medicaid unit rebate amount. Talecris has entered intoa Pharmaceutical Pricing Agreement with the government in which the companieshave agreed to participate in the 340B/PHS program by charging eligibleentities no more than the PHS ceiling price for drugs intended for outpatientuse. Recently enacted healthcare reform legislation imposes a “must sell”obligation on manufacturers so that they must offer for sale their products toeligible entities at legally-mandated discount prices, and expands the numberof qualified 340B entities eligible to purchase products for outpatient use.Additional legislation or regulation could require Talecris to allocate evenmore of their respective products for sale under the 340B/PHS program in orderto maintain the availability of federal funds to pay for their respectiveproducts under Medicaid and Medicare Part B coverage, which could have amaterial negative impact on Talecris’ sales and margin given the significantprice discount for 340B/PHS products as compared to their commercial prices.

 

Therecently enacted United States healthcare reform legislation imposes a fee onmanufacturers of branded drugs and biologics based on their sales to UnitedStates government health programs. The fee will first be imposed for 2011sales. The aggregate fee imposed on all covered entities is $2.5 billion for2011, $2.8 billion for 2012, $2.8 billion for 2013, $3 billion for 2014, $3billion for 2015, $3 billion for 2016, $4 billion for 2017, $4.1 billion for2018 and $2.8 billion for 2019 and following years. The aggregate fee will beallocated among applicable manufacturers and importers based on their relativesales to government health programs, with the caveat that entities with lowersales will have their sales counted at less than 100% in allocatingresponsibility for the fee. This new fee will increase costs for Talecris. Itis not clear that Talecris will be able to pass this increased cost on to itscustomers.

 

**RisksRelated to Our Business**

 

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

 

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

 

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**ITEM 6.  EXHIBITS**

 
| **Exhibit Number** | ** ** | **Exhibit Description**                                                                                                                                   |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **              | ** ** | ** **                                                                                                                                                     |
| 31.1                    |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                      |
|                    |       |                                                                                                                                                           |
| 31.2                    |       | Certification  of Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley  Act of 2002                                                         |
|                    |       |                                                                                                                                                           |
| 32.1                    |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
|                    |       |                                                                                                                                                           |
| 32.2                    |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |

 

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

 

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**SIGNATURES**

 

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

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

 

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