Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C.  20549**

 

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

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

 

**For the quarterly period ended September 30, 2009**

 

**or**

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

 

**For the Transition Period from          to**

 

**Commission File Number: 001-34473**

 

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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)

 

**Notapplicable**

(Former name, former addressand former fiscal year, if changed since last report)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes o No x

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date. 119,781,056****shares of Common Stock, $0.01 par value, asof October 31, 2009

 

 

 

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# **Talecris Biotherapeutics Holdings Corp.**

**Form 10-Q**

**Table of Contents**

 
| ** **                              | **Page**                                                                                              |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------|
| **Part I-  Financial Information** |                                                                                                  |
|                                    |                                                                                                  |   |
| Item 1.                                 | Unaudited  Interim Consolidated Financial Statements:                                                 | 3 |
|                                    |                                                                                                  |   |
|                                    | Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                 | 3 |
|                                    |                                                                                                  |   |
|                                    | Consolidated  Income Statements for the Three and Nine Months Ended September 30, 2009  and 2008 | 4 |
|                                    |                                                                                                  |   |
|                                    | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2009  and 2008    | 5 |
|                                    |                                                                                                  |   |
|                                    | Notes  to Consolidated Financial Statements                                                           | 6 |
|                                    |                                                                                                  |   |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           | 24 |
|                                    |                                                                                                  |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                           | 43 |
|                                    |                                                                                                  |   |
| Item 4T.                                | Controls and  Procedures                                                                              | 44 |
|                                    |                                                                                                  |   |
| **Part II- Other  Information**    |                                                                                                  |
| ** **                              |                                                                                                  |
| Item 1.                                 | Legal Proceedings                                                                                     | 45 |
|                                    |                                                                                                  |   |
| Item  1A.                               | Risk  Factors                                                                                         | 45 |
|                                    |                                                                                                  |   |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                          | 45 |
|                                    |                                                                                                  |   |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                  | 45 |
|                                    |                                                                                                  |   |
| Item  6.                                | Exhibits                                                                                              | 46 |
|                                    |                                                                                                  |   |
|                                    | Signatures                                                                                            | 47 |

 

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

 

#### **ITEM 1. FINANCIAL STATEMENTS**

 

**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Balance Sheets**

(inthousands, except share amounts)

(Unaudited)

 
| ** **                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                              |       |                   |       |                  |       |
| Current assets:                                                                                                                                         |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                               |       | $                      | 32,949     |                  | $          | 16,979 |   |
| Accounts receivable, net of  allowances of $4,099 and $2,020, respectively                                                                              |       | 162,467                |       | 148,417               |       |
| Inventories                                                                                                                                             |       | 637,609                |       | 581,720               |       |
| Deferred income taxes                                                                                                                                   |       | 77,557                 |       | 76,587                |       |
| Prepaid expenses and other                                                                                                                              |       | 23,086                 |       | 43,552                |       |
| Total current assets                                                                                                                                    |       | 933,668                |       | 867,255               |       |
| Property, plant, and  equipment, net                                                                                                                    |       | 234,977                |       | 213,251               |       |
| Investment in affiliate                                                                                                                                 |       | 1,790                  |       | 1,719                 |       |
| Intangible assets, net                                                                                                                                  |       | 10,166                 |       | 7,204                 |       |
| Goodwill                                                                                                                                                |       | 166,851                |       | 135,800               |       |
| Deferred income taxes                                                                                                                                   |       | 25,411                 |       | 33,353                |       |
| Other                                                                                                                                                   |       | 26,110                 |       | 48,817                |       |
| Total assets                                                                                                                                            |       | $                      | 1,398,973  |                  | $          | 1,307,399 |   |
|                                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities,  Obligations Under Common Stock Put/ Call Option, Redeemable  Preferred Stock, and Stockholders’ Deficit**                          |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                    |       |                   |       |                  |       |
| Accounts payable                                                                                                                                        |       | $                      | 59,728     |                  | $          | 54,903 |   |
| Accrued expenses and other  liabilities                                                                                                                 |       | 189,980                |       | 167,377               |       |
| Current portion of  long-term debt and capital lease obligations                                                                                        |       | 7,648                  |       | 7,341                 |       |
| Total current liabilities                                                                                                                               |       | 257,356                |       | 229,621               |       |
| Long-term debt and capital  lease obligations                                                                                                           |       | 1,080,644              |       | 1,194,205             |       |
| Other                                                                                                                                                   |       | 43,412                 |       | 60,344                |       |
| Total liabilities                                                                                                                                       |       | 1,381,412              |       | 1,484,170             |       |
| Commitments and  contingencies                                                                                                                          |       |                   |       |                  |       |
| Obligations under common  stock put/call option                                                                                                         |       | 39,942                 |       | 29,419                |       |
| Redeemable  series A and B preferred stock; $0.01 par value, 40,000,010 shares authorized;  0 and 1,192,310 shares issued and outstanding, respectively |       | —                 |       | 110,535               |       |
| Stockholders’ deficit:                                                                                                                             |       |                   |       |                  |       |
| Common  stock, $0.01 par value; 400,000,000 shares authorized; 90,836,284 and  2,856,288 shares issued and outstanding, respectively                    |       | 882                    |       | —                |       |
| Additional paid-in capital                                                                                                                              |       | 182,399                |       | 47,017                |       |
| Accumulated deficit                                                                                                                                     |       | (187,818               | )          | (340,335              | )          |
| Accumulated other  comprehensive loss, net of tax                                                                                                       |       | (17,844                | )          | (23,407               | )          |
| Total stockholders’ deficit                                                                                                                        |       | (22,381                | )          | (316,725              | )          |
| Total  liabilities, obligations under common stock put/call option, redeemable  preferred stock, and stockholders’ deficit                         |       | $                      | 1,398,973  |                  | $          | 1,307,399 |   |

 

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

 

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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,** | ** ** |
| ** **                                                                                | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenue:                                                                              |       |                   |       |                   |       |   |   |   |   |
| Product net revenue                                                                       |       | $                      | 387,898    |                   | $          | 339,245 |   | $ | 1,122,877 |   | $ | 942,890 |   |
| Other                                                                                     |       | 7,833                  |       | 11,247                 |       | 20,219 |   | 29,990 |   |
| Total net revenue                                                                         |       | 395,731                |       | 350,492                |       | 1,143,096 |   | 972,880 |   |
| Cost of goods sold                                                                        |       | 230,666                |       | 211,856                |       | 663,875 |   | 628,361 |   |
| **Gross profit**                                                                          |       | 165,065                |       | 138,636                |       | 479,221 |   | 344,519 |   |
| Operating expenses:                                                                       |       |                   |       |                   |       |   |   |   |   |
| Selling, general, and administrative                                                      |       | 79,488                 |       | 63,501                 |       | 213,913 |   | 159,030 |   |
| Research and development                                                                  |       | 16,167                 |       | 18,149                 |       | 51,728 |   | 48,232 |   |
| Total operating expenses                                                                  |       | 95,655                 |       | 81,650                 |       | 265,641 |   | 207,262 |   |
| **Income from operations**                                                                |       | 69,410                 |       | 56,986                 |       | 213,580 |   | 137,257 |   |
| Other non-operating (expense) income:                                                     |       |                   |       |                   |       |   |   |   |   |
| Interest expense, net                                                                     |       | (19,587                | )          | (24,382                | )          | (61,445 | ) | (73,027 | ) |
| Merger termination fee                                                                    |       | —                 |       | —                 |       | 75,000 |   | — |   |
| Equity in earnings of affiliate                                                           |       | 112                    |       | 97                     |       | 296 |   | 247 |   |
| Other                                                                                     |       | —                 |       | —                 |       | — |   | 400 |   |
| Total other non-operating (expense) income, net                                           |       | (19,475                | )          | (24,285                | )          | 13,851 |   | (72,380 | ) |
| Income before income taxes                                                                |       | 49,935                 |       | 32,701                 |       | 227,431 |   | 64,877 |   |
| Provision for income taxes                                                                |       | (14,125                | )          | (12,147                | )          | (74,914 | ) | (25,284 | ) |
| **Net income**                                                                            |       | 35,810                 |       | 20,554                 |       | 152,517 |   | 39,593 |   |
| Less dividends to preferred stockholders and other  non-common stockholders’ charges |       | 4,012                  |       | 3,634                  |       | 11,744 |   | 10,947 |   |
| **Net income available to common  stockholders**                                          |       | $                      | 31,798     |                   | $          | 16,920 |   | $ | 140,773 |   | $ | 28,646 |   |
|                                                                                      |       |                   |       |                   |       |   |   |   |   |
| **Net income per common share:**                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                                     |       | $                      | 12.01      |                   | $          | 14.65 |   | $ | 76.21 |   | $ | 22.86 |   |
|                                                                                      |       |                   |       |                   |       |   |   |   |   |
| Diluted                                                                                   |       | $                      | 0.38       |                   | $          | 0.22 |   | $ | 1.62 |   | $ | 0.43 |   |

 

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**Consolidated Statements of Cash Flows**

(inthousands)

(Unaudited)

 
| ** **                                                                                   | ** ** | **Nine  Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,** | ** ** |
| ** **                                                                                   | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Cash flows  from operating activities:**                                                   |       |                   |       |   |   |
| Net income                                                                                   |       | $                      | 152,517    |   | $ | 39,593 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                               |       | 21,403                 |       | 14,166 |   |
| Amortization of deferred  loan fees                                                          |       | 2,823                  |       | 2,823 |   |
| Change in allowance for  doubtful receivables and advances                                   |       | 3,203                  |       | 3,242 |   |
| Recognition of previously  deferred revenue                                                  |       | (169                   | )          | (4,728 | ) |
| Share-based compensation  expense                                                            |       | 39,625                 |       | 28,098 |   |
| Amortization of deferred  compensation                                                       |       | 4,407                  |       | 4,480 |   |
| Equity in earnings of  affiliate                                                             |       | (296                   | )          | (247 | ) |
| Decrease (increase) in  deferred tax assets                                                  |       | 8,409                  |       | (4,498 | ) |
| Asset impairment                                                                             |       | 1,010                  |       | 228 |   |
| Loss on disposal of  property, plant, and equipment                                          |       | 879                    |       | 804 |   |
| Excess tax benefits from  share-based payment arrangements                                   |       | (1,437                 | )          | — |   |
| Changes in assets and  liabilities, excluding the effects of business acquisitions           |       |                   |       |   |   |
| Accounts receivable                                                                          |       | (17,289                | )          | 4,974 |   |
| Inventories                                                                                  |       | (52,112                | )          | (92,679 | ) |
| Prepaid expenses and other  assets                                                           |       | 16,775                 |       | (4,547 | ) |
| Accounts payable                                                                             |       | 4,825                  |       | 22,384 |   |
| Accrued expenses and other  liabilities                                                      |       | 15,827                 |       | (15,178 | ) |
| Interest payable                                                                             |       | (1,676                 | )          | (1,444 | ) |
| Net cash provided by (used  in) operating activities                                         |       | 198,724                |       | (2,529 | ) |
|                                                                                         |       |                   |       |   |   |
| **Cash flows  from investing activities:**                                                   |       |                   |       |   |   |
| Purchases of property, plant,  and equipment                                                 |       | (36,291                | )          | (65,994 | ) |
| Financing arrangements with  third party suppliers, net of repayments                        |       | 402                    |       | (6,587 | ) |
| Business acquisitions, net  of cash acquired                                                 |       | (25,510                | )          | (5,792 | ) |
| Advance of purchase price  for plasma collection centers                                     |       | (1,603                 | )          | (2,534 | ) |
| Net proceeds from disposals  of property, plant, and equipment                               |       | 7                      |       | 260 |   |
| Dividend from affiliate                                                                      |       | 225                    |       | — |   |
| Net cash used in investing  activities                                                       |       | (62,770                | )          | (80,647 | ) |
|                                                                                         |       |                   |       |   |   |
| **Cash flows  from financing activities:**                                                   |       |                   |       |   |   |
| Borrowings under Revolving Credit  Facility                                                  |       | 1,090,222              |       | 1,065,664 |   |
| Repayments of borrowings  under Revolving Credit Facility                                    |       | (1,202,319             | )          | (997,734 | ) |
| Repayments of borrowings  under term loan                                                    |       | (5,250                 | )          | (5,250 | ) |
| Repurchases of common stock                                                                  |       | (4,132                 | )          | (36,076 | ) |
| Repayments of capital lease  obligations                                                     |       | (407                   | )          | (1,114 | ) |
| Excess tax benefits from  share-based payment arrangements                                   |       | 1,437                  |       | — |   |
| Net cash (used in) provided  by financing activities                                         |       | (120,449               | )          | 25,490 |   |
| Effect of exchange rate  changes on cash and cash equivalents                                |       | 465                    |       | (1 | ) |
| **Net increase  (decrease) in cash and cash equivalents**                                    |       | 15,970                 |       | (57,687 | ) |
| **Cash and  cash equivalents at beginning of period**                                        |       | 16,979                 |       | 73,467 |   |
| **Cash and  cash equivalents at end of period**                                              |       | $                      | 32,949     |   | $ | 15,780 |   |

 

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

 

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**Talecris Biotherapeutics Holdings Corp.**

**Notes to Unaudited ConsolidatedFinancial Statements**

 

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

 

***We are a biopharmaceutical company that researches,develops, manufactures, markets, and sells protein-based therapies that extendand enhance the lives of individuals who suffer from life-threatening diseases.Our products are derived from human plasma, the liquid component of blood,which is sourced from our plasma collection centers or purchased from thirdparties, located in the United States. Plasma contains many therapeuticproteins, which we extract through a process known as fractionation at ourClayton, North Carolina and/or Melville, New York facilities. The fractionatedintermediates are then purified, formulated into final bulk, and asepticallyfilled into vials for distribution.***

 

***The majority of our sales are concentrated in two keytherapeutic areas of the plasma business: Immunology/Neurology, through ourintravenous immune globulin (IGIV) product for the treatment of primary immunedeficiency and autoimmune diseases, as well as chronic inflammatorydemyelinating polyneuropathy (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 brand IGIV and Prolastin brand A1PI, respectively. Sales ofGamunex and Prolastin together comprised 72.8% and 73.9% of our net revenue forthe three months ended September 30, 2009 and 2008, respectively, and74.3% and 72.7% of our net revenue for the nine months ended September 30,2009 and 2008, respectively.  We alsohave a line of hyperimmune therapies that provides treatment for tetanus,rabies, hepatitis B, and Rh factor control during pregnancy and at birth. Inaddition, we provide plasma-derived therapies for critical care, including thetreatment of hemophilia, an anti-coagulation factor (Thrombate III antithrombinIII), as well as albumin to expand blood volume. Although we sell our productsworldwide, the majority of our sales are concentrated in the United States andCanada.***

 

***On October 6, 2009, we completed our initial publicoffering (IPO), which resulted in net primary proceeds to us of $519.7million.  We used the net primaryproceeds to us to repay $389.8 million and $129.9 million of principal underour First and Second Lien Term Loans, respectively.***

 

***On October 15, 2009, we entered into an amendment ofcertain provisions of our Revolving Credit Facility.  Further, on October 21, 2009, wecompleted the issuance of $600.0 million, 7.75% Unsecured Senior Notes, due2016 (7.75% Notes) at a price of 99.321% of par in a private placement tocertain qualified institutional buyers. We used the net proceeds to us of$583.9 million to repay principal and interest under our First and Second LienTerm Loans of $295.5 million and $204.1 million, respectively, which weresubsequently terminated, $55.6 million to repay principal under our RevolvingCredit Facility, as amended, and $28.7 million to settle and terminate certaininterest rate swap contracts with a notional amount of $390.0 million.***

 

***Additional information regarding our IPO and refinancingtransactions is included in Note 15, “Subsequent Events.”***

 

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

 

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

 

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

 

***A seven-for-one share dividend on our common stock was paidon September 10, 2009.  All shareand per-share amounts have been retroactively adjusted for all periodspresented to reflect the share dividend.***

*** ***

***Interim Financial Statements***

 

***We have prepared the accompanying unaudited interimconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America (U.S. GAAP) for interimfinancial statements and with the instructions to Form 10-Q and Article 10of Regulation S-X issued by the Securities and Exchange Commission (SEC).  The accompanying unaudited interimconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended December 31,2008, which are included in our prospectus filed pursuant to Rule 424(b) underthe Securities and Exchange Act, as amended (Securities Act), with the SEC on October 1,2009 (our prospectus).  In our opinion,the accompanying unaudited interim***

 

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***consolidated financial statements have been prepared on thesame basis as our annual audited consolidated financial statements and containall material adjustments (consisting of normal recurring accruals andadjustments) necessary to present fairly our financial condition, results ofoperations, and cash flows for the periods presented. The consolidated balancesheet that we have presented as of December 31, 2008 has been derived fromthe audited consolidated financial statements on that date, but does notinclude all of the information and footnotes required by U.S. GAAP for completefinancial statements.***

 

***Significant Accounting Policies***

 

***A detailed description of our significant accountingpolicies is presented in our annual audited consolidated financial statementsand footnotes included in our prospectus. Our significant accounting policies,estimates, and assumptions have not changed materially since that date.***

 

***RecentAccounting Pronouncements Applicable to our Company***

 

***In October 2009, the Financial Accounting StandardsBoard (FASB) issued new accounting guidance regarding multiple-deliverablerevenue arrangements.  The new guidanceaddresses the accounting for multiple-deliverable arrangements to enablevendors to account for products or services (deliverables) separatelyrather than as a combined unit. This guidance establishes a hierarchy fordetermining the selling price of a deliverable, which is based on: (a) vendor-specificobjective evidence; (b) third-party evidence; or (c) estimates. Thisguidance also eliminates the residual method of allocation and requires thatarrangement consideration be allocated at the inception of the arrangement toall deliverables using the relative selling price method. In addition, thisguidance significantly expands required disclosures related to a vendor’smultiple-deliverable revenue arrangements. The guidance is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010 and early adoption ispermitted. A company may elect, but will not be required, to adopt the guidanceretrospectively for all prior periods. We do not anticipate that the adoptionof this guidance will have a material impact on our consolidated financialstatements or related disclosures.***

 

***In August 2009, the FASB released new accountingguidance concerning measuring liabilities at fair value.  The new guidance provides clarification thatin circumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using certain valuation techniques. Additionally, it clarifies that a reporting entity is not required toadjust the fair value of a liability for the existence of a restriction thatprevents the transfer of the liability. This new guidance is effective for the first reporting period after itsissuance, however earlier application is permitted.  We do not anticipate that the adoption ofthis guidance will have a material impact on our consolidated financialstatements or related disclosures.***

 

***Effective July 1, 2009, the FASB Accounting StandardsCodification (ASC) became the single official source of authoritative,nongovernmental generally accepted accounting principles (GAAP) in the UnitedStates.  The historical GAAP hierarchywas eliminated and the ASC became the only level of authoritative GAAP, otherthan guidance issued by the SEC.  Ouraccounting policies were not affected by the conversion to ASC.***

 

***On January 30, 2009, the SEC released the final rules requiringall registered companies to use eXtensible Business Reporting Language (XBRL)when submitting financial statements to the SEC.  The new rules initially will requireinteractive data reporting only by domestic and foreign large acceleratedfilers that prepare their financial statements in accordance with U.S. GAAP andhave a worldwide public common equity float above $5.0 billion for their firstquarterly period ending after June 15, 2009 and all reporting periodsthereafter.  We expect to be required tofile using XBRL beginning with our quarterly reporting period ending March 31,2011.***

 

***In November 2008, the SEC released a proposed roadmapregarding the potential use by U.S. issuers of financial statements prepared inaccordance with International Financial Reporting Standards (IFRS).  IFRS is a comprehensive series of accountingstandards published by the International Accounting Standards Board.  Under the proposed roadmap, we may berequired in fiscal 2015 to prepare financial statements in accordance withIFRS.  However, the SEC announced it willmake a determination in 2011 regarding the mandatory adoption of IFRS.  We are currently assessing the impact thatthis potential change would have on our consolidated financial statements, andwill continue to monitor the development of the potential implementation ofIFRS.***

 

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

 

***On August 12, 2008, we entered into a definitive mergeragreement with CSL, under which CSL agreed to acquire us for cash considerationof $3.1 billion, less net debt, as defined. The closing of the transaction was subject to the receipt of certainregulatory approvals as well as other customary conditions.  The U.S. Federal Trade Commission challengedthe merger and the merger parties***

 

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***agreed to terminate the definitive merger agreement on June 8,2009.  CSL paid us a merger terminationfee of $75.0 million, which is included in other non-operating income in ourconsolidated income statement for the nine months ended September 30,2009.  The Federal Trade Commission’scomplaints were subsequently dismissed.***

 

***In consideration of the definitive merger agreement withCSL, our board of directors approved a retention program in August 2008for an amount up to $20.0 million, of which approximately $13.5 million hasbeen specifically allocated to certain employees as of September 30, 2009,as adjusted for forfeitures.  We classifythe cost of this retention program consistent with each recipient’ssalary.  We recorded retention expense of$1.4 million and $7.5 million, excluding fringe benefit, during the three andnine months ended September 30, 2009, respectively.  During the three months ended September 30,2008, we recorded retention expense of $1.6 million, excluding fringebenefit.  At September 30, 2009, theremaining unrecognized expense related to this retention program totaled $0.9million, which we will recognize through December 2009.  During the second quarter of 2009, we madethe first two payments under this retention program totaling $6.8 million andthe remaining balance will be paid in December 2009, adjusted for forfeitures.***

 

**4.****                  ****BusinessAcquisitions**

 

***Pursuant to the terms of our June 9, 2007 Plasma SupplyAgreement, as amended, with International BioResources, L.L.C. and affiliatedentities (IBR), we acquired ten licensed plasma collection centers from IBRduring the nine months ended September 30, 2009 to further support ourplasma supply vertical integration efforts. The plasma collection centers’ results of operations have been includedin our consolidated financial statements from their respective date ofacquisition.***

 

***The following table summarizes our purchase accounting forthe plasma collection centers acquired during 2009:***

*** ***
| Notes receivable and other  advances                       |   | $     | 36,950 |   |
|------------------------------------------------------------|--------|-------|--------|--------|
| Performance incentive  payments                            |   | 752   |   |
| Allocable portion of  accelerated contingent consideration |   | 5,160 |   |
| Payments at closing                                        |   | 4,459 |   |
| Total purchase price                                       |   | $     | 47,321 |   |

 
| Cash and cash equivalents       |   | $      | 49     |   |
|---------------------------------|--------|--------|--------|--------|
| Inventory                       |   | 4,700  |   |
| Other current assets            |   | 148    |   |
| Property, plant, and  equipment |   | 8,414  |   |
| Intangible assets               |   | 3,100  |   |
| Goodwill                        |   | 31,051 |   |
| Total assets acquired           |   | 47,462 |   |
| Current liabilities assumed     |   | (141   | )      |
| Total purchase price            |   | $      | 47,321 |   |

 

In the tableabove, the purchase price consists of various loans and advances made to IBRunder the terms of the June 9, 2007 Purchase and Sale of Assets Agreement. The purchase price also includesperformance incentive payments made to IBR for achieving milestones related tothe timing of plasma collection center openings and licensure.  Further, the purchase price includes theallocable portion of contingent consideration due to IBR under our November 18,2006 Asset Purchase Agreement, which was accelerated in June 2007, inconnection with the June 9, 2007 Purchase and Sale of Assets Agreement.

 

***We have no further financing commitments to IBR under theterms of our June 9, 2007 agreement. We purchased the two centers remaining under this agreement in October 2009.***

 

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

 

Inventories consisted of the following:

 
| ** **        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Raw material      |       | $                      | 165,567    |                  | $          | 155,055 |   |
| Work-in-process   |       | 333,682                |       | 306,950               |       |
| Finished goods    |       | 138,360                |       | 119,715               |       |
| Total inventories |       | $                      | 637,609    |                  | $          | 581,720 |   |

 

***Our raw material inventories include unlicensed plasma andrelated testing costs of $5.4 million and $8.2 million at September 30,2009 and December 31, 2008, respectively, which we believe are realizable.***

 

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

 

***Our cost of goods sold reflects $8.7 million and $25.7million for the three months ended September 30, 2009 and 2008,respectively, and $34.1 million and $77.7 million for the nine months ended September 30,2009 and 2008, respectively, related to unabsorbed TPR infrastructure andstart-up costs associated with the development of our plasma collection centerplatform.  Until our plasma collectioncenters reach normal operating capacity, we charge unabsorbed overhead costsdirectly to cost of goods sold.***

 

***Plasma Center cGMPIssue***

 

***During the nine months ended September 30, 2008, weincurred charges to cost of goods sold of $23.3 million due to deviations fromour standard operating procedures and cGMP at one of our plasma collectioncenters.  Our preliminary investigationsconcluded that the deviations from our standard operating procedures andcurrent Good Manufacturing Practices (cGMP) resulted in impairments to the relatedraw material and work-in-process inventories as we concluded there was noprobable future economic benefit related to the impacted inventories.  Subsequently, due to further investigationsand new facts and circumstances, we determined that certain impacted materialswere saleable.  We record recoveriesdirectly to cost of goods sold after the impacted material is converted intofinal products and sold to third parties. For the three and nine months ended September 30, 2009, we recordedrecoveries of $0.4 million and $1.1 million, respectively, and for the threeand nine months ended September 30, 2008, we recorded recoveries of $11.4million and $14.1 million, respectively. We do not expect to recognize significant further recoveries of theimpacted inventories.***

 

**6.****                  ****Long-TermDebt and Capital Lease Obligations**

 

***Long-Term Debt and Capital Lease Obligations***

 

We were obligated under the following debtinstruments:

 
| ** **                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Revolving Credit Facility                                                |       | $                      | 67,844     |                  | $          | 179,941 |   |
| First Lien Term Loan                                                     |       | 680,750                |       | 686,000               |       |
| Second Lien Term Loan                                                    |       | 330,000                |       | 330,000               |       |
| Capital lease obligations                                                |       | 9,698                  |       | 5,605                 |       |
| Total debt and capital  lease obligations                                |       | 1,088,292              |       | 1,201,546             |       |
| Less: current maturities                                                 |       | (7,648                 | )          | (7,341                | )          |
| Long-term debt and capital  lease obligations, net of current maturities |       | $                      | 1,080,644  |                  | $          | 1,194,205 |   |

 

Our First and Second Lien Term Loans, which wererepaid in full and terminated on October 21, 2009, contained defaultprovisions, imposed restrictions on annual capital expenditures, and containedfinancial covenants, which required us to maintain a maximum leverage ratio,which decreased over the term and a minimum interest coverage ratio, whichincreased over the term.  For the threemonths ended September 30, 2009, our leverage and interest coverage ratiorequirements under our First Lien Term Loan, calculated based upon our trailingtwelve months’ results, were 4.49 to 1.00 and 2.02 to 1.00, respectively.  For the three months ended September 30,2009, our leverage and interest coverage ratio requirements under our SecondLien Term Loan were 5.59 to 1.00 and 1.63 to 1.00, respectively, calculated onthe same basis as our First Lien Term Loan. We were in compliance with these requirements at September 30,2009.  At September 30, 2009, ourRevolving Credit Facility contained default provisions, imposed restrictions onannual capital expenditures, and contained a financial covenant which requiredus to maintain a minimum collateral availability of $32.5 million.

 

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On October 6, 2009, we completed our IPO, whichresulted in net primary proceeds to us of $519.7 million.  We used the net primary proceeds to us torepay $389.8 million and $129.9 million of principal under our First and SecondLien Term Loans, respectively.

 

On October 15, 2009, we entered into an amendmentof certain provisions of our Revolving Credit Facility.  Further, on October 21, 2009, wecompleted the issuance of our 7.75% Notes in a private placement to certainqualified institutional buyers.   We usedthe net proceeds to us of $583.9 million to repay principal and interest underour First and Second Lien Term Loans of $295.5 million and $204.1 million, respectively,which were subsequently terminated, $55.6 million to repay principal under ourRevolving Credit Facility, as amended, and $28.7 million to settle andterminate certain interest rate swap contracts with a notional amount of $390.0million.  As a result of the prepaymentand termination of the First and Second Lien Term Loans, we will write off theremaining unamortized debt issuance costs associated with these loans, totaling$12.1 million, within other non-operating expense, net, during the fourthquarter of 2009.

 

Additional information regarding our IPO andrefinancing transactions is included in Note 15, “Subsequent Events.”

 

***Interest Rate Swaps and Caps***

 

At September 30, 2009, our derivative financialinstruments consisted of four variable-to-fixed interest rate swap contracts($440.0 million notional amount) and two interest rate cap contracts ($175.0million notional amount).  Under theterms of the interest rate swap contracts, we make interest payments on theunderlying debt based on LIBOR and receive/pay interest based on the spreadbetween LIBOR and fixed interest rates ranging from 5.16% to 5.19% on variousnotional amounts over various swap terms through February 13, 2013.  Our interest rate caps at 6.00% effectivelyplace an upper limit on the floating interest rate for a portion of ourlong-term debt portfolio.  The interestrate caps mature on February 14, 2010. The counterparty to our interest rate swaps and caps is Morgan StanleyCapital Services, Inc.

 

Our interest rate swaps and caps are designated ascash flow hedges, and as a result, the effective portion of the net gain orloss on the derivative financial instruments is reported as a component ofother comprehensive income (loss) and reclassified to earnings in the sameperiod or periods during which the hedged transaction affects earnings.

 

We used $28.7 million of the net proceeds to us fromour issuance of the 7.75% Notes on October 21, 2009 to settle andterminate certain interest rate swap contracts with a notional amount of $390.0million.  We will record a loss on theextinguishment of these interest rate swap contracts of approximately $25.0million within other non-operating expenses, net, during the fourth quarter of2009.  In addition, we will settle andterminate the remaining interest rate swap contract with a notional amount of$50 million during the 2009 fourth quarter, which will result in a loss onextinguishment of approximately $5.8 million. The total losses of approximately$30.8 million related to the extinguishment of our interest rate swap contractshad previously been reflected as a component of other comprehensive (loss)income and therefore the recognition of these losses in our consolidated incomestatement during the fourth quarter of 2009 will have a negligible impact onour stockholders’ equity.  At September 30,2009, the recorded amount of our derivative financial instruments was $29.3million, of which $27.9 million was recorded within other long-term liabilitiesand $1.4 million was recorded within accrued expenses and other liabilities onour consolidated balance sheet. Additional information regarding the settlement and termination ofcertain of our interest rate swap contracts is included in Note 15, “SubsequentEvents.”

 

***Fair Value Hierarchy***

 

Accounting guidance on fair value measurements forcertain financial assets and liabilities requires that assets and liabilitiescarried at fair value be classified and disclosed in one of the following threecategories:

 

*Level 1*- Quoted market prices in active markets for identicalassets or liabilities.

 

*Level 2-* Observable market-based inputs or unobservable inputsthat are corroborated by market data.

 

*Level 3-* Unobservable inputs that are significantto the valuation methodology reflecting the reporting entity’s own assumptionsor external inputs from inactive markets.

 

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At September 30, 2009, we calculated the fairvalue of our derivative financial instruments using Level 2 inputs, whichincluded forward LIBOR curves and credit default swap data.  At September 30, 2009, we calculated thefair value of vested common stock with an embedded put/call feature using level2 inputs, which consisted of a signed underwriters’ agreement to purchaseshares of our common stock at $19.00 per share. At September 30, 2009, we had no financial assets or liabilitiesfor which fair value was determined using Level 1 or Level 3 inputs.

 

**7.****                  ****ComprehensiveIncome**

 

The following table illustrates the components of our comprehensiveincome:

 
| ** **                                                                  | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                                                  |       | $                                           | 35,810     |                                       | $          | 20,554 |   | $ | 152,517 |   | $ | 39,593 |   |
| Foreign currency  translation adjustments                                   |       | 376                                         |       | (117                                       | )          | 466 |   | 2 |   |
| Net unrealized gain (loss)  on derivative financial instruments, net of tax |       | 9                                           |       | (574                                       | )          | 5,097 |   | 157 |   |
| Total comprehensive income                                                  |       | $                                           | 36,195     |                                       | $          | 19,863 |   | $ | 158,080 |   | $ | 39,752 |   |

 

**8.****                  ****IncomeTaxes**

 

Our income tax expense was $14.1 million and $12.1million for the three months ended September 30, 2009 and 2008, respectively,resulting in effective income tax rates of 28.3% and 37.1%, respectively.  Our income tax expense was $74.9 million and$25.3 million for the nine months ended September 30, 2009 and 2008,respectively, resulting in effective income tax rates of 32.9% and 39.0%,respectively.

 

For the three and nine months ended September 30,2009, our effective income tax rates were lower than the U.S. statutory Federalincome tax rate, primarily due to credits for Federal Research andExperimentation and Orphan Drug clinical testing expenditures and the deductionof previously capitalized transaction costs related to our terminated mergeragreement with CSL.

 

For the three and nine months ended September 30,2008, our effective income tax rate was higher than the U.S. statutory Federalincome tax rate, primarily due to state tax expense, net of Federalbenefit.  In addition, during April 2008,862,432 shares of restricted stock issued to employees and directorsvested.  As a result of a decline in thefair value of our common stock price, we recognized a tax deduction on thevesting date, which was less than the previously deferred taxes, resulting inhigher tax expense during the nine months ended September 30, 2008.

 

At September 30, 2009, our total grossunrecognized tax benefits were approximately $12.6 million, of whichapproximately $9.2 million would reduce our effective income tax rate ifrecognized.

 

We have not provided for U.S. Federal income andforeign withholding taxes on our non-U.S. subsidiaries’ cumulativeundistributed earnings of approximately $10.7 million as of September 30,2009. Such earnings are intended to be reinvested outside of the United Statesindefinitely.  It is not practical toestimate the amount of tax that might be payable if some or all of suchearnings were to be remitted, and foreign tax credits would be available toreduce or eliminate the resulting U.S. income tax liability.

 

The Internal Revenue Service (IRS) recently completedthe fieldwork related to the audit of our 2005, 2006, and 2007 consolidatedFederal income tax returns.  The auditwill likely be finalized following review by the Joint Committee onTaxation.  We do not believe that theoutcome of this examination will have a material adverse impact on ourconsolidated financial statements or results of operations.

 

**9.****                  ****RelatedParty Transactions**

 

We consider Cerberus and Ampersand to be related parties during theperiods presented.  We are amajority-owned subsidiary of Talecris Holdings, LLC, which held approximately97.1% of our outstanding common stock at September 30, 2009.  Talecris Holdings, LLC is owned by (i) Cerberus-PlasmaHoldings LLC, the managing member of which is Cerberus Partners, L.P., and (ii) limitedpartnerships affiliated with Ampersand Ventures. Substantially all rights ofmanagement and control of Talecris Holdings, LLC

 

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are held byCerberus-Plasma Holdings LLC.  As of October 31,2009, Talecris Holdings, LLC held approximately 51.1% of our outstanding commonstock.

 

During the periods presented, we had a Management Agreement, asamended, with Cerberus-Plasma Holdings LLC and an affiliate of AmpersandVentures.  Under the terms of thisagreement, we were charged a management fee equal to 0.5% of net sales foradvisory services related to a number of topics including strategy,acquisitions, financing, and operational matters.  We also have a Master Consulting and AdvisoryServices Agreement with an affiliate of Cerberus to provide certain advisoryservices to us outside of the scope of the Management Agreement, asamended.  The Management Agreement, asamended, was terminated as of September 30, 2009 in connection with ourIPO.

 

We have an equity investment in Centric Health Resources, Inc.(Centric); therefore, we consider Centric to be a related party during theperiods presented.  Centric providesservices in the management of our Prolastin Direct and Gamunex Directprograms.  In this capacity, Centricprovides warehousing, order fulfillment, distribution, home infusion, andcustomer relationship services for us primarily related to our U.S. sales ofProlastin.  We provide Centric with a feefor each unit of product provided to patients which escalates with volume.

 

The following tables summarize our related party transactions for threeand nine months ended September 30, 2009 and 2008 and our related partyaccounts payable balances at September 30, 2009 and December 31,2008:

 
| ** **          | ** **   | **Activity/**                                     | ** **   | ** **   | ** **   |
|---------------------|--------------|---------------------------------------------------|--------------|--------------|--------------|
| **Related Party**   | ** **   | **Transaction**                                   | ** **   | **Expenses** | ** **   |
|                |         |                                              |         |         |         |
|                |         | ***Three months ended  September 30, 2009*** |         |         |         |
| Centric             |         | Product distribution and other services           |         | $            | 5,128        |   |
| Cerberus/ Ampersand |         | Management fees                                   |         | $            | 1,958        |   |
| Cerberus            |         | Operational support                               |         | $            | 84           |   |
|                |         |                                              |         |         |         |
|                |         | ***Three months ended  September 30, 2008*** |         |         |         |
| Centric             |         | Product distribution and other services           |         | $            | 4,826        |   |
| Cerberus/ Ampersand |         | Management fees                                   |         | $            | 1,752        |   |
| Cerberus            |         | Operational support                               |         | $            | 1,215        |   |
| *** ***        | *** *** | *** ***                                      | *** *** | *** *** | *** *** |
|                |         | ***Nine months ended  September 30, 2009***  |         |         |         |
| Centric             |         | Product distribution and other services           |         | $            | 15,076       |   |
| Cerberus/ Ampersand |         | Management fees                                   |         | $            | 5,715        |   |
| Cerberus            |         | Operational support                               |         | $            | 565          |   |
|                |         |                                              |         |         |         |
|                |         | ***Nine months ended  September 30, 2008***  |         |         |         |
| Centric             |         | Product distribution and other services           |         | $            | 13,234       |   |
| Cerberus/ Ampersand |         | Management fees                                   |         | $            | 4,864        |   |
| Cerberus            |         | Operational support                               |         | $            | 3,405        |   |

 
| ** **          | ** ** | **Activity/**                            | ** ** | **Payable**                  | ** ** |
|---------------------|------------|------------------------------------------|------------|------------------------------|------------|
| **Related Party**   | ** ** | **Transaction**                          | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
| Centric             |       | Product distribution and other  services |       | $                            | 5,356      |   | $ | 3,690 |   |
| Cerberus/ Ampersand |       | Management fees                          |       | $                            | 1,979      |   | $ | 2,007 |   |
| Cerberus            |       | Operational support                      |       | $                            | 508        |   | $ | 708 |   |

 

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

 

We have disclosed information regarding ourcommitments and contingencies in the footnotes to our consolidated financialstatements, which are included in our prospectus.  There have been no material changes to ourcommitments and contingencies since the date of our prospectus, except asindicated below.

 

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***Leases***

 

We lease office buildings, plasma collection centers, refrigeratedstorage, furniture, machinery, computer equipment, and miscellaneous equipmentunder leasing arrangements.  The majorityof our leases are operating leases.  Inaddition to rent, certain of our leases require us to pay directly for taxes,insurance, maintenance, and other operating expenses.  Future minimum lease payments required underour capital leases and under our non-cancellable operating leases as of September 30,2009 are as follows:

 
| ** **                                          | ** ** | ** **  | ** ** | **Non-cancellable** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|---------------------|------------|
| ** **                                          | ** ** | **Capital** | ** ** | **Operating**       | ** ** |
| ** **                                          | ** ** | **Leases**  | ** ** | **Leases**          | ** ** |
| 2009                                                |       | $           | 407        |                | $          | 4,244 |   |
| 2010                                                |       | 1,637       |       | 15,652              |       |
| 2011                                                |       | 1,656       |       | 11,470              |       |
| 2012                                                |       | 1,675       |       | 7,269               |       |
| 2013                                                |       | 1,698       |       | 4,154               |       |
| 2014                                                |       | 1,702       |       | 2,887               |       |
| Thereafter                                          |       | 6,284       |       | 5,864               |       |
| Total future minimum lease  payments                |       | 15,059      |       | $                   | 51,540     |   |
| Less: amounts representing  interest                |       | (5,361      | )          |                |       |
| Present value of net  minimum lease payments        |       | 9,698       |       |                |       |
| Less: current portion of  capital lease obligations |       | (648        | )          |                |       |
| Total                                               |       | $           | 9,050      |                |       |   |

 

In the preceding table, the future minimum annual rentals payable undernon-cancellable leases denominated in foreign currencies have been calculatedbased upon the September 30, 2009 foreign currency exchange rates.

 

***ForeignCorrupt Practices Act***

 

We are conducting an internal investigation intopotential violations of the Foreign Corrupt Practices Act (FCPA) that we becameaware of during the conduct of an unrelated review. The FCPA investigation isbeing conducted by outside counsel under the direction of a special committeeof our board of directors. The investigation primarily involves sales tocertain Eastern European and Middle Eastern countries. Our net revenue in 2008and for the nine months ended September 30, 2009 in such countriesrepresented approximately 2.3% and 3.3% of our net revenue during such periods.Our investigation will also review our business practices in other countries.

 

In July 2009, we voluntarily contacted the U.S.Department of Justice (DOJ) to advise them of the investigation and to offerour cooperation in any investigation that they want to conduct or they want usto conduct. The DOJ has not indicated what action it may take, if any, againstus or any individual, or the extent to which it may conduct its owninvestigation. The DOJ or other federal agencies may seek to impose sanctionson us that may include, among other things, injunctive relief, disgorgement,fines, penalties, appointment of a monitor, appointment of new control staff,or enhancement of existing compliance and training programs. Other countries inwhich we do business may initiate their own investigations and impose similarpenalties. As a result of this investigation, we have suspended shipments tosome of these countries while we put additional safeguards in place. We havealso terminated several consultants and suspended relations with otherdistributors and consultants in countries under investigation while we gatherfurther facts and implement safeguards. We expect these actions will result ina short term decline in revenue from these countries. To the extent that weconclude, or the DOJ concludes, that we cannot implement adequate safeguards orotherwise need to change our business practices, distributors, or consultantsin affected countries or other countries, this may result in a permanent lossof business. 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 consolidated financial statements as of September 30,2009.

 

As of October 31, 2009, we have approximately$2.6 million of accounts receivable, net, outstanding with customers related tothis matter.  If we determine that we maybe unable to collect some, or all, of these receivables, we would record aprovision for doubtful accounts receivable within SG&A in the period inwhich we determine that collection was unlikely or that the amounts that may becollected would be less than the amounts due.

 

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**11.****           ****EquityTransactions**

 

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

 

On September 30, 2009, 1,000,000 shares of ourseries A preferred stock and 192,310 shares of our series B preferred stockwere converted into an aggregate of 85,846,320 shares of our common stock inconnection with our IPO.  In addition, onSeptember 30, 2009, 2,381,548 shares of our common stock were issued tosettle $45.3 million of accrued dividends upon the conversion of our series Aand B preferred stock.

 

During the nine months ended September 30, 2008,we repurchased 2,146,232 shares of our common stock from IBR for $35.4 millionat a put value of $15.61 per share plus accrued charges.

 

During the second quarter of 2008, our board ofdirectors approved the retirement of 2,212,640 shares of our common stock heldin treasury, and approved that shares of our common stock repurchased in thefuture would be immediately retired by the Company.

 

On October 6, 2009, we completed our IPO of56,000,000 shares of our common stock, par value $0.01 per share.  Additional information regarding our IPO isincluded in Note 15, “Subsequent Events.”

 

**12.****           ****Share-BasedCompensation**

 

In connection with our IPO, we ceased further grantsunder the 2005 Stock Option and Incentive Plan and the 2006 Restricted StockPlan. The Talecris Biotherapeutics Holdings Corp. 2009 Long-Term Incentive Plan(2009 Plan), which was adopted by our board of directors on August 7, 2009,became effective in connection with our IPO. The 2009 Plan provides for the grant of awards in the form of incentivestock options, nonqualified stock options, share appreciation rights,restricted stock, restricted stock units (RSU’s), unrestricted shares of commonstock, deferred share units, and performance awards.  Our employees, directors, and consultants areeligible to receive awards under the 2009 Plan. The maximum number of shares that we may issue for all awards under the2009 Plan is 7,200,000.

 

We value share-based compensation at the grant dateusing a fair value model and recognize this value as expense over the employees’requisite service period, typically the period over which the share-basedcompensation vests.  We classifyshare-based compensation costs consistent with each grantee’s salary.  We record corporate income tax benefitsrealized upon exercise or vesting of an award in excess of that previouslyrecognized in earnings as additional paid-in capital.

 

The following is a summary of equity awards granted onthe dates presented:

 
| ** **              | ** ** | ** **             | ** ** | ** **                          | ** ** | ** **   | ** ** | **Fair  Value**   | ** ** |
|-------------------------|------------|------------------------|------------|-------------------------------------|------------|--------------|------------|-------------------|------------|
| ** **              | ** ** | ** **             | ** ** | **Number  of Options, RSU’s,** | ** ** | **Exercise** | ** ** | **per**           | ** ** |
| **Grant Date**          | ** ** | **Equity  Award**      | ** ** | **or  Shares Granted**              | ** ** | **Price**    | ** ** | **Common  Share** | ** ** |
| March 27, 2009     |       | Restricted stock       |       | 14,464                              |       | $            | —     |              | $          | 16.63 |   |
| March 27, 2009     |       | Stock options          |       | 31,392                              |       | $            | 16.63      |              | $          | 16.63 |   |
| September 30, 2009 |       | Stock options          |       | 597,713                             |       | $            | 19.00      |              | $          | 19.00 |   |
| September 30, 2009 |       | Restricted stock units |       | 483,100                             |       | $            | —     |              | $          | 19.00 |   |

 

We determined the fair value per common sharecontemporaneously with each equity award.

 

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Share-based compensation expense for the three monthsended September 30, 2009 and 2008 was as follows:

 
| ** **                                                         | ** ** | **Stock  Options** | ** ** | ** **       | ** ** | ** **     | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|------------------|------------|----------------|------------|
| ** **                                                         | ** ** | **Service-**       | ** ** | **Performance-** | ** ** | **Restricted** | ** ** | ** ** | ** ** |
| **Three Months Ended September 30, 2009** | ** ** | **Based**          | ** ** | **Based**        | ** ** | **Stock**      | ** ** | **Total** | ** ** |
| SG&A                                                           |       | $                  | 14,920     |             | $          | 661            |       | $ | 2,348 |   | $ | 17,929 |   |
| R&D                                                            |       | 312                |       | 67               |       | 134            |       | 513 |   |
| Cost of goods sold                                                 |       | 672                |       | 145              |       | 195            |       | 1,012 |   |
| Total expense                                                      |       | $                  | 15,904     |             | $          | 873            |       | $ | 2,677 |   | $ | 19,454 |   |
|                                                               |       |               |       |             |       |           |       |   |   |
| ** **                                                         | ** ** | **Stock  Options** | ** ** | ** **       | ** ** | ** **     | ** ** |
| ** **                                                         | ** ** | **Service-**       | ** ** | **Performance-** | ** ** | **Restricted** | ** ** | ** ** | ** ** |
| **Three Months Ended September 30, 2008** | ** ** | **Based**          | ** ** | **Based**        | ** ** | **Stock**      | ** ** | **Total** | ** ** |
| SG&A                                                           |       | $                  | 4,500      |             | $          | 2,118          |       | $ | 2,414 |   | $ | 9,032 |   |
| R&D                                                            |       | 319                |       | 214              |       | 134            |       | 667 |   |
| Cost of goods sold                                                 |       | 308                |       | 207              |       | 217            |       | 732 |   |
| Total expense                                                      |       | $                  | 5,127      |             | $          | 2,539          |       | $ | 2,765 |   | $ | 10,431 |   |

 

Share-based compensation expense for the nine monthsended September 30, 2009 and 2008 was as follows:

 
| ** **                                                        | ** ** | **Stock  Options** | ** ** | ** **       | ** ** | ** **     | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|------------------|------------|----------------|------------|
| ** **                                                        | ** ** | **Service-**       | ** ** | **Performance-** | ** ** | **Restricted** | ** ** | ** ** | ** ** |
| **Nine Months Ended September 30, 2009** | ** ** | **Based**          | ** ** | **Based**        | ** ** | **Stock**      | ** ** | **Total** | ** ** |
| SG&A                                                          |       | $                  | 23,886     |             | $          | 3,440          |       | $ | 7,053 |   | $ | 34,379 |   |
| R&D                                                           |       | 943                |       | 348              |       | 401            |       | 1,692 |   |
| Cost of goods sold                                                |       | 2,104              |       | 765              |       | 685            |       | 3,554 |   |
| Total expense                                                     |       | $                  | 26,933     |             | $          | 4,553          |       | $ | 8,139 |   | $ | 39,625 |   |
|                                                              |       |               |       |             |       |           |       |   |   |
| ** **                                                        | ** ** | **Stock  Options** | ** ** | ** **       | ** ** | ** **     | ** ** |
| ** **                                                        | ** ** | **Service-**       | ** ** | **Performance-** | ** ** | **Restricted** | ** ** | ** ** | ** ** |
| **Nine Months Ended September 30, 2008** | ** ** | **Based**          | ** ** | **Based**        | ** ** | **Stock**      | ** ** | **Total** | ** ** |
| SG&A                                                          |       | $                  | 11,746     |             | $          | 5,872          |       | $ | 7,130 |   | $ | 24,748 |   |
| R&D                                                           |       | 693                |       | 601              |       | 401            |       | 1,695 |   |
| Cost of goods sold                                                |       | 557                |       | 573              |       | 525            |       | 1,655 |   |
| Total expense                                                     |       | $                  | 12,996     |             | $          | 7,046          |       | $ | 8,056 |   | $ | 28,098 |   |

 

***Stock Options***

 

The following is a summary of stock option activityfor the nine months ended September 30, 2009:

 
| ** **                              | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted********Average  Remaining********Contractual********Term********(Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2008  |       | 14,278,416 |       | $                                      | 6.96       |                                                                                 |       |                            |       |   |
| Granted                                 |       | 629,105    |       | $                                      | 18.88      |                                                                                 |       |                            |       |   |
| Forfeited                               |       | (374,992   | )          | $                                      | 4.75       |                                                                                 |       |                            |       |   |
| Outstanding at  September 30, 2009 |       | 14,532,529 |       | $                                      | 7.53       |                                                                                 | 6.9        |                            | $          | 166,688 |   |
|                                    |       |       |       |                                   |       |                                                                                 |       |                            |       |
| Vested and expected to vest             |       | 14,532,529 |       | $                                      | 7.53       |                                                                                 | 6.9        |                            | $          | 166,688 |   |
|                                    |       |       |       |                                   |       |                                                                                 |       |                            |       |
| Exercisable at  September 30, 2009 |       | 11,118,600 |       | $                                      | 7.09       |                                                                                 | 6.1        |                            | $          | 132,423 |   |

 

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The aggregate intrinsic value in the table aboverepresents the total pre-tax intrinsic value (the difference between our IPOprice per common share of $19.00 at September 30, 2009 and the weightedaverage exercise price, multiplied by the number of options) that the optionholders would have received if all option holders exercised their options on September 30,2009, excluding the impact of income taxes. We do not record the aggregate intrinsic value for financial accountingpurposes and the value changes based upon changes in the fair value of ourcommon stock.

 

In connection with our IPO, we granted 597,713 stockoptions with an exercise price per share equal to our IPO price per share of$19.00.  These stock options will vestone-third on each of April 1 of 2011, 2012, and 2013, subject to theoption holder being employed on the vesting date.  The fair value of each option was determinedto be $9.57; resulting in aggregate future expense of approximately $5.2million, which we expect to recognize ratably through April of 2013.  At September 30, 2009, the remainingtotal estimated unrecognized compensation cost related to unvested stockoptions, including the IPO awards, was approximately $15.0 million, which weexpect to recognize over a weighted average period of approximately 2.2years.  The amount of share-basedcompensation expense that we will ultimately be required to record could changein the future as a result of additional grants, changes in the fair value ofshares for performance-based options, differences between our anticipatedforfeiture rate and the actual forfeiture rate, the probability of achievingtargets established for performance share vesting, and other actions by ourboard of directors or its compensation committee.

 

We estimated the fair value of stock options at theirgrant date using the Black-Scholes option pricing model.  This model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable, characteristics that are not present in our optiongrants.  If the model permittedconsideration of the unique characteristics of employee stock options, theresulting estimate of the fair value of the stock options could bedifferent.  The followingweighted-average assumptions were used to estimate the fair value of stockoptions granted during the nine months ended September 30, 2009 and 2008:

 
| ** **              | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Risk-free interest rate |       | 2.66                                       | %          | 2.65 | % |
| Expected term           |       | 5.96 years                                 |       | 5.20 years |   |
| Expected volatility     |       | 50                                         | %          | 50 | % |
| Expected dividend yield |       | 0                                          | %          | 0 | % |

 

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

 

We entered into an amended and restated employmentagreement with our Chairman and Chief Executive Officer which includedaccelerating the vesting of options to purchase 1,008,000 shares of our commonstock at an exercise price of $21.25 per common share to August 19,2009.  The acceleration of these optionsresulted in the recognition of a non-cash charge of $11.8 million ofcompensation expense during the three months ended September 30,2009.  Options to purchase these shareswere previously scheduled to vest in April of 2010 (504,000 options) and April of2011 (504,000 options).

 

***Restricted Stock***

 

The following is a summary of share activity for thenine months ended September 30, 2009:

 
| ** **                                              | ** ** | ** ** | ** ** | **Weighted**    | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **Average**     | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Grant  Date** | ** ** |
| ** **                                              | ** ** | **Shares** | ** ** | **Fair  Value** | ** ** |
| Unvested shares outstanding  at December 31, 2008  |       | 1,695,504  |       | $               | 14.40      |   |
| Granted                                                 |       | 14,464     |       | $               | 16.63      |   |
| Forfeited                                               |       | (13,824    | )          | $               | 11.00      |   |
| Vested                                                  |       | (771,744   | )          | $               | 13.42      |   |
| Unvested shares outstanding  at September 30, 2009 |       | 924,400    |       | $               | 15.31      |   |

 

At September 30, 2009, the remaining estimatedunrecognized compensation cost related to our restricted stock wasapproximately $9.7 million, which we expect to recognize over a weightedaverage period of approximately 0.6 years.

 

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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.  During the nine months ended September 30,2008, we repurchased 67,336 shares of our common stock from employees for $0.7million to settle their withholding tax obligations upon vesting of restrictedstock.

 

In the event of a participant’s termination of continuous service dueto death or disability, the participant (or designated beneficiary or estate)had the right to sell, or “put,” shares of our common stock back to us at fairmarket value.  In addition, we had theright to repurchase, or “call,” our common stock upon a participant’stermination of continuous services, as defined. As a result, we had recorded the fair value of vested common stock withan embedded put/call feature outside of permanent equity on our consolidatedbalance sheets at September 30, 2009 and December 31, 2008.  Both our redemption rights and theparticipants’ put rights were terminated in connection with the closing of ourIPO.  As a result, we reclassified thefair value of vested common stock to permanent equity in the fourth quarter of2009.

 

***Restricted Stock Units***

 

We granted 483,100 RSU’s in connection with ourIPO.  These RSU’s will vest one-third oneach of April 1 of 2011, 2012, and 2013, subject to the award holder beingemployed on the vesting date.  Theaggregate grant date fair value of the RSU’s was $8.4 million, which we expectto recognize ratably through April of 2013.

 

**13.****            Segment Reporting**

 

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 brand IGIV andProlastin brand A1PI constitute the majority of our net revenue. Although wesell our products worldwide, the majority of our net revenue was concentratedin the United States and Canada for the periods presented.

 

In the following table, we have presented our net revenue bysignificant category. Our Immunology/Neurology product category includesproducts that are used to provide antibodies to patients who have a genetic oracquired inability to produce these antibodies, as well as a treatment forCIDP, and also products that provide antibodies to counter specific antigenssuch as rabies. Our Pulmonology product category is currently comprised of ourProlastin brand A1PI product, which is used to treat patients with a genetic alpha-1antitrypsin deficiency. Our Critical Care product category includes productsthat are used to supplement, restore, or maintain normal plasma parameters suchas volume or coagulation values.  Otherproduct revenue consists of sales of PPF powder and sales of intermediateproducts, such as cryoprecipitate.  Othernon-product revenue primarily consists of royalties under collaborativeagreements.

 
| ** **                | ** ** | **Three  Months Ended** | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **September 30,**  | ** ** |
| ** **                | ** ** | **2009**                | ** ** | **2008** | ** ** |
| Product net revenue:      |       |                    |       |   |   |
| Immunology/Neurology      |       | $                       | 237,395    |   | $ | 215,768 |   |
| Pulmonology               |       | 80,813                  |       | 77,721 |   |
| Critical Care             |       | 42,434                  |       | 24,694 |   |
| Other                     |       | 27,256                  |       | 21,062 |   |
| Total product net revenue |       | 387,898                 |       | 339,245 |   |
| Other revenue             |       | 7,833                   |       | 11,247 |   |
| Total net revenue         |       | $                       | 395,731    |   | $ | 350,492 |   |

 

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| ** **                | ** ** | **Nine  Months Ended** | ** ** |
|---------------------------|------------|------------------------|------------|
| ** **                | ** ** | **September 30,** | ** ** |
| ** **                | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Product net revenue:      |       |                   |       |   |   |
| Immunology/Neurology      |       | $                      | 700,938    |   | $ | 557,680 |   |
| Pulmonology               |       | 230,193                |       | 235,434 |   |
| Critical Care             |       | 119,168                |       | 82,096 |   |
| Other                     |       | 72,578                 |       | 67,680 |   |
| Total product net revenue |       | 1,122,877              |       | 942,890 |   |
| Other revenue             |       | 20,219                 |       | 29,990 |   |
| Total net revenue         |       | $                      | 1,143,096  |   | $ | 972,880 |   |

 

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** | ** ** |
|-------------------|------------|-------------------------|------------|
| ** **        | ** ** | **September 30,**  | ** ** |
| ** **        | ** ** | **2009**                | ** ** | **2008** | ** ** |
| United States     |       | $                       | 267,411    |   | $ | 245,513 |   |
| Canada            |       | 58,227                  |       | 54,951 |   |
| Europe            |       | 45,956                  |       | 40,827 |   |
| Other             |       | 24,137                  |       | 9,201 |   |
| Total net revenue |       | $                       | 395,731    |   | $ | 350,492 |   |

 
| ** **        | ** ** | **Nine  Months Ended** | ** ** |
|-------------------|------------|------------------------|------------|
| ** **        | ** ** | **September 30,** | ** ** |
| ** **        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| United States     |       | $                      | 764,500    |   | $ | 648,938 |   |
| Canada            |       | 162,092                |       | 159,765 |   |
| Europe            |       | 132,617                |       | 122,791 |   |
| Other             |       | 83,887                 |       | 41,386 |   |
| Total net revenue |       | $                      | 1,143,096  |   | $ | 972,880 |   |

 

We did not maintain significant long-lived assets outside of the UnitedStates at September 30, 2009 and December 31, 2008.

 

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**14.****            Earnings per Share**

 

***The following tableillustrates the calculation of our basic earnings per common share outstandingfor the periods presented:***

 
| ** **                                                            | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                                                            | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                                            |       | $                       | 35,810     |                   | $          | 20,554 |   | $ | 152,517 |   | $ | 39,593 |   |
| Less:                                                                 |       |                    |       |                   |       |   |   |   |   |
| Series A convertible preferred stock  undeclared dividends       |       | (3,280                  | )          | (2,971                 | )          | (9,602 | ) | (8,699 | ) |
| Series B convertible preferred stock  undeclared dividends       |       | (732                    | )          | (663                   | )          | (2,142 | ) | (1,940 | ) |
| Accretion of common stock put option                                  |       | —                  |       | —                 |       | — |   | (308 | ) |
| Net income available to common stockholders                           |       | $                       | 31,798     |                   | $          | 16,920 |   | $ | 140,773 |   | $ | 28,646 |   |
|                                                                  |       |                    |       |                   |       |   |   |   |   |
| Weighted average common shares outstanding                            |       | 2,647,178               |       | 1,155,096              |       | 1,847,235 |   | 1,252,955 |   |
|                                                                  |       |                    |       |                   |       |   |   |   |   |
| Basic net income per common share:                                    |       | $                       | 12.01      |                   | $          | 14.65 |   | $ | 76.21 |   | $ | 22.86 |   |
|                                                                  |       |                    |       |                   |       |   |   |   |   |
| Pro forma basic income per common share:                              |       |                    |       |                   |       |   |   |   |   |
| Numerator:                                                            |       |                    |       |                   |       |   |   |   |   |
| Net income                                                            |       | $                       | 35,810     |                   |       |   | $ | 152,517 |   |   |   |
| Interest expense reduction for IPO debt repayment                     |       | 4,123                   |       |                   |       | 13,335 |   |   |   |
| Numerator for pro forma basic income per common  share                |       | $                       | 39,933     |                   |       |   | $ | 165,852 |   |   |   |
|                                                                  |       |                    |       |                   |       |   |   |   |   |
| Demominator:                                                          |       |                    |       |                   |       |   |   |   |   |
| Shares used above                                                     |       | 2,647,178               |       |                   |       | 1,847,235 |   |   |   |
| Pro forma adjustments to reflect assumed weighted  average effect of: |       |                    |       |                   |       |   |   |   |   |
| Conversion of series A preferred stock                                |       | 71,217,391              |       |                   |       | 71,736,264 |   |   |   |
| Conversion of series B preferred stock                                |       | 13,695,817              |       |                   |       | 13,795,601 |   |   |   |
| Shares issued for preferred stock dividend                            |       | 2,355,662               |       |                   |       | 2,372,824 |   |   |   |
| Newly issued shares for IPO                                           |       | 28,947,368              |       |                   |       | 28,947,368 |   |   |   |
| Denominator for pro forma basic income per common  share              |       | 118,863,416             |       |                   |       | 118,699,292 |   |   |   |
|                                                                  |       |                    |       |                   |       |   |   |   |   |
| Pro forma basic income per common share                               |       | $                       | 0.34       |                   |       |   | $ | 1.40 |   |   |   |

 

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

 
| ** **                                                            | ** ** | **Three  Months Ended**  | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **September   30,** | ** ** | **September 30,** | ** ** |
| ** **                                                            | ** ** | **2009**                 | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                                            |       | $                        | 35,810     |                   | $          | 20,554 |   | $ | 152,517 |   | $ | 39,593 |   |
| Less accretion of common stock put option                             |       | —                   |       | —                 |       | — |   | (308 | ) |
| Net income available to common stockholders                           |       | $                        | 35,810     |                   | $          | 20,554 |   | $ | 152,517 |   | $ | 39,285 |   |
|                                                                  |       |                     |       |                   |       |   |   |   |   |
| Weighted average common shares outstanding                            |       | 2,647,178                |       | 1,155,096              |       | 1,847,235 |   | 1,252,955 |   |
| Plus incremental shares from assumed conversions:                     |       |                     |       |                   |       |   |   |   |   |
| Series A preferred stock                                         |       | 71,217,391               |       | 72,000,000             |       | 71,736,264 |   | 72,000,000 |   |
| Series B preferred stock                                         |       | 13,695,817               |       | 13,846,320             |       | 13,795,601 |   | 13,846,320 |   |
| Stock options and restricted shares                                   |       | 6,350,815                |       | 5,095,988              |       | 6,540,453 |   | 4,427,306 |   |
| Dilutive potential common shares                                      |       | 93,911,201               |       | 92,097,404             |       | 93,919,553 |   | 91,526,581 |   |
|                                                                  |       |                     |       |                   |       |   |   |   |   |
| Diluted net income per common share                                   |       | $                        | 0.38       |                   | $          | 0.22 |   | $ | 1.62 |   | $ | 0.43 |   |
|                                                                  |       |                     |       |                   |       |   |   |   |   |
| Pro forma diluted income per common share:                            |       |                     |       |                   |       |   |   |   |   |
| Numerator:                                                            |       |                     |       |                   |       |   |   |   |   |
| Net income available to common stockholders and  assumed conversions  |       | $                        | 35,810     |                   |       |   | $ | 152,517 |   |   |   |
| Interest expense reduction for IPO debt repayment                     |       | 4,123                    |       |                   |       | 13,335 |   |   |   |
| Numerator for pro forma diluted income per common  share              |       | $                        | 39,933     |                   |       |   | $ | 165,852 |   |   |   |
|                                                                  |       |                     |       |                   |       |   |   |   |   |
| Denominator:                                                          |       |                     |       |                   |       |   |   |   |   |
| Shares used above                                                     |       | 93,911,201               |       |                   |       | 93,919,553 |   |   |   |
| Pro forma adjustments to reflect assumed weighted  average effect of: |       |                     |       |                   |       |   |   |   |   |
| Shares issued for preferred stock dividend                            |       | 2,355,662                |       |                   |       | 2,372,824 |   |   |   |
| Newly issued shares for IPO                                           |       | 28,947,368               |       |                   |       | 28,947,368 |   |   |   |
| Denominator for pro forma diluted income per common  share            |       | 125,214,231              |       |                   |       | 125,239,745 |   |   |   |
|                                                                  |       |                     |       |                   |       |   |   |   |   |
| Pro forma diluted income per common share                             |       | $                        | 0.32       |                   |       |   | $ | 1.32 |   |   |   |

 

Thepro forma earnings per common share calculations reflect an adjustment to netincome for reduced interest expense as if the net primary proceeds to us fromour IPO had been applied to repay our debt at the beginning of the periodspresented.  The pro forma adjustment tothe denominator reflects the impacts for the issuance of common shares toconvert preferred stock, settle accrued dividends, and complete the IPO as if theseevents occurred at the beginning of the periods presented.

 

**15.****            Subsequent Events**

 

We evaluated all events and transactions that occurred after September 30,2009 up through November 9, 2009, the date that we issued these unauditedinterim consolidated financial statements.

 

***Initial Public Offering***

 

On October 6, 2009, we completed our IPO of 56,000,000 shares ofour common stock, par value $0.01 per share, at an offering price of $19.00 pershare.  Our IPO included 28,947,368shares newly issued and sold by us and 27,052,632 shares sold by the sellingstockholder, Talecris Holdings, LLC, including 6,000,000 shares sold by theselling stockholder pursuant to the underwriters’ option to purchase additionalshares.  After deducting the payment ofunderwriters’ discounts and commissions, the net primary proceeds to us fromthe sale of shares in our IPO were approximately $519.7 million, which we usedto repay $389.8 million and $129.9 million of principal under our First andSecond Lien Term Loans, respectively.  Wedid not receive any proceeds from the sale of shares by the sellingstockholder.

 

***Revolving Credit Facility Amendment***

 

OnOctober 15, 2009, we entered into an amendment of certain provisions of ourRevolving Credit Facility dated as of October 12, 2009.  The Revolving Credit Facility, as amended,permits the 7.75% Notes, described below, to be issued as long as the First andSecond Lien Credit Agreements are terminated in connection with the offering ofthe 7.75% Notes.  The amendment also (i) increasesthe covenant baskets for permitted acquisitions to $250 million, (ii) permitsthe payment of cash dividends commencing with the first fiscal quarter of 2010,and (iii) increases our capital expenditure baskets so that we will bepermitted to make capital

 

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expendituresof up to $225 million in each of 2010 and 2011. Moreover, pursuant to the amendments, we are not subject to anylimitation on our capital expenditures in any fiscal year if our leverage ratio,as defined, as of the end of the fiscal year most recently ended was less thanor equal to 2.00 to 1.00.  Minimumavailability tests under the Revolving Credit Facility were also increased from$32.5 million to $48.75 million in connection with the amendment.

 

***Issuance of 7.75% Unsecured Senior Notes, due2016***

 

On October 21, 2009, we completed the issuance of $600.0 million,7.75% Senior Notes, due 2016 (7.75% Notes) at a price of 99.321% of par in aprivate placement to certain qualified institutional buyers.  The 7.75% Notes yield 7.875% to maturity andpay interest semi-annually on May 15 and November 15 to holders ofrecord on May 1 and November 1, respectively.  The 7.75% Notes are guaranteed on anunsecured senior basis by our existing and future domestic subsidiaries.

 

Except as described below, we will not be entitled to redeem the 7.75%Notes at our option prior to November 12, 2012.

 

We may redeem some or all of the 7.75% Notes, at our option, at anytime on or after November 12, 2012, at the redemption prices (expressed aspercentages of principal amount) set forth below plus accrued and unpaidinterest and additional interest, if any, on the 7.75% Notes redeemed, to theapplicable redemption date, if redeemed during the twelve month periodbeginning on November 15 of the years indicated below:

 
| **Year**            | ** ** | **Percentage** | ** ** |
|---------------------|------------|----------------|------------|
| 2012                |       | 103.875        | %          |
| 2013                |       | 102.583        | %          |
| 2014                |       | 101.292        | %          |
| 2015 and thereafter |       | 100.000        | %          |

 

In addition, at any time during each twelve-month period ending on November 15,2010, 2011, and 2012, we may redeem up to 10% of the originally issuedprincipal amount of the 7.75% Notes at a redemption price of 103% of theprincipal amount of the 7.75% Notes plus accrued and unpaid interest andadditional interest, if any, to the redemption date, subject to the rights ofthe holders of the 7.75% Notes on the relevant record date to receive interestdue on the relevant interest payment date.

 

At any time, or from time to time, on or prior to November 15,2012, we may, at our option, redeem up to 35% of the aggregate principal amountof the 7.75% Notes with the net cash proceeds to us of certain equity offeringsat a redemption price equal to 107.75% of the principal amount of the 7.75%Notes plus accrued and unpaid interest and additional interest, if any, to theapplicable redemption date, provided that at least 65% of the aggregateprincipal amount of the 7.75% Notes remains outstanding immediately after suchredemption and the redemption occurs within 90 days of the date of the closingof such equity offering.

 

Under the Make-Whole redemption feature, we may redeem 100% ofprincipal plus a premium of T + 0.50%, plus accrued and unpaid interest andadditional interest, if any, prior to November 15, 2012 with respect tosome or all of the 7.75% Notes, subject to the rights of the holders on therelevant record date to receive interest due on the relevant interest paymentdate.

 

Upon a change of control, the 7.75% Notes are puttable at 101% ofprincipal plus accrued and unpaid interest and additional interest, if any.

 

We may incur additional indebtedness and our subsidiary guarantors mayalso incur additional indebtedness if our Fixed Charge Coverage Ratio for ourmost recently ended four full fiscal quarters immediately preceding the date onwhich such additional indebtedness is incurred would have been at least 2.00 to1.00, determined on a pro forma basis.

 

We used the net proceeds to us of $583.9 million, after deductingtransaction fees, discounts, and commissions, to repay the remaining principaland interest amounts under our First and Second Lien Term Loans of $295.5million and $204.1 million, respectively, which were subsequently terminated,$55.6 million to repay principal under our amended Revolving Credit Facility,and $28.7 million to settle and terminate certain interest rate swap contractswith a notional amount of $390.0 million.

 

As a result of the prepayment and termination of our First and SecondLien Term Loans, we will write off the remaining unamortized debt issuancecosts associated with these loans, totaling $12.1 million, during the fourthquarter of 2009, within other non-operating expense, net, in our consolidatedincome statement.  As a result of thesettlement and termination of certain of our interest rate swap contracts, wewill recognize a loss on extinguishment of these interest rate swaps ofapproximately $25.0 million within other non-operating expense, net, during thefourth quarter of 2009.  In addition, wewill settle and terminate the remaining

 

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interest rate swap contract with a notional amount of $50 millionduring the 2009 fourth quarter, which will result in a loss on extinguishmentof approximately $5.8 million.  The totallosses of approximately $30.8 million related to the extinguishment of ourinterest rate swap contracts had been previously reflected as a component ofour other comprehensive (loss) income and therefore recognition of these lossesin our consolidated income statement during the fourth quarter of 2009 willhave a negligible impact on our stockholders’ equity.

 

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

·                  possible U.S. legislation orregulatory action affecting, among other things, the U.S. healthcare system,pharmaceutical pricing and reimbursement, including Medicaid and Medicare;

 

·                  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;

 

·                  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 planned facilities;

 

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

 

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

 

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

 

·                  our ability to resume salesto countries affected by our Foreign Corrupt Practices Act investigation;

 

·                  availability and cost offinancing opportunities;

 

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

 

·                  the impact of competitiveproducts and pricing;

 

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

 

·                  interest rate fluctuationsimpacting our Revolving Credit Facility and foreign currency exchange ratefluctuations in the international markets in which we operate; and

 

·                  other factors identifiedelsewhere in this Quarterly Report and in our prospectus filed pursuant to Rule424(b) under the Securities and Exchange Act, as amended (Securities Act), withthe SEC on October 1, 2009.

 

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 AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

You are encouraged to read the following discussion and analysis of ourfinancial condition and results of operations together with our auditedconsolidated financial statements and related footnotes, which are included inour prospectus filed pursuant to Rule 424(b) under the Securities and ExchangeAct, as amended (Securities Act), with the Securities and Exchange Commission(SEC) on October 1, 2009 (our prospectus). This discussion and analysis contains forward-looking statements thatinvolve risks and uncertainties.  See“Risk Factors” included in our prospectus for a discussion of some of theimportant factors that could cause actual results to differ materially fromthose described or implied by the forward-looking statements contained in thefollowing discussion and analysis.  See“Special Note Regarding Forward-Looking Statements” included elsewhere in thisQuarterly Report.

 

All tabular disclosures of dollar amounts are presented inthousands.  Percentages and amountspresented herein may not calculate or sum precisely due to rounding.

 

Unlessotherwise stated or the context otherwise requires, reference to “Talecris,”“we,” “us,” “our” and similar references refer to Talecris BiotherapeuticsHoldings Corp. and its wholly-owned subsidiaries.

 

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

 

**FINANCIAL HIGHLIGHTS**

 

Thefollowing are highlights of our results for the three and nine months ended September 30,2009:

 

·                  Total net revenue increased 12.9% to $395.7million for the three months ended September 30, 2009 and 17.5% to $1.14billion for the nine months ended September 30, 2009, over the comparableprior year periods.

 

·                  Gross margins improved 210 basis points to41.7% for the three months ended September 30, 2009 and 650 basis pointsto 41.9% for the nine months ended September 30, 2009, over the comparableprior year periods.

 

·                  Net income improved to $35.8 million, anincrease of 74.2%, for the three months ended September 30, 2009 ascompared to the prior year period, and to $152.5 million for the nine monthsended September 30, 2009, inclusive of the $48.8 million after-tax incomefrom the CSL merger termination fee, as compared to $39.6 million for the ninemonths ended September 30, 2008.

 

·                  Diluted earnings per share were $0.38 for thethree months ended September 30, 2009 and $1.62 for the nine months ended September30, 2009, inclusive of the CSL merger termination fee.

 

·                  Operating cash flows were $198.7 million forthe nine months ended September 30, 2009, reflecting an improvement of$201.2 million over the prior year period, inclusive of the CSL mergertermination fee.

 

**BUSINESS OVERVIEW**

 

We are a biopharmaceutical company that develops, produces, markets,and distributes protein-based therapies that extend and enhance the lives ofpeople suffering from chronic and acute, often life-threatening, conditions,such as primary immune deficiencies, chronic inflammatory demyelinatingpolyneuropathy (CIDP), alpha-1 antitrypsin deficiency, bleeding disorders,infectious diseases, and severe trauma. Our primary products have orphan drug designation to serve populationswith rare, chronic diseases.  We are oneof the largest producers and marketers in our industry.  Our products are derived from human plasma,the liquid component of blood, which is sourced from our plasma collectioncenters, or purchased from third parties, located in the United States. Plasmacontains many therapeutic proteins, which we extract through a process known asfractionation at our Clayton, North Carolina and/or Melville, New Yorkfacilities.  The fractionatedintermediates are then purified, formulated into a final bulk, and asepticallyfilled into vials for distribution.  Wealso sell the fractionated intermediate materials.  Our manufacturing facilities currently havethe capacity to fractionate approximately 4.2 million liters of human plasmaper year.  Purification, filling, andfinishing capacities are dependent on fraction mix.  We operate in an industry that has experiencedvolume demand growth for plasma-derived therapies, both

 

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in the United States and worldwide, for more than twenty years, as wellas industry consolidation.  We believeworldwide unit volume demand for plasma-derived products will grow over thelong-term at a compound annual rate of approximately 6% to 8%.

 

We have devoted significant resources to the internal development ofour plasma collection center platform, which has included organic growth, theacquisition of additional plasma collection centers from InternationalBioResources, L.L.C. and affiliated entities (IBR), and third-party centerdevelopment agreements, primarily with IBR, under which we provided financingfor the development of plasma collection centers that are dedicated to ourplasma collection. As of October 31, 2009, our plasma collection centerplatform consisted of 71 operating centers, of which 66 were licensed and 5were unlicensed.  These centers collectedapproximately 61% of our plasma during the nine months ended September 30,2009 and our plan is for our plasma collection center network, once it matures,to provide approximately 90% of our current plasma requirements.

 

We have experienced higher costs of production as a result of highercosts of raw materials, particularly plasma, due to limited third-party supplyand the development and remediation of our internal plasma collectionplatform.  The development of TalecrisPlasma Resources, Inc. (TPR) has also resulted in excess period costscharged directly to cost of goods.  Theseexcess period costs reflect the under-absorption resulting from lower plasmacollections at newly opened centers as they scale operations and the larger TPRinfrastructure necessary to support the development of our plasma collectionplatform.  We have reduced and plan tocontinue to reduce both the collection cost per liter and the amount of excessperiod costs charged directly to cost of goods sold as TPR matures.  Decreasing collection costs of our raw plasmaand the planned reduction of excess period costs combined with leveraging ourmanufacturing facilities as a result of higher volumes have contributed andwill continue, over the long term, to contribute to improving gross profitmargins.  Our cost of goods sold includes$8.7 million and $25.7 million for the three months ended September 30, 2009and 2008, respectively, and $34.1 million and $77.7 million for the nine monthsended September 30, 2009 and 2008, respectively, related to excess periodcosts associated with TPR.

 

The majority of our sales are concentrated in the therapeutic areasof:  Immunology/Neurology, primarilythrough our intravenous immune globulin (IGIV) product for the treatment ofprimary immune deficiency and autoimmune diseases, as well as CIDP, andPulmonology, through our alpha-1 proteinase inhibitor (A1PI) product for thetreatment of alpha-1 antitrypsin deficiency-related emphysema.  These therapeutic areas are served by ourbranded products, Gamunex brand IGIV (Gamunex or Gamunex IGIV) and Prolastinbrand A1PI (Prolastin or Prolastin A1PI), respectively.  Sales of Gamunex and Prolastin togethercomprised 72.8% and 73.9% of our net revenue for the three months ended September 30,2009 and 2008, respectively, and 74.3% and 72.7% of our net revenue for thenine months ended September 30, 2009 and 2008, respectively.  We have contracted commitments from ourcustomers for a substantial portion of our U.S. IGIV volume over the next threeto five years.  We are also the primarysupplier of Canadian IGIV under our contracts with the Canadian Blood Servicesand Hema Quebec.  We also have a line ofhyperimmune therapies that provide treatment for tetanus, rabies, hepatitis Band Rh factor control during pregnancy and at birth.  In addition, we provide plasma-derivedtherapies for critical care, including the treatment of hemophilia, ananti-coagulation factor, as well as albumin to expand blood volume.  Although we sell our products worldwide, themajority of our sales were concentrated in the United States and Canada for theperiods presented.

 

**SUBSEQUENT EVENTS**

 

***Initial Public Offering***

 

On October 6, 2009, we completed our IPO of 56,000,000 shares of ourcommon stock, par value $0.01 per share, at an offering price of $19.00 pershare.  Our IPO included 28,947,368shares newly issued and sold by us and 27,052,632 shares sold by the sellingstockholder, Talecris Holdings, LLC, including 6,000,000 shares sold by theselling stockholder pursuant to the underwriters’ option to purchase additionalshares.  After deducting the payment ofunderwriters’ discounts and commissions, the net primary proceeds to us fromthe sale of shares in our IPO were approximately $519.7 million.  We used the net primary proceeds to repayprincipal of $389.8 million and $129.9 million under our First and Second LienTerm Loans, respectively.  We did notreceive any proceeds from the sale of shares by the selling stockholder.  In addition, on September 30, 2009,2,381,548 shares of our common stock were issued upon the settlement of $45.3million of earned and unpaid dividends on our Series A and B preferredstock in connection with our IPO.

 

***Revolving Credit Facility Amendment***

 

OnOctober 15, 2009, we entered into an amendment of certain provisions of our RevolvingCredit Facility dated as of October 12, 2009. The Revolving Credit Facility, as amended, permits the 7.75% Notes,described below, to be issued as long as the First and Second Lien CreditAgreements are terminated in connection with the offering of the 7.75%Notes.  The amendment also (i) increasesthe covenant baskets for permitted acquisitions to $250 million, (ii) permitsthe payment of cash dividends commencing with

 

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thefirst fiscal quarter of 2010, and (iii) increases our capital expenditurebaskets so that we will be permitted to make capital expenditures of up to $225million in each of 2010 and 2011. Moreover, pursuant to the amendments, we are not subject to anylimitation on our capital expenditures in any fiscal year if our leverage ratio,as defined,  as of the end of the fiscalyear most recently ended was less than or equal to 2.00 to 1.00.  Minimum availability tests under theRevolving Credit Facility were also increased from $32.5 million to $48.75million in connection with the amendment.

 

***Issuance of 7.75% Unsecured Senior Notes, due2016***

 

On October 21, 2009, we completed the issuance of $600.0 million,7.75% Senior Notes, due 2016 (7.75% Notes) at a price of 99.321% of par in aprivate placement to certain qualified institutional buyers.  The 7.75% Notes yield 7.875% to maturity andpay interest semi-annually on May 15 and November 15 to holders ofrecord on May 1 and November 1, respectively.  The 7.75% Notes are guaranteed on anunsecured senior basis by our existing and future domestic subsidiaries.

 

We used the net proceeds to us of $583.9 million, after deductingtransaction fees, discounts, and commissions, to repay the remaining principaland interest amounts under our First and Second Lien Term Loans of $295.5million and $204.1 million, respectively, which were subsequently terminated,$55.6 million to repay principal under our amended Revolving Credit Facility,and $28.7 million to settle and terminate certain interest rate swap contractswith a notional amount of $390 million.

 

Additional information regarding the issuance of the 7.75% Notes isincluded Note 15 to our consolidated financial statements, “Subsequent Events,”included elsewhere in this Quarterly Report.

 

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

 

The following table illustrates the impact to our long-term debt fromthe application of the net proceeds to us from our IPO and refinancingtransactions discussed above:

 
| ** **                | ** ** | **September 30,** | ** ** | **October 6,** | ** ** | **October 21,** | ** ** | ** **     | ** ** |
|---------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|----------------|------------|
| ** **                | ** ** | **2009**               | ** ** | **2009**            | ** ** | **2009**             | ** ** | **Pro  Forma** | ** ** |
| ** **                | ** ** | **Actual**             | ** ** | **IPO**             | ** ** | **Refinancing**      | ** ** | **Adjusted**   | ** ** |
| Revolving Credit Facility |       | $                      | 67,844     |                | $          | —               |       | $              | (55,593    | ) | $ | 12,251 |   |
| First Lien Term Loan      |       | 680,750                |       | (389,812            | )          | (290,938             | )          | —         |       |
| Second Lien Term Loan     |       | 330,000                |       | (129,937            | )          | (200,063             | )          | —         |       |
| 7.75% Notes               |       | —                 |       | —              |       | 600,000              |       | 600,000        |       |
| Discount on 7.75% Notes   |       | —                 |       | —              |       | (4,074               | )          | (4,074         | )          |
| Capital Leases            |       | 9,698                  |       | —              |       | —               |       | 9,698          |       |
| Total long-term debt      |       | $                      | 1,088,292  |                | $          | (519,749             | )          | $              | 49,332     |   | $ | 617,875 |   |

 

In addition to the debt principal repayments in the preceding table, weused $28.7 million of the net proceeds to us from the issuance of the 7.75%Notes to settle and terminate certain interest rate swap contracts and $8.6million to pay accrued interest associated with our First and Second Lien TermLoans.  In addition to approximately $4.1million of discounts on the 7.75% Notes disclosed in the table above,approximately $12.0 million of commissions were deducted from the grossissuance proceeds. As a result of the changes to our debt structure, weanticipate that our weighted average interest rate will be approximately 8%during the next twelve months without considering potential new interest rateswaps and amortization of debt issuance costs.

 

As a result of the IPO and refinancing transactions, we expect torecognize a charge during the fourth quarter of 2009 of approximately $42.9million to write-off deferred debt issuance costs related to our First andSecond Lien Term Loans as well as costs associated with the termination of ourinterest rate swap contracts.  In addition,we expect to capitalize a currently estimated $17.5 million of debt issuancecosts primarily associated with the 7.75% Notes, which will be amortized overthe terms of the facilities.

 

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The following tablesummarizes changes in deferred debt issuance costs and unwinding interest rateswaps, as well as newly capitalized debt issuance costs, as a result of ourrefinancing transactions:

 
| ** **                           | ** ** | ** **                                                 | ** ** | **Fourth**                                                         | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                           | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                                 | ** ** | **Quarter**                                                        | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                           | ** ** |
| ** **                           | ** ** | **September 30,  2009  Actual  Debt Issuance  Costs** | ** ** | **Amortization  of Previously  Capitalized  Debt Issuance  Costs** | ** ** | **Charges  for  Debt  Extinguishment** | ** ** | **Newly  Capitalized  Debt Issuance  Costs** | ** ** | **Estimated  Adjusted  Total  Debt Issuance  Costs** | ** ** |
| Revolving Credit Facility            |       | $                                                          | 2,268      |                                                               | $          | (82                                    | )          | $                                            | —     |                                                 | $          | 1,500 |   | $ | 3,686 |   |
| First Lien Term Loan                 |       | 8,164                                                      |       | (110                                                               | )          | (8,054                                 | )          | —                                       |       | —                                               |       |
| Second Lien Term Loan                |       | 4,133                                                      |       | (46                                                                | )          | (4,087                                 | )          | —                                       |       | —                                               |       |
| 7.75% Notes                          |       | —                                                     |       | —                                                             |       | —                                 |       | 16,000                                       |       | 16,000                                               |       |
| Interest rate swap termination costs |       | —                                                     |       | —                                                             |       | (30,800                                | )          | —                                       |       | —                                               |       |
| Total                                |       | $                                                          | 14,565     |                                                               | $          | (238                                   | )          | $                                            | (42,941    | )                                                    | $          | 17,500 |   | $ | 19,686 |   |

 

***Approval of Prolastin-C***

 

On October 19, 2009, wereceived approval from the U.S. Food and Drug Administration for Prolastin-C, amore concentrated version of our Prolastin A1PI product.  Prolastin-C delivers twice the active proteinper milliliter as Prolastin, cutting infusion volume and time in half whengiven at the recommended rate.  Themanufacturing process for Prolastin-C incorporates technological advances suchas nanofiltration, a virus exclusion technology, and cation exchangechromatography, an additional purification step.  We anticipate the launch of Prolastin-C inthe first half of 2010.  We have filed asupplemental New Drug Submission (sNDS) with Health Canada related toProlastin-C.  We expect a post-approvalclinical trial will be required as a condition for approval.

 

**MATTERSAFFECTING COMPARABILITY**

 

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

 

***Definitive Merger Agreement withCSL Limited (CSL)***

 

On August 12, 2008, weentered into a definitive merger agreement with CSL, under which CSL agreed toacquire us for cash consideration of $3.1 billion, less net debt, asdefined.  The closing of the transactionwas subject to the receipt of certain regulatory approvals as well as othercustomary conditions.  The U.S. FederalTrade Commission filed an administrative complaint before the Commissionchallenging the merger and a complaint in Federal district court seeking toenjoin the merger during the administrative process.  On June 8, 2009, the merger partiesagreed to terminate the definitive merger agreement.  CSL paid us a merger termination fee of $75.0million, which is included in other non-operating income in our consolidatedincome statement for the nine months ended September 30, 2009.  The Federal Trade Commission’s complaintswere subsequently dismissed.

 

In consideration of thedefinitive merger agreement with CSL, our board of directors approved aretention program in August 2008 for an amount up to $20.0 million, ofwhich approximately $13.5 million has been specifically allocated to certainemployees as of September 30, 2009, as adjusted for forfeitures.  We recorded retention expense of $1.4 millionand $7.5 million, excluding fringe benefit, during the three and nine monthsended September 30, 2009, respectively. During the three months ended September 30, 2008, we recordedretention expense of $1.6 million, excluding fringe benefit.  At September 30, 2009, the remainingunrecognized expense related to this retention program totaled $0.9 million,which we will recognize through December 2009.  During the second quarter of 2009, we madethe first two payments under this retention program totaling $6.8 million andthe remaining balance will be paid in December 2009, adjusted forforfeitures.

 

We incurred legal and othercosts associated with the regulatory review process of $6.0 million during thenine months ended September 30, 2009 and $0.7 million and $1.5 millionduring the three and nine months ended September 30, 2008, respectively,which are included in SG&A in our consolidated income statements.

 

***Unabsorbed TPR Infrastructure andStart-Up Costs***

 

Our cost of goods soldincludes costs related to unabsorbed TPR infrastructure and start-up costsassociated with the development of our plasma collection center platform.  Until our plasma collection centers reach normaloperating capacity, we charge unabsorbed overhead costs directly to cost ofgoods sold.  The reduction of unabsorbedTPR infrastructure and start-up costs resulted from higher plasma volumescollected at our plasma collection centers and improved center laborefficiencies as well as lower support costs during 2009.  We anticipate that we will continue toexperience improving levels of unabsorbed TPR infrastructure and start-up

 

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costs with the maturation of our plasma collectioncenter platform.

 

***Plasma Center cGMP Issue***

 

During the nine months endedSeptember 30, 2008, we incurred charges to cost of goods sold of $23.3million due to deviations from our standard operating procedures and cGMP atone of our plasma collection centers. Our preliminary investigations concluded that the deviations from ourstandard operating procedures and cGMP resulted in impairments to the relatedraw material and work-in process inventories as we concluded there was noprobable future economic benefit related to the impacted inventories.  Subsequently, due to further investigationsand new facts and circumstances, we determined that certain impacted materialswere saleable.  We record recoveriesdirectly to cost of goods sold after the impacted material is converted tofinal products and sold to third parties. For the three and nine months ended September 30, 2009, we recordedrecoveries of $0.4 million and $1.1 million, respectively, and for the threeand nine months ended September 30, 2008, we recorded recoveries of $11.4million and $14.1 million, respectively. Recoveries for 2008 totaled $17.5 million.

 

***Foreign Corrupt Practices Act***

 

We are conducting aninternal investigation into potential violations of the Foreign CorruptPractices Act (FCPA) that we became aware of during the conduct of an unrelatedreview.  The FCPA investigation is beingconducted by outside counsel under the direction of a special committee of ourboard of directors.  Additionalinformation regarding our investigation into potential violations of the FCPAis included in Note 10 to our consolidated financial statements, “Commitmentsand Contingencies,” included elsewhere in this Quarterly Report, and in the “RiskFactors” section of our prospectus.

 

As of October 31, 2009,we have approximately $2.6 million of accounts receivable, net, outstandingwith customers related to this matter. If we determine that we may be unable to collect some, or all, of thesereceivables, we would record a provision for doubtful accounts receivablewithin SG&A in the period in which we determine that collection wasunlikely or that the amounts that may be collected would be less than theamounts due.

 

***Share-Based Compensation Awards***

*** ***

***We have granted options,restricted share awards, and unrestricted share awards of our common stock tocertain officers, employees, and members of our board of directors pursuant tothe Talecris Biotherapeutics Holdings Corp. 2005 Stock Option and IncentivePlan, as amended (Stock Option Plan), and the 2006 Restricted Stock Plan.  We ceased making grants under these plans inconnection with our IPO.***

*** ***

***The following table summarizes ourshare-based compensation expense:***

*** ***
| ** **               | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **               | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **               | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Stock Options**   |       |                    |       |                   |       |   |   |   |   |
| SG&A                 |       | $                       | 15,581     |                   | $          | 6,618 |   | $ | 27,326 |   | $ | 17,618 |   |
| R&D                  |       | 379                     |       | 533                    |       | 1,291 |   | 1,294 |   |
| Total operating expenses |       | 15,960                  |       | 7,151                  |       | 28,617 |   | 18,912 |   |
| Cost of goods sold       |       | 817                     |       | 515                    |       | 2,869 |   | 1,130 |   |
| Total expense            |       | $                       | 16,777     |                   | $          | 7,666 |   | $ | 31,486 |   | $ | 20,042 |   |

 
| ** **                  | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                  | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Restricted Stock Awards** |       |                    |       |                   |       |   |   |   |   |
| SG&A                    |       | $                       | 2,348      |                   | $          | 2,414 |   | $ | 7,053 |   | $ | 7,130 |   |
| R&D                     |       | 134                     |       | 134                    |       | 401 |   | 401 |   |
| Total operating expenses    |       | 2,482                   |       | 2,548                  |       | 7,454 |   | 7,531 |   |
| Cost of goods sold          |       | 195                     |       | 217                    |       | 685 |   | 525 |   |
| Total expense               |       | $                       | 2,677      |                   | $          | 2,765 |   | $ | 8,139 |   | $ | 8,056 |   |

 

Our share-based compensation expense increased $9.0 million and $11.5million for the three and nine months ended September 30, 2009,respectively, as compared to the same prior year periods.  During the third quarter of 2009, we enteredinto an amended and restated employment agreement with our Chairman and ChiefExecutive Officer which included accelerating the vesting of options topurchase 1,008,000 shares of our common stock at an exercise price of $21.25per common share to August 19, 2009.

 

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Theacceleration of these options resulted in the recognition of a non-cash chargeof $11.8 million of compensation expense during the third quarter of 2009.  Options to purchase these shares werepreviously scheduled to vest in April of 2010 (504,000 options) and April of2011 (504,000 options).

 

In connection with our IPO, we granted 597,713 stock options with anexercise price per share equal to our IPO price per share of $19.00 under ournewly effective 2009 Long-Term Incentive Plan (2009 Plan).  These stock options will vest one-third oneach of April 1 of 2011, 2012, and 2013, subject to the option holderbeing employed on the vesting date.  Thefair value of each option was determined to be $9.57, resulting in aggregatefuture expense of approximately $5.2 million, which we expect to recognizeratably through April of 2013.  At September 30,2009, the remaining total estimated unrecognized compensation cost related tounvested stock options, including the IPO awards, was approximately $15.0million, which we expect to recognize over a weighted average period ofapproximately 2.2 years.   In connectionwith our IPO, we also granted 483,100 restricted stock units (RSU’s).  These RSU’s will vest one-third on each of April 1of 2011, 2012, and 2013, subject to the award holder being employed on thevesting date.  The aggregate grant datefair value of the RSU’s was approximately $8.4 million, which we expect torecognize ratably through 2013.  At September 30,2009, the remaining unrecognized compensation cost related to our restricted stockawards was approximately $9.7 million, which we expect to recognize over aweighted average period of approximately 0.6 years.

 

**RESULTS OF OPERATIONS**

 

The following discussion andanalysis provides information which management believes is relevant to anassessment and understanding of our consolidated results of operations.  You are encouraged to read the followingdiscussion and analysis of our financial condition and results of operationstogether with our consolidated financial statements and related footnotesappearing elsewhere in this Quarterly Report, as well as information containedin our prospectus.  Additional informationregarding significant matters affecting the comparability of our results ofoperations is included in the section titled, “—Matters AffectingComparability.”

 

***Three Months Ended September 30,2009 as Compared to Three Months Ended September 30, 2008***

 

The following table containsinformation regarding our results of operations for the three months ended September 30,2009 as compared to the three months ended September 30, 2008:

 
| ** **                             | ** ** | **Three  Months Ended** | ** ** | **Percent  of Total** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **September 30,**  | ** ** | **Net  Revenue**      | ** ** |
| ** **                             | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenue:                           |       |                    |       |                  |       |   |   |   |   |
| Product net revenue                    |       | $                       | 387,898    |                  | $          | 339,245 |   | 98.0 | % | 96.8 | % |
| Other                                  |       | 7,833                   |       | 11,247                |       | 2.0 | % | 3.2 | % |
| Total net revenue                      |       | 395,731                 |       | 350,492               |       | 100.0 | % | 100.0 | % |
| Cost of goods sold                     |       | 230,666                 |       | 211,856               |       | 58.3 | % | 60.4 | % |
| Gross profit                           |       | 165,065                 |       | 138,636               |       | 41.7 | % | 39.6 | % |
| Operating expenses:                    |       |                    |       |                  |       |   |   |   |   |
| SG&A                               |       | 79,488                  |       | 63,501                |       | 20.1 | % | 18.1 | % |
| R&D                                |       | 16,167                  |       | 18,149                |       | 4.1 | % | 5.2 | % |
| Total operating expenses               |       | 95,655                  |       | 81,650                |       | 24.2 | % | 23.3 | % |
| Income from operations                 |       | 69,410                  |       | 56,986                |       | 17.5 | % | 16.3 | % |
| Other non-operating (expense) income:  |       |                    |       |                  |       |   |   |   |   |
| Interest expense, net                  |       | (19,587                 | )          | (24,382               | )          | (4.9 | )% | (6.9 | )% |
| Equity in earnings of affiliate        |       | 112                     |       | 97                    |       | — |   | — |   |
| Total other non-operating expense, net |       | (19,475                 | )          | (24,285               | )          | (4.9 | )% | (6.9 | )% |
| Income before income taxes             |       | 49,935                  |       | 32,701                |       | 12.6 | % | 9.4 | % |
| Provision for income taxes             |       | (14,125                 | )          | (12,147               | )          | (3.6 | )% | (3.5 | )% |
| Net income                             |       | $                       | 35,810     |                  | $          | 20,554 |   | 9.0 | % | 5.9 | % |
|                                        |            |                         |            |                       |            |  |  |  |  |  |  |  |

 

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***Net Revenue***

 

The following table containsinformation regarding our net revenue:

 
| ** **                | ** ** | **Three  Months Ended** | ** ** | **Percent  of Total** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **September 30,**  | ** ** | **Net  Revenue**      | ** ** |
| ** **                | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Product net revenue:      |       |                    |       |                  |       |   |   |   |   |
| Gamunex IGIV              |       | $                       | 207,180    |                  | $          | 181,394 |   | 52.3 | % | 51.8 | % |
| Prolastin A1PI            |       | 80,813                  |       | 77,721                |       | 20.4 | % | 22.2 | % |
| Albumin                   |       | 22,851                  |       | 15,131                |       | 5.8 | % | 4.3 | % |
| Other                     |       | 77,054                  |       | 64,999                |       | 19.5 | % | 18.5 | % |
| Total product net revenue |       | 387,898                 |       | 339,245               |       | 98.0 | % | 96.8 | % |
| Other net revenue         |       | 7,833                   |       | 11,247                |       | 2.0 | % | 3.2 | % |
| Total net revenue         |       | $                       | 395,731    |                  | $          | 350,492 |   | 100.0 | % | 100.0 | % |
|                      |       |                    |       |                  |       |   |   |   |   |
| United States             |       | $                       | 267,411    |                  | $          | 245,513 |   | 67.6 | % | 70.0 | % |
| International             |       | 128,320                 |       | 104,979               |       | 32.4 | % | 30.0 | % |
| Total net revenue         |       | $                       | 395,731    |                  | $          | 350,492 |   | 100.0 | % | 100.0 | % |

 

Our product net revenue was$387.9 million for the three months ended September 30, 2009 as comparedto $339.2 million for the three months ended September 30, 2008,representing an increase of $48.7 million, or 14.3%.  The increase consisted of higher volumes of$36.4 million and improved pricing of $12.3 million, net of foreign exchangelosses of $1.8 million.

 

Our other net revenue, whichconsists of royalties and licensing fees, milestones, and other third partycontract manufacturing revenue, decreased $3.4 million.  Our other net revenue for the three monthsended September 30, 2008 included the recognition of $2.6 million of apreviously deferred upfront licensing fee as a result of the completion of aportion of our performance obligations under a licensed technology agreementwith an unaffiliated third party.  Ourother net revenue for the three months ended September 30, 2009 wasfurther negatively impacted by lower contract manufacturing revenue as comparedto the 2008 period.

 

The $25.8 million increasein our Gamunex IGIV product net revenue consisted of higher volumes of $19.2million and improved pricing of $6.6 million. We experienced higher Gamunex IGIV volumes of $20.8 million in the U.S.,Canada, and other international regions. We experienced improved Gamunex IGIV pricing of $7.6 million in the U.S.and Canada regions.  We continue toexperience strong demand for Gamunex IGIV globally, driven primarily by supplyavailability, growth in our GPO business in the U.S., and geographicexpansion.  However, the $19.2 millionincrease in Gamunex IGIV volumes also reflects pent up demand due to our supplyconstraints in prior periods. Accelerated growth resulting from this pent up demand is not likely tocontinue, which could affect our comparative profitability and margins infuture periods.  The industry supply ofplasma has increased.  As a result, thesupply of IGIV inventory has been increasing throughout the distributionchannel from the previous low levels.

 

The $3.1 million increase inour Prolastin A1PI product net revenue was driven primarily by higher volumesin the U.S. and Europe.  Prolastin A1PIvolumes 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 upon our ability to obtain appropriatereimbursement on a country by country basis. Our Prolastin A1PI net revenue wasnegatively impacted by foreign exchange losses of $1.3 million in Europe duringthe three months ended September 30, 2009 as compared to the same prioryear period.

 

The $7.7 million increase inour albumin product net revenue consisted of higher volumes of $6.5 million andimproved pricing of $1.2 million. The increase in albumin volume was primarilydriven by sales in the U.S. and other international regions (excluding Canadaand Europe).  The increase in albuminpricing was driven by favorable pricing in other international regions (excludingCanada and Europe).

 

Our other product netrevenue increased $12.1 million during the three months ended September 30,2009 as compared to the prior year period. Our other product net revenue consists primarily of revenue related tothe Canadian blood system, where in addition to commercial sales of GamunexIGIV, we have toll manufacturing contracts with the two national Canadian bloodsystem operators, Canadian Blood Services and Hema Quebec.  We also have sales of Koate DVI Factor VIII(human), hyperimmunes, intermediate products, Thrombate III Antithrombin III(human) and PPF powder.

 

Our other product netrevenue was favorably impacted by improved volume of $6.1 million related tointermediate products, such as cryoprecipitate. Our other product net revenue was also favorably impacted by increasedsales of Koate DVI Factor VIII (human) of $9.5 million, primarily as a resultof higher volumes in the U.S. and higher pricing and volumes in otherinternational regions (excluding Europe and Canada).

 

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We generally experience afavorable revenue and gross margin benefit during the second and third quartersdue to higher sales of our hyperimmune therapies for the treatment of exposureto rabies.  Consequently, we expect thatrevenue and gross margin contribution from these products will decline in thefourth quarter.

 

We increased prices forseveral of our products in most of our geographic regions during 2009 as aresult of higher costs and generally increasing demand.  Our product net revenue was negativelyimpacted by $1.8 million, or 0.5%, as a result of unfavorable foreign exchangerate fluctuations in relation to the U.S. dollar during the three months ended September 30,2009 as compared to the three months ended September 30, 2008.

 

As a result of our internalinvestigation related to potential FCPA violations, we have suspended shipmentsto affected countries while we put additional safeguards in place.  We have also terminated several consultantsand suspended relations with other distributors and consultants in countriesunder investigation while we gather further facts and implement safeguards.  As a result, we expect that our revenues fromaffected regions will decline in the short term while we either revise ourbusiness relationships or establish new distribution channels in the impactedmarkets or expand our sales in other international regions. We resumed shippingto several affected countries in the 2009 fourth quarter.

 

***Cost of Goods Sold and GrossProfit***

 

Our gross profit was $165.1million for the three months ended September 30, 2009, as compared to$138.6 million for the three months ended September 30, 2008, representinggross margins of 41.7% and 39.6%, respectively. Our gross profit is impacted by the volume, pricing, and mix of ourproduct net revenue as discussed above, as well as the related cost of goodssold as discussed below.  The net impactof these items resulted in higher gross margins during the three months ended September 30,2009 as compared to the three months ended September 30, 2008.  In general, our gross margins and cost ofgoods sold are impacted by the volume and pricing of our finished product, ourraw material costs, production mix, and cycle times, as well as our productioncapacities and normal production shut-downs, and the timing and amount ofrelease of finished product.

 

Our cost of goods sold was$230.7 million, or 58.3% of net revenue, for the three months ended September 30,2009, as compared to $211.9 million, or 60.4% of net revenue, for the threemonths ended September 30, 2008. The decrease in our cost of goods sold as a percentage of net revenue isprimarily attributable to lower TPR unabsorbed infrastructure and start-upcosts.  During the three months ended September 30,2008, we experienced higher inventory recoveries as discussed further below.Due to the relatively fixed nature of our factory overhead and certain otherproduction costs, we experienced operating leverage as net revenue increased inthe 2009 period.

 

Unabsorbed TPRinfrastructure and start-up costs amounted to $8.7 million and $25.7 millionfor the three months ended September 30, 2009 and 2008, respectively,representing approximately 2.2% and 7.3%, respectively, of our netrevenue.  Our cost of goods sold for thethree months ended September 30, 2009 benefited from lower unabsorbed TPRinfrastructure and start-up costs, which resulted from higher plasma volumescollected at our plasma collection centers and improved center laborefficiencies as well as lower support costs. Unabsorbed TPR infrastructure and start-up costs during the three monthsended September 30, 2008 were negatively impacted by costs associated withremediation efforts in certain plasma collection centers.

 

Our inventory impairmentprovisions, net of recoveries, increased $6.3 million during the three monthsended September 30, 2009, as compared to the same prior year period.  During the 2008 period, we recorded recoveriesof $11.4 million related to the plasma center cGMP issue as discussed furtherin the section titled, “—Matters Affecting Comparability—Plasma Center cGMPIssue.”  This was offset by impairmentprovisions of $4.1 million related to raw material inventories, which resultedfrom the remediation and closure of certain plasma collection centers, as wellas other inventory impairment provisions of approximately $8.2 million relatedprimarily to work-in-process inventories. During the three months ended September 30, 2009, we experienced adelay in the restart of our manufacturing facility located in Melville, NewYork, following a scheduled maintenance shutdown, which resulted in aninventory impairment provision of $3.4 million. We also incurred other inventory provisions of approximately $3.8million related primarily to work-in-process inventories.

 

During the three monthsended September 30, 2009, we experienced higher costs of production andcosts associated with an increase in production volumes, which aggregated $29.5million.  Our acquisition cost of plasmaper liter, excluding the impact of TPR unabsorbed infrastructure and start-upcosts, increased 0.5% during the three months ended September 30, 2009 ascompared to the three months ended September 30, 2008.  Due to our long manufacturing cycle times,which range from 100 days to in excess of 400 days, the cost of plasma is notexpensed through cost of goods sold until a significant period of timesubsequent to its acquisition.

 

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***Operating Expenses***

 

Our SG&A was $79.5million and $63.5 million for the three months ended September 30, 2009and 2008, respectively, representing an increase of $16.0 million, or25.2%.  As a percentage of net revenue,SG&A was 20.1% and 18.1% for the three months ended September 30, 2009and 2008, respectively.  We recorded anon-cash charge of $11.8 million during the three months ended September 30,2009 as a result of the acceleration of the vesting of certain of our Chairmanand Chief Executive Officer’s stock options as discussed further in “—MattersAffecting Comparability—Share-Based Compensation Awards.”  Our SG&A for the three months ended September 30,2009 was negatively impacted by $3.9 million of legal costs associated with ourinternal investigation into potential violations of the FCPA as discussedfurther in “—Matters Affecting Comparability—Foreign Corrupt Practices Act.”  We experienced higher sales and marketingexpenses during the 2009 period as a result of costs associated with the launchof our Gamunex CIDP indication and Prolastin patient identification, as well assupport for other products.  We alsoexperienced higher donations of $2.6 million during the three months ended September 30,2009 as compared to the prior year period. During the three months ended September 30, 2009, our SG&Abenefited by foreign currency gains of $3.1 million as a result of favorableeuro/dollar exchange rates as compared to foreign currency losses of $5.0million during the three months ended September 30, 2008.  Our provision for uncollectable receivableswas $2.0 million higher during the 2008 period as a result of non-cash chargesrelated to outstanding notes receivable and other advances made to one of ourplasma suppliers due to uncertainty regarding collection.  In order to pursue our strategy of expandingmarket share and growing revenues, we began a material expansion of our U.S.sales force in the third quarter of 2009. We expect the sales force expansion to result in an annual increase inSG&A of approximately $10 million.

 

Our R&D was $16.2million for the three months ended September 30, 2009 as compared to $18.2million for the three months ended September 30, 2008, representing adecrease of $2.0 million, or 10.9%.  As apercentage of net revenue, R&D was 4.1% and 5.2%, for the three monthsended September 30, 2009 and 2008, respectively.  R&D expenses are influenced by the timingof in-process projects and the nature and extent of expenses associated withthese projects.    We anticipate thatR&D expenses will increase in subsequent periods primarily as a result ofincreased Plasmin clinical trials related to acute peripheral arterialocclusion and ischemic stroke.

 

***Other Non-Operating Income(Expense), Net***

 

Our other non-operatingincome (expense), net, consists primarily of interest expense related to ourFirst and Second Lien Term Loans and Revolving Credit Facility, which amountedto $14.0 million and $21.0 million for the three months ended September 30,2009 and 2008, respectively.  Ourweighted average interest rates on our outstanding debt were 5.1% and 6.9%,excluding amortization of deferred debt issuance costs, for the three monthsended September 30, 2009 and 2008, respectively, which resulted in a lowercost of borrowing during the 2009 period. The benefit of the lower cost of borrowings during 2009 was partiallymitigated by higher interest expense of $2.0 million related to our interestrate swaps as compared to 2008, as a result of falling three-month LIBOR ascompared to our fixed swap rates.

 

See the section titled “—Subsequent Events” for additional information regarding our IPO and refinancingtransactions, which occurred subsequent to September 30, 2009.

 

***Income Taxes***

 

Our income tax expense was$14.1 million and $12.1 million for the three months ended September 30,2009 and 2008, respectively, resulting in effective income tax rates of 28.3%and 37.1%, respectively.

 

For the three months ended September 30,2009, our effective income tax rate is lower than the U.S. statutory Federalincome tax rate due to Federal Research and Experimentation and Orphan Drugclinical testing credits for qualifying expenditures and the deduction ofpreviously capitalized transaction costs related to our terminated mergeragreement with CSL. For the three months ended September 30, 2008, oureffective income tax rate is higher than the U.S. statutory Federal income taxrate, primarily due to state tax expense, net of Federal benefit.

 

At September 30, 2009,our total gross unrecognized tax benefits were approximately $12.6 million, ofwhich approximately $9.2 million would reduce our effective income tax rate ifrecognized.

 

We have not provided forU.S. Federal income and foreign withholding taxes on our non-U.S. subsidiaries’cumulative undistributed earnings of approximately $10.7 million as of September 30,2009 as such earnings are intended to be reinvested outside of the U.S.indefinitely.  It is not practical toestimate the amount of tax that might be payable if some or all of suchearnings were to be remitted, and foreign tax credits would be available toreduce or eliminate the resulting U.S. income tax liability.

 

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We anticipate that lowertaxable income during the fourth quarter of 2009 as a result of fees related tothe issuance of our 7.75% Notes and the amendment to our Revolving CreditFacility, as well as charges associated with the termination of our First and SecondLien Term Loans and interest rate swap contracts, will have a significantimpact on the fourth quarter effective tax rate as compared to the priorquarters, although the overall effective income tax rate for the year shouldremain within the 32% to 33% range for 2009.

 

***Net Income***

 

Our net income was $35.8million and $20.6 million for the three months ended September 30, 2009and 2008, respectively.  The significantfactors and events contributing to the change in our net income are discussedabove.

 

***Nine Months Ended September 30,2009 as Compared to Nine Months Ended September 30, 2008***

 

The following table containsinformation regarding our results of operations for the nine months ended September 30,2009 as compared to the nine months ended September 30, 2008:

 
| ** **                                      | ** ** | **Nine  Months Ended** | ** ** | **Percent  of Total** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **September 30,** | ** ** | **Net  Revenue**      | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenue:                                    |       |                   |       |                  |       |   |   |   |   |
| Product net revenue                             |       | $                      | 1,122,877  |                  | $          | 942,890 |   | 98.2 | % | 96.9 | % |
| Other                                           |       | 20,219                 |       | 29,990                |       | 1.8 | % | 3.1 | % |
| Total net revenue                               |       | 1,143,096              |       | 972,880               |       | 100.0 | % | 100.0 | % |
| Cost of goods sold                              |       | 663,875                |       | 628,361               |       | 58.1 | % | 64.6 | % |
| Gross profit                                    |       | 479,221                |       | 344,519               |       | 41.9 | % | 35.4 | % |
| Operating expenses:                             |       |                   |       |                  |       |   |   |   |   |
| SG&A                                        |       | 213,913                |       | 159,030               |       | 18.7 | % | 16.3 | % |
| R&D                                         |       | 51,728                 |       | 48,232                |       | 4.5 | % | 5.0 | % |
| Total operating expenses                        |       | 265,641                |       | 207,262               |       | 23.2 | % | 21.3 | % |
| Income from operations                          |       | 213,580                |       | 137,257               |       | 18.7 | % | 14.1 | % |
| Other non-operating income (expense):           |       |                   |       |                  |       |   |   |   |   |
| Interest expense, net                           |       | (61,445                | )          | (73,027               | )          | (5.4 | )% | (7.4 | )% |
| Merger termination fee                          |       | 75,000                 |       | —                |       | 6.6 | % | — |   |
| Equity in earnings of affiliate                 |       | 296                    |       | 247                   |       | — |   | — |   |
| Other                                           |       | —                 |       | 400                   |       | — |   | — |   |
| Total other non-operating income (expense), net |       | 13,851                 |       | (72,380               | )          | 1.2 | % | (7.4 | )% |
| Income before income taxes                      |       | 227,431                |       | 64,877                |       | 19.9 | % | 6.7 | % |
| Provision for income taxes                      |       | (74,914                | )          | (25,284               | )          | (6.6 | )% | (2.6 | )% |
| Net income                                      |       | $                      | 152,517    |                  | $          | 39,593 |   | 13.3 | % | 4.1 | % |

 

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***Net Revenue***

 

The following table containsinformation regarding our net revenue:

 
| ** **                | ** ** | **Nine  Months Ended** | ** ** | **Percent  of Total** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **September 30,** | ** ** | **Net  Revenue**      | ** ** |
| ** **                | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Product net revenue:      |       |                   |       |                  |       |   |   |   |   |
| Gamunex IGIV              |       | $                      | 618,638    |                  | $          | 471,840 |   | 54.1 | % | 48.5 | % |
| Prolastin A1PI            |       | 230,193                |       | 235,434               |       | 20.1 | % | 24.2 | % |
| Albumin                   |       | 61,280                 |       | 41,165                |       | 5.4 | % | 4.2 | % |
| Other                     |       | 212,766                |       | 194,451               |       | 18.6 | % | 20.0 | % |
| Total product net revenue |       | 1,122,877              |       | 942,890               |       | 98.2 | % | 96.9 | % |
| Other net revenue         |       | 20,219                 |       | 29,990                |       | 1.8 | % | 3.1 | % |
| Total net revenue         |       | $                      | 1,143,096  |                  | $          | 972,880 |   | 100.0 | % | 100.0 | % |
|                      |       |                   |       |                  |       |   |   |   |   |
| United States             |       | $                      | 764,500    |                  | $          | 648,938 |   | 66.9 | % | 66.7 | % |
| International             |       | 378,596                |       | 323,942               |       | 33.1 | % | 33.3 | % |
| Total net revenue         |       | $                      | 1,143,096  |                  | $          | 972,880 |   | 100.0 | % | 100.0 | % |

 

Our product net revenue was$1,122.9 million and $942.9 million for the nine months ended September 30,2009 and 2008, respectively, representing an increase of $180.0 million, or19.1%.  The increase consisted of highervolumes of $139.6 million and improved pricing of $40.4 million, net of foreignexchange losses of $11.7 million.

 

Our other net revenue, whichconsists of royalties and licensing fees, milestones, and other third partycontract manufacturing revenue, decreased $9.8 million. Our other net revenuefor the nine months ended September 30, 2008 included the recognition of$1.9 million of previously deferred revenue as a result of the termination of alicensed technology agreement with an unaffiliated third party and $2.6 millionof a previously deferred upfront licensing fee as a result of the completion ofa portion of our performance obligations under a licensed technology agreementwith an unaffiliated third party.  Ourother net revenue for the nine months ended September 30, 2009 wasnegatively impacted by lower royalties and contract manufacturing revenue ascompared to the 2008 period.

 

The $146.8 million increasein our Gamunex IGIV product net revenue consisted of higher volumes of $116.1million and improved pricing of $30.7 million, net of foreign exchange lossesof $2.5 million.  We experienced higherGamunex IGIV volumes of $117.0 million in the U.S., Europe, and otherinternational regions, which were partially offset by lower volumes of $0.9million in Canada.  We experiencedimproved Gamunex pricing of $33.6 million in the U.S., Canada, and otherinternational regions.  We experiencedlower pricing of $2.9 million in Europe, primarily due to $2.5 million offoreign exchange losses.  We continue toexperience strong demand for Gamunex IGIV globally, driven primarily by supplyavailability, growth in our GPO business in the U.S. and geographic expansion.  However, the $116.1 million increase inGamunex IGIV volumes also reflects pent up demand due to our supply constraintsin prior periods.  Accelerated growthresulting from this pent up demand is not likely to continue, which couldimpact our comparative profitability and margins in future periods.  The industry supply of plasma hasincreased.  As a result, the supply ofIGIV inventory has been increasing throughout the distribution channel from theprevious low levels.

 

The $5.2 million decrease inour Prolastin A1PI product net revenue consisted of lower pricing of $6.6 million,partially offset by higher volumes of $1.4 million.  The decrease in Prolastin A1PI pricing wasdriven primarily by foreign exchange losses of $8.9 million in Europe andpricing adjustments of $3.0 million in Canada related to a pricingdispute.  These items were partiallyoffset by improved pricing of $5.9 million in the U.S. and Europe, excludingthe impact of the foreign exchange losses. We experienced higher volumes of Prolastin A1PI in the U.S. and Europedue to a net patient increase period over period.  Prolastin A1PI volumes are largely a functionof our ability to identify and enroll new patients compared to the number ofpatients lost due to attrition and competition. Our ability to grow our European volumes will also depend upon our abilityto obtain appropriate reimbursement on a country by country basis.

 

The $20.1 million increasein our albumin product net revenue consisted of higher volumes of $16.7 millionand improved pricing of $3.4 million. The increase in albumin volume was primarily driven by sales in the U.S.and other international regions (excluding Canada and Europe).  The increase in albumin pricing was primarilydriven by favorable pricing in other international regions (excluding Canadaand Europe).   For the nine months ended September 30,2008, our albumin volumes were negatively impacted by a change in productionmix to PPF powder from albumin as a result of the settlement of a customerdispute, which occurred during 2007. This change in production mix resulted in lower quantities of albuminavailable for sale during the nine months ended September 30, 2008.

 

Our other product netrevenue increased $18.3 million during the nine months ended September 30,2009 as compared to the nine months ended September 30, 2008.  Our other product net revenue consistsprimarily of revenue related to the Canadian blood system, where in addition tocommercial sales of Gamunex IGIV, we have toll manufacturing contracts with thetwo national Canadian

 

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blood system operators, Canadian Blood Services andHema Quebec, as well as sales of Koate DVI Factor VIII (human), hyperimmunes,intermediate products, Thrombate III Antithrombin III (human) and PPF powder.

 

Our other product netrevenue was favorably impacted by improved sales of $15.1 million related tointermediate products, such as cryoprecipitate. Our other product net revenue was also favorably impacted by increasedsales of Koate DVI Factor VIII (human) of $13.6 million, as a result of highervolumes and improved pricing in the U.S. and other international regions(excluding Canada and Europe).  Our otherproduct net revenue was negatively impacted by lower PPF powder sales of $7.4million during the nine months ended September 30, 2009 as compared to thesame prior year period.  For the ninemonths ended September 30, 2008, we experienced higher PPF powder sales asa result of the settlement of a customer dispute, as discussed previously.

 

We generally experience afavorable revenue and gross margin benefit during the second and third quartersdue to higher sales of our hyperimmune therapies for the treatment of exposureto rabies.  Consequently, we expect thatrevenue and gross margin contribution from these products will decline in thefourth quarter.

 

We increased prices forseveral of our products in most of our geographic regions during 2009 as aresult of higher costs and generally increasing demand.  Our product net revenue was negativelyimpacted by $11.7 million, or 1.2%, as a result of unfavorable foreign exchangerate fluctuations in relation to the U.S. dollar during the nine months ended September 30,2009 as compared to the nine months ended September 30, 2008.

 

As a result of our internalinvestigation related to potential FCPA violations, we have suspended shipmentsto affected countries while we put additional safeguards in place.  We have also terminated several consultantsand suspended relations with other distributors and consultants in countriesunder investigation while we gather further facts and implementsafeguards.  As a result, we expect thatour revenues from affected regions will decline in the short term while we eitherrevise our business relationships or establish new distribution channels in theimpacted markets or expand our sales in other international regions. We resumedshipping to several affected countries in the 2009 fourth quarter.

 

***Cost of Goods Sold and GrossProfit***

 

Our gross profit was $479.2million for the nine months ended September 30, 2009, as compared to$344.5 million for the nine months ended September 30, 2008, representinggross margins of 41.9% and 35.4%, respectively. Our gross profit is impacted by the volume, pricing, and mix of ourproduct net revenue as discussed above, as well as the related cost of goodssold as discussed below.  The net impactof these items resulted in substantially higher gross margins during the ninemonths ended September 30, 2009 as compared to the nine months ended September 30,2008.  In general, our gross margins andcost of goods sold are impacted by the volume and pricing of our finishedproduct, our raw material costs, production mix, and cycle times, as well asour production capacities and normal production shut-downs, and the timing andamount of release of finished product.

 

Our cost of goods sold was$663.9 million, or 58.1% of net revenue, for the nine months ended September 30,2009, as compared to $628.4 million, or 64.6% of net revenue, for the ninemonths ended September 30, 2008. The decrease in cost of goods sold as a percentage of net revenue duringthe 2009 period was attributable primarily to lower TPR unabsorbedinfrastructure and start-up costs of $43.6 million and lower inventoryimpairment provisions of $12.7 million. Due to the relatively fixed nature of our factory overhead and certainother production costs, we experienced operating leverage as net revenueincreased in the 2009 period.

 

Unabsorbed TPRinfrastructure and start-up costs amounted to $34.1 million and $77.7 millionfor the nine months ended September 30, 2009 and 2008, respectively,representing approximately 3.0% and 8.0%, respectively, of net revenue.  Our cost of goods sold for the nine monthsended September 30, 2009 benefited from lower unabsorbed TPRinfrastructure and start-up costs, which resulted from higher plasma volumescollected at our plasma collection centers and improved center laborefficiencies as well as lower support costs. Unabsorbed TPR infrastructure and start-up costs during the nine monthsended September 30, 2008 were negatively impacted by costs associated withthe expansion of our plasma collection center platform and the costs associatedwith remediation efforts in certain plasma collection centers.

 

Our inventory impairmentprovisions, net of recoveries, decreased $12.7 million during the nine monthsended September 30, 2009, as compared to the same prior year period.  During the nine months ended September 30,2008, we recorded an inventory impairment provision of $23.3 million due to theplasma center cGMP issue described in the section titled, “—Matters AffectingComparability—Plasma Center cGMP Issue,” for which we recovered $1.1 millionand $14.1 million during the nine months ended September 30, 2009 and2008, respectively.  Our inventoryimpairment provisions for the nine months ended September 30, 2008 alsoincluded $2.6 million related to a customer dispute that was settled in 2007,for which we recovered $0.9 million during 2009.  During 2009, we experienced a delay in therestart of our manufacturing facility located in Melville, New York, followinga scheduled

 

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maintenance shutdown, which resulted in an inventoryimpairment provision of $3.4 million.

 

The beneficial effects ofthe foregoing were offset by higher costs of production and costs associatedwith the increase in production volumes, which aggregate $91.8 million.  In addition, our acquisition cost of plasmaper liter, excluding the impact of TPR unabsorbed infrastructure and start-upcosts, increased 1.9% during the nine months ended September 30, 2009 ascompared to the nine months ended September 30, 2008.  Due to our long manufacturing cycle times,which range from 100 days to in excess of 400 days, the cost of plasma is notexpensed through cost of goods sold until a significant period of timesubsequent to its acquisition.

 

***Operating Expenses***

 

Our SG&A was $213.9million and $159.0 million for the nine months ended September 30, 2009and 2008, respectively, representing an increase of $54.9 million, or34.5%.  As a percentage of net revenue,SG&A was 18.7% and 16.3% for the nine months ended September 30, 2009and 2008, respectively.  We recorded anon-cash charge of $11.8 million during the nine months ended September 30,2009 as a result of the acceleration of the vesting of certain of our Chairmanand Chief Executive Officer’s stock options as discussed further in “—MattersAffecting Comparability—Share-Based Compensation Awards.”  As compared to the 2008 period, our SG&Afor the nine months ended September 30, 2009 includes higher costs of $8.6million related to our terminated merger agreement with CSL, of which $4.5million were costs associated with the regulatory review process and $4.1million were retention expenses, as discussed further in “—Matters AffectingComparability—Definitive Merger Agreement with CSL Limited (CSL).”  Our SG&A for the nine months ended September 30,2009 was negatively impacted by $6.3 million of legal costs associated with ourinternal investigation into potential violations of the FCPA as discussed furtherin “—Matters Affecting Comparability—Foreign Corrupt Practices Act.”  We experienced higher sales and marketingexpenses during the 2009 period as a result of costs associated with ourGamunex CIDP indication, Prolastin patient identification, as well as supportfor other products.  We also experiencedhigher donations of $7.3 million during the nine months ended September 30,2009 as compared to the prior year period. Our SG&A benefited by $3.0 million as a result of favorableeuro/dollar exchange rates during the 2009 period as compared to the prior yearperiod.  In order to pursue our strategyof expanding market share and growing revenues, we began a significantexpansion in the size of our U.S. sales force in the third quarter of2009.  We expect the sales forceexpansion to result in an annual increase in SG&A of approximately $10million.

 

Our R&D was $51.7million for the nine months ended September 30, 2009 as compared to $48.2million for the nine months ended September 30, 2008, representing anincrease of $3.5 million, or 7.2%.  As apercentage of net revenue, R&D was 4.5% and 5.0%, for the nine months endedSeptember 30, 2009 and 2008, respectively. We anticipate that R&D expenses will increase in subsequent periodsprimarily as a result of increased Plasmin clinical trials related to acuteperipheral arterial occlusion and ischemic stroke.

 

***Other Non-Operating Income(Expense), Net***

 

Our other non-operatingincome (expense), net, includes interest expense related to our First andSecond Lien Term Loans and Revolving Credit Facility, which amounted to $45.8million and $65.5 million for the nine months ended September 30, 2009 and2008, respectively. Our weighted average interest rates on our outstanding debt,excluding amortization of deferred debt issuance costs, were 5.3% and 7.4% forthe nine months ended September 30, 2009 and 2008, respectively, whichresulted in a lower cost of borrowing during the 2009 period.  The benefit of the lower cost of borrowingsduring 2009 was partially mitigated by higher interest expense of $6.1 millionrelated to our interest rate swaps as compared to 2008, as a result of fallingthree-month LIBOR as compared to our fixed swap rates.  Our other non-operating income, net, for thenine months ended September 30, 2009 also includes $75.0 million relatedto the merger termination fee as discussed in the section titled, “—MattersAffecting Comparability—Definitive Merger Agreement with CSL Limited (CSL).”

 

See the section titled “—Subsequent Events” for additional information regarding our IPO and refinancingtransactions subsequent to September 30, 2009.

 

***Income Taxes***

 

Our income tax expense was$74.9 million and $25.3 million for the nine months ended September 30,2009 and 2008, respectively, resulting in effective income tax rates of 32.9%and 39.0%, respectively.

 

For the nine months ended September 30,2009, our effective income tax rate is lower than the U.S. statutory Federalincome tax rate primarily due to Federal Research and Experimentation andOrphan Drug clinical testing credits for qualifying expenditures and thededuction of previously capitalized transaction costs related to our terminatedmerger agreement with CSL.

 

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For the nine months ended September 30, 2008, oureffective income tax rate is higher than the U.S. statutory Federal income taxrate, primarily due to state tax expense, net of Federal benefit.  In addition, during April 2008, 862,432shares of restricted stock issued to employees and directors vested.  As a result of a decline in the fair value ofour common stock price, we recognized a tax deduction on the vesting date whichwas less than the previously deferred taxes, resulting in higher tax expenseduring the nine months ended September 30, 2008.

 

At September 30, 2009, our total grossunrecognized tax benefits were approximately $12.6 million, of which approximately$9.2 million would reduce our effective income tax rate if recognized.

 

We have not provided for U.S. Federal income andforeign withholding taxes on our non-U.S. subsidiaries’ cumulativeundistributed earnings of approximately $10.7 million as of September 30,2009 as such earnings are intended to be reinvested outside of the U.S.indefinitely.  It is not practical toestimate the amount of tax that might be payable if some or all of suchearnings were to be remitted, and foreign tax credits would be available toreduce or eliminate the resulting U.S. income tax liability.

 

We anticipate that lower taxable income during thefourth quarter of 2009 as a result of fees related to the issuance of our 7.75%Notes and the amendment to our Revolving Credit Facility, as well as chargesassociated with the termination of our First and Second Lien Term Loans andinterest rate swap contracts, will have a significant impact on the fourthquarter effective tax rate as compared to the prior quarters, although the overalleffective income tax rate for the year should remain within the 32% to 33%range for 2009.

 

***Net Income***

 

Our net income was $152.5 million and $39.6 millionfor the nine months ended September 30, 2009 and 2008, respectively.  Our net income for the nine months ended September 30,2009, reflects the impact of the CSL merger termination fee of $75.0 million,net of $26.2 million income tax effect. The significant factors and events contributing to the change in our netincome are discussed above.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At September 30, 2009, our cash and cashequivalents totaled $32.9 million.  Underthe terms of our Revolving Credit Facility, U.S. available cash balances areswept daily from our lockbox directly to the administrative agent for thelending syndicate.  At September 30,2009, we had total outstanding indebtedness of $1.1 billion and availableunused borrowing capacity of $255.3 million under our Revolving CreditFacility.

 

Although we believe that our capital spending in 2008is more indicative of our annual capital spending, we anticipate significantlyhigher capital spending over the next five years.  We expect that our capital spending over thenext five years to be approximately $750 million on a cumulative basis,substantially higher than it has been in the past.  Given the nature of our planned capitalprojects, we anticipate our capital spending to increase to a peak of $220million in 2011.  Although some of theanticipated capital spending will be necessary to support our future volumegrowth, particularly with the anticipation that we will reach our fractionationcapacity in 2013, new product introductions and strategic initiatives, asignificant amount of incremental capital spending over historic capitalspending rates will be required in order to ensure ongoing compliance with cGMPand regulatory requirements.    Theamount and timing of future capital spending is dependent upon a number offactors, including market conditions, regulatory requirements, and the extent andtiming of particular projects including, among other things, the design andconstruction of a new, higher-capacity fractionation facility, which wecurrently estimate will cost approximately $280 million and anticipate will beoperational by 2015; construction of a new multi-purpose facility for Plasminand Koate, which we currently estimate will cost approximately $120 million;the expansion of albumin capacity, which we currently estimate will cost around$40 million; and projects to support continued new product development amongothers.  On an ongoing basis, we expectto evaluate means to moderate our capital spending, including implementingprojects in phases, exploring government subsidies, exploring strategicpartnerships, and the like.  We may needto incur future debt or issue additional equity if our cash flows and capitalresources are insufficient to finance these various activities, in particularin light of the scheduled maturity of our Revolving Credit Facility in 2011.  Additional funds may not be available onterms favorable to us, or at all.   Ourplanned capital program also includes projects to increase our fractionationcapacities.  As a result of our anticipatedcapacity constraints, we plan to build our Gamunex IGIV inventories, which willincrease our working capital requirements. The first phase of our Factor VIII purification expansion project, aswell as reliability improvements, has been completed.  In addition, we have completed constructionof our new ATIII purification facility as well as our new Prolastin-Cpurification facility.  Capitalexpenditures for these facilities were approximately $28 million and $26million, respectively, through September 30, 2009.

 

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On October 6, 2009, we completed our IPO, whichresulted in net primary proceeds to us of $519.7 million.  We used the net primary proceeds to us torepay $389.8 million and $129.9 million of principal under our First and SecondLien Term Loans, respectively.

 

On October 15, 2009, we entered into an amendmentof certain provisions of our Revolving Credit Facility dated as of October 12,2009.  Further, on October 21, 2009,we completed the issuance of our 7.75% Notes in a private placement to certainqualified institutional buyers.  We usedthe net proceeds to us of $583.9 million to repay principal and interest underour First and Second Lien Term Loans of $295.5 million and $204.1 million,respectively, which were subsequently terminated, $55.6 million to repayprincipal under our Revolving Credit Facility, as amended, and $28.7 million tosettle and terminate certain interest rate swap contracts with a notionalamount of $390.0 million.

 

Additional information regarding our IPO andrefinancing transactions is included in the section titled “—Subsequent Events.”

 

***CashFlow Analysis***

 

During the ninemonths ended September 30, 2009, we generated cash from operatingactivities of $198.7 million.  We reducedour outstanding borrowings under our First Lien Term Loan and revolving creditfacility by $117.3 million, while investing $36.3 million and $25.5 million incapital projects and the acquisitions of ten plasma collection centers fromIBR, respectively.  The following tableand subsequent discussion and analysis contain additional information regardingour cash flows.

 
| ** **                                                                                   | ** ** | **Nine  Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,** | ** ** |
| ** **                                                                                   | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Operating activities:**                                                                    |       |                   |       |   |   |
| Net income                                                                                   |       | $                      | 152,517    |   | $ | 39,593 |   |
| Non-cash items                                                                               |       | 79,857                 |       | 44,368 |   |
| Changes in operating assets and liabilities,  excluding the effects of business acquisitions |       | (33,650                | )          | (86,490 | ) |
| **Net cash provided by (used in)  operating activities**                                     |       | $                      | 198,724    |   | $ | (2,529 | ) |
|                                                                                         |       |                   |       |   |   |
| **Investing activities:**                                                                    |       |                   |       |   |   |
| Purchases of property, plant, and equipment                                                  |       | $                      | (36,291    | ) | $ | (65,994 | ) |
| Financing arrangements with third party suppliers,  net of repayments                        |       | 402                    |       | (6,587 | ) |
| Business acquisitions, net of cash acquired                                                  |       | (25,510                | )          | (5,792 | ) |
| Advance of purchase price for plasma collection  centers                                     |       | (1,603                 | )          | (2,534 | ) |
| Other                                                                                        |       | 232                    |       | 260 |   |
| **Net cash used in investing  activities**                                                   |       | $                      | (62,770    | ) | $ | (80,647 | ) |
|                                                                                         |       |                   |       |   |   |
| **Financing activities:**                                                                    |       |                   |       |   |   |
| (Repayments) borrowings under Revolving Credit  Facility                                     |       | $                      | (112,097   | ) | $ | 67,930 |   |
| Repayments of borrowings under term loan                                                     |       | (5,250                 | )          | (5,250 | ) |
| Repurchases of common stock                                                                  |       | (4,132                 | )          | (36,076 | ) |
| Other                                                                                        |       | 1,030                  |       | (1,114 | ) |
| **Net cash (used in) provided by  financing activities**                                     |       | $                      | (120,449   | ) | $ | 25,490 |   |

 

***Cash Flows from Operating Activities***

 

We generated net cashflows from operating activities of $198.7 million for the nine months ended September 30,2009 as compared to net cash used in operating activities of $2.5 million forthe nine months ended September 30, 2008. Our cash flows generated from operating activities for the nine monthsended September 30, 2009 benefited from the $75.0 million (approximately$48.8 million after tax effect) payment we received from CSL as a result of thetermination of the definitive merger agreement.

 

Our non-cash itemswere $79.9 million and $44.4 million for the nine months ended September 30,2009 and 2008, respectively.  The $35.5million increase in our non-cash items, as compared to the prior year period, waspredominantly driven by an increase of $7.2 million of depreciation andamortization expense as a result of our cumulative capital investments and$11.5 million of share-based compensation expense primarily as a result of theacceleration of the vesting of certain of our Chairman and Chief ExecutiveOfficer’s stock options.  Our non-cashitems were also positively impacted by a decrease in our deferred tax assets of$8.4 million during the 2009 period as

 

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compared to an increase in our deferred taxassets of $4.5 million during the 2008 period. Our non-cash items for the nine months ended September 30, 2008reflect the recognition of $4.7 million of previously deferred revenue, ofwhich $1.9 million related to the termination of a licensed technologyagreement with an unaffiliated third party and $2.6 million related to thecompletion of a portion of our performance obligations under a licensedtechnology agreement with an unaffiliated third party.

 

Our operatingassets (excluding the effects of business acquisitions), net, increased $33.7million and $86.5 million for the nine months ended September 30, 2009 and2008, respectively, and were driven by the following items.

 

·                  Our accounts receivable, net, increased $17.3 million during the ninemonths ended September 30, 2009 as compared to a decrease of $5.0 millionduring the nine months ended September 30, 2008.  Accounts receivable, net, balances areinfluenced by the timing of net revenue and customer collections.  Our days sales outstanding (DSO) were 38 daysand 31 days at September 30, 2009 and 2008, respectively.  Our international sales terms can range from30 to 90 days due to industry and national practices outside of the U.S., whichcan impact our DSO results.  We calculateDSO as our period end accounts receivable, net, divided by our prior threemonths’ net sales, multiplied by 90 days. Our calculation of DSO may not be consistent with similar calculationsperformed by other companies.

 

·                  Our inventories increased $52.1 million and $92.7 million during thenine months ended September 30, 2009 and 2008, respectively.  Our inventories fluctuate based upon ourplasma collections, production mix and cycle times, production capacities,normal production shut-downs, finished product releases, targeted safety stocklevels, and demand for our products.  Ourbiological manufacturing processes result in relatively long inventory cycletimes ranging from 100 days to in excess of 400 days in addition to a required60 day pre-production holding period for plasma.  Specialty plasma, due to its nature, canoften have cycle times in excess of one year. Consequently, we have significant investment in raw material andwork-in-process inventories for extended periods, and correspondingly, lowerlevels of finished goods inventories on hand. Our inventories for the 2008 period were also impacted by the repurchaseof $28.6 million of inventories from a Bayer affiliate in Germany, where weterminated our distribution agreement.

 

·                  Our prepaid expenses and other assets decreased $16.8 million for thenine months ended September 30, 2009 as compared to an increase of $4.5million for the nine months ended September 30, 2008.  The decrease in our prepaid expenses andother assets for the nine months ended September 30, 2009 resultedprimarily from a decrease in prepaid plasma and related testing fees of $10.6million and prepaid income taxes of $8.2 million.

 

·                  Our operating liabilities increased $19.0 million and $5.8 million forthe nine months ended September 30, 2009 and 2008, respectively.  Our liabilities fluctuate as a result of ourcash management strategies and the varying due dates of accounts payable,accrued expenses, and other liabilities. The increase in our liabilities duringthe nine months ended September 30, 2009 resulted primarily from anincrease in accounts payable obligations of $4.8 million; higher Medicaid,commercial rebates, and chargebacks of $10.7 million; and higher taxes payableof $7.9 million.  These items werepartially offset by a reduction in the recorded amount of our interest rateswaps and caps of $9.3 million.

 

***Cash Flows fromInvesting Activities***

 

Ourcapital expenditures were $36.3 million and $66.0 million for the nine monthsended September 30, 2009 and 2008, respectively.  Our capital expenditures reflect investmentsin our facilities to support a platform for future growth and efficiencyimprovements, including compliance enhancements, general infrastructureupgrades, capacity expansions, and new facilities.  Our capital expenditures also reflectinvestment in our TPR infrastructure to support our plasma collectionefforts.  Our capital expenditures duringthe nine months ended September 30, 2009 reflect significantly lowerspending related to our TPR infrastructure as compared to the prior year periodas a result of the maturation of our plasma collection platform, as well as thecompletion of several projects.

 

Ourcash flows used in investing activities also include various cash outflows forthe development of our plasma collection center platform, including thepurchase price of plasma collection centers acquired from IBR and loans andadvances made to third-party plasma suppliers, net of repayments, for thedevelopment of plasma collection centers which will be used to source plasmafor us, and which we have the option to purchase under certain conditions.  We completed the acquisitions of ten centersfrom IBR during the nine months ended September 30, 2009, as compared toone center during the 2008 period.

 

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***Cash Flows fromFinancing Activities***

 

Our net cash (used in) provided by financingactivities consists primarily of (repayments) borrowings under our RevolvingCredit Facility, repayments of principal under our First Lien Term Loan, andrepurchases of our common stock.

 

During the nine months ended September 30, 2009,we reduced the outstanding balance under our Revolving Credit Facility by$112.1 million, primarily from the application of the $75.0 million paymentreceived from CSL, as well as from the cash flows generated from our operatingactivities.  During the nine months endedSeptember 30, 2008, the outstanding balance under our Revolving CreditFacility increased by $67.9 million, primarily as a result of inventory buildin anticipation of a planned shutdown at our Clayton, North Carolina,manufacturing facility, increased collections at TPR, and higher capitalspending.  During both periods, we madeprincipal reduction payments of $5.3 million under our First Lien Term Loan.

 

During the nine months ended September 30, 2009and 2008, we repurchased 248,512 and 67,336 shares of our common stock,respectively, from employees for $4.1 million and $0.7 million, respectively,to settle their withholding tax obligations upon vesting of restrictedstock.  During the nine months ended September 30,2008, we also repurchased 2,146,232 shares of our common stock from IBR for$35.4 million at a put value of $15.61 per share plus accrued charges.

 

***Off Balance Sheet Arrangements***

 

As of September 30, 2009, we do not have anyoff-balance sheet arrangements that are material or reasonably likely to bematerial to our consolidated financial position or results of operations.

 

***RelatedParty Transactions***

 

We consider Cerberus, Ampersand, and Centric to be related partiesduring the periods presented.  Additionalinformation regarding transactions with our related parties is included in Note9, “Related Party Transactions,” included elsewhere in this Quarterly Report.

 

**NON-GAAP FINANCIAL MEASURE**

 

We believe that a meaningful analysis of ourhistorical operating performance is enhanced by the use of adjustedEBITDA.  Adjusted EBITDA is a financialmeasure that is not defined by accounting principles generally accepted in theU.S. (U.S. GAAP).  A non-GAAP financialmeasure is a numerical measure of a company’s financial performance that (i) excludesamounts, or is subject to adjustments that have the effect of excludingamounts, that are included in a comparable measure calculated and presented inaccordance with U.S. GAAP in the statement of operations, such as net income,or the statement of cash flows, such as operating cash flow; or (ii) includesamounts, or is subject to adjustments that have the effect of includingamounts, that are excluded from the comparable measure so calculated andpresented.  Adjusted EBITDA should not beconsidered a substitute for any performance measure determined in accordancewith U.S. GAAP.   We do not rely solelyon adjusted EBITDA as a performance measure and also consider our U.S. GAAPresults.  Because adjusted EBITDA is notcalculated in the same manner by all companies, it may not be comparable tosimilarly titled measures used by other companies.  To properly and prudently evaluate ourbusiness, we encourage you to also review the U.S. GAAP financial statementsincluded elsewhere in this Quarterly Report, and not to rely on any singlefinancial measure to evaluate our business. Adjusted EBITDA has materiallimitations as an analytical tool and you should not consider this measure inisolation, or as a substitute for analysis of our results as reported underU.S. GAAP.  Additional informationregarding our use of adjusted EBITDA is included in our prospectus filedpursuant to Rule 424(b) on October 1, 2009.

 

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In the following table, we have presented areconciliation of EBITDA and adjusted EBITDA to the most comparable U.S. GAAPmeasure, net income:

 
| ** **                                       | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                                       | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Net income**                                   |       | $                       | 35,810     |                   | $          | 20,554 |   | $ | 152,517 |   | $ | 39,593 |   |
| Interest expense, net (a)                        |       | 19,587                  |       | 24,382                 |       | 61,445 |   | 73,027 |   |
| Income tax provision (b)                         |       | 14,125                  |       | 12,147                 |       | 74,914 |   | 25,284 |   |
| Depreciation and  amortization (c)               |       | 7,482                   |       | 5,621                  |       | 21,403 |   | 14,166 |   |
| **EBITDA**                                       |       | 77,004                  |       | 62,704                 |       | 310,279 |   | 152,070 |   |
| Management fees (d)                              |       | 1,958                   |       | 1,752                  |       | 5,715 |   | 4,864 |   |
| Non-cash stock option  expense (e)               |       | 16,777                  |       | 7,666                  |       | 31,486 |   | 20,042 |   |
| Non-cash restricted stock  expense (e)           |       | 2,677                   |       | 2,765                  |       | 8,139 |   | 8,056 |   |
| Special recognition bonus  expense (f)           |       | 1,489                   |       | 1,617                  |       | 4,852 |   | 5,020 |   |
| Equity in earnings of  affiliate (g)             |       | (112                    | )          | (97                    | )          | (296 | ) | (247 | ) |
| Loss on sales of equipment  (h)                  |       | 10                      |       | 928                    |       | 879 |   | 804 |   |
| Asset impairment charges,  net of recoveries (i) |       | 198                     |       | (11,424                | )          | (133 | ) | 9,439 |   |
| Retention bonus awards (j)                       |       | 1,573                   |       | 1,726                  |       | 8,310 |   | 1,726 |   |
| Other (k)                                        |       | 918                     |       | 913                    |       | 1,157 |   | 602 |   |
| **Adjusted  EBITDA (l)**                         |       | $                       | 102,492    |                   | $          | 68,550 |   | $ | 370,388 |   | $ | 202,376 |   |

 

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(a)          Represents interest expense associated with our debtstructure.  During the periods presented,our capital structure consisted of a $1.355 billion credit facility, of whichapproximately $1.1 billion was outstanding at September 30, 2009.

 

(b)         Represents our income tax expense as presented on ourconsolidated income statements.

 

(c)          Represents depreciation and amortization associatedwith our property, plant, and equipment, and all other intangible assets.

 

(d)         Represents the advisory fees paid to TalecrisHoldings, LLC, under the Management Agreement, as amended.  This agreement was terminated in connectionwith our initial public offering.

 

(e)          Represents our non-cash equity compensation expenseassociated with stock options and restricted stock.

 

(f)            Represents compensation expense associated withspecial recognition bonus awards granted to certain of our employees and seniorexecutives.  These awards were granted toreward past performance and were provided to these individuals in recognitionof the extraordinary value realized by us and our stockholders due to theefforts of such individuals since inception of our operating activities on April 1,2005.  While the awards included deferreddistributions for employee retention, we do not anticipate granting similarawards in the future.

 

(g)         Represents non-operating income associated with ourinvestment in Centric Health Resources, Inc., which we believe are notpart of our core operations.

 

(h)         Represents net losses on sales of equipment, which webelieve are not part of our core operations.

 

(i)             For the nine months ended September 30, 2008,represents an inventory impairment charge, net of recoveries, of $9.2 million,due to deviations from our standard operating procedures and cGMP at one of ourplasma collection centers, as well as approximately $0.2 million of otherimpairment charges related to certain equipment.  Asset impairment charges, net of recoveriesincludes $11.4 million, $0.4 million, and $1.1 million of recoveries related tothis issue for the three months ended September 30, 2008 and the three andnine months ended September 30, 2009, respectively.  Other asset impairment charges totaled $0.6million and $1.0 million for the three and nine months ended September 30,2009, respectively. Additional information regarding the plasma center cGMPissue is included in “—Matters Affecting Comparability—Plasma Center cGMP Issue.”

 

(j)             Represents merger related retention expense and otherbonuses related to our terminated merger agreement with CSL.  Additional information regarding theterminated merger agreement with CSL is included in “—Matters AffectingComparability—Definitive Merger Agreement with CSL Limited (CSL).

 

(k)          Represents $0.9 million of costs related to the IPOthat was discontinued during 2008 for the three and nine months ended September 30,2008, partially offset by an insurance recovery of $0.3 million for the ninemonths ended September 30, 2008. Represents $0.9 million and $1.2 million of costs related to our IPO forthe three and nine months ended September 30, 2009,

 

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respectively.

 

(l)             Our adjusted EBITDA for the nine months ended September 30,2009 includes a $75.0 million merger termination fee received from CSL as aresult of the termination of the definitive merger agreement.  In addition, we incurred legal and othercosts associated with the regulatory review process of our terminated mergeragreement with CSL of $6.0 million for the nine months ended September 30,2009 and $0.7 million and $1.5 million for the three and nine months ended September 30,2008, respectively.  This termination feeand these expenses are not permitted as adjustments to our adjusted EBITDA asdefined in our credit facilities at September 30, 2009.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates of America (U.S. GAAP) requires us to make estimates and assumptions incertain circumstances that affect the reported amounts of assets, liabilities,revenue and expenses, and the related disclosures of contingent assets andliabilities.  Some of the estimates andassumptions we are required to make relate to matters that are inherentlyuncertain as they pertain to future events.

 

A detailed description of our critical accountingpolicies is presented in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in our prospectus. There have been nomaterial changes to our critical accounting policies.

 

**RECENT ACCOUNTINGPRONOUNCEMENTS APPLICABLE TO OUR COMPANY**

 

Adescription of recent accounting pronouncements applicable to our company isincluded in Note 2, “Summary of Significant Accounting Policies,” locatedelsewhere in this Quarterly Report.

 

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

 

At September 30, 2009, we had cash and cash equivalents of $32.9million.  Under the terms of ourRevolving Credit Facility, U.S. available cash balances are swept daily fromour springing lockbox directly to the administrative agent for the lendingsyndicate.  Because our cash and cash equivalentsare short-term in duration, we believe that our exposure to interest rate riskis not significant and a 100 basis point movement in market interest rateswould not have a significant impact on the carrying value of our cash and cashequivalents.  We actively monitor changesin interest rates.

 

***InterestRate Risk***

 

We are exposed to interest rate risk through our floating rate debtinstruments.  At September 30, 2009,our indebtedness totaled $1.1 billion, all of which exposed us to floatinginterest rates.  Based upon the averagefloating rate debt levels outstanding during the three and nine months ended September 30,2009 which were not covered by our interest rate swaps and caps, a 100 basispoint increase in interest rates would have impacted our interest expense, net,by approximately $1.2 million and $3.9 million, respectively.

 

As part of our overall financial risk management policy and as requiredunder the terms of our First and Second Lien Term Loans, we have entered intointerest rate protection agreements consisting of interest rate swaps and capswhich are intended to convert variable interest rates to fixed interest rateson a portion of our long-term indebtedness. At September 30, 2009, we had four variable-to-fixed interest rateswaps outstanding in the aggregate notional principal amount of $440.0 million,which mature on various dates through February 13, 2013.  At September 30, 2009, we also had twointerest rate caps outstanding in the aggregate notional principal amount of$175.0 million, which mature on February 14, 2010.  We do not use derivative financialinstruments for speculative or trading purposes.

 

On October 6, 2009, we completed our IPO, whichresulted in net primary proceeds to us of $519.7 million.  We used the net primary proceeds to us torepay $389.8 million and $129.9 million of principal under our First and SecondLien Term Loans, respectively.

 

On October 15, 2009, we entered into an amendmentof certain provisions of our Revolving Credit Facility.  Further, on October 21, 2009, wecompleted the issuance of our 7.75% Notes in a private offering to qualifiedinstitutional buyers under SEC Rule 144A. We used the net proceeds to us of $583.9 million to repay principal andinterest under our First and Second Lien Term Loans of $295.5 million and$204.1 million, respectively, which were subsequently terminated, $55.6 millionto repay principal under our Revolving Credit Facility, as amended, and $28.7million to settle and terminate certain interest rate swap contracts with anotional amount of $390.0 million.  Weintend to settle and terminate the remaining interest rate swap contract with anotional amount of $50 million during the 2009 fourth quarter.

 

Additional information regarding our IPO andrefinancing transactions is included in the section titled “—Subsequent Events.”

 

***ForeignCurrency Risk***

 

We operate internationally and enter into transactions denominated inforeign currencies.  As such, ourfinancial results are subject to the variability that arises from exchange ratemovements in relation to the U.S. dollar. Our foreign currency exposures are primarily limited to the Canadiandollar and the euro.  We translate thefinancial statements of international subsidiaries to their U.S. dollarequivalents at end-of-period currency exchange rates for assets and liabilitiesand at average currency exchange rates for revenue and expenses.  We record these translation adjustments as acomponent of other comprehensive income (loss) within stockholders’deficit.  We recognize transaction gainsand losses arising from fluctuations in currency exchange rates on transactionsdenominated in currencies other than the functional currency as incurred in ourconsolidated income statements.  Weincurred transaction gains, net, of $3.1 million and $3.3 million for the threeand nine months ended September 30, 2009, respectively.

 

Since we operate internationally and approximately 32.4% and 33.1% ofour net revenue for the three and nine months ended September 30, 2009,respectively, were generated outside of the United States, foreign currencyexchange rate fluctuations could significantly impact our financial position,results of operations, cash flows, and competitive position.  Our product net revenue was negativelyimpacted by $1.8 million, or 0.5%, and $11.7 million, or 1.2%, as a result offoreign currency exchange rate fluctuations in relation to the U.S. dollarduring the three and nine months ended September 30, 2009, respectively.

 

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For the purposes of specific risk analysis, we used a sensitivityanalysis to measure the potential impact to our consolidated financialstatements for a hypothetical 10% strengthening of the U.S. dollar comparedwith the Canadian dollar and euro for the three and nine months ended September 30,2009.  Assuming a 10% strengthening ofthe U.S. dollar, our product net revenue would have been negatively impacted byapproximately $3.6 million and $10.2 million for the three and nine monthsended September 30, 2009, respectively. There would have been minimal impact to our transaction gains for both2009 periods.  To date, we have nothedged our exposure to changes in foreign currency exchange rates, and as aresult, we could incur unanticipated translation gains and losses.

 

***CommodityRisk***

 

Plasma is the key raw material used in the production of our products,which has historically accounted for more than half of our cost of goodssold.    At October 31, 2009, ourplasma collection center platform consisted of 71 operating centers, of which66 were licensed and 5 were unlicensed. These centers collected approximately 61% of our plasma during the ninemonths ended September 30, 2009.

 

For purposes of specific risk analysis, we used a sensitivity analysisto measure the potential impact to our consolidated financial statements for ahypothetical 10% increase in the cost of plasma used to produce the productssold during the three and nine months ended September 30, 2009.  Assuming this 10% increase in the cost ofplasma, our cost of goods sold would have increased by $11.2 million and $33.1million for the three and nine months ended September 30, 2009, respectively,and our gross margin would have been negatively impacted by 284 basis pointsand 289 basis points for the three and nine months ended September 30,2009, respectively.  This sensitivityanalysis assumes that we would not be able to pass the hypothetical costincrease to our customers in the form of pricing increases.

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

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

 

Our management, with the participation of our ChiefExecutive Officer and our Chief Financial Officer, evaluated the effectivenessof our disclosure controls and procedures as of September 30, 2009.  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 toensure that information required to be disclosed by a company in reports thatit files or submits under the Exchange Act is recorded, processed, summarized,and reported, within the time periods is 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, canprovide only 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 30,2009, 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 overfinancial reporting identified 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 - OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

There have been no material changes to our legal proceedings previouslydisclosed in our prospectus filed pursuant to Rule 424(b) on October 1,2009.

 

**ITEM 1A. RISK FACTORS**

 

In addition to the information set forth in thisQuarterly Report, you should carefully consider the risk factors included underthe caption “Risk Factors” in our prospectus filed pursuant to Rule 424(b) onOctober 1, 2009.  There have been nomaterial changes to the risk factors previously disclosed in our prospectus.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS**

 

**Recent Sales of Unregistered Securities**

 

On September 30, 2009, we issued options topurchase 597,713 shares of common stock to employees with an exercise price of$19.00 per share.  These options vest inthree equal installments over a three-year period.

 

On September 30, 2009, we issued 483,100restricted stock units to employees. These restricted stock units vest in three equal installments over athree-year period.

 

The issuance of securities described above are exemptfrom registration under the Securities Act of 1933 in reliance on Rule 701of the Securities Act pursuant to compensatory benefit plans approved by ourboard of directors.

 

**Purchases of Equity Securities by the Issuer andAffiliated Purchasers**

 

None.

 

**Use of Proceeds from Public Offering of CommonStock**

 

On September 30, 2009, our Registration Statementon Form S-1 (File Nos. 333-144941 and 333-162247) was declared effectivefor our initial public offering of common stock, par value $0.01 per share,pursuant to which we registered the offering and sale of $1.064 billion ofcommon stock.  On October 6, 2009,the offering closed.  The aggregate grossoffering primary proceeds to us and the selling stockholder were $550.0 millionand $400.0 million, respectively.  Inaddition, the selling stockholder granted the underwriters an over-allotmentoption to purchase an additional 6,000,000 shares at the initial public offeringprice, which was exercised in full.  Theaggregate offering price of all common stock sold was $1.064 billion.  Morgan Stanley, Goldman, Sachs &Co., Citigroup Global Markets Inc., and J.P. Morgan Securities Inc. acted asjoint book-runners and Wells Fargo Securities, LLC, Barclays Capital Inc. andUBS Investment Bank acted as co-managers.

 

As a result of this offering, we received net primaryproceeds of approximately $519.7 million, after deducting underwritingdiscounts and commissions of $30.3 million. No offering expenses were paid directly or indirectly to any of ourdirectors or officers (or their associates) or persons owning ten percent ormore of any class of our equity securities or to any other affiliate.  We used the net primary proceeds to us torepay $389.8 million and $129.9 million of amounts owed under our First andSecond Lien Term Loans, respectively.  Weincurred approximately $5.0 million of legal and other offering expenses inconnection with this offering, which will be funded from borrowings under ourRevolving Credit Facility.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

On September 8, 2009, acting pursuant to awritten consent, holders of securities representing approximately 97% of thevoting power of the company and all of the outstanding shares of series A andseries B preferred stock took the following actions:

 

·                  The shareholders approved the filing of an Amended andRestated Certificate of Incorporation with the Secretary of State for the Stateof Delaware.

 

·                  The shareholders elected directors and apportionedthem among several classes as follows:  Class Iconsisting of Stuart A. 

 

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Auerbach, Paul N.Clark and Kenneth J. Martin with a term expiring at the annual meeting ofstockholders held in 2010; Class II consisting of W. Brett Ingersoll,Lawrence D. Stern and Ruedi E. Waeger with a term expiring at the annual meetingof stockholders held in 2011; and Class III consisting of Richard A.Charpie, James T. Lenehan and Steven F. Mayer with a term expiring at theannual meeting of stockholders held in 2012.

 

·                  The shareholders approved the Company’s 2009 Long-TermIncentive Plan, the forms of award agreements and the filing of registrationstatements to register securities issued thereunder.

 

On September 8,2009, acting pursuant to a written consent, the holder of all of the shares ofthe Company’s series A preferred stock and series B preferred stock approvedthe filing of an Amended Series A Designation Certificate and an Amended Series BDesignation Certificate.  All outstandingshares of the Company’s series A and B preferred stock were converted intocommon stock in connection with the Company’s initial public offering.

 

**ITEM 6. EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1                  |       | Amended and Restated Certificate of Incorporation of  Talecris Biotherapeutics Holdings Corp. (incorporated by reference to  Exhibit 3.1 of Amendment No. 9 to Form S-1 (Registration  No. 333-144941) filed on September 11, 2009)                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2                  |       | Amended and Restated By-Laws of Talecris  Biotherapeutics Holdings Corp. (incorporated by reference to Exhibit 3.2  of Amendment No. 8 to Form S-1 (Registration No. 333-144941)  filed on August 19, 2009)                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1                  |       | Form of Certificate of Talecris Biotherapeutics  Holdings Corp. common stock (incorporated by reference to Exhibit 3.2 of  Amendment No. 11 to Form S-1 (Registration No. 333-144941)  filed on September 25, 2009)                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.1                 |       | Second Amendment to Management Agreement, dated  August 17, 2009, by and between Cerberus-Plasma Holdings LLC, Ampersand  2001 Limited Partnership, Talecris Biotherapeutics Holdings Corp., and  Talecris Biotherapeutics, Inc. (incorporated by reference to  Exhibit 10.27.3 of Amendment No. 9 to Form S-1 (Registration  No. 333-144941) filed on September 11, 2009) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2                 |       | First Amendment to Stockholders’ Agreement, dated  August 17, 2009, by and among Talecris Biotherapeutics Holdings Corp.  and Talecris Holdings, LLC (incorporated by reference to Exhibit 10.15.2  of Amendment No. 9 to Form S-1 (Registration No. 333-144941)  filed on September 11, 2009                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.3                 |       | Talecris Biotherapeutics Holdings Corp. 2009  Long-Term Incentive Plan (incorporated by reference to Exhibit 10.7 of  Amendment No. 9 to Form S-1 (Registration No. 333-144941)  filed on September 11, 2009)                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4                 |       | Form of Stock Option Award Agreement under the  2009 Long-Term Incentive Plan of Talecris Biotherapeutics Holdings Corp.  (incorporated by reference to Exhibit 10.7.2 of Amendment No. 11 to  Form S-1 (Registration No. 333-144941) filed on September 28,  2009)                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5                 |       | Form of Restricted Share Unit Award Agreement  under the 2009 Long-Term Incentive Plan of Talecris Biotherapeutics Holdings  Corp. (incorporated by reference to Exhibit 10.7.3 of Amendment  No. 11 to Form S-1 (Registration No. 333-144941) filed on September 25,  2009)                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1                 |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.2                 |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.1                 |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.2                 |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                 |

 

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#### **Table ofContents**

 

#### **SIGNATURES**

#### ** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| ** ** | **Talecris Biotherapeutics Holdings Corp.**          |
|------------|------------------------------------------------------|
| ** ** | ** **                                           |
| ** ** | ** **                                           |
|       | Dated: November 9, 2009                         |
|       |                                                 |
|       | /s/ Lawrence D. Stern                                |
|       | Lawrence D. Stern                                    |
|       | Chairman and Chief Executive Officer                 |
|       |                                                 |
|       |                                                 |
|       | Dated: November 9, 2009                         |
|       |                                                 |
|       | /s/ John M. Hanson                                   |
|       | John M. Hanson                                       |
|       | Executive Vice President and Chief Financial Officer |
|            |                                                      |  |

 

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