10-K 1 a11-1850_110k.htm 10-K

Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-K

 

(Mark One)

 

x

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

 

For the fiscal year ended December 31, 2010

 

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

 

TALECRIS BIOTHERAPEUTICS HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-2533768

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer Identification No.)

 

P.O. Box 110526

4101 Research Commons

79 T.W. Alexander Drive

Research Triangle Park, North Carolina 27709

(Address of principal executive offices, including
Zip Code)

 

(919) 316-6300

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which
registered

Common Stock, $0.01 par value

 

The NASDAQ Global Select Market

 

Securities registered pursuant to section 12(g) of the Act: None

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 registrant was required to submit and post such files)  Yes o  No o

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non- accelerated filer o

 

Smaller reporting company o

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2010, was approximately $1.3 billion. The registrant has no non-voting common stock.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  125,816,959 shares of Common Stock, $0.01 par value, as of February 21, 2011.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Talecris Biotherapeutics Holdings Corp. Definitive Proxy Statement to the 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year are incorporated by reference in Part III to the extent described therein.

 

 

 



Table of Contents

 

Talecris Biotherapeutics Holdings Corp.

2010 Annual Report on Form 10-K

Table of Contents

 

 

 

 

 

Page

Special Note Regarding Forward-Looking Statements

 

1

Part I

 

 

 

2

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

18

Item 1B.

 

Unresolved Staff Comments

 

42

Item 2.

 

Properties

 

42

Item 3.

 

Legal Proceedings

 

43

 

 

 

 

 

Part II

 

 

 

46

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

46

Item 6.

 

Selected Financial Data

 

48

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

50

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

91

Item 8.

 

Financial Statements and Supplementary Data

 

93

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

141

Item 9A.

 

Controls and Procedures

 

141

Item 9B.

 

Other Information

 

141

 

 

 

 

 

Part III

 

 

 

142

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

142

Item 11.

 

Executive Compensation

 

143

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

144

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

144

Item 14.

 

Principal Accounting Fees and Services

 

144

 

 

 

 

 

Part IV

 

 

 

145

Item 15.

 

Exhibits, Financial Statement Schedules

 

145

 

 

Signatures

 

149

 

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Table of Contents

 

Special Note Regarding Forward-Looking Statements

 

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

 

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

 

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

 

·      the unprecedented volatility in the global economy and fluctuations in financial markets;

 

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

 

·      the impact of competitive products and pricing;

 

·                  recently enacted and additional proposed U.S. healthcare legislation, regulatory action or legal proceedings affecting, among other things, the U.S. healthcare system, pharmaceutical pricing and reimbursement, including Medicaid, Medicare and the Public Health Service Program and additional legislation and regulatory action now under consideration;

 

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

 

·                  our ability to procure adequate quantities of plasma and other materials which are acceptable for use in our manufacturing processes from our own plasma collection centers or from third-party vendors;

 

·                  our ability to maintain compliance with government regulations and licenses, including those related to plasma collection, production, and marketing;

 

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

 

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

 

·                  unexpected shut-downs of our manufacturing and storage facilities or delays in opening new planned facilities;

 

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

 

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

 

·                  our ability to resume or replace sales to countries affected by our Foreign Corrupt Practices Act (FCPA) investigation;

 

·                  potential sanctions, if any, that the Department of Justice (DOJ) or other federal agencies, may impose on us as a result of our internal FCPA investigation;

 

·                  the impact of the PCA judgment;

 

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

 

·                  foreign currency exchange rate fluctuations in the international markets in which we operate;

 

·      the impact of our substantial capital plan; and

 

·                  other factors identified elsewhere in this Annual Report.

 

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

 

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Table of Contents

 

PART I

 

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

 

ITEM 1.  BUSINESS

 

We are a biopharmaceutical company that, according to the Marketing Research Bureau (MRB), is one of the largest producers and marketers of plasma-derived protein therapies in the world.  We develop, produce, market, and distribute therapies that extend and enhance the lives of people suffering from chronic and acute, often life-threatening, conditions, such as chronic inflammatory demyelinating polyneuropathy (CIDP), primary immune deficiencies (PI), alpha-1 antitrypsin deficiency, bleeding disorders, infectious diseases and severe trauma.  Our products are derived from human plasma, the liquid component of blood, which is sourced from our plasma collection centers or purchased from third party plasma collection centers in the United States.  Plasma contains many therapeutic proteins which we extract through a process known as fractionation at our Clayton, North Carolina and Melville, New York facilities.  The fractionated intermediates are then purified, formulated into a final bulk, and aseptically filled into final containers for sale. We also sell fractionated intermediate products. Our manufacturing facilities currently have the capacity to fractionate approximately 4.2 million liters of human plasma per year.  Purification, filling and finishing capacities are dependent on fraction mix.

 

We believe that many plasma-derived products are underutilized and have positive growth outlook. We believe worldwide unit volume demand for plasma-derived products will grow over the long term at a compound annual rate of approximately 5% to 8%, driven principally by the following factors:

 

·      population growth;

 

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

 

·      growth of diagnosed cases;

 

·      treatment of previously diagnosed, but untreated patients;

 

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

 

·      increased utilization in developing countries.

 

Products

 

According to MRB, our largest product, Gamunex, Immune Globulin Intravenous (Human), 10% Caprylate/Chromatography Purified (Gamunex, Gamunex IGIV), is one of the leading products in the intravenous immune globulin (IGIV) segment, with a reputation as a premium product. Gamunex and its successor in the United States and Canada, Gamunex-C Immune Globulin Injection (Human) 10% Caprylate/Chromatography Purified, are the only IGIV products approved for the treatment of CIDP, a neurological indication, in the U.S. and Canada and, through a Mutual Recognition Procedure, in 16 European countries. The Gamunex IGIV share of sales was 23% in the U.S. in 2009 and 14% globally in 2008 based on data from MRB. Our second largest product, Prolastin Alpha-1 Proteinase Inhibitor (Human) and its successor in the United States and Canada, Prolastin-C Alpha 1 Proteinase Inhibitor (Human), had a 62% share of sales in the United States in 2009 and a 74% share of sales worldwide in 2008 and has a high degree of brand recognition within the alpha-1 proteinase inhibitor, or A1PI, category. Gamunex and Prolastin/Prolastin-C A1PI, together represented 76.4% of our net revenue in 2010. We also have a line of hyperimmune therapies that provide treatment for tetanus, rabies, hepatitis B, hepatitis A and Rh factor control during pregnancy and at birth.  In addition, we provide plasma-derived therapies for critical care, including the treatment of hemophilia, an anti-coagulation factor, as well as albumin to expand blood volume. Although we sell our products worldwide, the majority of our sales are concentrated in the United States and Canada. Our products are primarily prescribed by specialty physicians, including neurologists, immunologists, pulmonologists, and hematologists. Our six key products categories and their indications are given in the table below:

 

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Table of Contents

 

Category and Talecris
Key Products

 

Talecris Indications

 

Talecris
Share of
Sales

 

Talecris Net
Revenue
2010 (in millions)

IGIV

Gamunex-C

Gamunex IGIV

 

U.S., Canada and EU—PI,ITP, CIDP.

 

23%—U.S.(1)

 

$660.0—U.S.

 

Canada and EU—Post Bone Marrow Transplant, Pediatric HIV Infection.

 

14%—Worldwide(2)

 

$871.6(3)—Worldwide

 

 

EU only—Kawasaki Disease, Guillain Barre Syndrome, Chronic Lymphocytic Leukemia, Multiple Myeloma

 

 

 

 

A1PI
Prolastin-C A1PI
Prolastin A1PI

 

A1PI Deficiency related emphysema

 

62%—U.S.(1) 

 

$231.7—U.S.

 

 

 

74%—Worldwide(2)

 

$351.5—Worldwide

Fraction V (Albumin and PPF)
Plasbumin-5 (Human) 5% USP Plasbumin-20 (Human) 25% USP Plasmanate, Plasma Protein Fraction 5% USP

 

Plasma expanders, severe trauma, acute liver and kidney failures

 

13%—U.S.(1)

5%—Worldwide(2)

 

$46.7—U.S.

$78.4(3)—Worldwide

Factor VIII(4)
Koate DVI

 

Hemophilia A

 

0.8%—U.S.(1)

1.3%—Worldwide(2)

 

$17.6—U.S.

$57.0—Worldwide

Antithrombin III
Thrombate III

 

Heriditary antithrombin III deficiency

 

92%—U.S.(1) 

6%—Worldwide(2)

 

$30.2—U.S.

$30.2—Worldwide

Hyperimmunes
GamaStan, HyperHepB, HyperRho, HyperRab, HyperTet

 

Hepatitis A, Hepatitis B, Rabies, RH Sensitization, Tetanus

 

20%—U.S.(1)

7.5%—Worldwide(2)

 

$53.3—U.S.

$69.8—Worldwide

 


(1)                                  For the 2009 calendar year, according to MRB. The Plasma Fractions Market in the United States, 2009.

(2)                                  For the 2008 calendar year, according to MRB. The Worldwide Fractions Market, 2008.

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

(4)                                  Sales include plasma-derived and recombinant Factor VIII products but exclude von Willenbrands.

 

The majority of our sales are concentrated in the therapeutic areas of: Immunology/Neurology, primarily through our IGIV product for the treatment of primary immune deficiency and CIDP, and Pulmonology, through our alpha-1 proteinase inhibitor (A1PI) product for the treatment of alpha-1 antitrypsin deficiency-related emphysema.   These therapeutic areas are served by our branded products, Gamunex and Gamunex-C brands IGIV (Gamunex, Gamunex-C), Prolastin and Prolastin-C brands A1PI (Prolastin, Prolastin A1PI, Prolastin-C A1PI). Our six largest product categories and net revenues are included in the following table.

 

 

 

 

 

Net Revenue (in millions)
Years Ended December 31,

 

Category

 

 

 

2010

 

2009

 

2008

 

IGIV(1)

 

 

 

$

871.6

 

$

826.4

 

$

677.7

 

A1PI

 

 

 

$

351.5

 

$

319.1

 

$

316.5

 

Fraction V (Albumin and PPF) (1)

 

 

 

$

78.4

 

$

84.8

 

$

61.1

 

Factor VIII

 

 

 

$

57.0

 

$

46.5

 

$

40.2

 

Antithrombin III

 

 

 

$

30.2

 

$

24.2

 

$

21.3

 

Hyperimmunes

 

 

 

$

69.8

 

$

74.2

 

$

78.2

 

 


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

 

We have a strong product portfolio with over ten licensed products focused on what we believe to be under diagnosed, underdeveloped markets. The following is a discussion of our key products or product classes:

 

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Table of Contents

 

IGIV—Gamunex-C/Gamunex IGIV

 

IGIV products are antibody-rich plasma therapies that have long been used in the treatment of immune related disorders such as primary immune deficiencies and certain autoimmune disorders, such as CIDP. For many indications, IGIV is thought to act as an immune modulator; however, in most cases formal regulatory approvals have not been obtained. We believe that the overall unit demand for IGIV is still significantly underdeveloped, due to under-diagnosis of conditions amenable to IGIV therapy, physician under-dosing for current indications and underutilization for many indications where it has demonstrated efficacy. We believe demand for IGIV products will generally increase as a result of new European Medicines Agency (EMA) and FDA approved indications, physician education on diagnosis and treatment options and development of consensus guidelines (to ensure appropriate therapeutic use and optimal dosing).

 

Our product, Gamunex-C, is a ready-to-use 10% liquid. Gamunex-C has the most approved indications of any liquid IGIV currently marketed in the U.S. Further, the FDA granted Gamunex-C/Gamunex IGIV orphan drug status, which provides marketing exclusivity for the CIDP indication in the U.S. until September 2015. According to an independent study by Harris Interactive, CIDP is the largest therapeutic use of IGIV volume, representing 29% of the total U.S. IGIV unit volume. We believe Gamunex-C/Gamunex IGIV indication for CIDP doubles our market access for licensed indications to 61% of total U.S. IGIV unit volume in the U.S. In an online survey conducted by Harris Interactive on our behalf during the first quarter of 2010, Gamunex was shown to be the preferred IGIV among neurologists who indicated a brand preference.  The survey results showed that neurologists selected Gamunex over four times more often than all other available liquid IGIV therapies, with a statistically significant margin (p<0.05).  In 2009, we submitted an sBLA with the FDA and an sNDS with Health Canada for subcutaneous route of administration for Gamunex IGIV for treatment of PI.  In May 2010 and October 2010, Gamunex-C/Gamunex IGIV was approved for the subcutaneous route of administration for the PI indication in Canada and the U.S., respectively.

 

The approved indications for Gamunex-C/Gamunex IGIV in the U.S. and Canada and Gamunex in 17 countries in the European Union are Primary Humoral Immunodeficiency (PI), and Idiopathic Thrombocytopenic Purpura (ITP). Chronic Inflammatory Demyelinating Polyneuropathy (CIDP) is also an approved indication for Gamunex-C/Gamunex IGIV in the United States and Canada and  for Gamunex in 16 European countries. Gamunex IGIV is also approved in the European Union for post bone marrow transplant and pediatric HIV infection as is Gamunex-C/Gamunex IGIV in Canada. Gamunex IGIV is approved in the European Union for Kawasaki Disease, Guillain Barre Syndrome, Chronic Lymphocytic Leukemia and Multiple Myeloma.

 

A1PI—Prolastin/Prolastin-C

 

A1PI is a naturally occurring, self-defensive protein produced in the liver. A1PI is used to treat congenital A1PI deficiency-related emphysema. This deficiency may predispose an individual to several illnesses but most commonly appears as emphysema in adults. U.S. sales of A1PI have experienced a compound annual growth rate of 15% between 1996 and 2009. Our Prolastin A1PI product represented 74% of worldwide A1PI sales in 2008 and 62% of U.S. A1PI sales in 2009 according to MRB.

 

Prolastin/Prolastin-C A1PI has the leading share of sales in the U.S., and approximately 87% share of sales in the European Union in 2008 according to MRB. From 1987 when our A1PI product, Prolastin A1PI, was granted orphan drug status, until 2003, when competitors began selling in the U.S., Prolastin had 100% share of A1PI sales in the U.S. Prolastin had a 62% share of U.S. sales in 2009 according to MRB. As a result of our first-mover advantage, pricing, brand strength and direct-to-patient distribution model, we have lost very few of our patients to competitors, which rely on identification of new patients to establish their market share. We consistently experience patient losses due to the nature of the disease. Globally, we continue to focus on access to new markets and patient identification efforts, including distribution of diagnostic kits as a way to increase sales of A1PI, and are seeking reimbursement in several European countries.

 

We believe there are approximately 11,000 individuals currently identified with A1PI deficiency in North America and Europe with 5,500 of those individuals currently undergoing A1PI treatment, based on internal estimates. There are an estimated 200,000 individuals with A1PI deficiency at high risk for development of emphysema in North America and Europe. Many individuals with symptoms are misdiagnosed before receiving a diagnosis of A1PI deficiency-related emphysema. Based on patient registries in many European countries, we believe that severe A1PI deficiency is also prevalent in Europe, and that European patients may represent approximately 30% of potential global sales.

 

Epidemiological surveys have demonstrated that there is significant latent demand for A1PI as only approximately 10% of all patients in need of treatment have been identified (source: Alpha-1-antitrypsin deficiency. High prevalence in the St. Louis area determined by direct population screening. Silverman EK, et al. Am Rev Respir Dis. 1989; 140:961-966). Even fewer patients are being treated using an A1PI product due to the limited number of countries with licensed product. This represents two distinct opportunities for market expansion—improved disease awareness leading to increased patient identification, and gaining licenses in new markets where there has not been access to A1PI.

 

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We completed the conversion of our existing U.S. and Canadian Prolastin A1PI patients to our newer A1PI product Prolastin-C A1PI in 2010. Prolastin-C A1PI has improved yields, higher concentration, and significantly reduced infusion time. We believe Prolastin-C A1PI is differentiated in the United States by its unique direct-to-patient distribution and service model, Prolastin Direct, which provides easy enrollment, home infusion, access to insurance experts and patient-centered health management. Prolastin Direct health management provides better patient outcomes by reducing the frequency of respiratory exacerbations. Furthermore, Prolastin Direct results in high medication compliance, with over 94% of prescribed doses being administered annually and high patient loyalty, with an annual retention rate of over 96%. Unlike our competitors, our Prolastin-C A1PI product are primarily shipped in the U.S. directly to the patient through Centric Health Resources (Centric), a specialized pharmacy. We own 30% of Centric’s common stock as of December 31, 2010.

 

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

 

Hyperimmunes

 

Hyperimmunes are antibody rich preparations, the majority of which are used to provide antibodies to counter specific antigens. Other products, collectively referred to as hyperimmune globulins, are made from human plasma collected from donors with immunity to specific diseases. We have one of the broadest lines of FDA-approved hyperimmunes for hepatitis A, hepatitis B, rabies, tetanus and treatment of Rh negative women pregnant with Rh positive children.

 

We had the largest share of sales in the U.S. for HyperRab and HyperTet in 2009 and 2010 according to MRB.

 

Albumin and PPF

 

Albumin is the most abundant protein in human plasma. It is a protein synthesized by the liver and performs multiple functions, including the transport of many small molecules in the blood and the binding of toxins and heavy metals, which prevents damage they might otherwise cause.

 

Plasma Protein Factor (Human) (PPF) has similar therapeutic uses as albumin and both are derived from plasma Fraction V. We are licensed to produce and market albumin and PPF under the brand names: Plasbumin and Plasmanate.

 

Some of our indications for albumin are:

 

·                  Emergency treatment of Hypovolemic Shock

·                  Burn therapy

·                  Hypoproteinemia with or without edema

·                  Adult Respiratory Distress Syndrome (ARDS)

·                  Cardiopulmonary bypass

·                  Acute Liver Failure

·                  Neonatal Hemolytic Disease

·                  Acute Nephrosis

·                  Eythrocyte Resuspension

·                  Renal Dialysis

 

We are planning to expand our production capacity to support future growth.

 

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Table of Contents

 

Plasma-Derived Hematology Products

 

Plasma-derived hematology products are used to treat patients who either lack one of the necessary factors for blood clotting or suffer from conditions in which clotting occurs abnormally. There are 13 blood coagulation factors found in human blood.

 

·                  We produce plasma-derived Factor VIII, called Koate DVI. Factor VIII is the primary treatment for Hemophilia A, a congenital bleeding disorder caused by a deficiency of coagulation agents in the blood. Total sales of  hemostasis products, including recombinant products, in 2009 were $2.3 billion in the U.S. Sales of plasma-derived hemostasis products in 2009 were $477.9 million in the U.S. In 2008, total sales were $7.0 billion worldwide (including plasma-derived and recombinant FVIII, FIX, ATIII, von Willenbrands, and FVII), while plasma-derived only product sales were $2.5 billion (includes plasma-derived Factor VIII, FIX, ATIII, and von Willebrands and FVII). We are expanding production capabilities in a phased approach to help meet demand.

 

·                  ATIII is an important anticoagulant and ATIII therapies are designed to treat and prevent thromboemboli, or spontaneous clotting within vital organs, in patients with congenital ATIII deficiency during high risk surgery, trauma, pregnancy, or childbirth. Our ATIII product, Thrombate III, represented 92% of sales in the U.S. in 2009 and 6% of worldwide sales in 2008 according to MRB, Thrombate III is currently produced for us by Bayer pursuant to a manufacturing agreement. We are currently validating a new production facility at our Clayton, North Carolina site with regulatory approval expected in 2012. We believe that we have sufficient inventory of intermediates and finished product to meet demand until the new facility is approved. The new facility will increase our capacity and will allow us to increase supply.

 

PPF-powder Intermediate Sales

 

Separately from our sales of PPF packaged for final use, we provide PPF powder to Bayer as an intermediate product for the fermentation of Kogenate, Bayer’s recombinant Factor VIII product. We will continue to provide PPF powder to the Bayer Kogenate business through 2012 pursuant to a supply agreement with potential extensions at Bayer’s option to 2015.

 

Manufacturing and Raw Materials

 

Our Clayton, North Carolina manufacturing site is one of the world’s largest fully integrated facilities for plasma-derived therapies. The site includes plasma receiving, fractionation, purification, filling/freeze-drying and packaging capabilities as well as freezer storage, testing laboratories and a cGMP pilot plant for clinical supply manufacture. In addition, we have a manufacturing facility in Melville, NewYork that provides additional fractionation capacity as well as capabilities for other contract manufacturing services. In addition to the on-site freezer storage, we also utilize a leased facility which allows for expanded inventory storage capacity.

 

Our manufacturing facilities currently have the capacity to fractionate approximately 4.2 million liters of human plasma per year. We processed approximately 3.8 million liters of plasma in 2010, which represents a utilization rate of approximately 90.5% of our fractionation capacity. The majority of the capacity is used for internal production requirements with a small amount utilized for contract fractionation, mainly for the Canadian blood system operators.  We anticipate that we will reach our fractionation capacity in the near term depending upon the demand for our products, the availability of source plasma, the impact of variability in yield, potential inventory impairments, among other factors. To allow full fractionation capacity utilization of 4.2 million liters, harvest of albumin paste will be capped at 2.3 million liters.

 

We are planning to expand our fractionation capacity with a new facility that will be able to process annually, 6.0 million liters of Crypoprecipitate (Factor VIII) and II+III paste (IGIV) and 4.0 million liters for IV-I paste (Alpha-1). Fraction V paste (albumin) will continue to be fractionated in our existing facility in the mid-term at a capacity of 4.0 million liters.  Purification, filling, and finishing capacities are dependent on fraction and vial size mix.

 

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Talecris Plasma Resources

 

Plasma is the key raw material used in the production of plasma-derived biological products, representing greater than 50% of our cost of goods sold. Human plasma can be secured through internal or external collection networks or sources. As of December 31, 2010, we operated 69 plasma collection centers (67 FDA licensed, two unlicensed) with approximately 2,700 employees.  Over the past four years, we have aggressively expanded our plasma supply through these collection centers under our wholly-owned subsidiary, TPR.  These centers collectively represent substantially all of our currently planned collection center network for the next three years.  We expect this network, once it fully matures, will provide in excess of 90% of our current plasma requirements.  Our licensed centers collected approximately 69% of our plasma during the year ended December 31, 2010.

 

The rapid vertical integration of our plasma supply was accomplished through the development of an extensive infrastructure necessary to manage the multiple work streams to open and obtain FDA licenses at our centers, as well as the ramp up of their production. Prior to the execution of our vertical integration strategy, we relied exclusively on third parties for all of our plasma, a significant portion of which was provided to us through plasma collection centers owned or controlled by our competitors.  Through the successful execution of our strategy, we have been able to reduce our reliance on third party suppliers, enhance our flexibility in procuring plasma, increase our operating efficiencies and improve our gross margin and profitability by reducing levels of under absorbed TPR infrastructure and start-up costs as a result of the maturation of our TPR plasma center platform.

 

We intend to continue to purchase some plasma from third parties through plasma supply contracts. On August 12, 2008, we signed a five-year plasma supply agreement with CSL Plasma Inc., a subsidiary of CSL Limited, a major competitor.  This agreement provides us with minimum annual purchase commitments that decline from 550,000 liters in 2010 to 200,000 liters in 2013, the final year of the agreement.  We have the ability to obtain additional volumes above the minimum purchase commitments under the terms of the agreement.  CSL Plasma, Inc. is obligated to supply 300,000 liters of plasma to us in 2011 as we have not elected to take optional volumes for the 2011 contract year. In addition to the contract with CSL Plasma Inc., we have several other contracts to purchase minimum quantities of plasma with various third parties.

 

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

 

We will need to significantly increase plasma collections generated from TPR in the near term to offset the expected decrease in plasma supplied by third parties and planned increases in our fractionation to meet anticipated demand.  To meet our plasma requirements, we have increased donor fees, increased marketing expenses, and expanded plasma center hours of operations, among other initiatives, which may limit our ability to reduce our cost per liter of plasma.

 

Pathogen safety

 

Assuring the pathogen safety of our products is a priority for us. There are a number of steps used to help ensure the pathogen safety of the source plasma we use and the products we produce. The initial step is the application of donor qualification procedures by our plasma suppliers. We also test donated plasma for serum antibodies. The purpose of serological testing is to detect serum antibodies and other biological markers that appear specifically in association with certain diseases. Serological testing is provided under contract by qualified laboratories according to our specifications.

 

Prior to delivery of the source plasma from our suppliers to our manufacturing plant, we internally perform nucleic acid amplification testing, or NAT, for various viruses, including HBV, HCV, HIV, HAV, and B-19. Our ability to perform NAT testing internally provides us with a strategic advantage over competitors who do not have such facilities and must contract with a third party, the National Genetics Institute. We perform these tests in a 76,000 square foot testing facility, located in Raleigh, North Carolina. The facility is leased through September 2017, with an option to purchase through September 2011. The laboratory tested approximately 4.9 million samples in 2010 and is operated by 106 operations and quality employees.

 

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Research and Development

 

As a result of our past and ongoing investment in research and development, we believe that we are positioned to continue as a leader in the plasma-derived therapies industry. Innovation by our research and development operations is critical to our future growth and ability to remain competitive in our industry.   We have a strong commitment to science and technology with a track record of accomplishments and pipeline opportunities. As of December 31, 2010, we had 308 scientists and support staff engaged in research and development activities.  We focus our research and development efforts in three key areas: continued enhancement of our process technologies (including pathogen safety), life cycle management for our existing products (including new indications), and development of new products.  To the extent we wish to add new products to our research and development pipeline, we anticipate making opportunistic business acquisitions or partnering with other companies with projects that fit our expertise.  Our research and development spending was $69.6 million, $71.2 million, and $66.0 million for the years ended December 31, 2010, 2009, and 2008, respectively.

 

The following table includes information regarding the clinical development stage of various product candidates currently in our development pipeline:

 

Product Candidate

 

Therapeutic Area

 

Product Type

 

Use

 

Development Phase

 

 

 

 

 

 

 

 

 

Plasmin

 

Thrombolytic

 

Plasma-derived Plasmin

 

aPAO

 

Phase I completed; Phase II initiated

 

 

 

 

 

 

 

 

 

Plasmin

 

Thrombolytic

 

Plasma-derived Plasmin

 

Acute Ischemic Stroke

 

Proof of concept clinical trial

 

 

 

 

 

 

 

 

 

recPlasmin

 

Thrombolytic

 

Recombinant Plasmin

 

Acute Ischemic Stroke

 

Preclinical

 

 

 

 

 

 

 

 

 

Prolastin-C A1PI

 

Respiratory

 

IVA1PI

 

A1PI deficiency

 

Phase IV commitment

 

 

 

 

 

 

 

 

 

Recombinant FVIII

 

Coagulation

 

Intravenous

 

Hemophilia A

 

Preclinical

 

 

 

 

 

 

 

 

 

Recombinant A1PI

 

Respiratory

 

Intravenous and/or Aerosolized

 

A1PI deficiency, COPD, Cystic Fibrosis

 

Preclinical

 

The content of our development portfolio will change over time as new plasma products progress from pre-clinical to development to market, and as we discontinue testing of product candidates that do not prove to be promising or feasible to develop. Due to the uncertainties and difficulties of the development process, it is not unusual for protein therapeutics, especially those in the early stages of investigation, to be terminated or delayed as they progress through development.

 

While our current protein products are derived from human plasma, we expect that recombinant technologies will be a major source of new protein therapies commercialized in the future. We have initiated recombinant protein development programs for Plasmin, Factor VIII, and A1PI. Recombinant or recPlasmin is a patentable form of Plasmin that retains key properties of Plasmin that make it a candidate for development as a therapy for ischemic stroke. We have filed composition of matter patents covering recPlasmin. We are conducting pre-clinical development of recombinant Factor VIII and A1PI utilizing advanced protein production technology licensed from Crucell N.V.

 

Gamunex-C (TAL-05-0002)

 

We developed a subcutaneous route of administration option for Gamunex 10% IGIV to meet a growing demand for subcutaneous self-administration of immunoglobulin for PI patients. In October 2010, the FDA approved Gamunex-C for the subcutaneous route of administration for the PI indication.  A required post-marketing study will be initiated in the second half of 2011.  We received approval from Health Canada for Gamunex-C subcutaneous administration in Canada.  We launched subcutaneous administration in Canada in the fourth quarter of 2010.

 

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Plasmin (TAL-05-00013)

 

Plasmin, a direct-acting thrombolytic agent, is our most innovative pipeline product. Plasmin is purified from human plasma in its inactive, zymogen form, plasminogen. Historically, attempts to use plasminogen in clinical settings have been impeded by the inability to provide sufficient quantities of Plasmin at the site of clotting before it autodegraded or because such attempts required potentially toxic additives. We have avoided these difficulties by converting plasminogen to Plasmin, the active form of the enzyme, and stabilizing it by placing it in an acidified solution that allows us to administer it directly into patients at appropriate doses and low toxicity to dissolve blood clots as determined by pre-clinical investigation.  Plasmin is being produced for clinical trials at our cGMP clinical manufacturing facilities in Clayton, North Carolina. Our intellectual property on Plasmin related to its method of use as a direct-acting thrombolytic, its formulation, and its manufacturing process is supported by multiple patents issued in the U.S., European Union, and elsewhere.  In 2010, another broad claims method of use patent was allowed in the U.S.

 

Plasmin has an expected advantage over tissue plasminogen activator as it has a reduced likelihood of causing bleeding. As a natural human plasma enzyme, Plasmin plays a key role in maintaining hemostasis in human and animal physiology. Its main physiologic function is dissolution of blood clots. Plasmin is inactivated in less than a second when it is present in the bloodstream unless it is bound to a blood clot. To ensure that Plasmin remains active, it is delivered locally to a clot using a catheter. Once Plasmin is delivered to a clot, it binds and dissolves the clot. When the clot is dissolved and Plasmin is released into the blood stream it is immediately inactivated thereby preventing active Plasmin from circulating and causing bleeding at distal sites within the body. The balance between clot binding and systemic inhibition provides the basis for differentiation of our direct-acting Plasmin development product from any other thrombolytic agents, both licensed and those in development.

 

Plasmin’s formulation is designed for direct delivery into clots via state-of-the-art procedures (catheter-directed thrombolytic therapy) performed in catheterization laboratories of hospitals, rather than by the current method involving intravenous injection into the bloodstream. Potential applications of catheter delivered thrombolytics include aPAO, DVT (deep vein thrombosis), and ischemic stroke. Basically, wherever a vessel or device is occluded by a blood clot and is accessible by catheter, the potential exists for directed thrombolytic therapy. We have filed Investigational New Drug Applications (IND) for aPAO, DVT and HGO (hemodialysis graft occlusion). We believe Plasmin may have other significant indications as well. We are also evaluating the use of Plasmin for the treatment of clots in stroke. A proof of concept trial in acute ischemic stroke is ongoing in certain countries outside of the United States.

 

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

 

Based on the encouraging outcome of this initial trial, we conducted a Phase I study in the U.S., EU and other countries to evaluate Plasmin in the treatment of aPAO, a condition in which arterial blood flow to extremities, usually the legs, becomes blocked by a clot. Affecting approximately 100,000 people in the U.S. each year, this condition is most common in people with underlying narrowing of arteries and gradual restriction of blood flow over time resulting from peripheral arterial disease (PAD). Without prompt intervention, aPAO can result in significant complications such as permanent nerve and muscle damage, and in the most severe cases, even amputation or death.

 

There is an unmet medical need for a proven safe direct-acting thrombolytic agent to treat aPAO. Current methods focus on pharmacologic, mechanical, or surgical removal of the blood clot, or bypass grafting to direct flow around the area of the clot. However, no clot-busting drugs currently are approved for this indication by regulatory authorities, and those currently used (plasminogen activators) may require a prolonged infusion averaging 24 to 36 hours and produce increased risk of bleeding complications. We received an orphan drug designation in the U.S. for the development of Plasmin for aPAO, which provides incentives for qualified clinical testing expenses and, if approved, market exclusivity for seven years. We are investigating Plasmin to assess its safety and efficacy in the treatment of aPAO. We completed our Phase I clinical trial in the second quarter of 2010 and initiated a Phase II clinical trial in several countries outside of the U.S. in the fourth quarter of 2010. In Phase I and preclinical trials, Plasmin appears able to rapidly dissolve blood clots without an elevated risk of bleeding. Pd-Plasmin delivered by catheter has dissolved blood clots over 30 cm long in two hours. We also have an open IND for Plasmin in deep vein thrombosis but currently have no plans to pursue an indication.

 

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Prolastin-C A1PI

 

We completed pivotal clinical studies and submitted a sBLA with the FDA and a sNDS with Health Canada for the approval of Prolastin-C A1PI.  Prolastin-C A1PI is a key product life cycle enhancement to Prolastin A1PI. Like Prolastin, Prolastin-C A1PI is intended to treat A1PI deficiency, an inherited disorder that causes a significant reduction in the naturally occurring protein A1PI. The modified production process of Prolastin-C A1PI will allow for increased yield and higher concentration versus our current Prolastin A1PI product, effectively increasing our capacity by 40%. The European Union regulatory authorities have indicated that a successful efficacy trial will be a prerequisite to applying for marketing authorization for Prolastin-C A1PI in the European Union.  The sBLA has been approved by the FDA; and a post-approval clinical trial is required as a condition for approval. The sNDS has been approved by Health Canada. We completed the conversion of our existing U.S. and Canadian Prolastin A1PI patients to Prolastin-C A1PI in 2010.

 

Recombinant A1PI and Factor VIII

 

We are exploring the potential for human cell-line based protein production technology to produce A1PI and Factor VIII with human modifications. Current recombinant forms of A1PI and Factor VIII are produced in animal cell lines and therefore lack key protein modifications characteristic of the human plasma version of the two proteins. Human protein modifications have the potential to make the human recombinant forms physiologically similar to their plasma-derived counterparts. The availability of recombinant A1PI may facilitate the application of A1PI therapy to other respiratory diseases such as COPD or cystic fibrosis (CF).

 

Technical Support of Manufacturing Operations

 

Our R&D activities also support improvements in manufacturing and testing processes that enhance yield and product quality. In addition to the above initiatives, we are working to transfer production of our Thrombate III product from Bayer, with whom we currently have a supply agreement. We are currently validating a new production facility at our Clayton site with regulatory approval expected in early 2012. We believe that we have sufficient inventory of intermediates and finished product to meet demand until the new facility is approved.

 

Customers

 

FFF Enterprise Inc. and Amerisource Bergen collectively accounted for approximately 27% of our net revenue for both the years ended December 31, 2010 and 2009.   Similarly, our accounts receivable balances have also been concentrated with a small number of customers. Amerisource Bergen accounted for approximately 13% of our accounts receivable, net, as of December 31, 2010 and FFF Enterprise Inc. accounted for approximately 15% of our accounts receivable, net, as of December 31, 2009.  Additionally, we are the largest supplier of plasma-derived products to the Canadian blood system operators, Canadian Blood Services and Hema Quebec, and derive significant revenue and profits from these contracts. We have experienced and expect to continue to experience, annual volume declines in Canada, due to Canadian Blood Services objective to have multiple sources of supply which has and will continue to impact our overall IGIV growth. We expect that sales of our products to a limited number of customers will continue to represent a substantial amount of our revenues for the foreseeable future.  For a discussion of certain risks related to our customer concentration, please see “Risk Factors—A substantial portion of our revenue is derived from a small number of customers, and the loss of one or more of these customers could have a material adverse effect on us.”

 

The following table includes a geographic breakdown of our net revenues:

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

United States

 

$

1,098,969

 

$

1,011,468

 

$

906,376

 

Canada

 

195,092

 

214,883

 

215,964

 

Europe

 

196,571

 

185,297

 

168,081

 

Other

 

110,987

 

121,561

 

83,871

 

Total net revenue

 

$

1,601,619

 

$

1,533,209

 

$

1,374,292

 

 

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Our international business is subject, in various degrees, to a number of risks inherent in conducting business in other countries.  These include, but are not limited to, currency exchange rate fluctuations, capital and exchange control regulations, expropriation and other restrictive government actions.  Our international business is also subject to government-imposed constraints, including laws on pricing, reimbursement, and access to our products.

 

Our worldwide net revenue does not reflect a significant degree of seasonality.  We generally experience a favorable revenue and gross margin benefit during the second and third quarters due to higher sales of our hyperimmune therapies for the treatment of exposure to rabies.

 

Contract Services

 

Apart from contracts with the Canadian blood system operators, we also provide a variety of contract manufacturing or process services, including plasma fractionation, manufacturing, and analytical testing. These contracts are for a limited number of batches of product and development services during the clinical development phase of a project and then change to a guaranteed annual minimum purchase commitment for a term of typically three to five years during the commercial phase of each agreement.

 

Sales, Marketing and Distribution

 

We have sales and marketing teams in the U.S., Germany and Canada as well as a team dedicated to the development of other international markets. Within the U.S., our core market, we have developed a “push-pull” distribution network comprised of both direct and indirect channels. Our direct channel is comprised of three specialty sales teams: Immunology/Neurology, Pulmonary, and Hematology. Our specialty sales representatives are experienced professionals with a combination of extensive commercial and healthcare related experience calling on a variety of touch points including physicians, pharmacists, and homecare companies. For 2009, MRB estimates that 65% (including 10% sold to distributors) of the IGIV sold in the U.S. was purchased by hospitals for both in-patient and out-patient use; physician offices represented about 15% of IGIV volume; and home and specialty pharmacies represented 20% of the IGIV volume.

 

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

 

·                  The Pulmonary team promotes Prolastin-C A1PI, focusing on identification of A1PI patients and driving brand choice for Prolastin-C A1PI, which is the most prescribed A1PI therapy in the U.S.

 

·                  The Hematology team promotes Koate-DVI and Thrombate III, calling on hematologists and other healthcare providers within the hospital and specialty treatment centers.

 

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

 

We sell, market and distribute our various products through both our direct sales personnel and our network of distributors. Our sales, marketing and distribution efforts focus on strengthening our relationships with physicians, pharmacists, nurses, patients, GPOs, distributors, home healthcare and specialty pharmacy providers. In the U.S., our Prolastin Direct Program has engaged a prescription fulfillment provider to ensure that Prolastin-C A1PI can be shipped directly to patients. This direct-to-patient distribution service is designed to enhance user convenience and ensure the patient of an uninterrupted supply of Prolastin-C A1PI, while providing us with valuable information about their usage patterns.  We are the only A1PI provider to have completed a Mutual Recognition Procedure in the European Union.  Prolastin A1PI is approved in 15 European countries and we are currently established in six of these markets. We have been in reimbursement discussions with a number of these countries since late 2007 and these discussions must be concluded before we can expect to significantly increase sales in these countries.

 

Packaging and Distribution Contracts

 

Since 2005, we significantly reduced the number of our distributors and simultaneously entered into long-term distribution agreements with major hospital group purchasing organizations, or GPOs, distributors, home care and specialty pharmacy providers and distributors which we consider favorable.

 

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

 

Patents and Other Intellectual Property Rights

 

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

 

Patents

 

As of December 31, 2010, we owned or licensed for uses within our field of business 117 U.S. patents and U.S. patent applications as well as numerous foreign counterparts to many of these patents and patent applications. At present, we do not consider any individual patent, patent application or patent family to be material to the operation of our business as a whole. Our patent portfolio includes patents and patent applications with claims directed to the composition of matter, manufacturing processes, pharmaceutical formulation and methods of use of many of our compounds and products, including a composition of matter patent application for a recombinant Plasmin molecule and a manufacturing process patent for Gamunex-C/Gamunex IGIV.

 

Trademarks

 

Given the importance of our name brands, particularly with respect to IGIV and A1PI products, we rely heavily on the protection of trade names and trademarks. We have registered trademarks for a number of our products, including Gamunex®, Gaminex 10%®, Prolastin®, Prolastin-C A1PI®, Plasbumin®, Plasmanate®, Koate®, Thrombate III®, GamaStan®, HyperHepB®, HyperRho®, HyperRab®, HyperTet®, Gamimune®, Talecris Direct®, and Prolastin Direct®.

 

Trade Secrets

 

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by maintaining a trade secret registry and by implementing confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors.

 

In-License Agreements

 

We license from Bayer HealthCare LLC certain intellectual property rights.  Under the licensing agreement with Bayer Healthcare, we were granted a royalty-free, worldwide and perpetual license covering certain intellectual properties not acquired by us in connection with our formation transaction.  As amended on August 10, 2007, the agreement permits us, subject to specified limitations, to grant a sublicense to Baxter International Inc., Baxter Healthcare Corporation, and certain of their affiliates relating to certain Japanese patent rights not acquired by us in connection with our formation transaction. On August 1, 2006 we entered into a collaboration and development agreement with Activaero GmbH, which grants us exclusive rights to use the Akita™ inhalation device for the aerosol delivery of A1PI for any indication. Under that agreement, we are committed to a minimal level of spending each year during development and should the product reach commercialization we must pay a royalty on sales, with no milestone payments due to Activaero GmbH. The agreement is valid until the last to expire applicable patent right currently not expected until 2025. We have the right to terminate with up to 120 days notice, but must pay a progressively higher termination fee determined by considering both the reason for our termination and the number of years since the effective date of the agreement. On September 4, 2008 and December 17, 2008, we entered into exclusive commercial licenses with Crucell N.V. for two recombinant proteins, A1PI and Factor VIII (alone or combined with recombinant Von Willebrand Factor), respectively, utilizing advanced protein technology. We paid Crucell license fees and committed to pay them milestone payments when certain research and clinical targets have been met and royalty payments upon commercialization, while reserving the right for us to terminate the agreements without penalty upon 90 days notice.

 

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Competition

 

The plasma products industry is highly competitive with changing competitive dynamics.  We face, and will continue to face, competition from both U.S.-based and foreign producers of plasma-derived therapies, some of which have lower cost structure, greater capital, manufacturing facilities, resources for research and development, and marketing capabilities.  In addition to competition from other large worldwide plasma products providers, we face competition in local areas from smaller entities.  For example, in Europe, where the industry is highly regulated and health care systems vary from country to country, local entities may have greater knowledge of local health care systems, more established infrastructure and have existing regulatory approvals or a better understanding of the local regulatory process, allowing them to market their products more quickly.  Moreover, plasma-derived therapies generally face competition from non-plasma products and other courses of treatment.

 

In 2008, we were ranked third along with Octapharma in global plasma product sales, each with an 11% share of worldwide sales. According to MRB, our principal plasma derivatives competitors are Baxter International, Inc., CSL Behring, Octapharma AG and Grifols, representing 22%, 18%, 11% and 8%, respectively, of worldwide plasma derivative sales in 2008. We also face competition in specific countries from local non-profit organizations. Currently, product production capacity may be limited by fractionation capacity or purification capacity. Our competitors and we have announced plans to invest in the development of additional fractionation and purification capacity, which should allow production of plasma-derived therapies to meet the pace of demand.

 

With regard to other large plasma product providers and certain key products of the plasma product business, the competition we face, and the principal bases on which we compete, vary from product class to product class.

 

IGIV

 

Since 2002, the majority of sales for IGIV products have shifted from lyophilized to liquid with liquids capturing 29% of the market in 2002 and 80% in 2008. Liquid IGIV products are viewed as preferable because they are ready-to-use (i.e., they require no reconstitution), with generally excellent efficacy and tolerability profiles. Product margin improvement opportunities are being driven by the transition from lower priced lyophilized products to higher priced liquids using manufacturing processes that deliver improved IgG (immune gamma globulin) yields.

 

Grifols has recently received FDA approval for and launched its liquid 10% IGIV Flebogamma 10% DIF. CSL received U.S. regulatory approval for its liquid 10% IGIV and launched its product in 2008. CSL launched Rhophylac for ITP in 2007 and in 2010 received FDA approval for HizentraTM,  Immune Globulin subcutaneous (Human), 20% Liquid, for treating PI. In 2005, Baxter Bioscience launched Gammagard Liquid 10% soon after its purchase of the American Red Cross IGIV product line (Panglobulin and Polygam). Other Baxter efforts in subcutaneous formulation and delivery in flexible containers have also been announced. We expect additional producers of IGIV outside the U.S. to introduce products into the U.S. in the next few years.  For example, Bio Products Laboratory, a not-for-profit organization wholly-owned by the U.K. government, received approval from the FDA for its 5 percent concentration IGIV for PI and Octapharma and Biotest have filed for approval of a 10% liquid IGIV. Octapharma’s IGIV products have been off the market during much of 2010 in the U.S. and other parts of the world. When Octapharma resumes sales of its products, it may discount prices to regain lost market share. Among producers of liquid IGIV products, we intend to compete primarily on the basis of our first-line positioning as a premium liquid IGIV brand with extensive clinical experience and well developed brand loyalty supplemented in the medium term with new indications and formulations. In addition, we believe our use of a caprylate purification process gives our product an advantage over competitors’ products that are purified by harsher solvent processes.

 

Gamunex also faces competition from non-plasma products and other courses of treatments. For example, two RhD hyperimmune globulins for intravenous administration, Cangene’s WinRho SDF and CSL Behring’s Rhophylac, are now approved for use to treat ITP, and GSK and Amgen launched thrombopoietin inhibitors targeting ITP patients in 2008 that may reduce the demand for IGIV to treat this immune disorder.

 

A1PI

 

Until 2003, our A1PI product, Prolastin A1PI, was the only plasma product licensed and sold for therapy of congenital A1PI deficiency-related emphysema in the U.S.  Our share of units sold of Prolastin A1PI in the U.S. was approximately 62% of all A1PI product sales in 2009 according to MRB.  We completed the conversion of our existing U.S. and Canadian Prolastin A1PI patients to our newer product, Prolastin-C A1PI, in 2010.  We compete against Baxter’s Aralast and CSL Behring’s Zemaira, which were launched in 2003.  In addition, Kamada Ltd. launched its liquid A1PI product, Glassia, in 2010 in the U.S.  We expect to compete on the basis of our long clinical history as well as brand name recognition and customer acceptance. In that regard, we believe we have a significant advantage because of our existing direct-to-patient delivery program, Prolastin Direct, which is our primary distribution mode in the U.S. Prolastin Direct health management provides better patient outcomes by reducing the frequency of respiratory exacerbations. Furthermore, Prolastin Direct results in high medication compliance, with over 94% of prescribed doses being administered annually and high patient loyalty with, an annual retention rate of over 96%.  Newer entrants will likely continue to gain some share of product sales for new patients (competitors have also invested in new patient identification efforts), but we have not incurred significant erosion of our existing customer base due to patients’ switching to alternative A1PI products and we have been successful in identifying new patients. We experience continual patient attrition due to the nature of the disease.

 

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In the European Union, we had an 87% share of A1PI sales in 2008 according to MRB data, and have the only licensed A1PI product, other than Grifols, which has marketing authorization for Trypsone A1PI in Spain, and LFB, which sells Alfalastin in France. In 2006, we completed a Mutual Recognition Procedure in the European Union covering countries where over 1,300 symptomatic patients have been identified but have had no access to a licensed A1PI product. Prolastin A1PI is approved in 15 European countries and we are currently established in six of these markets. We have been in reimbursement discussions with a number of these countries since late 2007 and these discussions must be concluded before we can expect to significantly increase sales in these countries.  Our competitors are currently pursuing licensing trials in Europe.

 

New products may reduce demand for plasma-derived A1PI.  In addition to us, Arriva and GTC Biotherapeutics are in the early stages of development for a recombinant form of recA1PI. Although we are not aware of any active clinical trials for a recA1PI product or where the companies are in the development of these products, a successful recA1PI, prior to us developing a similar product, could gain first mover advantage and result in a loss of our A1PI market share.  Similarly, several companies are attempting to develop products which would be substitution threats in the A1PI sector, including retinoic acid, oral synthetic elastase inhibitors and gene therapy.

 

Albumin

 

Among albumin products, competition is generally based on price, given that the products tend to be homogenous. In 2008, we had an approximate 5% share of global albumin and PPF sales. Most of our albumin sales are in the U.S.

 

Koate DVI

 

During the late 1970s and early 1980s, some plasma-derived Factor VIII patients were exposed to HIV and Hepatitis C through contaminated Factor VIII products. In an effort to eliminate the risk of pathogen transmission, scientists developed recombinant or synthetic alternatives to plasma-derived Factor VIII products for the treatment of Hemophilia A and Hemophilia B.

 

Recombinant products have taken a significant share of Factor VIII sales due to their near independence from human plasma. Of the 6.9 billion units of Factor VIII sold in 2008, approximately 58% were recombinant. On a per unit basis, recombinants are priced approximately 88% higher than plasma-derived products and have been adopted more rapidly in the U.S. and industrialized nations. Growth in the demand for plasma-derived Factor VIII is being driven by increased patient identification and treatment in developing countries. The high cost of recombinant products prevents their use in developing markets where plasma derivatives are the standard. We are conducting pre-clinical development of recombinant Factor VIII proteins utilizing advanced protein production technology.

 

Thrombate

 

We have the only plasma-derived brand ATIII licensed in the U.S.  In 2009, a competing product—Atryn, transgenic ATIII (produced in transgenic goats) for the treatment of hereditary antithrombin deficiency was launched in the U.S.

 

Government Regulation

 

Government authorities in the U.S., at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, promotion, storage, advertising, distribution, marketing and export and import of pharmaceutical products such as those we are developing. The process of obtaining regulatory approvals and the subsequent substantial compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

 

United States Government Regulation

 

In the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act and implementing regulations. Failure to comply with the applicable FDA requirements at any time during the product development process, approval process or after approval may result in administrative or judicial sanctions. These sanctions could include the FDA’s imposition of a clinical hold on trials, refusal to approve pending applications, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution, or any combination of these sanctions. Any agency or judicial enforcement action could have a material adverse effect on us.

 

Drugs that are also biological products must also satisfy the requirements of the Public Health Services Act and its implementing regulations. In order for a biological drug product to be legally marketed in the U.S., the product must have a Biologic License Application (BLA), approved by the FDA.

 

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Before approving a BLA, the FDA generally will inspect the facility or the facilities at which the product is manufactured. The FDA will not approve the product if it finds that the facility does not appear to be in cGMP compliance. If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it will either disapprove the application or issue an approvable letter in which it will outline the deficiencies in the BLA and provide the applicant an opportunity to meet with FDA representatives and subsequently to submit additional information or data to address the deficiencies. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

 

The testing and approval processes require substantial time, effort and financial resources, and each may take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the products. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.

 

After regulatory approval of a product is obtained, we are required to comply with a number of post-approval requirements. For example, as a condition of approval of a BLA, the FDA may require post marketing testing and surveillance to monitor the product’s safety or efficacy. In addition, holders of an approved BLA are required to keep extensive records, to report certain adverse reactions and production problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations as well as the manufacturing conditions of approval set forth in the BLA. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP regulations, which imposes certain procedural, substantive and recordkeeping requirements. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

 

Orphan Drug Designation

 

The FDA may grant orphan drug designation to drugs intended to treat a “rare disease or condition” that affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for this type of disease or condition will be recovered from sales in the U.S. for that drug. Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. Orphan drug designation can provide opportunities for grant funding towards clinical trial costs, tax advantages and FDA user-fee benefits. In addition, if a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or a meaningfully different mode of administration. Competitors may receive approval of different drugs or biologics for the indications for which the orphan product has exclusivity. However, if a company with orphan drug exclusivity is not able to supply the market, the FDA could allow another company with the same drug a license to market for said indication.

 

Regulation Outside the United States

 

In addition to regulations in the U.S., we are subject to a variety of regulations in other jurisdictions governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of countries outside the U.S. before we can commence clinical trials or marketing of the product in those countries. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

 

To obtain regulatory approval of a drug under European Union regulatory systems, we may submit marketing authorizations either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. All marketing authorizations for products designated as orphan drugs must be granted in accordance with the centralized procedure. The decentralized procedure provides for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state, known as the reference member state. If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to the public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all member states.

 

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The European Medicines Agency grants orphan drug designation to promote the development of products that may offer therapeutic benefits for life-threatening or chronically debilitating conditions affecting not more than five in 10,000 people in the European Union. In addition, orphan drug designation can be granted if the drug is intended for a life threatening, seriously debilitating or serious and chronic condition in the European Union and that without incentives it is unlikely that sales of the drug in the European Union would be sufficient to justify developing the drug. Orphan drug designation is only available if there is no other satisfactory method approved in the European Union of diagnosing, preventing or treating the condition, or if such a method exists, the proposed orphan drug will be of significant benefit to patients. Orphan drug designation provides opportunities for free protocol assistance, fee reductions for access to the centralized regulatory procedures before and during the first year after marketing authorization and 10 years of market exclusivity following drug approval. Fee reductions are not limited to the first year after authorization for small and medium enterprises. The exclusivity period may be reduced to six years if the designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.

 

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

 

Pharmaceutical Pricing and Reimbursement

 

In the United States and markets in other countries, sales of any products for which we receive regulatory approval for  commercial sale will depend in part on the availability of reimbursement from third-party payors. Third-party payors include government health programs, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Our products may not be considered cost effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. In the U.S., Talecris’ products are reimbursed or purchased under several government programs, including Medicaid, Medicare Parts B and D, the 340B/Public Health Service (PHS) program, and pursuant to our contract with the Department of Veterans Affairs. Medicaid is a joint state and federal government health plan that provides covered outpatient prescription drugs for low-income individuals. Under Medicaid, drug manufacturers pay rebates to the states based on utilization data provided by the states.

 

The rebate amount for most branded drugs was previously equal to a minimum of 15.1% of the Average Manufacturer Price, which is referred to as AMP, or AMP less Best Price, which is referred to as AMP less BP, whichever is greater. The U.S.  healthcare reform legislation that was signed into law in 2010 generally increased the size of the Medicaid rebates paid by drug manufacturers for single source and innovator multiple source (brand name) drugs from a minimum of 15.1% to 23.1% of the AMP, subject to certain exceptions, for example, for certain clotting factors the increase is limited to a minimum of 17.1% of the AMP. For non-innovator multiple source (generic) drugs, the rebate percentage is increased from a minimum of 11% of AMP to 13% of AMP. The legislation also extends the rebate obligation to prescription drugs covered by Medicaid managed care organizations. The increase in required rebates which became effective January 1, 2010 may adversely affect financial performance.

 

Medicare Part B reimburses providers for drugs provided in the outpatient setting based upon Average Sales Price (ASP). Beginning January 1, 2008 federal government reforms to Medicare Part B have reduced the reimbursement rates for IGIV.  At that time  CMS reduced the reimbursement for separately covered outpatient drugs and biologicals, including IGIV in the hospital outpatient setting, from ASP +6% to ASP +5% using 2006 Medicare claims data as a reference for this reduction. CMS reduced this reimbursement further in 2009 to ASP +4% using aggregate hospital cost report data as a reference for the reduction. Additional reductions in Medicare Part B reimbursement rates could restrict access to our products.

 

Medicare Part D is a partial, voluntary prescription drug benefit created by the federal government primarily for persons 65 years old and over. The Part D drug program is administered through private insurers that contract with CMS. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, to obtain payments under this program, we are required to negotiate prices with private insurers operating pursuant to federal program guidance. These prices may be lower than we might otherwise obtain.

 

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

 

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The availability of federal funds to pay for our products under the Medicaid and Medicare Part B programs requires that we extend discounts under the 340B/PHS drug pricing program. The 340B drug pricing program extends discounts to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of certain low income individuals. The PHS price or “ceiling price” cannot exceed the AMP (as reported to CMS under the Medicaid drug rebate program) less the Medicaid unit rebate amount. Talecris has entered into a Pharmaceutical Pricing Agreement (PPA) with the government in which the company has agreed to participate in the 340B/PHS program by charging eligible entities no more than the PHS ceiling price for drugs intended for outpatient use.

 

Beyond the changes made to the 340B program in the 2010 health care reform legislation, further reforms to the 340B program remain a possibility.

 

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

 

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. Federal, state and local governments in the U.S. continue to consider legislation to limit the growth of healthcare costs, including the cost of prescription drugs. Future legislation could limit payments for pharmaceuticals such as the drug candidates that we are developing, including possibly permitting the federal government to negotiate prices directly with manufacturers. In addition, an increasing emphasis on managed care in the U.S. has increased and will continue to increase the pressure on pharmaceutical pricing. For a discussion of certain risks related to reimbursement and pricing, please see “Risk Factors—Risks Related to Healthcare Reform and Reimbursement—We could be adversely affected if government or private third-party payors decrease or otherwise limit the amount, price, scope or other eligibility requirements for reimbursement for the purchasers of our products.”

 

Other

 

Our operations and many of the products we manufacture or sell are subject to extensive regulation by numerous other governmental agencies, both within and outside the United States. In the United States, apart from the agencies discussed above, our facilities, operations, employees, products (their manufacture, sale, import and export) and services are regulated by the Drug Enforcement Agency, the Environmental Protection Agency, the Occupational Health & Safety Administration, the Department of Agriculture, the Department of Labor, Customs and Border Protection, the Department of Commerce, the Department of Treasury, the Department of Justice and others. Furthermore, because we supply products and services to healthcare providers that are reimbursed by federally funded programs such as Medicare, our activities are also subject to regulation by the Centers for Medicare and Medicaid Services and enforcement by the Office of the Inspector General within the Department of Health and Human Services. State agencies also regulate our facilities, operations, employees, products and services within their respective states. Government agencies outside the United States also regulate public health, product registration, manufacturing, environmental conditions, labor, exports, imports and other aspects of the company’s global operations. For further discussion of the impact of regulation on our business, see “Risk Factors—Risks Related to Our Business—Certain of our other business practices are subject to scrutiny by regulatory authorities.”

 

Employees

 

As of December 31, 2010, we had approximately 5,400 full-time employees, none of which are represented by labor unions or covered by collective bargaining agreements.  We consider our relationships with our employees to be good.

 

Available Information

 

Our Internet website address is www.talecris.com.  Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission (SEC) and are available in print to any stockholder who requests a copy.  Additionally, the charters of the standing committees of our board of directors are available on our website under “Investor Relations — Corporate Governance”. Information on our website shall not be deemed incorporated into, or to be a part of, this Annual Report on Form 10-K.

 

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The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Additionally, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.

 

ITEM 1A.  RISK FACTORS

 

Risks Related to Proposed Merger

 

Termination of our proposed merger with Grifols could result in fluctuations in the price of our common stock.

 

On February 14, 2011, our shareholders approved our proposed merger transaction with Grifols.  This transaction has not yet been consummated and may still be terminated, including for failure to obtain anti-trust clearance.  Grifols agreed to provide written notice to the FTC staff at least thirty days prior to closing the transaction and, in any event, not to close the transaction until after 11:59 p.m. on March 20, 2011.  There can be no assurance that Grifols will reach resolution with the FTC by March 20, 2011.  Under the pending merger agreement, if this transaction is not closed by the current “outside date” of March 6, 2011, then under specified circumstances, either Grifols or we may elect to cause the “outside date” to be extended to a date not later than the expiration of Grifols financing for the transaction, or September 6, 2011, whichever is earlier.  Any termination of the transaction could result in stockholders who purchased or held the stock in anticipation of receiving the merger consideration deciding to sell their stock.  If a sufficient number of such stockholders seek to dispose of their stock in the near term, the increased number of shares for sale could materially depress our stock price.

 

Additionally, our stock price recently may have been impacted by the value of the expected merger consideration.  If the merger is terminated, the market may reprice the value of our stock based on other factors.  Such a repricing may result in increased volatility in our stock price and a decline in our stock price.

 

Any decline in our stock price resulting from a termination of the merger could also result in lawsuits by stockholders seeking to recover damages allegedly caused by the price decline or actions leading up to the merger termination.  Any such lawsuits could seek material amounts in damages and could result in significant demands on management’s time and resources.

 

Our proposed merger with Grifols may adversely affect our operations and financial performance.

 

Our proposed merger with Grifols may result in the loss of key employees, suppliers, and customers.  Employees, suppliers or customers who do not support the merger or do not want to work for or with the resulting entity may seek other opportunities as a result of our plans.  Key employees may also decide to leave if the merger is subsequently not consummated.  Additionally, the demand on management’s time and our resources relating to regulatory approvals and integration planning may interfere with management’s day-to-day oversight of operations.  As a result, our operations and financial performance could be adversely affected while we prepare for the merger or in future periods should the merger not occur.

 

Lawsuits have been filed against us and certain of our officers and directors challenging the merger, and any adverse judgment for monetary damages could have a material adverse effect on the combined company’s operations after the transaction.

 

Four purported class action lawsuits have been filed by our stockholders challenging the proposed transaction. Two of the lawsuits were filed in the Court of Chancery of the State of Delaware and have been consolidated under the caption In re Talecris Biotherapeutics Holdings Shareholder Litigation, Consol. C.A. No. 5614-VCL. The other two lawsuits were filed in the Superior Court of the State of North Carolina and are captioned Rubin v. Charpie, et al., No. 10 CV 004507 (North Carolina Superior Court, Durham County), and Kovary v. Talecris Biotherapeutics Holdings Corp., et al., No. 10 CV 011638 (North Carolina Superior Court, Wake County). The lawsuits name as defendants Talecris, the members of the Talecris Board of Directors, Grifols, S.A. and its subsidiary, Grifols Inc., and, in the Delaware consolidated action, Talecris Holdings and Stream Merger Sub, Inc. The two North Carolina actions have been stayed.

 

All of the lawsuits allege that the individual defendants (and, in the consolidated Delaware action, Talecris Holdings) breached their fiduciary duties to our stockholders in connection with the proposed transaction with Grifols, and that Grifols (and, in one of the North Carolina cases, Talecris, and in the Delaware action, Grifols Inc.) aided and abetted those breaches. The Delaware complaint alleges, among other things, that the consideration offered to Talecris stockholders pursuant to the proposed transaction is inadequate; that our board of directors failed to take steps to maximize stockholder value; that our IPO and debt refinancing in 2009 were intended to facilitate a sale of Talecris; that Cerberus and Talecris Holdings arranged the proposed merger for the benefit of Cerberus, without regard to the interests of other stockholders; that the voting agreements impermissibly lock up the transaction; and that the merger agreement contains terms, including a termination fee, that favor Grifols and deter alternative bids. The Delaware complaint further alleges that the preliminary Form F-4 filed on August 10, 2010 contains material misstatements and/or omissions, including with respect to the availability of appraisal rights in the merger; the purpose and effects of the Virginia reincorporation merger; the antitrust risks of the proposed transaction; the financial advisors’ analyses regarding the Grifols’ non-voting stock to be issued in connection with the transaction; and the fees to be paid to Morgan Stanley by us

 

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and Grifols in connection with the proposed transaction. The Delaware complaint also alleges that our stockholders are entitled to appraisal rights in connection with the transaction pursuant to Section 262 of the Delaware General Corporation Law, and that the transaction violates the Delaware General Corporation Law by failing to provide such rights. The Delaware action seeks equitable and injunctive relief, including a determination that the stockholders have appraisal rights in connection with the merger, and damages. On October 29, 2010, the parties to the Delaware litigation entered into a Memorandum of Understanding, or MOU, reflecting an agreement in principle to settle that litigation. The MOU provides, among other things, for the provision of appraisal rights in accordance with DGCL 262 in connection with the transaction as described at pages 135-137 of the MOU; for an increase in the merger consideration by an additional 500,000 shares of Grifols non-voting shares to holders of our common stock other than our specified affiliated stockholders as described at pages 144-145 of the MOU; and for certain additional disclosures provided herein. The MOU also provides for a dismissal of the action with prejudice and a release of claims. On January 21, 2011, the parties executed a formal Stipulation of Settlement documenting the agreement set forth in the MOU, and on January 25, 2011, the Delaware court entered an order preliminarily approving the settlement.  The settlement remains subject, among other things, to notice to the class, final court approval and consummation of the transaction.

 

One of the conditions to the completion of the transaction is that no temporary restraining order, or preliminary or permanent injunction, or other judgment or order issued by a court or other governmental entity that prohibits or prevents the completion of the Talecris-Grifols merger shall be in effect. A preliminary injunction could delay or jeopardize the completion of the transaction, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the transaction. An adverse judgment for monetary damages could have a material adverse effect on the operations of the combined company after the transaction.

 

Our Merger Agreement with Grifols may prevent us from consummating desirable business combinations.

 

As long as our merger agreement with Grifols is in place, we are prohibited from doing any material acquisition or business combinations without the consent Grifols. This may cause us to lose opportunities that would otherwise benefit our business.

 

Risks Related to the Healthcare Industry

 

We could be adversely affected by changes in the legal requirements for the market for medical care or healthcare coverage in the United States resulting from the implementation of 2010 healthcare reform legislation, regulatory rule making, or the enactment of additional legislation under consideration.

 

Substantial changes are being made to the current system for paying for healthcare in the U.S., including changes made in order to extend medical benefits to those who currently lack insurance coverage. Approximately 47 million Americans currently lack health insurance of any kind.  While a provision in the health care reform legislation requiring those without insurance to pay a penalty was recently declared unconstitutional by two federal district courts, other federal district courts have upheld this provision, and other litigation relating to the legislation is pending. Provisions of the legislation that could increase coverage have not been affected.  Extending coverage to such a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payors and government programs (Medicare, Medicaid and State Children’s Health Insurance Program), creation of state-sponsored healthcare insurance exchanges, as well as other changes. Restructuring the coverage of medical care in the U.S. could impact the reimbursement for prescribed drugs and biopharmaceuticals, such as those produced and marketed by us. If reimbursement for these products is substantially reduced in the future, or rebate obligations associated with them are substantially increased (discussed in more detail below), our business could be materially impacted.

 

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

 

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All of the changes discussed above, and others passed in this legislation, are subject to rule-making and implementation timelines that extend for several years.  This uncertainty limits our ability to forecast changes that may occur in the future and to manage our business accordingly.  In addition, beginning in 2012, the new law may require us to issue Internal Revenue Service Form 1099 to plasma donors whose remuneration equals or exceeds six hundred dollars annually.  The cost of implementing this requirement, as well as its potential impact on plasma donations, is unknown at this time.

 

We could be adversely affected by other provisions of recently passed United States healthcare reform legislation.

 

In the United States, our products are reimbursed or purchased under several government programs, including, Medicaid, Medicare Parts B and D, the 340B/PHS program, and pursuant to contracts with the Department of Veterans Affairs. In order for a drug manufacturer’s products to be reimbursed by federal funding under Medicaid, the manufacturer must enter into a Medicaid drug rebate agreement with the Secretary of the United States Department of Health and Human Services, and pay certain rebates to the states based on utilization data provided by each state to the manufacturer and to the Centers for Medicare & Medicaid Services, which is referred to as CMS, and pricing data provided by the manufacturer to the federal government. The states have been required to share this savings with the federal government. The rebate amount for most branded drugs was previously equal to a minimum of 15.1% of the Average Manufacturer Price, which is referred to as AMP, or AMP less Best Price, which is referred to as AMP less BP, whichever is greater. The recently enacted healthcare reform legislation generally increases the size of the Medicaid rebates paid by drug manufacturers for single source and innovator multiple source (brand name) drugs from a minimum of 15.1% to 23.1% of the AMP, subject to certain exceptions, for example, for certain clotting factors the increase is limited to a minimum of 17.1% of the AMP. For non-innovator multiple source (generic) drugs, the rebate percentage is increased from a minimum of 11% of AMP to 13% of AMP. The legislation also extends the rebate obligation to prescription drugs covered by Medicaid managed care organizations. The increase in required rebates, which became effective January 1, 2010, may adversely affect our financial performance.

 

In addition, many states have implemented special Medicaid rebate programs, approved by CMS. These programs often involve drug manufacturers paying supplemental rebates to the states pursuant to a supplemental rebate agreement between the drug manufacturer and the state. The supplemental rebates are typically a condition to the manufacturer obtaining “preferred status” for its drugs on the state’s Medicaid drug formularies and avoiding otherwise mandatory prior authorization by Medicaid officials as a condition to any Medicaid recipient using the manufacturer’s drugs. As with standard Medicaid rebates, the states have shared the savings from supplemental rebate programs with the federal government. However, under the recently enacted healthcare reform legislation, the savings realized from the increased rebate amounts, described above (e.g., the 8% increase in the minimum brand name drug rebate), will be retained entirely by the federal government, and not shared with the states. As a result, states with supplemental rebate programs that, for example, have already increased brand name drug rebates by up to 8%, may effectively lose the portion of the savings they previously shared with the federal government. While the increase in rebates from Medicaid managed care organizations may mitigate this issue for the states, this is not certain, and states with supplemental rebate arrangements may seek to increase supplemental rebate requirements in order to address this, thus affecting financial performance.

 

Medicare Part D is a partial, voluntary prescription drug benefit created by the United States federal government primarily for persons 65 years old and over. The Part D drug program is administered through private insurers that contract with CMS. To obtain payments under this program, we are required to negotiate prices with private insurers operating pursuant to federal program guidance. These prices may be lower than might otherwise be obtained. In addition, beginning in 2011, the recently enacted healthcare reform legislation generally requires drug manufacturers to provide 50% savings for brand name drugs and biologics provided to Medicare Part D beneficiaries who are in the “donut hole” (or a gap in Medicare Part D coverage for beneficiaries who have expended certain amounts for drugs). The rebate requirement could adversely affect financial performance, particularly if contracts with Part D plans cannot be favorably renegotiated.

 

The availability of federal funds to pay for our products under the United States Medicaid and Medicare Part B programs requires that we extend discounts under the 340B/PHS program. The 340B/PHS program extends discounts to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of certain low income individuals. The PHS price (or “ceiling price”) cannot exceed the AMP (as reported to CMS under the Medicaid drug rebate program) less the Medicaid unit rebate amount. We have entered into a Pharmaceutical Pricing Agreement with the government in which we have agreed to participate in the 340B/PHS program by charging eligible entities no more than the PHS ceiling price for drugs intended for outpatient use. Recently enacted healthcare reform legislation, as amended by a technical corrections bill signed into law on December 15, 2010, imposes a “must sell” obligation on manufacturers so that they must offer for sale their products to eligible entities at legally-mandated discount prices and expands the number of qualified 340B entities eligible to purchase products for outpatient use.

 

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Beyond the changes made to the 340B program in the 2010 health care reform legislation, further reforms to the 340B program remain a possibility, which could have a material negative impact on our sales and margin given the significant price discount for 340B/PHS products as compared to our commercial prices.

 

The recently enacted United States healthcare reform legislation imposes a fee on manufacturers and importers of branded drugs and biologics based on their sales to United States government health programs. The fee will first be imposed for 2011 sales. The aggregate fee imposed on all covered entities is $2.5 billion for 2011, $2.8 billion for 2012, $2.8 billion for 2013, $3 billion for 2014, $3 billion for 2015, $3 billion for 2016, $4 billion for 2017, $4.1 billion for 2018 and $2.8 billion for 2019 and following years. The aggregate fee will be allocated among applicable manufacturers and importers based on their relative sales to government health programs, with the caveat that entities with lower sales will have their sales counted at less than 100% in allocating responsibility for the fee. This new fee will increase our costs. It is not clear that we will be able to pass this increased cost on to our customers.

 

We could be adversely affected if other government or private third-party payors decrease or otherwise limit the amount, price, scope or other eligibility requirements for reimbursement for the purchasers of our products.

 

We have experienced and expect to continue to experience pricing pressures on our current products and pipeline products from initiatives aimed at reducing healthcare costs by government and private third-party payors, the increasing influence of managed care organizations, and regulatory proposals, both in the United States and in foreign markets.  Recently enacted healthcare reform in the United States is likely to increase the pressure.  This pressure may include the effect of such healthcare reform changes as the introduction of a biosimilar pathway (which will permit companies to obtain FDA approval of generic versions of existing biologic based upon lessor showings of safety and efficacy than is required for the pioneer biologic), the redefinition of the term “single source” product, which plays a key role in determining reimbursements under the Medicare Part B program, and changes to the 340B Public Health Service (PHS) drug pricing program imposing a “must sell” obligation on manufacturers so that they must offer for sale their products to eligible entities at legally-mandated discount prices.  Additional legislative changes to current pricing rules are possible.  We cannot predict which additional changes, if any, will eventually be adopted, or their impact on us.  Certain changes could have a materially adverse impact on our financial performance.  In addition, certain pharmaceutical products, such as plasma-derived products, are subject to price controls in countries within the European Union. Price controls are expanding beyond those already imposed by governmental authorities in some of the countries where we operate.  The existence of direct and indirect price controls over our products have affected, and may continue to materially adversely affect, our ability to maintain or increase gross margins.

 

In the United States, group purchasing organizations, which are referred to as GPOs, which are entities that act as purchasing intermediaries for hospitals and physicians, constitute the largest marketing channel. The United States GPO channel is dominated by a small number of companies. The GPOs’ large market position and their substantial purchasing volume provide them with significant negotiating power, resulting in price pressures for manufacturers like us. In addition, in the United States, health insurance providers have been setting a cap on the amounts that they will reimburse for certain products. This could have a negative effect on the price that we may be able to charge for our products and could function as an indirect nongovernmental price control.

 

If payors reduce the amount of reimbursement for a product, it may cause groups or individuals dispensing the product to discontinue administration of the product, to administer lower doses, to substitute lower cost products or to seek additional price related concessions. These actions could have a negative effect on our financial results, particularly in cases where we have a product that commands a premium price in the marketplace, or where changes in reimbursement induce a shift in the site of treatment.  For example, beginning in 2005, the Medicare drug reimbursement methodology for physician and hospital outpatient payment schedules changed to Average Sales Price (ASP), which is referred to as ASP+6%. This payment was based on a volume-weighted average of all brands under a common billing code. Medicare payments to physicians between the fourth quarter of 2004 and the first quarter of 2005 dropped 14% for both the powder and liquid forms of intravenous immune globulin, which is referred to as IGIV. Medicare payments to hospitals fell 45% for powder IGIV and 30% for liquid IGIV between the fourth quarter of 2005 and the first quarter of 2006. The Medicare reimbursement changes resulted in the shift of a significant number of Medicare IGIV patients to hospitals from physicians’ offices beginning in 2005 as many physicians could no longer recover their costs of obtaining and administering IGIV in their offices and clinics. After 2006, some hospitals reportedly began to refuse providing IGIV to Medicare patients due to reimbursement rates that were below their acquisition costs. While subsequent changes have improved some of these Medicare reimbursement issues, on January 1, 2008, the CMS reduced the reimbursement for separately covered drugs and biologicals, including IGIV, in the hospital outpatient setting from ASP +6% to ASP +5% using 2006 Medicare claims data as a reference for this reduction. In addition, CMS reduced a hospital add-on payment from $75 to $38 per infusion. Beginning January 1, 2009, CMS further reduced the hospital outpatient reimbursement for separately covered outpatient drugs, including IGIV, to ASP +4%, and eliminated the add-on payment.

 

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Physicians frequently prescribe legally available therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. These unapproved (also known as “off-label”) uses are common across medical specialties, and physicians may believe such off-label uses constitute the preferred treatment or treatment of last resort for many patients in varied circumstances. We believe that a significant portion of our IGIV volume may be used to fill physician prescriptions for indications not approved by the FDA or similar regulatory authorities. If reimbursement for off-label uses of our products, including IGIV, is reduced or eliminated by Medicare or other third-party payors, including those in the United States or the European Union, we could be adversely affected.

 

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

 

Healthcare reform legislation established and provided significant funding for a Patient-Centered Outcomes Research Institute to coordinate and fund Comparative Effectiveness Research (CER). While the stated intent of CER is to develop information to guide providers to the most efficacious therapies, outcomes of CER could influence the reimbursement or coverage for therapies that are determined to be less cost-effective than others. Should any of our products be determined to be less cost-effective than alternative therapies, the levels of reimbursement for these products, or the willingness to reimburse at all, could be impacted, which could materially impact our financial results.

 

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

 

The use of AWP and WAC as pricing benchmarks has been subject to legal challenge by both government officials and private citizens, often based on claims that the benchmarks were used in a misleading manner, thus defrauding consumers and third-party payors. It is possible that we, as a reporter of WAC, could be challenged on this basis. Additionally, the settlement of class action litigation against First DataBank and others has resulted in the downward revision of certain reported AWP listings (to a level of 20% over WAC). Issues regarding AWP have contributed to suggestions to eliminate its use as a drug pricing benchmark.

 

Risks Related to Our Business

 

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

 

We rely heavily upon the sales of two of our products: Gamunex-C/Gamunex IGIV and Prolastin/Prolastin-C A1PI. Sales of Gamunex-C/Gamunex IGIV and Prolastin/Prolastin-C A1PI together comprised approximately 76% and 75% of our total net revenue for the years ended December 31, 2010 and 2009, respectively. Sales of Gamunex IGIV comprised approximately half of our total net revenue in each of these years. If either Gamunex-C/Gamunex IGIV or Prolastin/Prolastin-C A1PI lost significant sales, or were substantially or completely displaced in the market, we would lose a significant and material source of our net revenue. Similarly, if either Gamunex-C/Gamunex IGIV or Prolastin/Prolastin-C A1PI were to become the subject of litigation and/or an adverse governmental ruling requiring us to cease sales of either product, our business would be adversely affected.

 

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A recent review of two previously conducted studies of the safety and effectiveness of alpha-1 antitrypsin, sold by us as Prolastin, was conducted by the Nordic Cochrane Centre at Rigshospitalet in Copenhagen, Denmark. The review of these older studies concluded that there was no statistically meaningful difference between treatment with intravenous alpha-1 antitrypsin or a placebo. While we believe that the Nordic Cochrane Centre review is flawed, the review could have an adverse affect on sales of Prolastin and the prospects of obtaining future reimbursement approvals in Europe. Additionally, the FDA recently objected to promotional claims in marketing materials for Prolastin as inconsistent with the product’s approved package insert because they were based on data which the FDA considered insufficient to demonstrate the long-term effects derived from chronic augmentation therapy of individuals with alpha-1 antitrypsin deficiency.

 

We rely heavily upon sales from the U.S. region, which comprised approximately 69% and 66% of our net revenue for the years ended December 31, 2010 and 2009, respectively. If our U.S. sales were significantly impacted by either material changes to government or private payor reimbursement, by other regulatory developments, or by competition, then our business would be adversely affected.

 

Our manufacturing processes are complex and involve biological intermediates that are susceptible to contamination and variations in yield.

 

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

 

The manufacture of our plasma products is an extremely complex process of fractionation, purification, filling and finishing. Our products can become non-releasable or otherwise fail to meet our stringent specifications through a failure of one or more of our product testing, manufacturing, process controls, and quality assurance processes. We may detect instances in which an unreleased product was produced without adherence to our manufacturing procedures or plasma used in our production process was not collected or stored in a compliant manner consistent with our current Good Manufacturing Practices (cGMP) or other regulations. Such an event of non-compliance would likely result in our determination that the impacted products should not be released and therefore should be destroyed. For example, a malfunction of the Gamunex IGIV chromatography system just prior to our formation transaction in 2005 resulted in the processing of IGIV products containing elevated levels of antibodies for over one month. Our total cost related to this incident, including the costs of product loss, investigation, testing, disposal, and other remedial actions, was approximately $41.6 million.  We subsequently recovered from Bayer $10.7 million through our 2005 working capital adjustment and $9.0 million in the first quarter of 2007 through a settlement. As an additional example, our 2010 inventory impairment provisions included $24.6 million of provisions for raw materials and work in process inventories related to a Gamunex-C/Gamunex IGIV production issue. We believe we have identified the cause of the issue and have implemented appropriate remediation steps.

 

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

 

While we expect to write off small amounts of work-in-progress in the ordinary course of business due to the complex nature of plasma, our processes and our products, unanticipated events may lead to write-offs and other costs materially in excess of our expectations. We have in the past had issues with product quality and purity that have caused us to write off the value of the product. Such write-offs and other costs could cause material fluctuations in our profitability. Furthermore, contamination of our products could cause investors, consumers, or other third parties with whom we conduct business to lose confidence in the reliability of our manufacturing procedures, which could adversely affect our sales and profits. In addition, faulty or contaminated products that are unknowingly distributed could result in patient harm, threaten the reputation of our products and expose us to product liability damages and claims from companies for whom we do contract manufacturing.

 

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

 

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Our business requires substantial capital to operate and grow and to achieve our strategy of realizing increased operating leverage, including the completion of several large capital projects.

 

We intend to undertake several large capital projects to maintain compliance with cGMP and expand capacity.  These projects are required for us to expand our production capabilities and achieve our strategy of realizing operating leverage. Capital projects of this magnitude involve technology and project management risks. Technologies that have worked well in a laboratory or in a pilot plant may cost more or not perform as well, or at all, in full scale operations. Projects may run over budget or be delayed. We cannot be certain that these projects will be completed in a timely manner or that we will maintain our compliance with cGMP, and we may need to spend additional amounts to achieve compliance. Additionally, by the time these multi-year projects are completed, market conditions may differ significantly from our assumptions regarding the number of competitors, customer demand, alternative therapies, reimbursement and public policy, and as a result capital returns might not be realized.

 

We began a spending program in 2010 to obtain FDA approval for new indications for existing products, to enhance the facilities in which and processes by which we manufacture existing products, to develop new product delivery mechanisms for existing products, to strengthen our plasma collection system and to develop innovative product additions. We anticipate spending substantial sums in capital and operating expense for this program over the next five years. We face a number of obstacles to successfully converting these efforts into profitable products including but not limited to the successful development of a experimental product for use in clinical trials, the design of clinical study protocols acceptable to FDA, the successful outcome of clinical trials, our ability to scale our manufacturing processes to produce commercial quantities or successfully transition technology, FDA approval of our product or process and our ability to successfully market an approved product with our new process or new indication.

 

We expect to operate at or near our fractionation capacity over the next few years depending upon the demand for our products, the availability of source plasma, the impact of yield variability, the potential impact of inventory impairments, and normal production shut-downs, among other factors. We plan to utilize most of our available fractionation capacity in the near term, which may result in increased inventory levels in order to attempt to maintain pace with projected future growth in product demand, although we have not been successful in building excess finished goods inventories to date as a result of the factors previously mentioned. Consequently, any disruption in meeting our fractionation and purification plans would most likely result in lower revenue, gross profit, net income, and operating cash flows as well as lower than planned growth given our fractionation and purification constraints. Our fractionation constraints would likely preclude us from participating in greater than estimated overall market  demand or higher demand for Gamunex-C/Gamunex IGIV. In response to our capacity constraints, we have embarked on a substantial capital plan, which we currently estimate to be in the range of $750 million to $800 million on a cumulative basis over the next five years through 2015, excluding capitalized interest. The amount and timing of future capital spending is dependent upon a number of factors, including market conditions, regulatory requirements, and the extent and timing of particular projects, among other things. Given our expectations that we will need fractionation capacity in the near term, our ability to grow our business is dependent upon the timely completion of these facilities and obtaining the requisite regulatory approvals.

 

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

 

Our ability to continue manufacturing and distributing our products depends on our and our suppliers’ continued adherence to cGMP regulations.

 

The manufacturing processes for our products are governed by detailed written procedures and federal regulations that set forth cGMP requirements for blood and blood products. Our Quality Operations unit monitors compliance with these procedures and regulations, and the conformance of materials, manufacturing intermediates, and final products to their specifications. Failure to adhere to established procedures or regulations, or to meet a specification, could require that a product or material be rejected and destroyed. There are relatively few opportunities for us to rework, reprocess or salvage nonconforming materials or products.

 

Our adherence to cGMP regulations and the effectiveness of our quality systems are periodically assessed through inspections of our facilities by the FDA in the U.S. and analogous regulatory authorities in other countries. We could be cited for deficiencies in the future. If deficiencies are noted during an inspection, we must take action to correct those deficiencies and to demonstrate to the regulatory authorities that our corrections have been effective. If serious deficiencies are noted or if we are unable to prevent recurrences, we may have to recall product or suspend operations until appropriate measures can be implemented. We are required to report some deviations from procedures to the FDA. Even if we determine that the deviations were not

 

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material, the FDA could require us to take similar measures. Since cGMP reflects ever evolving standards, we regularly need to update our manufacturing processes and procedures to comply with cGMP. These changes may cause us to incur costs without improving our profitability or the safety of our products. For example, more sensitive testing assays may be required (if and when they become available) or existing procedures or processes may require revalidation, all of which may be costly and time-consuming and could delay or prevent the manufacturing of a product or launch of a new product.

 

Changes in manufacturing processes, including a change in the location where the product is manufactured or a change of a third-party manufacturer, may require prior FDA review and approval or revalidation of the manufacturing process and procedures in accordance with cGMP. There may be comparable foreign requirements. For example, we have completed the process of transferring the manufacture of our Thrombate III product from Bayer’s Berkeley, California, biologics manufacturing facility to our Clayton manufacturing facility that we are currently validating with regulatory approval expected in 2012. We cannot guarantee that we have a sufficient inventory of intermediates and finished product to meet demand until the new facility is approved and manufacturing can recommence. To validate our manufacturing processes and procedures following completion of upgraded facilities, we must demonstrate that the processes and procedures at the upgraded facilities are comparable to those currently in place at Bayer’s facilities. In order to provide such a comparative analysis, both the Bayer facility processes and the processes that we expect to be implemented at our upgraded facilities must comply with the regulatory standards prevailing at the time that our expected upgrade is completed.  If the FDA does not approve the transfer, our ability to market our Thrombate III product will be seriously impaired or eliminated. In addition, regulatory requirements, including cGMP regulations, continually evolve. Failure to adjust our operations to conform to new standards as established and interpreted by applicable regulatory authorities would create a compliance risk that could impair our ability to sustain normal operations.

 

A number of inspections by the FDA and foreign control authorities, including the German Health Authority (GHA), have been conducted or are expected at our plasma collection centers in 2011. Some of these inspections are of licensed centers to assess ongoing compliance with cGMP, while others are of our currently unlicensed centers as a prerequisite to final approval of the centers’ license applications. If the FDA (or other authorities) finds these centers not to be in compliance, our ongoing operations and/or plans to expand plasma collections would be adversely affected.

 

We must continually monitor the performance of our products once approved and marketed for signs that their use may elicit serious and unexpected side effects, which could jeopardize our ability to continue marketing the products. We may also be required to conduct post-approval clinical trials as a condition to licensing a product.

 

As for all pharmaceutical products, the use of our products sometimes produces undesirable side effects or adverse reactions or events (referred to cumulatively as “adverse events”). For the most part, these adverse events are known, are expected to occur at some frequency and are described in the products’ labeling.  Known side effects described in the labeling for our products are as follows:  the use of Plasbumin 5%, 20%, 25% sometimes produce the following adverse events: allergic manifestations including urticaria, chills, fever and changes in respiration, pulse and blood pressure; the use of Plasmanate sometimes produces the following adverse events: hypotension, flushing, urticaria, back pain, nausea, headache; the use of Koate DVI sometimes produces the following adverse events: allergic type reactions; tingling in the arm, ear and face; blurred vision, headache, nausea, stomach ache and jittery feeling; the use of Gamunex sometimes produces the following adverse events: nausea, vomiting, asthenia, pyrexia, rigors, injection site reaction, allergic/anaphylactic reaction, aseptic meningitis, arthralgia, back pain, dizziness, headache, rash, pruritus, urticaria, hemolysis/hemolytic anemia;  the use of Prolastin/Prolastin-C sometimes produces the following adverse events: dyspnea, tachycardia, rash, chest pain, chills, influenza-like symptons, hypersensitivity, hypotension, hypertension;  the use of Thrombate III sometimes produces the following adverse events: dizziness, chest tightness, nausea, foul taste in mouth, chills, cramps, shortness of breath, chest pain, filmy vision, light-headedness, gastrointestinal fullness, hives, fever, hematoma formation; the use of HyperHEP B sometimes produces the following adverse events: local pain and tenderness at the injection site, urticaria, angioedema, anaphylactic reactions; the use of HyperRAB sometimes produces the following adverse events: soreness at injection site, mild temperature elevation, sensitivity to repeated injections in immunoglobulin-deficient patients, angioneurotic edema, skin rash, nephritic syndrome, anaphylactic shock; the use of HyperTET sometimes produces the following adverse events: soreness at injection site, sensitization to repeated injections of immunoglobulin, slight temperature elevation, angioneurotic edema, nephritic syndrome, anaphylactic shock; the use of HyperRHO sometimes produces the following adverse events: soreness at injection site, sensitization to repeated injections of immunoglobulin, slight temperature elevation, elevated bilirubin; and the use of GamaSTAN sometimes produces the following adverse events: local pain and injection site soreness, angioedema, anaphylaxis, and urticaria. When adverse events are reported to us, we investigate each event and circumstances surrounding it to determine whether it was caused by our product and whether it implies a previously unrecognized safety issue exists. Periodically, we report summaries of these events to the applicable regulatory authorities.

 

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In addition, the use of our products may be associated with serious and unexpected adverse events, or with less serious reactions at a greater than expected frequency. This may be especially true when our products are used in critically ill patient populations. When these unexpected events are reported to us, we must make a thorough investigation to determine causality and implications for product safety. These events must also be specifically reported to the applicable regulatory authorities. If our evaluation concludes, or regulatory authorities perceive, that there is an unreasonable risk associated with the product, we would be obligated to withdraw the impacted lot(s) of that product. Furthermore, an unexpected adverse event of a new product could be recognized only after extensive use of the product, which could expose us to product liability risks, enforcement action by regulatory authorities and damage to our reputation and public image.

 

We have received reports that some Gamunex patients have experienced transient hemolysis and/or hemolytic anemia, which are known potential side effects for this class of drugs. Since 2005, a disproportionate number of these reports have been received from Canada, where our product accounted for 80% of all IGIV distributed in 2008. The Canadian product labeling was updated in 2005 after these hemolysis events were first reported to Health Canada.

 

Subsequently, Talecris provided annual updates on these events to Health Canada from 2006 to 2008, but no further action was recommended by the Canadian regulators. A serious adverse finding concerning the risk of hemolysis by any regulatory authority for intravenous immune globulin products in general, or Gamunex in particular, could adversely affect our business and financial results.

 

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

 

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

 

Our products face increased competition.

 

Recently, certain of our products have experienced increased competition. Until 2004, we were one of two North American suppliers with an approved liquid IGIV product. In 2004, Grifols launched Flebogamma® 5% liquid IGIV and Octapharma launched Octagam® 5% liquid IGIV. In 2005, Baxter’s Gammagard® 10% liquid IGIV was launched. In 2007 CSL Behring received approval for Privigen® 10% liquid IGIV. Privigen® was launched in the U.S. in 2008. In 2010, CSL Behring received FDA approval and launched Hizentra Immune Globulin Subcutaneous (Human) 20% liquid. Also in 2010, Grifols received FDA approval and launched its 10% liquid IGIV, Flebogamma 10% DIF.We expect Octapharma to launch a 10% liquid IGIV product in the U.S. Omrix and Biotest are both seeking approval for liquid IGIV products in the U.S., which, if approved, will further increase competition among liquid IGIV products. Additionally, Bio Products Laboratory received approval from the FDA for its 5% concentration IGIV for PI. As competition has increased, competitors have discounted the price of IGIV products.  Furthermore, many customers are increasingly more price sensitive regarding IGIV products.  Octapharma’s IGIV products have been off the market during much of 2010 in the U.S. and other parts of the world.  When Octapharma resumes sales of its products, it may discount prices to regain lost market share.  If customers demand lower priced products of competitors, we may lose sales or be forced to lower our prices.

 

In Canada, we have been the “supplier of record” since the 1980s.  We have experienced, and expect to continue to experience, annual volume declines in Canada due to Canadian Blood Services objective to have multiple sources of supply, which has impacted and will continue to impact our overall IGIV growth.  Canadian Blood Services may further reduce volumes to contract minimums and Hema Quebec may adopt a similar strategy.

 

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Until December 2002, our A1PI product, Prolastin A1PI, was the only plasma product licensed and marketed for therapy of congenital A1PI deficiency-related emphysema in the U.S. Accordingly, until that time, Prolastin A1PI had virtually 100% market share in its category. In December 2002 and July 2003, predecessors of Baxter and CSL Behring received licenses for Aralast and Zemaira, respectively, which were launched in the U.S. in 2003, and Grifols received marketing authorization for Trypsone in Spain in 2003. Due in part to our inability to fully meet demand for A1PI product, as well as patient losses due to the nature of the disease, our share of sales has dropped to approximately 62% in 2009 in the United States and 74% in 2008 globally according to the Marketing Research Bureau, which is referred to as MRB. Competitors may increase their sales, lower their prices or change their distribution model, which may harm our product sales and financial condition. Also, if the attrition rate of our Prolastin/Prolastin-C A1PI patient base accelerates faster than we have forecast, we would have fewer patients and lower sales volume. In addition, Kamada Ltd. received approval of its BLA for its liquid A1PI product, Glassia, on July 1, 2010. In the European Union, we have an 87% share of A1PI sales in 2008 according to MRB data, and have the only licensed A1PI product, other than Grifols, which has marketing authorization for Trypsone A1PI in Spain, and LFB, which sells Alfalastin in France. Our competitors are currently pursuing licensing trials in Europe. Should our competitors receive approvals in the European Union sooner than expected, our unit volumes and share of sales will be impacted.

 

New products may reduce demand for plasma-derived A1PI. A recombinant form of A1PI (recA1PI) could gain market share through the elimination of the risk of plasma-borne pathogens, or through a reduced price permitted by significantly decreased costs (because the recA1PI would not be sourced from plasma). In addition to us, Arriva and GTC Biotherapeutics are in the early stages of development for a recombinant form of recA1PI. Although we are not aware of any active clinical trials for a recA1PI product, a successful recA1PI, prior to us developing a similar product, could gain first mover advantage and result in a loss of our A1PI market share. If a new formulation of A1PI is developed that has a significantly improved rate or method of administration, such as aerosol inhalation, the market share of Prolastin/Prolastin-C A1PI could be negatively impacted. Similarly, several companies are attempting to develop products which would be substitution threats in the A1PI sector, including retinoic acid, oral synthetic elastase inhibitors and gene therapy. While these products are all in early stages of development, the potential for successful product development and launch cannot be ruled out.

 

In addition, our plasma-derived therapeutics face competition from non-plasma products and other courses of treatments. For example, two RhD hyperimmune globulins for intravenous administration, Cangene’s WinRho SDF and CSL Behring’s Rhophylac, are now approved for use to treat ITP, and GSK and Amgen launched thrombopoietin inhibitors targeting ITP patients in 2008 that may reduce the demand for IGIV to treat this immune disorder. There is also a risk that indications for which our products are now used will be susceptible to new treatments, such as small molecules, monoclonal or recombinant products. Recombinant Factor VIII product competes with our own plasma-derived product in the treatment of Hemophilia A and is perceived by many experts to have lower risks of disease transmission. Additional recombinant products or the use of monoclonal antibodies, small molecules or stem cell transplantations could compete with our products and reduce the demand for our products. Crucell and Sanofi Pasteur have completed Phase II clinical trials for a monoclonal rabies product to compete with our rabies hyperimmune product. If successful, we estimate that the monoclonal product could take a significant portion of the rabies market in years subsequent to its introduction. Also, in February 2009, GTC Biotherapeutics obtained FDA approval of a competitive ATIII product for the treatment of hereditary antithrombin deficiency, which is derived from the milk of transgenic goats. This product now directly competes with our product, Thrombate III (Human), which had been the only FDA approved product.

 

We do not currently sell any recombinant products. Although we are attempting to develop recombinant versions of Plasmin, A1PI and Factor VIII, we cannot be certain that any of these products will ever be approved or commercialized. As a result, our product offerings may remain plasma-derived, even if our competitors offer recombinant products.

 

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

 

The opening of new plasma collection centers, which take up to several years to reach efficient production capacity, and the creation of a corporate infrastructure to support our vertical integration strategy have historically resulted in our per liter cost of plasma being higher than many of our larger competitors.

 

In order to continue to improve the cost per liter of plasma, we will need to significantly increase production levels to leverage fixed costs, improve operational efficiency, reduce overall fixed costs, reduce variable costs such as donor fees or a combination of some or all of the foregoing. Our inability to significantly reduce the cost per liter of plasma will result in higher costs of operations, lower margins and lower cash flow than our competitors. If by attempting to reduce these costs, we adversely affect compliance with cGMP, we may be required to write-off plasma and any intermediates and products manufactured with non-compliant plasma and we may face shortages of plasma needed to manufacture our products.

 

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We would become supply-constrained and our financial performance would suffer if we could not obtain adequate quantities of FDA-approved source plasma.

 

In order for plasma to be used in the manufacturing of our products, the individual centers at which the plasma is collected must be licensed by the FDA, and approved by the regulatory authorities, such as the GHA, of those countries in which we sell our products. When a new plasma center is opened, and on an ongoing basis after licensure, it must be inspected by the FDA and GHA for compliance with cGMP and other regulatory requirements. An unsatisfactory inspection could prevent a new center from being licensed or risk the suspension or revocation of an existing license.

 

In order to maintain a plasma center’s license, its operations must continue to conform to cGMP and other regulatory requirements. In the event that we determine that plasma was not collected in compliance with cGMP, we may be unable to use and may ultimately destroy plasma collected from that center, which would be recorded as a charge to cost of goods. Additionally, if non-compliance in the plasma collection process is identified after the impacted plasma has been pooled with compliant plasma from other sources, entire plasma pools, in-process intermediate materials and final products could be impacted. Consequently, we could experience significant inventory impairment provisions and write-offs which could adversely affect our business and financial results. During 2008, we experienced such an event at one of our plasma collection centers, which resulted in a charge to cost of goods sold of $23.3 million, for which we subsequently recovered $19.4 million through December 31, 2010. In this particular instance, a portion of the impacted plasma had been released to manufacturing prior to our detection of the issue.

 

We plan to increase our supplies of plasma for use in our manufacturing processes through increased collections at our plasma collection centers and through selective remodeling or relocations of existing centers. This strategy is dependent upon our ability to successfully integrate new centers, to obtain FDA and GHA approval for the remaining unlicensed plasma centers, to maintain a cGMP compliant environment in all plasma centers, and to expand production and attract donors to our centers.

 

Our ability to expand production and increase our plasma collection centers to more efficient production levels may be affected by changes in the economic environment and population in selected regions where TPR operates plasma centers, by the entry of competitive plasma centers into regions where TPR operates, by misjudging the demographic potential of individual regions where TPR expects to expand production and attract new donors, by unexpected facility related challenges, or by unexpected management challenges at selected plasma centers.  In addition, beginning in 2012, the recently enacted healthcare reform legislation may require us to issue Internal Revenue Service Form 1099 to plasma donors whose remuneration equals or exceeds six hundred dollars annually.  The cost of implementing this requirement, as well as its potential impact on plasma donations, is unknown at this time.

 

Our financial performance is dependent upon third-party suppliers of FDA-approved source plasma.

 

For the years ended December 31, 2010 and 2009, we obtained 15.3% and 14.3% of our plasma under a five-year supply arrangement with CSL Plasma Inc., a subsidiary of CSL, a major competitor. The agreement with CSL Plasma Inc. provides that our minimum purchase obligations are: (i) 550,000 liters for calendar year 2010; (ii) 300,000 liters of plasma for each of calendar years 2011 and 2012; and (iii) 200,000 liters of plasma for calendar year 2013. Each quarter, CSL Plasma Inc. is obligated to deliver at least 20% of our minimum purchase obligation for that year.  We notified CSL Plasma Inc that we will not elect to take optional volumes under the contract in 2011. Either we or CSL Plasma Inc. may terminate the agreement in the event of material nonperformance after a 30-day cure period. For the years ended December 31, 2010 and 2009, we obtained 9.9% and 8.9% of our plasma from Interstate Blood Bank, Inc. (IBBI). The agreement with IBBI requires us to make a minimum purchase of 330,000 liters of plasma for each year during the term of the agreement, which terminates at the end of 2016. We have a right of first refusal with respect to any material quantities of plasma that IBBI has available for sale in excess of this amount, as well as a right of first refusal with respect to the transfer of any asset, equity, or controlling interest of IBBI related to any of the centers which supply us. We also agreed to provide secured financing for additional centers approved by us and the relocation of IBBI’s plasma centers in a maximum amount of $1.0 million per center and $3.0 million in the aggregate. Either we or IBBI may terminate the agreement in the event of material nonperformance after a 30 day cure period. Were any dispute to arise or were CSL Plasma Inc. or IBBI to experience any plasma collection difficulties, it could be difficult or impossible for us to replace the shortfall, which would materially adversely affect our business.

 

Plasma volumes obtained under arrangements with independent third parties have not always met expectations. An inability of any of our suppliers to operate their business successfully and satisfy their obligations in a timely manner may cause a disruption in our plasma supply, which could materially adversely affect our business.

 

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Industry-wide disruptions could reduce the availability of FDA-approved source plasma and our financial performance would suffer.

 

A number of other factors could disrupt our ability to increase source plasma collections, including but not limited to:

 

·                  A lack of alternative plasma supply sources.  In recent years, there has been consolidation in the industry as several plasma derivatives manufacturers have acquired previously independent plasma collectors. As a result, it could be difficult or impossible to resolve any significant disruption in the supply of plasma or an increased demand for plasma with plasma from alternative sources.

 

·                  A reduction in the donor pool.  Regulators in most of the large markets for plasma-derived products, including the United States, restrict the use of plasma collected from specific countries and regions in the manufacture of plasma-derived products. For example, the appearance of the variant Creutzfeldt-Jakob disease, commonly referred to as “mad cow” disease (which resulted in the suspension of the use of plasma collected from U.K. residents), and concern over the safety of blood products (which has led to increased domestic and foreign regulatory control over the collection and testing of plasma and the disqualification of certain segments of the population from the donor pool), have significantly reduced the potential donor pool.

 

Our products have historically been subject to supply-driven price fluctuations.

 

Our products, particularly IGIV, have historically been subject to price fluctuations as a result of changes in industry supply levels, the availability and pricing of plasma, development of competing products and the availability of alternative therapies. Higher prices for plasma-derived products have traditionally spurred increases in plasma production and collection capacity, resulting over time in increased product supply and lower prices. As demand continues to grow, if plasma supply and manufacturing capacity do not commensurately expand, prices tend to increase.

 

The demand for plasma derived products, particularly for IGIV, over the last few years has resulted in efforts on the part of companies, including ourselves, to increase manufacturing capacity and open new plasma collection centers to increase the availability of source plasma. Some of our competitors have announced plans to grow product supply at a rate above expected demand growth. The growth in demand for IGIV has been outpaced by the recent supply growth, as evidenced by increased supply in the distribution channel. We, or our competitors, may misjudge demand growth and over-invest in expanding plasma collection or manufacturing capacity, which ultimately may result in lower prices for, or inability to sell, our products.

 

Exchange rate fluctuations and our foreign currency hedges could adversely affect our financial results.

 

As a result of our international operations, currency exchange rate fluctuations may affect our results of operations, cash flows, and financial position.  Our most significant foreign currency exposure is the euro. Although from time to time, we may enter into foreign currency exchange agreements with financial institutions to reduce our exposure to fluctuations in foreign currency values relative to our foreign receivables and forecasted sales transactions, these hedging transactions do not eliminate that risk entirely.  These hedges may also serve to reduce any gain that we may have made based on favorable foreign currency fluctuations.  Furthermore, these contracts have inherent levels of counterparty risk over which we have no control.  We are exposed to potential losses if a counterparty fails to perform according to the terms of the agreement.  We do not require collateral or other security to be furnished by counterparties to our derivative financial instruments.  A number of financial institutions similar to those that serve or may serve as counterparties to our hedging arrangements were adversely affected by the global credit crisis.  The failure of any of the counterparties to our hedging arrangements to fulfill their obligations to us could adversely affect our results of operations.  At December 31, 2010, we were not a party to any foreign currency hedges. During the first quarter of 2011, we entered into approximately $49.5 (€37.1) million in notional value of fair value hedges against firm commitments and $38.4 (€28.2) million in notional value of cash flow hedges against anticipated future sales. The weighted average U.S. dollar to euro exchange rate on these foreign currency contracts is 1.3461.

 

We are investigating potential Foreign Corrupt Practices Act violations.

 

We are conducting an internal investigation into potential violations of the Foreign Corrupt Practices Act (FCPA) that we became aware of during the conduct of an unrelated review.  The FCPA investigation is being conducted by outside counsel under the direction of a special committee of our board of directors.  The investigation initially focused on sales to certain Eastern European and Middle Eastern countries, primarily Belarus, Russia and Iran, but we are also reviewing sales practices in Brazil, Bulgaria, China, Georgia, Libya, Poland, Turkey, Ukraine and other countries as deemed appropriate.

 

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In July 2009, we voluntarily contacted the U.S. Department of Justice (DOJ) to advise them of the investigation and to offer our cooperation in any investigation that they want to conduct or they want us to conduct. The DOJ has not indicated what action it may take, if any, against us or any individual, or the extent to which it may conduct its own investigation. Even though we self-disclosed this matter to the DOJ, it or other federal agencies may seek to impose sanctions on us that may include, among other things, debarment, injunctive relief, disgorgement, fines, penalties, appointment of a monitor, appointment of new control staff, or enhancement of existing compliance and training programs. Other countries in which we do business may initiate their own investigations and impose similar penalties. As a result of this investigation, we suspended shipments to some of these countries while we put additional safeguards in place. In some cases, safeguards involved terminating consultants and suspending relations with or terminating distributors in countries under investigation as circumstances warranted. These actions unfavorably affected revenue from these countries in 2010 and 2009. We have resumed sales in countries where we believe we have appropriate safeguards in place and are reallocating product to other countries as necessary.  To the extent that we conclude, or the DOJ concludes, that we cannot implement adequate safeguards or otherwise need to change our business practices, distributors, or consultants in affected countries or other countries, this may result in a permanent loss of business from those countries. We expect to complete our internal FCPA investigation and present our findings to the DOJ in 2011.  The preliminary findings of our investigation indicate that it is probable that there were FCPA violations by persons associated with us that the DOJ or other regulators may assert are attributable to us. Given the preliminary nature of our findings, our continuing investigation and the uncertainties regarding this matter, we are unable to estimate the financial outcome.  Any such sanctions or loss of business could have a material adverse effect on us or our results of operations financial condition, or cash flows.

 

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

 

In November 2009, we received a letter from the United States Attorney’s Office for the Eastern District of Pennsylvania (USAO). The USAO requested a meeting to review our compliance with the terms of the Pharmaceutical Pricing Agreement (PPA) under the Public Health Service program. Specifically, the USAO asked for information related to the sale of our IGIV product, Gamunex, under that program.  In order to have federal financial participation apply to their products under the Medicaid program and to obtain Medicare Part B coverage, manufacturers are required to enter into a PPA. The PPA obligates manufacturers to charge covered entities the Public Health Service price for drugs intended for outpatient use. The Public Health Service price is based on the Medicaid rebate amount. We believe that we have complied with the terms of the PPA and federal law.  If the USAO determines that our practices are inconsistent with the terms of the PPA, the USAO has stated that it may file a civil action against us under the Anti-fraud Injunction Act and seek a court order directing us to comply with the PPA or, potentially, proceed under some other legal theory.  An adverse outcome in an Anti-fraud Injunction Act action could have a material adverse effect on us or our results of operation to the extent that we are barred from allocating a fixed amount of IGIV as available for sale at the Public Health Service price and we are forced to give a preference to those purchasers over all other customers.  We could also be subject to fines, damages, penalties, appointment of a monitor, or enhancement of existing compliance and training programs as a result of government action. We are cooperating with the investigation and intend to respond to information requests from the USAO.

 

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

 

In 2010, we had sales of $16.6 million, or approximately 1.0% of our net revenue, to customers located in Iran pursuant to an export license which must be renewed annually.  Although the Office of Foreign Asset Control (OFAC) renewed our license to supply humanitarian products, tensions with Iran continue to impede our ability to conduct business in Iran.  Our revenues related to our business in Iran have declined in 2010 compared to 2009 and are likely to continue to decline in the future.

 

Our ability to continue to produce safe and effective products depends on the safety of our plasma supply against transmittable diseases.

 

Despite overlapping safeguards, including the screening of donors and other steps to remove or inactivate viruses and other infectious disease causing agents, the risk of transmissible disease through plasma-derived products cannot be entirely eliminated. For example, since plasma-derived therapeutics involve the use and purification of human plasma, there has been concern raised about the risk of transmitting HIV, prions, West Nile virus, H1N1 virus (commonly known as the swine flu) and other blood-borne pathogens through plasma-derived products. There are also concerns about the future transmission of H5N1 virus (commonly known as the bird flu). In the 1980s, thousands of hemophiliacs worldwide were infected with HIV through the use of contaminated Factor VIII. Bayer and other producers of Factor VIII, though not us, are defendants in numerous lawsuits resulting from these infections.

 

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

 

During the early phase of an outbreak of a new infectious disease, our ability to manufacture safe products would depend on the manufacturing process’ capacity to inactivate or remove the infectious agent. To the extent that a product’s manufacturing process is inadequate to inactivate or remove an infectious agent, our ability to manufacture and distribute that product would be impaired.

 

If a new infectious disease were to emerge in the human population, the regulatory and public health authorities could impose precautions to limit the transmission of the disease that would impair our ability to procure plasma, manufacture our products or both. Such precautionary measures could be taken before there is conclusive medical or scientific evidence that a disease poses a risk for plasma-derived products.

 

In recent years, new testing and viral inactivation methods have been developed that more effectively detect and inactivate infectious viruses in collected plasma. There can be no assurance, however, that such new testing and inactivation methods will adequately screen for, and inactivate, infectious agents in the plasma used in the production of our products.

 

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

 

Substantially all of our revenues are derived from products manufactured, and services performed, at our plants located in Clayton, North Carolina and Melville, New York. In addition, a substantial portion of our plasma supply is stored at facilities in Benson, North Carolina, and our Clayton facility.  If any of these facilities were to be impacted by an accident or a force majeure event such as an earthquake, major fire or explosion, major equipment failure or power failure lasting beyond the capabilities of our backup generators, our revenues would be materially adversely affected. In this situation, our manufacturing capacity could be shut down for an extended period and we could experience a loss of raw materials, work in process or finished goods inventory. Other force majeure events such as terrorist acts, influenza pandemic or similar events could also impede our ability to operate our business. In addition, in any such event, the reconstruction of our Clayton fractionation plant or our plasma storage facilities, the regulatory approval of the new facilities, and the replenishment of raw material plasma could be time-consuming. During this period, we would be unable to manufacture our products at other plants due to the need for FDA and foreign regulatory authority inspection and certification of such facilities and processes. While we maintain property damage and business interruption insurance with limits of $1 billion, these amounts may still be insufficient to mitigate the losses from any such event. We may also be unable to recover the value of the lost plasma or work-in-progress, as well as the sales opportunities from the products we would be unable to produce.

 

A significant number of our plasma collection centers are located near the U.S. border with Mexico.  For the years ended December 31, 2010 and 2009, approximately 21% and 22%, respectively, of our internally sourced plasma came from collection centers located on the United States border with Mexico. Donations at these centers could be impacted by changes in U.S. visa rules and the recently enacted healthcare reform legislation, which may require us beginning in 2012 to issue Internal Revenue Service Form 1099 to plasma donors whose remuneration equals or exceeds six hundred dollars annually.  The cost of implementing this requirement, as well as its potential impact on plasma donations, is unknown at this time.  In addition, we have a number of plasma centers in regions of the southeast which could be affected by natural disasters such as hurricanes. A disruption in our source of plasma due to events arising in a geographic region where many of our collection centers are located would limit our ability to maintain our current production levels of plasma-derived products.

 

If we experience equipment difficulties or if the suppliers of our equipment or disposable goods fail to deliver key product components or supplies in a timely manner, our manufacturing ability would be impaired and our product sales could suffer.

 

We depend on a limited group of companies that supply and maintain our equipment and provide supplies such as chromatography resins, filter media, glass and stoppers used in the manufacture of our products. In some cases we have only one qualified supplier. If our equipment should malfunction, the repair or replacement of the machinery may require substantial time and cost, which could disrupt our production and other operations. Our plasma collection centers rely on disposable goods supplied by Haemonetics Corporation and information technology systems hosted by a subsidiary of Haemonetics Corporation. Our plasma collection centers cannot operate without an uninterrupted supply of these disposable goods and the operation of these systems. We have experienced periodic outages of these systems, but a material outage would affect our ability to operate our collection centers. Alternative sources for key component parts or disposable goods may not be immediately available. Any new equipment or change in supplied materials may require revalidation by us and/or review and approval by the FDA, or foreign regulatory authorities, including the German Health Authority, which may be time-consuming and require additional capital and other resources. We may not be able to find an adequate alternative supplier in a reasonable time period, or on commercially acceptable terms, if at all. As a result, shipments of affected products may be limited or delayed. Our inability to obtain our key source supplies for the manufacture of our products may require us to delay shipments of products, harm customer relationships and force us to curtail operations.

 

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We purchase nearly all of our specialty plasma used for the production of hyperimmunes from a limited number of companies under short-term contracts.

 

We currently rely on three companies — Biotest Pharmaceuticals Corporation, Octapharma AG, and Advanced Bioservices, LLC, which is referred to as ABS, a subsidiary of Kedrion SpA, all of which are our direct competitors — to supply nearly all of our specialty plasma required for the production of our hyperimmunes, which represented $69.8 million, or 4.4%, of our net revenue for the year ended December 31, 2010 and $74.2 million, or 4.8%, of our net revenue for the year ended December 31, 2009. Specialty plasma is plasma that contains antibodies to specific diseases, usually because the donor has been vaccinated. Our contracts with suppliers of specialty plasma are usually on a short-term basis. We have entered into contracts with Octapharma and Biotest to secure our expected need for specialty plasma in 2011 and 2012. Depending upon these competitors’ production plans, it may be difficult to increase the amounts of plasma we purchase from them or to renew our contracts in the future. Our inability to replace the volumes provided by these suppliers through our own plasma collection efforts or through increased specialty plasma deliveries from other third parties would materially adversely affect our business. To the extent that we develop a supply of specialty plasma from our own collection centers, such specialty plasma may come at the expense of the plasma we use for our other products. It would also take significant time to obtain the necessary regulatory approvals and develop a sufficient donor base.

 

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

 

In the U.S., we regularly enter into distribution, supply and fulfillment contracts with group purchasing organizations, home care companies, alternate infusion sites, hospital groups, and others. We are highly dependent on these contracts for the successful sale, distribution and delivery of our products. For example, we rely principally on group purchasing organizations and on our distributors to sell our IGIV product and on Centric Health Resources to fulfill prescriptions for Prolastin/Prolastin-C A1PI. If the parties with which we contract breach, terminate, or otherwise fail to perform under the agreements, our ability to effectively distribute our products will be impaired and our business may be materially and adversely affected. In addition, through circumstances outside of our control, such as general economic decline, market saturation, or increased competition, we may be unable to successfully renegotiate our contracts or secure terms which are as favorable to us. In addition, we rely on distributors for sales of our products outside the U.S. Disagreements or difficulties with our distributors supporting our export business could result in a loss of sales.

 

Product liability lawsuits against us could cause us to incur substantial liabilities, limit sales of our existing products and limit commercialization of any products that we may develop.

 

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution, and sale of plasma-derived therapeutic protein products. We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and an even greater risk when we commercially sell any products. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

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

 

·                  injury to our reputation;

 

·                  withdrawal of clinical trial participants;

 

·                  costs to defend the related litigation;

 

·                  substantial monetary awards to trial participants or patients;

 

·                  loss of revenue; and

 

·                  the inability to commercialize any products that we may develop.

 

Bayer is the defendant in continuing litigation alleging that use of products manufactured at our Clayton site in the 1980s, prior to our formation transaction and carve-out from Bayer, resulted in the transmission of Hepatitis C virus and HIV to patients. Bayer is also a defendant in litigation alleging that thimerosal, a preservative that was added to some intra muscular (hyperimmune) immune globulin products until 1996 (at which time its use was discontinued), was the cause of autism and other disorders in children who received these products. While we are not a party to any of these actions, and Bayer has agreed to fully indemnify us from any claims or losses arising out of these actions, we cannot assure you that our products or any of their constituents or additives may not someday give rise to similar product liability claims that we will be forced to defend and which may have a material adverse affect on our business.

 

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We have a global insurance policy with limits of $100 million with a per claim deductible of $5 million and an aggregate deductible of $10 million. This amount of insurance may not be adequate to cover all liabilities that we may incur. We intend to expand our insurance coverage as our sales grow. Insurance coverage is, however, increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.

 

Our products and manufacturing processes are subject to regulatory requirements and authority, including over our manufacturing practices and any product recalls.

 

Our business is heavily regulated in all jurisdictions where we collect plasma or manufacture or sell our products. In particular, plasma collection activities in the United States are regulated by the FDA, which requires a licensing and certification process for each plasma collection center prior to opening and conducts periodic inspections of facilities and processes. Many states also regulate plasma collection, imposing similar obligations and additional inspections and audits. In addition, the marketing and sale of a pharmaceutical product such as plasma derivatives and parenteral solutions are subject to the prior registrations, listings, licenses and approvals of such products with the competent authorities of the jurisdiction where the product is to be marketed and sold, including compliance with promotion, labeling and advertising requirements. Our manufacturing facilities located in Clayton, North Carolina, must meet strict European Union and FDA rules and our manufacturing facilities in Melville, New York, must comply with FDA rules. Our manufacturing facilities must also comply with applicable state laws. U.S. plasma centers collecting plasma for manufacture into products to be distributed in the European Union must also be approved by the competent European Health Authority.

 

Collection centers and manufacturing facilities are subject to periodic inspections by regulatory authorities. The consequences of adverse findings following inspections can be more serious, such as the temporary shutdown of such center or facility, the loss of that center’s or facility’s license because of alleged noncompliance with applicable requirements, a voluntary or mandatory recall of finished product released to the market, or the destruction of inventory. These more serious consequences are often highly public and may also prompt private products liability lawsuits, additional regulatory enforcement actions, the imposition of substantial fines or penalties by regulatory authorities, and damage to the reputation and public image of the collection or manufacturing facility.

 

With respect to product recalls, we have, from time to time, voluntarily recalled plasma products that had been released to the market in an effort to address drug safety issues and may do so again in the future. Since it’s formation in 2005, we have had four recalls of finished biological products. The products involved were: Plasma Protein Fraction (Human) 5% USP, Plasmanate®, Lot Number: 26N39N1; Antihemophilic Factor (Human), Koate DVI®; Lot Numbers: 26N7802, 26N6XW1, 26N6N01, 26N7H01; Rho(D) Immune Globulin (Human); HyperRHO S/D®, Mini-Dose, Lot Number: 26N7XX1; and Plasbumin-5®, Albumin (Human) 5%, USP, Lot Number: 26N9P21. In addition, plasma unit retrievals are routinely handled between Talecris Plasma Resources and its consignee, exclusively Talecris Biotherapeutics, when new information relevant to donor or plasma suitability is received after a donation is collected. Plasma unit retrievals are also triggered if units were distributed that should have been rejected by the plasma center. A minority of unit retrievals are required to be reported to the FDA as Biological Product Deviation Reports (“BPDRs”), and a relatively small number are classified by the FDA as recalls. There have been approximately 176 incidents that resulted in retrievals of plasma units by Talecris Plasma Resources from 2007 through December 2010 that have been classified as recalls by the FDA.

 

In addition, the FDA conducts ongoing monitoring and surveillance of advertising and promotional matter used by manufacturers to sell and promote their products. The FDA assesses these materials for compliance with the FDCA, regulations on misbranding and other requirements, for example, assessing if information about the risks and benefits of regulated products are communicated in a truthful, accurate, science-based, non-misleading and balanced manner. The FDA issued Untitled Letters on three occasions since 2008 requesting that we change advertising materials on the basis that they were inconsistent with the package insert for the product. We addressed these matters to the satisfaction of the FDA.

 

In particular, our manufacturing processes are governed by detailed and constantly evolving federal and sometimes state regulations that set forth cGMP for drugs and devices manufactured or distributed in the United States. We monitor compliance with these evolving procedures and regulations to help assure compliance, but failure to adhere to established procedures or regulations, or to meet a specification, could require that a product or material be rejected and destroyed, and could result in adverse regulatory actions against the companies. As a result of routine inspections by regulatory health authorities, we have been issued observations, for example, Form 483 FDA Inspection Observations, with regard to cGMP compliance. While these issues have been corrected, no assurances can be provided that we will avoid citation for deficiencies in the future. If serious deficiencies are noted or recur, compliance may be costly and difficult to achieve, and consequences may include the need to recall product or suspend operations until appropriate measures can be implemented. Also, certain deviations from procedures must be reported to the FDA, and even if we determine that the deviations were not material, the FDA could require us to take similar measures.

 

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Later discovery of previously unknown problems with our products or failure by us or any third-party manufacturers, including Bayer, to comply with cGMP regulations, or failure to comply with regulatory requirements, may result in, among other things:

 

·      restrictions on such products or manufacturing processes;

·      withdrawal of products from the market;

·      voluntary or mandatory recall;

·      suspension or withdrawal of regulatory approvals and licenses;

·      cessation of our manufacturing activities, which may be for an extended or indefinite period of time;

·      product seizure; and

·      injunctions or the imposition of civil or criminal penalties.

 

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

 

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

 

Separately, our plans to transition from Prolastin to our next generation therapy, Prolastin-C A1PI, in Europe have been delayed because we have yet to receive European regulatory approval.  Presently additional clinical trials are being required by European regulators as a precursor to Prolastin-C A1PI approval. Additionally, we could face further delays with respect to launches in specific European countries. To the extent regulatory authorities do not act within the same time-frame, we will need to operate both new and old manufacturing processes in parallel with overlapping crews, higher costs, and lower yields.

 

Certain of our business practices are subject to scrutiny by regulatory authorities, as well as to lawsuits brought by private citizens under federal and state false claims laws. Failure to comply with applicable law or an adverse decision in lawsuits may result in adverse consequences to us.

 

The laws governing our conduct are enforceable by criminal, civil and administrative penalties. Violations of laws such as the Federal Food, Drug and Cosmetic Act, the False Claims Act and the Anti-Kickback Law, the Public Health Service Act, and any regulations promulgated under their authority, may result in jail sentences, fines, or exclusion from federal and state programs, as may be determined by Medicare, Medicaid and the Department of Defense and other regulatory authorities as well as by the courts. There can be no assurance that our activities will not come under the scrutiny of regulators and other government authorities or our practices will not be found to violate applicable laws, rules and regulations or prompt lawsuits by private citizen “relators” under federal or state false claims laws.

 

For example, under the Anti-Kickback Law, and similar state laws and regulations, even common business arrangements, such as discounted terms and volume incentives for customers in a position to recommend or choose drugs and devices for patients, such as physicians and hospitals, can result in substantial legal penalties, including, among others, exclusion from the Medicare and Medicaid programs, and arrangements with referral sources must be structured with care to comply with applicable requirements. Also, certain business practices, such as consulting fees to healthcare providers, sponsorship of educational or research grants, charitable donations, interactions with healthcare providers that prescribe products for uses not approved by the FDA, and financial support for continuing medical education programs, must be conducted within narrowly prescribed and controlled limits to avoid any possibility of wrongfully influencing healthcare providers to prescribe or purchase particular products or as a reward for past prescribing. Under the U.S. healthcare reform legislation, such payments by pharmaceutical manufacturers to United States healthcare practitioners and academic medical centers must be publicly disclosed starting with payments made in calendar year 2012. A number of states have similar laws in place. Additional and stricter prohibitions could be implemented by federal and state authorities. Where such practices have been found to be improper incentives to use such products, government investigations and assessments of penalties against manufacturers have resulted in substantial damages and fines. Many manufacturers have been required to enter into consent decrees or orders that prescribe allowable corporate conduct.

 

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Failure to satisfy requirements under the Federal Food, Drug and Cosmetic Act can also result in penalties, as well as requirements to enter into consent decrees or orders that prescribe allowable corporate conduct.

 

Adverse consequences can also result from failure to comply with the requirements of the 340B/PHS program under the Public Health Service Act, which extends discounts to a variety of community health clinics and other entities that receive health services grants from the PHS. Although the recently passed health care reform legislation adds a “must sell” obligation to the terms of the program’s Pharmaceutical Pricing Agreement (PPA), under the current PPA no such obligation is stated, although some government regulators have suggested that a similar obligation exists. In November 2009, the United States Attorney’s Office for the Eastern District of Pennsylvania commenced an investigation with respect to our method of allocating our IGIV product, Gamunex, as available for sale at the PHS price to covered entities. We are cooperating with the investigation, and believe we have complied with the terms of the PPA and federal law, but an adverse outcome in this investigation could have a material adverse effect on us or our results of operation.

 

In addition, while regulatory authorities generally do not regulate physicians’ discretion in their choice of treatments for their patients, they do restrict communications by manufacturers on unapproved uses of approved drugs or on the potential safety and efficacy of unapproved products in development. Companies in the United States, Canada and European Union cannot promote approved products for other indications that are not specifically approved by the competent regulatory authorities (e.g., FDA in the United States), nor can companies promote unapproved products. In limited circumstances companies may disseminate to physicians information regarding unapproved uses of approved products or results of studies involving investigational products. If such activities fail to comply with applicable regulations and guidelines of the various regulatory authorities, we may be subject to warnings from, or enforcement action by, these authorities. Furthermore, if such activities are prohibited, it may harm demand for our products.

 

Promotion of unapproved drugs or devices or unapproved indications for a drug or device is a violation of the Federal Food, Drug and Cosmetic Act and subjects us to civil and criminal sanctions. Furthermore, sanctions under the Federal False Claims Act have recently been brought against companies accused of promoting off-label uses of drugs, because such promotion induces the use, and subsequent claims for reimbursement under Medicare and other federal programs. Similar actions for off-label promotion have been initiated by several states for Medicaid fraud. The U.S. healthcare reform legislation significantly strengthened provisions of the Federal False Claims Act, Medicare and Medicaid Anti-Kickback provisions, and other health care fraud provisions, leading to the possibility of greatly increased qui tam suits by relators for perceived violations. Violations or allegations of violations of the foregoing restrictions could materially and adversely impact our business.

 

To market and sell our products outside of the United States, we must obtain and maintain regulatory approvals and comply with regulatory requirements in such jurisdictions. The approval procedures vary among countries in complexity and timing. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all, which would preclude us from commercializing products in those markets.

 

In addition, some countries, particularly the countries of the European Union, regulate the pricing of prescription pharmaceuticals. In these countries, pricing discussions with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of their product candidate to other available therapies. Such trials may be time-consuming, expensive, and may not show an advantage in efficacy for our products. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, in either the United States or the European Union, we could be adversely affected.

 

Our business involves the controlled use of hazardous materials, various biological compounds and chemicals. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials and chemicals. Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us. Additional federal, state, and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial capital costs and operating expenses to comply with any of these laws or regulations and the terms and conditions of any permits required pursuant to such laws and regulations, including costs to install new or updated pollution control equipment, modify our operations or perform other corrective actions at our respective facilities. In addition, fines and penalties may be imposed for noncompliance with environmental and health and safety laws and regulations or for the failure to have or comply with the terms and conditions of required environmental permits.

 

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On the international front, the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which is commonly called the Kyoto Protocol, became effective in February 2005. Adopted by some of the countries in which we operate, the Kyoto Protocol requires the implementation of national programs to reduce emissions of certain gases, generally referred to as greenhouse gases, which contribute to global warming. Climate change-related legislation has also passed the U.S. House of Representatives, which, if enacted by the full Congress, would limit and reduce greenhouse gas emissions from large emitters of greenhouse gasses through a “cap-and-trade” system of allowances and credits and other provisions.  Moreover, the Environmental Protection Agency, which is referred to as the EPA, issued a finding that the current and projected concentrations of certain greenhouse gases in the atmosphere, including carbon dioxide, which is referred to as CO2, threaten the public health and welfare of current and future generations. While this finding in itself does not impose any requirements on our industry, it authorizes the EPA to regulate directly greenhouse gas emissions through a rule-making process. Existing legislation and the future passage of climate control legislation or regulations that restricts emissions of greenhouse gases in the areas in which we operate could result in adverse financial and operational impacts on our business.

 

In addition, we export our products to a variety of countries whose legal regimes and business customs and practices differ significantly from those in the United States. A failure to comply with laws and regulations applicable to their international operations or export sales could expose them to significant penalties. These laws and regulations include data privacy requirements, labor relations laws, tax laws, competition regulations, anti-money laundering, import and trade restrictions, export requirements, including those of the U.S. Office of Foreign Assets Control, U.S. laws such as the Foreign Corrupt Practices Act, which is referred to as the FCPA, and local laws which also prohibit payments to corrupt governmental officials. While we require our employees to comply with applicable laws and we monitor legal compliance, we cannot be certain that our employees or agents will comply in all instances or that they will promptly identify violations. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could result in prohibitions on our ability to offer products in one or more countries, and could also materially damage our reputation, our products’ reputations, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. We are currently conducting an internal investigation into violations of the FCPA of which we became aware during conduct of an unrelated review. As a result of the internal investigation, we suspended shipment to some countries while safeguards were implemented, and voluntarily contacted the U.S. Department of Justice. Any government sanctions or any continued loss of business from certain countries could have a material adverse effect on us or our operating results.

 

To enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory authorities, such as the United States Health and Human Services Department Office of Inspector General (“OIG”), have recommended the adoption and implementation of a comprehensive health care compliance program that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the United States Sentencing Commission Guidelines Manual. Increasing numbers of United States-based pharmaceutical companies have such programs. While we have adopted U.S. healthcare compliance and ethics programs that generally incorporate the OIG’s recommendations, and train our U.S. employees in such compliance, having such a program can be no assurance that we will avoid any compliance issues.

 

We are required to provide accurate pricing information to the U.S. government for the purpose of calculating reimbursement levels by the Centers for Medicare and Medicaid Services (CMS) and for calculating certain federal prices and federal rebate obligations.

 

We are required to report detailed pricing information, net of included discounts, rebates and other concessions, to CMS for the purpose of calculating national reimbursement levels, certain federal prices, and certain federal rebate obligations. We have established a system for collecting and reporting this data accurately to CMS and have instituted a compliance program to assure that the information we collect is complete in all respects. If we report pricing information that is not accurate to the federal government, we could be subject to fines and other sanctions that could adversely affect our business. In addition, the government could change its calculation of reimbursement, federal prices, or federal rebate obligations which could negatively impact our financial results.

 

We seek to obtain and maintain protection for the intellectual property relating to our technology and products.

 

Our success depends in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products, especially intellectual property related to our purification processes. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Additionally, most of our patents relate to the processes we use to produce our products, not the products themselves. In many cases, the plasma-derived products we produce or develop in the future will not, in and of themselves, be patentable. Since our patents relate to processes, if a competitor is able to design and utilize a process that does not rely on our protected intellectual property, that competitor could sell a plasma-derived product similar to one we developed or sell. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, we are a party to a number of license agreements which may impose various obligations on us, including milestone and royalty payments. If we fail to comply with these obligations, the licensor may terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.

 

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Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a U.S. patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our anticipated U.S. patent position.

 

We also rely on unpatented technology, trade secrets, know-how and confidentiality agreements with our employees, consultants and third parties to protect our unpatented proprietary technology, processes and know-how. We require our officers, employees, consultants and advisors to execute proprietary information and invention and assignment agreements upon commencement of their relationships with us. There can be no assurance, however, that these agreements will provide meaningful protection for our inventions, trade secrets or other proprietary information in the event of unauthorized use or disclosure of such information. These agreements may be breached and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor to develop alternative products, we could face increased competition and lose a competitive advantage.

 

We, like other companies in the pharmaceutical industry, may become aware of counterfeit versions of our products becoming available domestically and abroad. Counterfeit products may use different and possibly contaminated sources of plasma and other raw materials, and the purification process involved in the manufacture of counterfeit products may raise additional safety concerns, over which we have no control. Any reported adverse events involving counterfeit products that purport to be our products could harm our reputation and the sale of our products, in particular, and consumer willingness to use plasma-derived therapeutics generally.

 

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

 

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

 

If we are found to infringe the patent rights of a third party, or in order to avoid potential claims, we or our collaborators may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms.

 

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

 

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We try to ensure that our employees do not use the proprietary information or know-how of others in their work for us. We may, however, be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.

 

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We may not be able to commercialize products in development.

 

Before obtaining regulatory approval for the sale of our product candidates or for marketing of existing products for new indicated uses, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:

 

·                  regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial within a country or at a prospective trial site respectively;

 

·                  the regulatory requirements for product approval may not be explicit, may evolve over time and may diverge by jurisdiction;

 

·                  our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we had expected to be promising;

 

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

 

·                  our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;

 

·                  we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks or if any participant experiences an unexpected serious adverse event;

 

·                  regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including non-compliance with regulatory requirements;

 

·                  undetected or concealed fraudulent activity by a clinical researcher, if discovered, could preclude the submission of clinical data prepared by that researcher, lead to the suspension or substantive scientific review of one or more of our marketing applications by regulatory agencies, and result in the recall of any approved product distributed pursuant to data determined to be fraudulent;

 

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

 

·                  the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate because we do not currently have any agreements with third-party manufacturers for the long-term commercial supply of any of our product candidates;

 

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

 

·                  the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics.

 

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

·                  be delayed in obtaining marketing approval for our product candidates;

 

·                  not be able to obtain marketing approval;

 

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

 

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·                  obtain approval for indications that are not as broad as intended; or

 

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

 

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

 

Even if clinical trials are successful, we may still be unable to commercialize the product due to difficulties in obtaining regulatory approval for the process or problems in scaling the engineering process to commercial production. Additionally, if produced, the product may not achieve an adequate level of market acceptance by physicians, patients, healthcare payors and others in the medical community to be profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, some of which are beyond our control, including:

 

·                  the prevalence and severity of any side effects;

 

·                  the efficacy and potential advantages over alternative treatments;

 

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

 

·                  relative convenience and ease of administration;

 

·                  the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

·                  the strength of marketing and distribution support; and

 

·                  sufficient third-party coverage or reimbursement.

 

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

 

Our future success depends on our ability to retain members of our senior management and to attract, retain and motivate qualified personnel.

 

We are highly dependent on the principal members of our executive and scientific teams. The loss of the services of any of these persons might impede the achievement of our research, development, operational and commercialization objectives. In particular, we believe the loss of the services of Lawrence D. Stern, John M. Hanson, Mary J. Kuhn, Thomas J. Lynch, John R. Perkins, Joel E. Abelson, Stephen R. Petteway, John F. Gaither, Kari D. Heerdt, Daniel L. Menichella, James R. Engle and Bruce Nogales would significantly and negatively impact our business.  Our risk of key employee turnover may increase due to the vesting of restricted shares in March 2010 and options in April 2010 and due to the announcement of our definitive merger agreement with Grifols.

 

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

 

Federal cGMP regulations also require that the personnel we employ and hold responsible for the collection, processing, testing, storage or distribution of blood or blood components be adequate in number, educational background, training and experience, including professional training as necessary, or combination thereof, and have capabilities commensurate with their assigned functions, a thorough understanding of the procedures or control operations they perform, the necessary training or experience, and adequate information concerning the application of relevant cGMP requirements for their individual responsibilities. Our failure to attract, retain, and motivate qualified personnel may result in a regulatory violation, affect product quality, require recall or market withdrawal of affected product, or a suspension or termination of our license to market our products, or any combination thereof.

 

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

 

FFF Enterprises Inc. and Amerisource Bergen collectively accounted for approximately 27% of our net revenue for both the years ended December 31, 2010 and 2009. Similarly, our accounts receivable balances have also been concentrated with a small number of customers. Amerisource Bergen accounted for approximately 13% of our accounts receivable, net, as of December 31, 2010 and FFF Enterprise, Inc. accounted for approximately 15% of our accounts receivable, net, as of December 31, 2009. In the event that any of these customers were to suffer an adverse downturn in their business or a downturn in their supply needs, our business could be materially adversely affected. We cannot guarantee that these customers will continue purchasing our products at past volumes, or, in the event that any of them were to cease doing business with us, that we could replace such customer on substantially similar terms or at all. Therefore, the loss of one or more of these customers could have a material adverse effect on our net sales, gross profit and financial condition. Under certain market conditions, our customers’ liquidity may worsen and they may demand longer payment terms, higher early payment discounts, volume rebates and other concessions which would have adverse financial consequences on us.

 

A significant amount of our U.S. Gamunex volume is contracted.  As these contracts expire over the next few years, beginning in 2011, we may not be able to renew the commitments on as favorable terms, or at all.

 

Since the late 1980s we have been the “supplier of record” for the Canadian blood system. Under existing contracts, we are the largest supplier of plasma-derived products to the Canadian blood system operators, Canadian Blood Services and Hema Quebec. We transport plasma from Canadian Blood Services and Hema Quebec collection centers to our manufacturing facility in Clayton, North Carolina for manufacture, and return the finished product, along with commercial product, for sale to Canadian Blood Services and Hema Quebec. Pricing for our products and services is set at the beginning of the contract period, subject to adjustment for inflation. The U.S. dollar based contracts are terminable upon default, or the occurrence of certain events, including a third party obtaining Canadian regulatory approval to introduce a significantly superior product or fractionation service, our products or services becoming obsolete, or if we make certain nonrelated improvements and Canadian Blood Services or Hema Quebec do not accept the associated price increase. We were awarded new five year contracts in December 2007, which became effective April 1, 2008. The contracts may be extended for two one-year terms upon agreement of the parties. Under these contracts, we fractionate 100% of the Canadian plasma initially and a majority of the Canadian plasma throughout the contract period and supply a majority of the Canadian requirements for IGIV during the contract term as well. Canadian Blood Services has elected to pursue a multi-source strategy and although we will continue to be the primary supplier, we anticipate annual volume declines because of their strategy.  Hema Quebec currently has a sole source strategy for fractionation of their plasma but could switch to a multi-source strategy. In 2010 we fractionated 71% of Canadian plasma and supplied 67% of Canadian requirements of IGIV. We derive significant revenue and profits under these contracts, and a failure to maintain contracts with the Canadian blood system operators or any diminution in the volume or price under future contracts could have a material adverse effect on our financial results.

 

Potential business combinations could require significant management attention and prove difficult to integrate with our business.

 

If we become aware of potential business combination candidates that are complementary to our business, we may decide to combine with such businesses or acquire their equity or assets. We have acquired businesses or product lines in the past. For example, in April 2005, we acquired Precision Pharma Services, Inc., a contract fractionator located in Melville, New York, and in November 2006 and June 2007 we acquired groups of plasma collection centers in varying stages of development and assumed certain liabilities from IBR, a supplier of source plasma. We have since acquired additional plasma collection centers on a case by case basis. Business combinations generally may involve a number of difficulties and risks to our business, including:

 

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

 

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

 

·                  disruption of our ongoing business and diversion of management’s attention from other business concerns;

 

·                  potential loss of the acquired company’s customers;

 

·                  failure to develop further the other company’s technology successfully;

 

·                  unanticipated costs and liabilities; and

 

·                  other accounting and operational consequences.

 

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

 

Talecris Holdings, LLC and its affiliated entities will continue to exercise significant control over us and could delay or prevent a change in corporate control.

 

As of December 31, 2010 Talecris Holdings, LLC owned approximately 48.7% of our outstanding common stock. Talecris Holdings, LLC is owned by (i) Cerberus-Plasma Holdings LLC, the managing member of which is Cerberus Partners, L.P., and (ii) limited partnerships affiliated with Ampersand Ventures. Substantially all rights of management and control of Talecris Holdings, LLC are held by Cerberus-Plasma Holdings LLC.

 

As long as Talecris Holdings, LLC owns or controls such a substantial portion of our outstanding voting power, it may have the ability to delay or prevent a change in control of us that may be favored by other stockholders and may otherwise exercise substantial control over all corporate actions requiring stockholder approval:

 

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

 

·                  any amendment of our certificate of incorporation or bylaws;

 

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

 

·                  the defeat of any non-negotiated takeover attempt that might otherwise benefit our other stockholders.

 

Our quarterly results of operations may fluctuate and this fluctuation may cause our stock price to decline, resulting in losses to our investors.

 

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

 

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

 

·                  changes in plasma procurement costs, yield, or other manufacturing costs that may increase our cost of goods sold for the period;

 

·                  non-capitalizable costs associated with our capital projects;

 

·                  seasonality of sales, particularly our hyperimmune products;

 

·                  competitor activities, including new product introductions;

 

·                  variations in product demand or price;

 

·                  regulatory developments in the United States and elsewhere;

 

·                  the departure of key personnel;

 

·                  interest rate fluctuations impacting our outstanding balances under our floating rate revolving credit facility and foreign currency exchange rate fluctuations in the international markets in which we operate; and

 

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

 

If our quarterly operating results fail to meet the expectations of stock market analysts and investors, the price of our common stock may rapidly decline, resulting in losses to our investors. Additional factors that could cause actual results to differ materially are included in “Special Note Regarding Forward Looking Statements” located elsewhere in this Annual Report.

 

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We do not anticipate paying dividends in the foreseeable future.

 

We currently anticipate that we will retain all funds for use in the operation of our business, and we do not anticipate paying any cash dividends on our common stock for the foreseeable future. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market. We cannot guarantee that our common stock will appreciate in value. See the discussion contained elsewhere in this Annual Report under the heading “Dividend Policy.”

 

Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt.

 

We and our subsidiaries may be able to incur substantially more additional indebtedness in the future, including by accessing approximately $322.6 million of unused available borrowing capacity under our existing revolving credit facility, based on our December 31, 2010 indebtedness.  We are not fully restricted under the terms of the indenture governing the 7.75% Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not prohibited by the terms of the indenture governing the 7.75% Notes, any of which actions could have the effect of diminishing our ability to make payments on the 7.75% Notes when due and further exacerbate the risks associated with our substantial indebtedness.  Furthermore, the terms of the instruments governing our subsidiaries’ indebtedness may not fully prohibit us or our subsidiaries from taking such actions.  Although the indenture for the 7.75% Notes and our revolving credit facility contain covenants limiting indebtedness, these covenants are subject to a number of significant exceptions and qualifications.

 

The indenture governing the 7.75% Notes and our revolving credit facility contain operating and financial restrictions on us that may limit our flexibility in operating our business.

 

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

 

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

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable

 

ITEM 2.  PROPERTIES

 

Our primary facilities are described below.  All of our owned real estate is pledged as security under our revolving credit facility.

 

·                  Clayton Site.   A 175-acre site that we own, located in Clayton, North Carolina, which includes a 14-building complex of office space, lab space, warehouse, freezer storage, and biopharmaceutical manufacturing facilities consisting of 654,139 square feet.  An additional 37,000 square feet of administrative office and 23,600 square feet of warehouse space are leased through December 2019 in a building located adjacent to our Clayton site.  A 30,159 square foot climate controlled warehouse located next to the Clayton site is also leased through September 2014.

 

·                  Research Triangle Park.  A leased three-building headquarters/administrative office facility consisting of 123,000 square feet.  The main building housing our corporate headquarters and additional space in two other buildings are leased through May 2022. An expansion covering 45,359 square feet of office space is also leased through May 2022. We hold a five-year renewal option on the facility and a termination option exercisable effective 2018.

 

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·                  Raleigh Test Lab.  A laboratory space located in Raleigh, North Carolina consisting of 76,000 square feet leased through September 2017, with an option to purchase through September 2011.

 

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

 

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

 

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

 

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

 

·                  Frankfurt.  A 2,552 square meters office facility located in Frankfurt Germany, which serves as our European headquarters and which is leased until June 30, 2015.

 

·                  Canada.  A 6,396 square foot office facility located in Mississauga, Ontario, which serves as our Canadian headquarters and which is leased until March 2012. We also lease a 2,356 square foot sales office in Ottawa, Ontario, which is leased until December 2012.

 

·                  Plasma Collection Centers.  As of December 31, 2010, we operated 69 plasma collection centers of various sizes under non-cancellable lease agreements expiring at various dates.

 

We believe our properties are adequately maintained and suitable for their intended use.  We continually evaluate our properties and believe that our current facilities plus any planned expansions and upgrades are generally sufficient to meet our expected needs and expected near-term growth.  Expansion projects and facility closings are undertaken as necessary in response to market needs.

 

ITEM 3.  LEGAL PROCEEDINGS

 

We are involved in a number of judicial, regulatory and arbitration proceedings (including those described below) concerning matters arising in connection with the conduct of our businesses. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but might be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

 

National Genetics Institute/Baxter Healthcare Corporation Litigation

 

In May 2008, Baxter Healthcare Corporation (Baxter) and National Genetics Institute (NGI), a wholly-owned subsidiary of Laboratory Corporation of America, filed a complaint in the U.S. District Court for the Eastern District of North Carolina alleging that we infringed U.S. Patents Nos. 5,780,222, 6,063,563, and 6,566,052. The patents deal primarily with a method of screening large numbers of biological samples utilizing various pooling and matrix array strategies, and the complaint alleges that the patents are owned by Baxter and exclusively licensed to NGI. In November 2008, we filed our answer to their complaint, asserting anti-trust and other counterclaims, and filed a request for re-examination of the patents with the Patent and Trademark Office (PTO), which was subsequently granted. The case was settled effective October 1, 2010, whereby we paid $3.9 million to NGI and received a paid-up license to the technology subject to the disputed patents and the parties dismissed their claims and counterclaims.

 

Plasma Centers of America, LLC and G&M Crandall Limited Family Partnership Litigation

 

We had a three year Amended and Restated Plasma Sale/Purchase Agreement with Plasma Centers of America, LLC (PCA) under which we were required to purchase annual minimum quantities of plasma from plasma collection centers approved by us, including the prepayment of 90% for unlicensed plasma. We were also committed to finance the development of up to eight plasma collection centers, which were to be used to source plasma for us. Under the terms of the agreement, we had a conditional obligation to purchase such centers under certain conditions for a sum determined by a formula set forth in the agreement. We provided approximately $4.2 million in financing related to the development of such centers and advanced payments for unlicensed plasma. We recorded a provision within SG&A during 2008 related to loans and advances provided.

 

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In August 2008, we notified PCA that they were in breach of the Amended and Restated Plasma Sale/Purchase Agreement. We terminated the agreement in September 2008. In November 2008, we filed suit in federal court in Raleigh, North Carolina, against the G&M Crandall Limited Family Partnership and its individual partners as guarantors of obligations of PCA. We were served in January 2009 in a parallel action by PCA, alleging breach of contract by TPR. The federal case has been stayed.  On December 13, 2010, a jury in the state court case rendered a verdict in the amount of $37 million in favor of PCA against TPR in a breach of contract claim, which was confirmed by the court in post trial motions. We intend to appeal. Interest on the verdict, if sustained, will accrue at 8% simple interest from the date of breach, which is approximately $6.7 million at December 31, 2010.

 

Foreign Corrupt Practices Act Investigation

 

In July 2009, we voluntarily contacted the U.S. Department of Justice (DOJ) to advise them that we were conducting an internal investigation into potential violations of the Foreign Corrupt Practices Act (FCPA). The FCPA investigation is being conducted by outside counsel under the direction of a special committee of our Board of Directors.  The investigation into possible improper payments to individuals and entities made after our formation initially focused on payments made in connection with sales in certain Eastern European and Middle Eastern countries, primarily Belarus, Russia, and Iran, but we are also reviewing sales practices in Brazil, Bulgaria, China, Georgia, Libya, Poland, Turkey, Ukraine, and other countries as deemed appropriate. The DOJ has not indicated what action it may take, if any, against us or any individual, or the extent to which it may conduct its own investigation. Even though we self-disclosed this matter to the DOJ, it or other federal agencies may seek to impose sanctions on us that may include, among other things, debarment, injunctive relief, disgorgement, fines, penalties, appointment of a monitor, appointment of new control staff, or enhancement of existing compliance and training programs. Other countries in which we do business may initiate their own investigations and impose similar penalties. We expect to complete our internal FCPA investigation and present our findings to the DOJ in 2011.

 

Compliance with Pharmaceutical Pricing Agreement

 

                                                In November 2009, we received a letter from the United States Attorney’s Office for the Eastern District of Pennsylvania (USAO). The USAO requested a meeting to review the company’s compliance with the terms of the Pharmaceutical Pricing Agreement (PPA) under the Public Health Service program. Specifically, the USAO asked for information related to the sale of our IGIV product, Gamunex, under that program.  In order to have federal financial participation apply to their products under the Medicaid program and to obtain Medicare Part B coverage, manufacturers are required to enter into a PPA. The PPA obligates manufacturers to charge covered entities the Public Health Service price for drugs intended for outpatient use. The Public Health Service price is based on the Medicaid rebate amount. We believe that we have complied with the terms of the PPA and federal law. If the USAO determines that our practices are inconsistent with the terms of the PPA, the USAO has stated that it may file a civil action against us under the Anti-fraud Injunction Act and seek a court order directing us to comply with the PPA or, potentially, proceed under some other legal theory.   We could also be subject to fines, damages, penalties, appointment of a monitor, or enhancement of existing compliance and training programs as a result of government action. We are cooperating with the investigation and intend to respond to information requests from the USAO.

 

Talecris – Grifols Merger

 

                                                Four purported class action lawsuits have been filed by our stockholders challenging the proposed merger transaction with Grifols. Two of the lawsuits were filed in the Court of Chancery of the State of Delaware and have been consolidated under the caption In re Talecris Biotherapeutics Holdings Shareholder Litigation, Consol. C.A. No. 5614-VCL. The other two lawsuits were filed in the Superior Court of the State of North Carolina and are captioned Rubin v. Charpie, et al., No. 10 CV 004507 (North Carolina Superior Court, Durham County), and Kovary v. Talecris Biotherapeutics Holdings Corp., et al., No. 10 CV 011638 (North Carolina Superior Court, Wake County). The lawsuits name as defendants Talecris, the members of the Talecris Board of Directors, Grifols, S.A. and its subsidiary, Grifols, Inc., and, in the Delaware consolidated action, Talecris Holdings and Stream Merger Sub, Inc. The two North Carolina actions have been stayed.

 

                                                All of the lawsuits allege that the individual defendants (and, in the consolidated Delaware action, Talecris Holdings) breached their fiduciary duties to the Talecris stockholders in connection with the proposed transaction with Grifols, and that Grifols (and, in one of the North Carolina cases, Talecris, and in the Delaware action, Grifols, Inc.) aided and abetted those breaches. The Delaware complaint alleges, among other things, that the consideration offered to Talecris stockholders pursuant to the proposed transaction is inadequate; that the Talecris Board of Directors failed to take steps to maximize stockholder value; that Talecris’ IPO and debt refinancing in 2009 were intended to facilitate a sale of Talecris; that Cerberus and Talecris Holdings arranged the proposed merger for the benefit of Cerberus, without regard to the interests of other stockholders; that the voting agreements impermissibly lock up the transaction; and that the merger agreement contains terms, including a termination fee, that favor Grifols and deter alternative bids. The Delaware complaint further alleges that the preliminary Form F-4 filed on August 10, 2010 contains material misstatements and/or omissions, including with respect to the availability of appraisal rights in the merger; the purpose and effects of the Virginia reincorporation merger; the antitrust risks of the proposed transaction; the financial advisors’ analyses regarding the Grifols’ non-voting stock to be issued in connection with the transaction; and the fees to be paid to Morgan Stanley by Talecris and Grifols in connection with the proposed transaction. The Delaware complaint also alleges that Talecris stockholders are entitled to appraisal rights in connection with the transaction pursuant to Section 262 of the Delaware General Corporation Law, and that the transaction violates the Delaware General Corporation Law by failing to provide such rights. The Delaware action seeks equitable and injunctive relief, including a determination that the stockholders have appraisal rights in connection with the merger, and damages.

 

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On October 29, 2010, the parties to the Delaware litigation entered into a MOU reflecting an agreement in principle to settle that litigation. The MOU provides, among other things, for the provision of appraisal rights in accordance with DGCL 262 in connection with the transaction as described at pages 135-137 of the MOU; for an increase in the merger consideration by an additional 500,000 shares of Grifols non-voting stock to holders of Talecris common stock other than the Talecris specified affiliated stockholders as described at pages 144-145 of the MOU; and for certain additional disclosures provided herein. The MOU also provides for a dismissal of the action with prejudice and a release of claims. On January 21, 2011, the parties executed a formal Stipulation of Settlement documenting the agreement set forth in the MOU, and on January 25, 2011, the Delaware court entered an order preliminarily approving the settlement.  The settlement remains subject, among other things, to notice to the class, final court approval and consummation of the transaction.

 

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PART II

 

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

 

Market Information

 

Our common stock, par value $0.01, has been listed on The NASDAQ Global Select Market under the symbol “TLCR” since October 1, 2009.  Prior to that time, there was no public market for our common stock.  The initial public offering price of our common stock on October 1, 2009 was $19.00 per share.  The following table sets forth the range of the high and low market prices of our common stock for the periods indicated as reported by The NASDAQ Global Select Market:

 

 

 

2009

 

2010

 

 

 

4th Quarter

 

1st Quarter

 

2nd Quarter

 

3rd Quarter

 

4th Quarter

 

High

 

$

23.44

 

$

24.41

 

$

23.09

 

$

23.30

 

$

24.63

 

Low

 

$

18.01

 

$

19.77

 

$

15.70

 

$

20.95

 

$

21.30

 

 

Stockholders

 

There were 43 registered accounts of record of our common stock as of the close of business on February 21, 2011.  The number of holders of record is based upon the actual number of holders registered at such date and does not include holders of shares in “street names” or persons, partnerships, associates, corporations, or other entities identified in security position listings maintained by depositories.

 

Dividends

 

We did not declare or pay cash dividends on our common stock in either 2010 or 2009. We currently do not anticipate paying cash dividends on our common stock in the foreseeable future.  Instead, we anticipate that all of our earnings, if any, in the foreseeable future will be used for working capital and to finance the growth and development of our business.  Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our outstanding indebtedness, earnings, capital requirements, financial condition and future prospects, applicable Delaware law, which provides that dividends are only payable out of surplus or net profit for the then current and immediately preceding fiscal years, and other factors that our board of directors may deem relevant.

 

Our revolving credit facility, as amended, permits the payment of cash dividends to holders of our common stock commencing with the first fiscal quarter of 2010, so long as (i) the Leverage Ratio determined as of the end of the immediately preceding fiscal quarter for the then most recently completed four fiscal quarters, is equal to or less than 2.00 to 1.00 and (ii) the minimum pro forma availability as of the date of such dividend (after giving effect to such cash dividend, the funding of all revolving loans, and the issuance of all letters of credit to be funded or issued as of such date) is not less than $48.75 million; provided that, the aggregate amount of restricted payments shall not exceed 50% of net income during the period from October 1, 2009 to the end of the most recently ended fiscal quarter as of the date of the restricted payment.

 

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

 

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Recent Sales of Unregistered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

During the fourth fiscal quarter ended December 31, 2010, we did not repurchase any of our outstanding common stock.

 

Performance Graph

 

We have presented below the cumulative total return to our stockholders during the period from October 1, 2009, the date of our initial public offering of common stock, through December 31, 2010 in comparison to the cumulative return on the NASDAQ Composite Index and a customized peer group of seventeen companies during that same period.  Our peer group consisted of seventeen companies which are: Abbott Laboratories, Alcon Inc, Allergan Inc, Amgen Inc, Baxter International Inc, Bristol Myers Squibb Company, Covidien PLC, Edwards Lifesciences Corp., ELI Lilly & Company, Glaxosmithkline PLC, Hospira Inc, King Pharmaceuticals Inc, Medtronic Inc, Merck & Company Inc, Pfizer Inc, Sanofi-Aventis and Takeda Pharmaceutical Company. The results assume that $100 (with reinvestment of all dividends) was invested in our common stock, in the peer group, and in the index on October 1, 2009 and its relative performance tracked through December 31, 2010. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock. The performance graph set forth below shall not be deemed incorporated by reference into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934 except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such Acts.

 

COMPARISON OF CUMULATIVE TOTAL RETURN

 

Among Talecris Biotherapeutics Holdings Corp, The NASDAQ Composite Index

And a Peer Group

 

GRAPHIC

 

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ITEM 6.  SELECTED FINANCIAL DATA

 

The following is a summary of our historical consolidated financial data for the periods ended and at the dates indicated below.  You are encouraged to read this information together with our audited consolidated financial statements and the related footnotes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report.

 

The historical consolidated financial data for the years ended December 31, 2010, 2009, and 2008 and as of December 31, 2010 and 2009 has been derived from our audited consolidated financial statements, which are included elsewhere in this Annual Report.  The historical consolidated financial data for the years ended December 31, 2007 and 2006 and as of December 31, 2008, 2007, and 2006 has been derived from our audited consolidated financial statements, which are not included in this Annual Report.

 

We believe that the comparability of our financial results between the periods presented in the table below is significantly impacted by the following items, many of which are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Matters Affecting Comparability.”

 

·                  The financial impact related to our 2009 initial public offering (IPO) and refinancing transactions, including the repayment and termination of our First and Second Lien Term Loans; the issuance of our 7.75% Senior Notes, due November 15, 2016 (7.75% Notes), the write-off of previously deferred debt issuance costs, and charges related to the settlement and termination of our interest rate swap contracts;

 

·                  The increase in the number of shares of our common stock outstanding as a result of the issuance of new shares of our common stock in our IPO, to convert our Series A and B preferred stock, and to settle accrued dividends upon the conversion of our Series A and B preferred stock;

 

·                  Costs associated with our definitive merger agreement with Grifols;

 

·                  Costs associated with the judgment related to litigation with Plasma Centers of America, LLC (PCA);

 

·                  Costs and non-operating income associated with our terminated merger agreement with CSL Limited (CSL);

 

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

 

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

 

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

 

·                  Inventory impairment provisions, and subsequent recoveries, related to a customer dispute settlement regarding intermediate material;

 

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

 

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

 

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

 

·                  Tax benefit due to the release of our deferred tax asset valuation allowance.

 

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Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

 

 

(in thousands, except share and per share amounts)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

1,576,936

 

$

1,507,754

 

$

1,334,550

 

$

1,196,686

 

$

1,114,489

 

Other

 

24,683

 

25,455

 

39,742

 

21,823

 

14,230

 

Total

 

1,601,619

 

1,533,209

 

1,374,292

 

1,218,509

 

1,128,719

 

Cost of goods sold

 

911,976

 

901,077

 

882,157

 

788,152

 

684,750

 

Gross profit

 

689,643

 

632,132

 

492,135

 

430,357

 

443,969

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

SG&A

 

287,011

 

289,929

 

227,524

 

189,387

 

241,448

 

R&D

 

69,649

 

71,223

 

66,006

 

61,336

 

66,801

 

Total

 

356,660

 

361,152

 

293,530

 

250,723

 

308,249

 

Income from operations

 

332,983

 

270,980

 

198,605

 

179,634

 

135,720

 

Other non-operating (expense) income:

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(45,837

)

(74,491

)

(96,640

)

(110,236

)

(40,867

)

CSL merger termination fee

 

 

75,000

 

 

 

 

PCA judgment

 

(43,690

)

 

 

 

 

Equity in earnings of affiliate

 

991

 

441

 

426

 

436

 

684

 

Loss on extinguishment of debt

 

 

(43,033

)

 

 

(8,924

)

Litigation settlement

 

 

 

 

12,937

 

 

Income before income taxes and extraordinary items

 

244,447

 

228,897

 

102,391

 

82,771

 

86,613

 

(Provision) benefit for income taxes

 

(78,379

)

(75,008

)

(36,594

)

40,794

 

(2,222

)

Income before extraordinary items

 

166,068

 

153,889

 

65,797

 

123,565

 

84,391

 

Extraordinary items:

 

 

 

 

 

 

 

 

 

 

 

Loss from unallocated negative goodwill

 

 

 

 

 

(306

)

Gain from settlement of contingent consideration due Bayer

 

 

 

 

 

3,300

 

Net income

 

$

166,068

 

$

153,889

 

$

65,797

 

$

123,565

 

$

87,385

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before extraordinary items per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.35

 

$

4.56

 

$

39.01

 

$

65.58

 

$

(119.83

)

Diluted

 

$

1.29

 

$

1.50

 

$

0.71

 

$

1.36

 

$

(119.83

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

$

132.82

 

Diluted

 

 

 

 

 

$

8.61

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

123,323,722

 

31,166,613

 

1,310,448

 

1,685,784

 

5,679,456

 

Diluted

 

128,927,053

 

102,514,363

 

92,761,800

 

91,065,600

 

5,679,456

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at year end):

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

197,876

 

$

65,239

 

$

16,979

 

$

73,467

 

$

11,042

 

Total assets

 

$

1,738,453

 

$

1,445,005

 

$

1,307,399

 

$

1,142,322

 

$

903,474

 

Long-term debt and capital lease obligations

 

$

605,301

 

$

605,267

 

$

1,194,205

 

$

1,129,692

 

$

1,102,920

 

Redeemable preferred stock

 

 

 

$

110,535

 

$

110,535

 

$

110,535

 

Total stockholders’ equity (deficit)

 

$

794,364

 

$

582,154

 

$

(316,725

)

$

(390,757

)

$

(528,980

)

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data and Ratios (unaudited):

 

 

 

 

 

 

 

 

 

 

 

Liters of plasma fractionated

 

3,803

 

3,569

 

3,240

 

2,650

 

2,983

 

Gross margin

 

43.1

%

41.2

%

35.8

%

35.3

%

39.3

%

Operating margin

 

20.8

%

17.7

%

14.5

%

14.7

%

12.0

%

 

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

 

You are encouraged to read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related footnotes included at the end of this Annual Report.  This discussion and analysis contains forward-looking statements that involve risks and uncertainties.  See “Risk Factors” included elsewhere in this Annual Report for a discussion of some of the important factors that could cause actual results to differ materially from those described or implied by the forward-looking statements contained in the following discussion and analysis.  See “Special Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report.

 

All tabular disclosures are presented in thousands, except share and per share amounts.  Percentages and amounts presented herein may not calculate or sum precisely due to rounding.

 

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

 

BUSINESS OVERVIEW

 

We are a biopharmaceutical company that researches, develops, manufactures, markets, and sells protein-based therapies that extend and enhance the lives of individuals who suffer from chronic and acute, often life-threatening, conditions, such as primary immune deficiencies, chronic inflammatory demyelinating polyneuropathy (CIDP), alpha-1 antitrypsin deficiency-related emphysema, bleeding disorders, infectious diseases, and severe trauma.  Our primary products have orphan drug designation to serve populations with rare, chronic diseases.  Our products are derived from human plasma, the liquid component of blood, which is sourced from our plasma collection centers or purchased from third parties with plasma collection centers located in the United States. Plasma contains many therapeutic proteins, which we extract through the process of fractionation at our Clayton, North Carolina and Melville, New York facilities.  The fractionated intermediates are then purified, formulated into final bulk, and aseptically filled into final containers for sale.  We also sell the fractionated intermediate products.

 

The majority of our sales are concentrated in the therapeutic areas of Immunology/Neurology and Pulmonology.  Our largest product, representing 54.4%, 53.9%, and 49.3% of our net revenue for the years ended December 31, 2010, 2009, and 2008, respectively, Gamunex, Immune Globulin Intravenous (Human), 10% Caprylate/Chromatography Purified (Gamunex, Gamunex IGIV), provides a treatment for primary immunodeficiency (PI), idiopathic thrombocytopenic purpura (ITP), and autoimmune diseases, such as CIDP.  In May 2010 and October 2010, Gamunex-C was approved for the subcutaneous route of administration for the PI indication in Canada and the U.S., respectively.  Our second largest product, representing 22.0%, 20.8%, and 23.0% of our net revenue for the years ended December 31, 2010, 2009, and 2008, respectively, Prolastin Alpha-1 Proteinase Inhibitor (Human) (Prolastin, Prolastin A1PI, Prolastin-C A1PI), provides a treatment for alpha-1 antitrypsin deficiency-related emphysema.  We completed the conversion of our existing U.S. and Canadian Prolastin A1PI patients to Prolastin-C A1PI in 2010.

 

We believe U.S. IGIV distribution increased between 6% and 8% during the year ended December 31, 2010.  Despite solid demand growth for IGIV, there has been increased scrutiny and price sensitivity in the hospital segment.  In addition, the increase in the number of hospitals qualifying for the 340B discounts has effectively reduced demand from GPO’s who are not permitted to service this discounted channel.  This, among other factors, has led us to accept reduced volume tiers under certain of our GPO contracts.  We have seen solid demand growth for Gamunex-C/Gamunex IGIV with most customer segments.  We believe that U.S. and international IGIV demand will grow approximately 5% to 8% over the long-term, which is consistent with demand growth during the year ended December 31, 2010.  However, IGIV demand can vary significantly on a quarter-to-quarter basis.

 

Our ability to expand our international business has been hampered by the effects of our internal Foreign Corrupt Practices Act (FCPA) investigation, our reliance on the tender process for generating business and increased price sensitivities of our customers. We expect to complete our internal FCPA investigation and present our findings to the Department of Justice (DOJ) in 2011.  The preliminary findings of our investigation indicate that it is probable that there were FCPA violations by persons associated with us that the DOJ or other regulators may assert are attributable to us.  We are unable to estimate the potential impact of any sanctions, that may be imposed.   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Matters Affecting Comparability—Foreign Corrupt Practices Act (FCPA)” for further discussion.  Our business with an Iranian distributor, one of our major customers, has been in decline, which is likely to continue.  Our profitability has and may continue to be negatively impacted by unfavorable euro/U.S. dollar exchange rates.  We have experienced, and expect to continue to experience, annual volume declines in Canada due to Canadian Blood Services’ (CBS) objective to have multiple sources of supply, which has impacted and will continue to impact our overall IGIV growth.  CBS may further reduce volumes to contract minimums and Hema Quebec may adopt a similar strategy.

 

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We expect to operate at or near our fractionation capacity over the next few years depending upon the demand for our products, the availability of source plasma, the impact of yield variability, the potential impact of inventory impairments, and normal production shut-downs, among other factors.  We plan to utilize most of our available fractionation capacity in the near term, which may result in increased inventory levels in order to attempt to maintain pace with projected future growth in product demand, although we have not been successful in building excess finished goods inventories to date as a result of the factors previously mentioned.  Consequently, any disruption in meeting our fractionation and purification plans would most likely result in lower revenue, gross profit, net income, and operating cash flows as well as lower than planned growth given our fractionation and purification constraints. Our fractionation constraints would likely preclude us from participating in greater than estimated overall market demand or higher demand for Gamunex-C/Gamunex IGIV. In response to our capacity constraints, we have embarked on a substantial capital plan which we anticipate to be in the range of $750 million to $800 million on a cumulative basis from 2011 through 2015, excluding capitalized interest.  Given the nature of our planned capital projects, we anticipate our capital spending to peak in a range of $250 million to $270 million in 2011, excluding capitalized interest.   Our most significant capital project is the construction of our new fractionation facility, which we estimate will cost approximately $340 million, excluding capitalized interest.  Through December 31, 2010, our capital spending on this project was approximately $90 million with estimated additional capital spending of $250 million to be incurred, excluding capitalized interest. Estimated costs related to the construction of our new purification facilities for Plasmin is $120 million with additional expenditures planned for Koate modernization and albumin purification expansion.  The successful execution of this capital plan, which is discussed further in the section titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Access to Capital and Capital Resources,” will be necessary to support our projected future volume growth, particularly given our current fractionation and purification constraints, launch new products, and complete strategic initiatives.

 

As of December 31, 2010, we operated 69 plasma collection centers (67 FDA licensed, two unlicensed) with approximately 2,700 employees.  Over the past four years, we have aggressively expanded our plasma supply through these collection centers under our wholly-owned subsidiary, Talecris Plasma Resources, Inc. (TPR).  These centers collectively represent substantially all of our currently planned collection center network for the next three years.  We expect this network, once it fully matures, will provide in excess of 90% of our current plasma requirements.  Our licensed centers collected approximately 69% of our plasma during the year ended December 31, 2010.  We intend to continue to purchase some plasma from third parties through plasma supply contracts.  We have a five-year plasma supply contract with CSL Plasma, Inc., a subsidiary of CSL Limited, a major competitor.  This agreement provides us with minimum annual purchase commitments that decline from 550,000 liters in 2010 to 200,000 liters in 2013, the final year of the agreement.  We have the ability to obtain additional volumes above the minimum purchase commitments under the terms of the agreement.  CSL Plasma, Inc. is obligated to supply 300,000 liters of plasma to us in 2011 as we have not elected to take optional volumes for the 2011 contract year.  In addition to the contract with CSL Plasma, Inc., we have several other contracts to purchase minimum quantities of plasma with various third parties.

 

We will need to significantly increase plasma collections generated from TPR in the near term to offset the expected decrease in plasma supplied by third parties and planned increases in our fractionation to meet anticipated demand.  To meet our plasma requirements, we have increased donor fees, increased marketing expenses, and expanded plasma collection center days and hours of operations, among other initiatives, which may limit our ability to reduce our cost per liter of plasma.  Consequently, we expect to continue to produce plasma at a cost per liter which we believe is significantly higher than our competitors. However, TPR is in the process of upgrading its plasmapheresis machines to speed plasma collections as well as the installation of automated digital screening to improve compliance. These measures, in addition to reductions in infrastructure support as the platform matures, will improve costs as well as the donor experience.

 

Our historical results show a substantial reduction in both the collection cost per liter and the amount of excess period costs charged directly to cost of goods sold as a result of the maturation of our plasma collection center platform.  Decreasing collection costs and the reduction of excess period costs, combined with leveraging our manufacturing facilities as a result of higher volumes, have contributed to improving our gross margins.  Our cost of goods sold reflects $6.6 million, $44.0 million, and $98.5 million for the years ended December 31, 2010, 2009, and 2008, respectively, related to excess period costs associated with TPR.  We believe that we have substantially eliminated unabsorbed TPR infrastructure and start-up costs.  Consequently, future margin improvements will need to be derived from increases in product pricing and volumes, product mix, improvements in the cost per liter of plasma, manufacturing efficiencies, yield improvements or some combination thereof.  We believe that we have limited opportunities to increase price as well as enhance product mix.  We have recently experienced and expect to continue to experience higher costs of goods sold due to yield variability, inventory impairment provisions, less efficient utilization of each incremental liter of plasma fractionated as we increase Gamunex-C/Gamunex IGIV production, and higher non-capitalizable costs associated with our capital projects, particularly the construction of our new fractionation facility.

 

The combination of the factors mentioned above, particularly competitive pressures, slower than planned reductions in our cost per liter of plasma, yield variability as well as inefficient plasma utilization and the potential impact of inventory impairment provisions, among other factors, will most likely result in lower gross margins in future periods.

 

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Our U.S. sales force is comprised of three specialty teams focused on Immunology/Neurology for the promotion of Gamunex-C for use in PI, ITP, and CIDP, as well as our portfolio of hyperimmune products and Plasbumin; Pulmonary for the promotion of Prolastin/Prolastin-C A1PI with an emphasis on patient identification; and Hematology which promotes Koate and Thrombate III.  In addition to this direct sales force, we also have managed markets and national account sales teams that manage relationships and contracting efforts with GPO’s, distributors, home healthcare and specialty pharmacy providers and private commercial payors.  In addition to our U.S. operations, we have operations located in Germany, Canada, as well as a team dedicated to the development of other international markets.  We believe that we are well positioned in the IGIV market given the features and benefits of Gamunex-C/Gamunex IGIV.  As a result of eliminating our plasma supply constraints, the attributes of Gamunex-C/Gamunex IGIV and its approval for CIDP have resulted in significant increases in our share of sales.  Our fractionation constraints, however, will limit the supply of Gamunex-C/Gamunex IGIV and our ability to grow Gamunex-C/Gamunex IGIV volumes.  In addition our current purification constraints related to albumin and Koate, our plasma-derived Factor VIII product, will continue.

 

HIGHLIGHTS

 

Our 2010 financial and business highlights are included below.

 

2010 Financial Highlights

 

The following summarizes our 2010 financial highlights. Additional information regarding our results of operations is included in the section entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

 

·                  Total net revenue increased 4.5% for the year ended December 31, 2010 to $1.602 billion as compared to $1.533 billion for the year ended December 31, 2009.  We experienced year over year growth in our U.S. Gamunex-C and Prolastin-C A1PI net revenue of 10.0% and 12.4%, respectively, driven by both higher volumes and pricing.  Pull-through sales growth by our distributors exceeded our ex-factory sales growth.  In addition, we experienced a $6.8 million increase in international Prolastin/Prolastin-C A1PI net revenue, driven by higher volumes and pricing in Europe, including the impact of unfavorable foreign exchange.  Despite strong European growth in Gamunex net revenue, international Gamunex-C/Gamunex IGIV net revenue declined 6.6% as a result of lower Canadian sales as a result of CBS’ multi-source strategy, as well as lower sales in other international regions.

 

·                  Gross margin improved approximately 200 basis points to 43.1% for the year ended December 31, 2010 as compared to 41.2% for the year ended December 31, 2009.  Gross margin benefited primarily from a $37.4 million reduction in TPR unabsorbed infrastructure and start-up costs as a result of the maturation of our plasma collection center platform.

 

·                  Operating margin improved approximately 310 basis points to 20.8% for the year ended December 31, 2010 as compared to 17.7% for the year ended December 31, 2009.

 

·                  Net income was $166.1 million for the year ended December 31, 2010, as compared to $153.9 million for the year ended December 31, 2009.  Diluted earnings per common share were $1.29 and $1.50 for the years ended December 31, 2010 and 2009, respectively.  Our 2010 results include $27.7 million (approximately $17.3 million after tax) in transaction-related costs associated with our definitive merger agreement with Grifols as well as a charge, including accrued interest, of $43.7 million (approximately $26.6 million after tax) associated with the judgment in favor of Plasma Centers of America, LLC (PCA).  Our 2009 results include the impact of the CSL merger termination income of $75.0 million (approximately $48.8 million after tax), transaction-related costs related to the terminated CSL merger agreement of $15.1 million (approximately $9.3 million after tax), and charges related to our refinancing transactions of $43.0 million (approximately $26.3 million after tax).  We believe that a meaningful comparison of our results for the years presented is enhanced by a quantified presentation of the impact of theses items on our net income and diluted earnings per share, which is illustrated in the table below.

 

·                  Operating cash flows were $255.5 million and $234.2 million for the years ended December 31, 2010 and 2009, respectively.  Capital expenditures were $152.8 million and $75.2 million for the years ended December 31, 2010 and 2009, respectively.

 

In addition, our 2010 diluted earnings per common share amounts reflect a significant increase in the number of weighted average common shares used in our computation of diluted earnings per share as discussed below and in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Matters Affecting Comparability—Comparability of Outstanding Common Shares and Pro Forma Diluted Earnings Per Common Share.”

 

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

 

 

 

 

 

Income Tax

 

 

 

Diluted Earnings

 

 

 

Pre- Tax

 

Expense

 

 

 

Per

 

 

 

Amount

 

(Benefit)

 

Net Income

 

Common Share

 

Year Ended December 31, 2010

 

 

 

 

 

 

 

 

 

U.S. GAAP

 

$

244,447

 

$

(78,379

)

$

166,068

 

$

1.29

 

Grifols merger-related expenses

 

27,730

 

(10,454

)

17,276

 

0.13

 

PCA judgment

 

43,690

 

(17,083

)

26,607

 

0.21

 

Excluding specific items

 

$

315,867

 

$

(105,916

)

$

209,951

 

$

1.63

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2009

 

 

 

 

 

 

 

 

 

U.S. GAAP

 

$

228,897

 

$

(75,008

)

$

153,889

 

$

1.50

 

CSL merger termination fee

 

(75,000

)

26,250

 

(48,750

)

(0.48

)

CSL merger-related expenses

 

15,136

 

(5,873

)

9,263

 

0.08

 

Write-off of deferred debt issuance costs

 

12,141

 

(4,711

)

7,430

 

0.07

 

Loss on extinguishment of interest rate swap contracts

 

30,892

 

(11,986

)

18,906

 

0.19

 

Excluding specific items

 

$

212,066

 

$

(71,328

)

$

140,738

 

$

1.36

 

 

 

 

 

 

 

 

 

 

 

As adjusted for pro forma weighted average number of shares (1)

 

 

 

 

 

 

 

$

1.11

 

 


(1)          As discussed further in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability—Comparability of Outstanding Common Shares and Pro Forma Diluted Earnings Per Common Share,” we believe the comparability of our diluted earnings per share between the years presented is enhanced by the use of an adjusted share base to reflect the impact for the issuance of common shares to convert our Series A and B preferred stock, settle accrued dividends on the preferred stock, and complete our IPO as if these events occurred at the beginning of 2009.

 

Business Highlights

 

·                  During the fourth quarter of 2010, we initiated our Phase II clinical trial for our direct-acting thrombolytic Plasmin to treat acute Peripheral Arterial Occlusion.

 

·                  On December 13, 2010, a jury in the General Court of Justice, Superior Court Division, Wake County, North Carolina, rendered a verdict in the amount of $37.0 million in favor of PCA against TPR in a breach of contract claim, which was confirmed by the court in post trial motions. We intend to appeal. The jury verdict, if sustained, will bear simple interest at 8% per statute from the date of the breach, which totals approximately $6.7 million at December 31, 2010. We have included a charge of $43.7 million (approximately $26.6 million after tax) in our consolidated income statement for the year ended December 31, 2010 related to this judgment.

 

·                  During the fourth quarter of 2010, we initiated a clinical trial evaluating the safety and pharmacokinetic profile of two doses of Prolastin-C A1PI.  The study will investigate the safety and pharmacokinetic profile of a higher dose, 120 mg/kg weekly, of Prolastin-C A1PI, versus the licensed dose of 60 mg/kg weekly.

 

·                  On October 13, 2010, we received approval from the FDA for Gamunex-C (Immune Globulin Injection [Human], 10% Caprylate/Chromatography Purified) for subcutaneous administration in the treatment of primary immunodeficiency (PI).  Gamunex-C is the first and only immune globulin to provide both the intravenous route of administration and a new subcutaneous route of administration.  The intravenous delivery mode is approved to treat PI, CIDP, and ITP.  The subcutaneous mode is approved to treat only PI.  A required post-marketing study will be initiated in the second half of 2011.

 

·                  In September 2010 and March 2010, we launched our next generation A1PI product, Prolastin-C, in Canada and the United States, respectively.  We have completed the conversion of existing Canadian and U.S. Prolastin patients to Prolastin-C A1PI.

 

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·                  On June 6, 2010, we entered into a definitive merger agreement with Grifols under which Grifols will acquire, through merger transactions, all of our common stock.  On November 4, 2010, pursuant to a memorandum of understanding entered into in connection with the litigation described under “Legal Proceedings” included elsewhere in this Annual Report, the parties to the merger agreement entered into an amendment to the merger agreement, pursuant to which Grifols agreed to pay a per Talecris merger consideration of a combination of (1) $19.00 in cash and (2) subject to adjustment under limited circumstances, 0.6485 (or 0.641 for Talecris’ directors and Talecris Holdings, LLC) of a share of Grifols non-voting share.

 

·                  On May 13, 2010, we received approval from Health Canada to launch Gamunex for subcutaneous administration in Canada for the PI indication.  We launched subcutaneous administration for Gamunex in Canada in the fourth quarter of 2010.

 

·                  During the first quarter of 2010, we received approval to proceed with the proof of concept trial for plasma-derived Plasmin to treat acute ischemic stroke in certain countries outside of the United States.

 

·                  In March 2010, we began constructing our new fractionation facility located in Clayton, North Carolina.  The new fractionation facility, which is expected to be operational in 2015, will have the capacity to fractionate 6.0 million liters of human plasma annually.

 

·                  In February 2010, we were granted orphan drug designation by the U.S. FDA for the development of an aerosol formulation of A1PI to treat congenital alpha-1 antitrypsin (AAT) deficiency.  AAT deficiency is a chronic, hereditary condition that increases the risk of certain diseases, particularly emphysema.  Currently, there are no approved, inhaled treatments available for the treatment of AAT.  We received a similar orphan drug designation for the aerosolized form of A1PI from the European Commission in June of 2008.  We have decided not to initiate an aerosol trial with plasma-derived Prolastin-C A1PI.

 

SUBSEQUENT EVENTS

 

Special Meeting of Stockholders

 

On February 14, 2011, we held a special meeting at which holders of a majority of our outstanding common stock approved the adoption of the Agreement and Plan of Merger, dated as of June 6, 2010, among Grifols and Talecris Biotherapeutics Inc. The completion of the transaction is subject to obtaining certain regulatory approvals and other customary conditions.  Grifols agreed to provide written notice to the FTC staff at least thirty days prior to closing the transaction and, in any event, not to close the transaction until after 11:59 p.m. on March 20, 2011.  There can be no assurance that Grifols will reach resolution with the FTC by March 20, 2011.  Under the pending merger agreement, if this transaction is not closed by the current “outside date” of March 6, 2011, then under specified circumstances, either Grifols or we may elect to cause the “outside date” to be extended to a date not later than the expiration of Grifols financing for the transaction, or September 6, 2011, whichever is earlier.

 

Foreign Currency Hedging Program

 

In order to reduce the impact of the volatility of foreign currency exchange rates and improve predictability, we initiated a foreign currency hedging program in the first quarter of 2011 as discussed further in the section titled “Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Risk,” included elsewhere in this Annual Report.

 

HEALTHCARE REFORM

 

In March 2010, healthcare reform legislation was enacted in the United States.  This legislation contains several provisions that impact our business.  Certain of these provisions are included below.  Additional information regarding U.S. healthcare reform is included in the section titled, “Business—Pharmaceutical Pricing and Reimbursement”, located elsewhere in this Annual Report.

 

Although many provisions of the new legislation do not take effect immediately, several provisions became effective during 2010. These include (1) an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% of the Average Manufacturer Price (AMP) on our branded prescription drugs, with a limitation of this increase on clotting factors to 17.1% of the AMP; (2) the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries; and (3) the expansion of the 340B Public Health Services (PHS) drug pricing program, which provides hospital outpatient drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers.  These new provisions did not have a material impact on our 2010 financial results.

 

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

 

Beginning in 2012, the new law may require us to issue Internal Revenue Service Forms 1099 to plasma donors whose remuneration exceeds six hundred dollars annually.  The cost of implementing this requirement, as well as its potential impact on plasma donations, is unknown at this time.

 

Presently, uncertainty exists as many of the specific determinations will be developed as regulatory bodies interpret the law and enact new regulations.  For example, determination as to how the Medicare Part D coverage gap will operate and how the annual fee on branded prescriptions will be calculated and allocated remains to be clarified.  As noted above, these programs will become effective in 2011.

 

BASIS OF PRESENTATION

 

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

 

The comparability of our financial results is impacted by significant events and transactions during the years presented as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability.”

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent assets and liabilities.  A detailed description of our significant accounting policies is included in the footnotes to our audited consolidated financial statements included elsewhere in this Annual Report.

 

We believe that certain of our accounting policies are critical because they are the most important to the preparation of our consolidated financial statements.  These policies require our most subjective and complex judgments, often requiring the use of estimates about the effects of matters that are inherently uncertain.  We apply estimation methodologies consistently from year to year.  Other than changes required due to the issuance of new accounting guidance, there have been no significant changes in our application of our critical accounting policies during 2010.  We periodically review our critical accounting policies and estimates with the audit committee of our board of directors.  The following is a summary of accounting policies that we consider critical to our consolidated financial statements.

 

Revenue Recognition and Gross-to-Net Revenue Adjustments

 

We recognize revenue when earned, which is generally at the time of delivery to the customer.  Recognition of revenue also requires reasonable assurance of collection of sales proceeds, a fixed and determinable price, persuasive evidence that an arrangement exists, and completion of all other performance obligations.   The recognition of revenue is deferred if there are significant post-delivery obligations, such as customer acceptance.

 

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

 

We have supply agreements with our major distributors, which require them to purchase minimum quantities of our products.  We regularly review the supply levels of our products on hand at major distributors, primarily by analyzing inventory reports supplied by these distributors, available data regarding the sell-through of our products, our internal data, and other available information.  When we believe distributor inventory levels have increased relative to underlying demand, we evaluate the need for sales return allowances.  Factors that influence the allowance include historical sales return activity, levels of inventory in the distribution network, inventory turnover, demand history, demand projections, estimated product shelf-life, pricing, and competition.  Sales returns have not been material during the years presented.

 

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Revenue from milestone payments for which we have no continuing performance obligations is recognized upon achievement of the related milestone.  When we have continuing performance obligations, the milestone payments are deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations.

 

Gross product sales are subject to a variety of deductions that are generally estimated and recorded in the same period that the revenues are recognized, and primarily represent rebates to government agencies, chargebacks to wholesalers and distributors, and customer prompt pay discounts.  These gross-to-net revenue adjustments are described below.

 

We offer rebates to some classes of trade, which we account for by establishing an accrual at the time the sale is recorded in an amount equal to our estimate of rebates attributable to each sale.  We determine our estimate of the rebates primarily based on historical experience and current contract arrangements.  We consider the sales performance of products subject to rebates and the levels of inventory in the distribution channel and adjust the accrual periodically to reflect actual experience.  Rebates accrued upon sale are settled based on actual experience.  Due to the limited classes of trade that participate in rebate programs and our visibility of inventories in the channel, adjustments for actual experience have not been material.

 

We participate in state government-managed Medicaid programs. We account for Medicaid rebates by establishing an accrual at the time the sale is recorded in an amount equal to our estimate of the Medicaid rebate claims attributable to such sale. We determine our estimate of the Medicaid rebates accrual primarily based on historical experience regarding Medicaid rebates, legal interpretations of the applicable laws related to the Medicaid program and any new information regarding changes in the Medicaid programs’ regulations and guidelines that would impact the amount of the rebates. We consider outstanding Medicaid claims, Medicaid payments, and levels of inventory in the distribution channel and adjust the accrual periodically to reflect actual experience. While these rebate payments to the states generally occur on a one to two quarter lag, any adjustments for actual experience have not been material.

 

As of December 31, 2010, our allowance for managed health care and Medicaid rebates and other items was $23.8 million. A hypothetical 10% change in payments made for managed health care and Medicaid rebates for the year ended December 31, 2010 would not have a material impact to our consolidated results of operations.

 

We enter into agreements with some customers to establish contract pricing for our products, which these entities purchase from the authorized wholesaler or distributor (collectively, wholesalers) of their choice. Consequently, when our products are purchased from wholesalers by these entities at the contract price which is less than the price charged by us to the wholesaler, we provide the wholesaler with a credit referred to as a chargeback. We record the chargeback accrual at the time of the sale. The allowance for chargebacks is based on our estimate of the wholesaler inventory levels, and the expected sell-through of our products by the wholesalers at the contract price based on historical chargeback experience and other factors. We periodically monitor the factors that influence our provision for chargebacks, and make adjustments when we believe that actual chargebacks may differ from established allowances. These adjustments occur in a relatively short period of time. As these chargebacks are typically settled within 30 to 45 days of the sale, adjustments for actual experience have not been material.

 

As of December 31, 2010, our allowance for chargebacks was $3.4 million. A hypothetical 10% change in credits issued for chargebacks for year ended December 31, 2010 would not have a material impact to our consolidated results of operations.

 

Sales allowances are established based upon consideration of a variety of factors, including, but not limited to, our sales terms, which generally provide for up to a 2% prompt pay discount on domestic and international sales, contractual agreements with customers, estimates of the amount of product in the pipeline and prescribing patterns. We believe that our sales allowance accruals are reasonably determinable and are based on the information available at the time to arrive at our best estimate of the accruals at the time of the sale. Actual sales allowances incurred are dependent upon future events. We periodically monitor the factors that influence sales allowances and make adjustments to these provisions when we believe that the actual sales allowances may differ from prior estimates. If conditions in future periods change, revisions to previous estimates may be required, potentially in significant amounts. As these prompt pay discounts are typically settled within 30 to 45 days of the sale, adjustments for actual experience have not been material.

 

As of December 31, 2010, our allowance for cash discounts was $1.2 million. A hypothetical 10% change in credits issued for cash discounts for the year ended December 31, 2010 would not have a material impact to our consolidated results of operations.

 

Shelf-stock adjustments are credits issued to customers to reflect decreases in the selling prices of products. Agreements to provide this form of price protection are customary in our industry and are intended to reduce a customer’s inventory cost to better reflect current market prices. Shelf-stock adjustments are based upon the amount of product that customers have remaining in their inventories at the time of a price reduction. Decreases in our selling prices are discretionary decisions made by us to reflect market conditions. Any amounts recorded for estimated price adjustments would be based upon the specific terms with customers, estimated declines in price, and estimates of inventory held by the customer. We have not experienced material shelf-stock adjustments during the years presented as a result of

 

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the demand for plasma-derived products outpacing the supply due to our constraints in our industry.  Recently, product supply and demand have become more balanced.  We could experience material shelf-stock adjustments in the future in the event that the supply-demand dynamic become unbalanced and resulted in price declines.

 

We utilize information from external sources to estimate our significant gross-to-net revenue adjustments. Our estimates of inventory at wholesalers and distributors are based on written and oral information obtained from certain wholesalers and distributors with respect to their inventory levels and sell-through to customers. The inventory information received from wholesalers and distributors is a product of their record-keeping process. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information was itself in the form of estimates, and reflect other limitations, including lags between the date as of which the third-party information is generated and the date on which we receive third-party information. We believe, based on our experience, that the information obtained from external sources provides a reasonable basis for our estimate.

 

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

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

Gross product revenue

 

$

1,660,643

 

$

1,593,995

 

$

1,389,542

 

Chargebacks

 

(28,013

)

(24,380

)

(13,927

)

Cash discounts

 

(20,186

)

(18,710

)

(15,147

)

Rebates and other

 

(35,130

)

(42,397

)

(24,008

)

SG&A reimbursements

 

(378

)

(754

)

(1,910

)

Product net revenue

 

$

1,576,936

 

$

1,507,754

 

$

1,334,550

 

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

Gross product revenue

 

100.0

%

100.0

%

100.0

%

Chargebacks

 

(1.7

)%

(1.5

)%

(1.0

)%

Cash discounts

 

(1.2

)%

(1.2

)%

(1.1

)%

Rebates and other

 

(2.1

)%

(2.7

)%

(1.7

)%

SG&A reimbursements

 

 

 

(0.1

)%

Product net revenue

 

95.0

%

94.6

%

96.1

%

 

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

 

 

 

 

 

Cash

 

Rebates and

 

 

 

 

 

Chargebacks

 

Discounts

 

Other

 

Total

 

Balance at December 31, 2007

 

$

2,688

 

$

1,074

 

$

11,432

 

$

15,194

 

Provision

 

13,927

 

15,147

 

24,008

 

53,082

 

Credits issued

 

(12,752

)

(14,727

)

(23,029

)

(50,508

)

Balance at December 31, 2008

 

3,863

 

1,494

 

12,411

 

17,768

 

Provision

 

24,380

 

18,710

 

42,397

 

85,487

 

Credits issued

 

(23,981

)

(18,930

)

(28,381

)

(71,292

)

Balance at December 31, 2009

 

4,262

 

1,274

 

26,427

 

31,963

 

Provision

 

28,013

 

20,186

 

35,508

 

83,707

 

Credits issued

 

(28,850

)

(20,280

)

(38,118

)

(87,248

)

Balance at December 31, 2010

 

$

3,425

 

$

1,180

 

$

23,817

 

$

28,422

 

 

As discussed elsewhere in this Annual Report, the recently enacted healthcare reform legislation increased the size of Medicaid rebates paid by drug manufacturers from 15.1% to 23.1% of the AMP, with a limitation of this increase on clotting factors to 17.1% of the AMP.

 

The increase in the provision for chargebacks during 2010 as compared to prior years was largely due to increased sales related to government contracts.  Rebates and other adjustments were impacted by the reduction of channel inventories during 2010.  The increase in the provision for rebates and other for the year ended December 31, 2009 as compared to the year ended December 31, 2008 was primarily due to higher GPO fees, Medicaid rebates, and the potential Canadian pricing adjustment, among others.  The provision for chargebacks for the year ended December 31, 2009 as compared to the year ended December 31, 2008 was largely due to increased sales related to government contracts.

 

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Concentrations of Credit Risk

 

Customer Concentrations

 

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

 

·                  At December 31, 2010: Amerisource Bergen- 12.8%

 

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

 

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

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

FFF Enterprise, Inc.

 

13.9

%

14.4

%

12.8

%

Amerisource Bergen

 

13.1

%

12.3

%

12.0

%

Canadian Blood Services

 

<10

%

<10

%

10.6

%

 

In the event that any of these customers were to suffer an adverse downturn in their business or a downturn in their supply needs, our business could be materially adversely affected.  Additional information regarding customer concentrations is included in the section titled “Risk Factors—Risks Related to our Business— A substantial portion of our revenue is derived from a small number of customers, and the loss of one or more customers could have a material adverse effect on us.”

 

Counterparty Risk

 

As discussed further in “Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Risk,” we initiated a foreign currency hedging program in the first quarter of 2011 for the purpose of managing the economic effects of the volatility associated with short-term changes in euro/U.S. dollar exchange rates on our earnings and cash flows.  These derivative financial instruments present certain market and counterparty risks.  We seek to manage the counterparty risks associated with these contracts by limiting transactions to counterparties with which we have established banking relationships  and limit the duration of the contracts to less than one year.  We are exposed to potential losses if a counterparty fails to perform according to the terms of the agreement.  We do not require collateral or other security to be furnished by counterparties to our derivative financial instruments. There can be no assurance, however, that our practice effectively mitigates counterparty risk. A number of financial institutions similar to those that serve or may serve as counterparties to our hedging arrangements were adversely affected by the global credit crisis.  The failure of any of the counterparties to our hedging arrangements to fulfill their obligations to us could adversely affect our results of operations and cash flows.

 

Research and Development

 

Our R&D expenses include the costs directly attributable to the conduct of research and development programs for new products and extensions or improvements of existing products and the related manufacturing processes.  Such costs include salaries and related employee benefit costs, payroll taxes, materials (including the material required for clinical trials), supplies, depreciation on and maintenance of R&D equipment, services provided by outside contractors for clinical development and clinical trials, regulatory services, and fees.  R&D also includes the allocable portion of facility costs such as rent, depreciation, utilities, insurance, and general support services.  All costs associated with R&D activities are expensed as incurred.

 

We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing products.  We have a strong commitment to science and technology with a track record of accomplishments and pipeline opportunities.  We focus our R&D efforts in three key areas: continued enhancement of our process technologies (including pathogen safety), life cycle management for our existing products (including new indications), and the development of new products.  We expect overall R&D spending to increase in subsequent periods due to life-cycle management, new product projects, and licensure of technology or products.

 

The following table summarizes our significant R&D projects and expenses for the years presented:

 

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Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

Life Cycle Management:

 

 

 

 

 

 

 

Gamunex CIDP

 

$

50

 

$

200

 

$

600

 

Prolastin-C A1PI

 

$

3,200

 

$

2,200

 

$

3,900

 

Prolastin Alpha-1 Aerosol

 

$

1,900

 

$

8,900

 

$

6,100

 

Gamunex subcutaneous administration

 

$

400

 

$

1,400