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As filed with the Securities and Exchange Commission on July 27, 2007

Registration No. 333-          



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


TALECRIS BIOTHERAPEUTICS HOLDINGS CORP.
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)
  2834
(Primary Standard Industrial
Classification Code Number)
  20-2533768
(I.R.S. Employer
Identification No.)

P.O. Box 110526
4101 Research Commons
79 T.W. Alexander Drive
Research Triangle Park, North Carolina 27709
(919) 316-6300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

LAWRENCE D. STERN
Chairman and Chief Executive Officer
TALECRIS BIOTHERAPEUTICS HOLDINGS CORP.
P.O. Box 110526
4101 Research Commons
79 T.W. Alexander Drive
Research Triangle Park, North Carolina 27709
(919) 316-6300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)



with copies to:

GERARD S. DIFIORE
ARON IZOWER

REED SMITH LLP
599 Lexington Avenue
New York, New York 10022
(212) 521-5400
(212) 521-5450 (facsimile)

 

JOHN F. GAITHER, Jr.
Executive Vice President,
General Counsel and Secretary
TALECRIS BIOTHERAPEUTICS
HOLDINGS CORP.
P.O. Box 110526
4101 Research Commons
79 T.W. Alexander Drive
Research Triangle Park,
North Carolina 27709
(919) 316-6300
(253) 390-6623 (facsimile)

 

JOHN T. BOSTELMAN
GLEN T. SCHLEYER

SULLIVAN & CROMWELL LLP
125 Broad Street
New York, New York 10004
(212) 558-4000
(212) 558-3588 (facsimile)

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement is declared effective.

        If any of the securities being registered on this Form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") please check the following box.    o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE


Title of Each Class of
Securities to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)

  Amount of
Registration Fee(2)


Common Stock $0.01 par value per share   $1,000,000,000   $30,700

(1)
Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)
Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.


        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.




PROSPECTUS (Subject to Completion)

Issued July 27, 2007

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

                     Shares

GRAPHIC

COMMON STOCK


Talecris Biotherapeutics Holdings Corp. is offering              shares of common stock. The selling stockholders identified in this prospectus are offering an additional               shares. This is our initial public offering, and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $              and $              per share. We will not receive any proceeds from sales by the selling stockholders.


We will apply to have our common stock approved for quotation on The Nasdaq Global Market under the symbol "TLCR."


Investing in our common stock involves risks. See "Risk Factors" beginning on page 15.


Price $     a Share


 
  Price to
Public

  Underwriting
Discounts and
Commissions

  Proceeds to
Talecris

  Proceeds to
Selling
Stockholders

Per Share   $        $             $             $          
Total   $                      $                      $                      $                   

We and the selling stockholders have granted to the underwriters the option to purchase up to an additional            shares of common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus. The first            shares under this option would be purchased from the selling stockholders.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about                        , 2007.

Morgan Stanley   Goldman, Sachs & Co.   JPMorgan

                                                       , 2007



TABLE OF CONTENTS

 
  Page
Prospectus Summary   1
The Offering   9
Risk Factors   15
Special Note Regarding Forward-Looking Statements   38
Use of Proceeds   39
Dividend Policy   40
Capitalization   41
Dilution   43
Selected Historical Consolidated and Combined Financial Data   45
Management's Discussion and Analysis of Financial Condition and Results of Operations   50
Quantitative and Qualitative Disclosures About Market Risk   92
Industry   94
Business   101
Management   130
Certain Relationships and Related Person Transactions   167
Principal and Selling Stockholders   178
Description of Certain Indebtedness   181
Description of Capital Stock   184
Shares Eligible for Future Sale   187
Underwriters   189
Validity of Common Stock   195
Experts   195
Where You Can Find More Information   195
Index to Financial Statements   F-1

        No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

        Through and including                        , 2007 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

        This prospectus includes market share and industry data and forecasts that we have obtained from market research, consultant surveys, publicly available information and industry publications and surveys as well as our internal data. Except where otherwise indicated, information regarding the plasma-derived protein market is derived from Market Research Bureau's reports entitled (1) Market Research Bureau Worldwide Fractions Market, 2005 Data; (2) Market Research Bureau Revised U.S. Plasma Fractions Market 2006; (3) Market Research Bureau International Directory of Plasma Fractionators 2005; (4) Marketing Research Bureau, Inc.; The Plasma Fractions Market in Canada 2005 (5) Revised Market Research Bureau Presentation to International Plasma Protein Congress March 2006 (6) Marketing Research Bureau, Inc.: Albumin 2012; and (7) Market Research Bureau Worldwide Alpha-1 Antitrypsin Market: Present to Future 2005-2015. Market research, consultant surveys, and industry publications and surveys generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy or completeness of such information. Although we believe that the publications and reports are reliable, neither we nor the underwriters have independently verified the data. Our internal data, estimates and forecasts are based upon information obtained from our investors, partners, trade and business organizations and other contacts in the markets in which we operate and our management's understanding of industry conditions. Although we believe that such information is reliable, we have not had such information verified by any independent sources.

        We have a number of registered marks, including Gamunex®, Prolastin®, Plasbumin®, Plasmanate®, Koate®, Thrombate III®, GamaStan®, HyperHepB®, HyperRho®, HyperRab®, HyperTet®, Gamimune® and Talecris Direct®. This prospectus also contains additional trade names, trademarks and service marks belonging to us and to other companies. All trademarks and trade names appearing in this prospectus are the property of their respective holders.

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PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that is important to you. Before investing in our common stock, you should read this prospectus carefully in its entirety, especially the risks of investing in our common stock that we discuss in the "Risk Factors" section of this prospectus and our financial statements and financial statements of the Bayer Plasma Products Business Group and of International BioResources, L.L.C. (IBR) and affiliated entities and the related notes beginning on page F-1.

        All information in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares, unless otherwise indicated.

        In this prospectus, unless otherwise stated or the context otherwise requires, references to "Talecris," "we," "us," "our" and similar references refer to Talecris Biotherapeutics Holdings Corp. for the period subsequent to our formation, and refer to Bayer Plasma Products Business Group, an operating unit of the Biological Products division of Bayer Healthcare LLC, which is a subsidiary of Bayer AG, for the period prior to our formation. Unless otherwise stated or the context requires otherwise, "Bayer" means Bayer AG, or any of its directly or indirectly wholly-owned subsidiaries.

        We refer to EBITDA and adjusted EBITDA in various places in this prospectus. The definitions of EBITDA and adjusted EBITDA, and a reconciliation of EBITDA and adjusted EBITDA to Net Income (Loss), are provided in footnotes 1 and 2 under the heading "Summary Historical Consolidated and Combined Financial Data" and "Selected Historical Consolidated and Combined Financial Data."

Talecris Biotherapeutics Holdings Corp.

Overview

        We are a biopharmaceutical company that 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 immune deficiency disorders, alpha-1 antitrypsin (AAT) deficiency, infectious diseases, hemophilia and severe burns. In 2006, our internal estimates show that we ranked second in the North American market with a 27% share of combined product sales and contract manufacturing. In 2005, we ranked third in the $7.0 billion global market with a 14% share of product sales. Our largest product, Gamunex Immune Globulin Intravenous (Human), is one of the leading products in the IGIV market with a reputation as a premium product within the intravenous immune globulin, or IGIV, category. Our second largest product, Prolastin Alpha 1 Proteinase Inhibitor (Human), was granted "orphan drug" status and has a 71% share of sales in the United States, a 78% share of sales in the European Union and a high degree of brand recognition within the alpha-1 proteinase inhibitor, or A1PI, category, which is one of the fastest growing categories of this industry. We began operations as an independent company on April 1, 2005, upon the completion of our acquisition of substantially all of the assets and specified liabilities of the Bayer Plasma Products Business Group, an operating unit of the Biological Products division of Bayer Healthcare LLC, which is a subsidiary of Bayer AG. During the year ended December 31, 2006, we generated net revenue and net income of $1.1 billion and $87.4 million, respectively, and EBITDA and adjusted EBITDA of $140.7 million and $264.1 million, respectively.

        We established our leading market positions through a history of innovation, including developing the first ready-to-use 10% liquid IGIV product in North America and the first A1PI product globally. We continue to develop products to address unmet medical needs and employ over 220 scientists and support staff to develop new products, expand the uses of our existing products, and enhance our process technologies. Our business is supported by an integrated infrastructure including 46 plasma collection centers, one of the world's largest integrated fractionation and purification facilities, a differentiated distribution network, and sales and marketing organizations in the U.S., Canada and Germany. Our

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heritage of patient care innovations in therapeutic proteins dates back to Cutter Laboratories, which began to produce plasma-derived products in the early 1940s, and its successor companies, including Miles Inc., Bayer Corporation and Bayer Healthcare LLC. Our long experience as a producer and marketer of plasma-derived protein therapies has enabled us to forge strong ties with members of the medical community, patient advocacy groups and our distributors.

The Plasma Products Industry

        Market Dynamics.    The human plasma-derived products industry has demonstrated total sales growth at a compound annual rate of approximately 7% globally over the past 15 years with worldwide sales of approximately $7.0 billion in 2005. U.S. sales have grown at a compound annual rate of approximately 9% over the past 16 years with sales of $3.1 billion in 2006. Consistent worldwide growth in demand and favorable supply/demand dynamics have generally provided a basis for price increases over the past three years. Price increases may be influenced by a number of considerations, including increases in costs, the need to maintain patient access to products, the rate of inflation and the need for capital and other investments. The key factors driving demand include population growth, the expansion of labeled indications for existing products, the discovery of new applications for plasma-based products, the improvement in diagnosis of patients who will benefit from the therapies, and changes in payor coverage rules recognizing the clinical benefits of the therapies.

        Significant consolidation over the past five years has reduced the number of major producers of plasma products to five companies, including us. Three companies, including us, currently collectively account for over 82% of U.S. sales. This consolidation accompanied the exit of major non-profits, such as the American Red Cross, from the industry. The exiting non-profits operated under a different business model than commercial fractionators, viewing the plasma business as a way to offset costs of whole blood collection. The resulting industry has fewer participants, which tend to be larger, vertically integrated and more profit driven, with the economics necessary to permit them to invest in the development of new therapies and indications, and more efficient and compliant facilities to serve the patient community.

        While demand for plasma-derived products has continued to expand, the supply of human plasma has decreased significantly over the past 10 years. From 1996 to 2006, U.S. plasma collections decreased from 14.1 million liters to 11.9 million liters, while plasma recovered from whole blood donations remained flat. During this period of time, the number of U.S. plasma centers collecting source plasma declined from 454 centers to 321 centers. Worldwide plasma collections have also declined, from 19.4 million liters in 2000 to 18.0 million liters in 2005. Although there has been a recent increase in U.S. plasma collections, the general decrease has led to industry supply constraints.

        We expect demand for plasma products to continue to grow at a compound annual rate of 6% to 8% for the next five to seven years. There are significant barriers to entry into the plasma derivatives manufacturing business, including the operationally complex nature of the business, which requires a highly skilled workforce with specialized know-how; a high level of capital expenditures to develop, equip and maintain the necessary storage, fractionation and purification facilities; significant intellectual property, including trade secrets relating to purification of products and pathogen safety; and the ability to comply with extensive regulation by the FDA and comparable authorities worldwide. Any new competitors in the U.S. would need to secure an adequate supply of U.S. sourced plasma since, as a practical matter, although plasma collected in the U.S. may be certified for use in products sold in Europe, only plasma collected in the U.S. is certified for use in products sold in the U.S. Since there are currently a limited number of independent plasma suppliers, any new competitor would likely have to develop its own U.S. based plasma collection centers and related infrastructure.

        Market Overview.    Plasma contains many therapeutic proteins which the body uses to, among other things, fight infection, regulate body function, and control bleeding. These proteins are extracted from plasma through a process known as fractionation, which separates the therapeutic proteins contained in

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the plasma into constituent fractions. These fractions are then further processed and purified to create different product classes addressing a range of therapeutic needs. Our six key product categories and their indications are given in the table below:


Segment and Talecris Key Products
  Our Indications
  Talecris Share of Sales
  Market Historic Growth Rate CAGR
  Talecris Net Revenue 2006 (000's)

IGIV
Gamunex IGIV
  U.S. and EU—Primary Immune Deficiency Idiopathic Thrombocytopenic Purpura.
EU only—Guillain Barre Syndrome, Chronic Lymphocytic Leukemia, Post Bone Marrow Transplant
  26%—U.S.(1)


19%—Worldwide(2)
  15%—U.S.(3)


11%—Worldwide(4)
  $460,036—U.S.


$649,903(7)—Worldwide


A1PI
Prolastin A1PI

 

AAT Deficiency related emphysema

 

71%—U.S.(1)
78%—Worldwide(2)

 

16%—U.S.(3)
15%—Worldwide(4)

 

$157,732—U.S.
$225,986—Worldwide


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

 

Plasma expanders, severe burns, acute liver and kidney failures

 

15%—U.S.(1)


7%—Worldwide(2)

 

21%—U.S.(5)


5%—Worldwide(4)

 

$33,536—U.S.


$73,768(7)—Worldwide

Factor VIII
Koate DVI
  Hemophilia A   3%—U.S.(1)
3%—Worldwide(2)
  6%—U.S.(6)
0.3%—Worldwide(4)
  $4,536—U.S.
$40,880—Worldwide

Antithrombin III
Thrombate III antithrombin III
  Anticoagulant   100%—U.S.(1)
7%—Worldwide(2)
  2%—U.S.(8)
-4%—Worldwide(4)
  $12,037—U.S.
$12,037—Worldwide

Hyperimmunes
GamaStan, HyperHepB, HyperRho, HyperRab,
HyperTet
  Hepatitis A, Hepatitis B, Rabies, RH Sensitization, Tetanus   17%—U.S.(1)

10%—Worldwide(2)
  3%—U.S.(5)

5%—Worldwide(4)
  $45,578—U.S.

$60,107—Worldwide

(1)
For the 2006 calendar year, according to MRB.
(2)
For the 2005 calendar year, according to MRB.
(3)
Represents the compound annual growth rate from 1996 to 2006, calculated based on data from MRB.
(4)
Represents the compound annual growth rate from 1994 to 2005, calculated based on data from MRB.
(5)
Represents the compound annual growth rate from 2003 to 2006, calculated based on data from MRB.
(6)
Represents the compound annual growth rate from 1986 to 2006, calculated based on data from MRB.
(7)
Includes tolling revenues from Canadian blood system.
(8)
Represents the compound annual growth rate from 2000 to 2006, calculated based on data from MRB.

Competitive Strengths

        We believe that the following strengths position us to compete effectively in the plasma products industry:

    Premium Global Liquid 10% IGIV product.    Our brand, Gamunex IGIV, launched in North America in 2003 as a premium ready-to-use liquid IGIV product, is one of the leading products in the IGIV market. We believe Gamunex IGIV is considered to be the industry benchmark due to a comprehensive set of differentiated product characteristics that have positioned it as the premium product in its category since its launch. Gamunex IGIV is a ready-to-use 10% liquid product with no sugar, which makes it a product of choice for many at-risk patients. We are the preferred liquid IGIV of allergists/immunologists in the United States (source: Harris Interactive Report January 2007). As a measure of our focus on continued enhancement of product safety, we are the only IGIV therapy labeled with respect to prion removal. We also use a patented caprylate process

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      that preserves more of the fragile IgG proteins compared to prior generation IGIV products made with a harsher solvent detergent purification process. As a result of its differentiated characteristics, Gamunex IGIV achieves a price premium compared to most other IGIV products. We focus on enhancing this position in this attractive product class through continued innovation. We are currently pursuing an indication for Gamunex IGIV in CIDP (chronic inflammatory demyelinating polyneurophathy) and have been granted fast track review and orphan drug designation by the FDA. In addition, we are also developing various subcutaneous administration concentrations of Gamunex IGIV.

    Leading Producer of A1PI with Strong Brand Recognition.    We are the world's largest producer of A1PI, which is used for the treatment of AAT deficiency-related emphysema. Prolastin A1PI has the leading share of sales in the United States, and is the only A1PI product licensed in Canada, Germany, Italy and Austria. While other manufacturers began selling A1PI products in the United States and Spain beginning in 2003, we continue to benefit from having been the first provider in this product class and from our strong relationships with the primary patient advocacy groups. Our Talecris Direct direct-to-patient delivery system with a sophisticated disease state management program provides us a competitive advantage through increased patient loyalty, a high degree of channel integrity, proprietary customer and sales data, and a predictable revenue stream with better economics than indirect channels. We remain committed to expanding our A1PI presence globally. In 2006 we became the first producer of an A1PI therapy to complete a Mutual Recognition Procedure giving us the regulatory approval necessary to sell Prolastin A1PI in ten additional European countries where, based upon our internal estimates, we believe approximately 30% of the global patient population may reside and where there is no other licensed A1PI product. We are currently in reimbursement negotiations in these countries. In addition, we are developing additional product enhancements, including Alpha-1 MP A1PI, providing for increased yield and purity, and an inhaled version of our A1PI product.

    Leader and Innovator in the Global Plasma Products Industry with a Well-Established, Integrated Platform.    We are one of the largest producers and marketers of plasma-derived protein therapies in the world. We have a successful history of product innovation and commercialization, and we possess specific expertise and core competencies in the development, purification, large-scale manufacture and sale of protein therapeutics. Our longstanding infrastructure, processes and expertise have enabled us to develop a stable of growing marketed products and create a robust pipeline of potential new products.

    Process Innovation: We are the developer of the first ready-to-use 10% liquid IGIV product in North America and the first A1PI product. We have applied new developments in protein purification, including caprylate and chromatography technologies, to develop the next generation of industry leading products, and are now selling a third generation IGIV product while many of our competitors have only begun to produce their first generation liquid.

    R&D Pipeline: Our current research and development consists of a range of programs that aim to obtain new therapeutic indications for existing products, enhance product delivery, improve purity and safety, and increase product yields. In addition, our Phase I/II candidate, Plasmin, represents an opportunity to expand into a new market addressing the dissolution of blood clots including acute peripheral arterial occlusion (aPAO) and ischemic stroke.

    Enhancing future growth through recombinant protein technologies: Our protein products expertise is also applicable beyond plasma-derived products, as shown by the patents we received regarding our recombinant version of Plasmin. We are currently developing a commercial process to produce recombinant Plasmin and plan to pursue the development of recombinant Plasmin to treat ischemic stroke.

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    Established Infrastructure Supported by Proven Operating Expertise.    Fractionating and purifying therapeutic proteins from human plasma is a complex and difficult process due to the fragility of the proteins and the potential for contamination. Our many years of reliably producing and supplying quality plasma therapeutics demonstrate our expertise in this field. There has never been a documented or confirmed transmission of disease through our IGIV or A1PI products. Our facilities in Clayton, North Carolina have benefited from approximately $466 million in capital investment since 1995, including compliance enhancements, general site infrastructure upgrades, capacity expansions, and new facilities, such as our chromatographic purification facility and our high-capacity sterile filling facility. Our Clayton site is one of the world's largest integrated protein manufacturing sites, including fractionation, purification and aseptic filling and finishing of plasma-derived proteins. Together with our facility in Melville, New York, we have a combined fractionation capacity of 4.2 million liters of plasma per year.

    Favorable Distribution Arrangements.    We enjoy favorable distribution arrangements, particularly in North America for our IGIV products.

    Our size, history and reputation in the industry have enabled our sales force to establish direct and indirect channels for the distribution of our products, and have provided us with experience in dealing with our key regulators, doctors, patient advocacy groups and plasma protein policy makers. We place significant emphasis on channel integrity issues and controls.

    Since the late 1980s, we have been the "supplier of record" for the Canadian blood system. We have contracts with the two national Canadian blood system operators, Canadian Blood Services and Hema Quebec, to provide plasma-derived products. Under these contracts, we process plasma and supply a majority of the Canadian requirements for IGIV. These three to five year contracts are currently the largest government contracts for IGIV units globally, some of which are toll manufactured from plasma collected in Canada.

    Since 2005, we have rationalized our distribution network and simultaneously entered into long-term distribution agreements with major hospital group purchasing organizations, or GPOs, home care and specialty pharmacy providers and distributors which we believe grant us favorable volume, pricing, and payment terms, including financial penalties if they fail to purchase the agreed volume of products. We have made appropriate commitments to the Public Health Service and Federal Supply Schedule programs as part of our distribution system.

    Project Management Expertise and Execution.    We have consistently demonstrated a core competence in managing complex projects. For example, we successfully planned and executed the complex carve-out of the acquired assets from Bayer and the establishment of a stand-alone corporate entity while simultaneously rationalizing our distribution channels and implementing a number of production efficiency initiatives. Key functional areas that we developed include executive leadership, human resources, information technology, finance and accounting, treasury, tax, risk management, contract management and government price reporting, customer service, sales and operational planning, and global drug safety. In parallel with these activities, we successfully launched our Canadian and German entities and transitioned the distribution from Bayer. By utilizing best project management practices, we were able to effectively create a stand-alone corporate entity with the business processes and controls necessary to drive profitable growth.

    Plasma Collection Center Process.    In support of our vertical integration efforts, we are relying on our proven project management skills and demonstrated ability to manage complex activities. We are focused on the development of a plasma collection center platform consisting of human resources, training, information technology, accounting, regulatory and compliance, as well as quality control and assurance. This new platform has supported the successful integration of the plasma collection centers acquired from IBR, the opening of new centers, and increased efficiencies

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      and capacities at existing centers. We have developed a formalized multistage process for opening and achieving licensure for new collection centers. We have created a new functional group dedicated exclusively to the efforts of locating, sizing, staffing, marketing, opening, operating and licensing plasma centers. To date, we have opened ten new plasma centers and received licenses for four centers. We believe this process will assist us in efficiently scaling-up our plasma collection center expansion.

    Experienced, Proven Management Team.    Our business is led by an experienced management team, with our executive officers having an average of nearly 8 years of experience in the plasma/protein therapeutics business and an average of over 16 years of experience in healthcare-related businesses, as well as a broad spectrum of general business experience. Our management team has been effective and successful in transitioning our business from a division of Bayer to a stand-alone company, a process that required sophisticated planning and the development of extensive infrastructure. We have both the complex technical knowledge required in the protein therapeutic products industry and proven competency in commercializing protein therapeutic products. As a partially vertically integrated company we have the technical knowledge and competence required in the plasma-derived products industry, from plasma collection through product development, manufacturing and commercialization of therapeutic protein products.

Business Strategy

        Our goal is to be the recognized global leader in developing and delivering premium protein therapies to extend and enhance the lives of individuals suffering from chronic, acute and life-threatening conditions. The key elements of our strategy for achieving this goal are as follows:

    Capitalize on favorable industry dynamics.    The plasma-derived protein therapeutics industry is enjoying favorable conditions. As a result of the long-term increase in demand for our plasma-derived products and limits in production and collection capacity, pricing has increased steadily for our key plasma-derived products since 2004. Investment needs and increases in costs have also contributed, often significantly, to price increases. We intend to serve the overall market growth with incremental increases in production capacity and expect to implement measured price increases for most of our products in 2007 and 2008.

    Realize operating leverage.    We seek to improve our profitability by capitalizing on the operating leverage in our business model. During 2005, we formalized a five-year operations improvement program which currently encompasses over 70 active projects focused on enhancing efficiency, increasing yield, reducing product rejects, lowering cycle times, and improving utilization of plasma and other raw materials. As a result, in part, of these efforts, our gross profit margin has increased from 22.4% in the quarter ended September 30, 2005 to 39.9% in the quarter ended March 31, 2007. A significant portion of our cost structure, other than raw materials, is relatively fixed and therefore incremental volume contributes significant additional profit. As we expand our supply of plasma, we intend to increase production and leverage our existing operations, intellectual property, expertise, distribution channels and infrastructure. Over the longer term, we plan to leverage available capacity in Gamunex IGIV purification even if we do not produce added quantities of other therapies. If successful, this plan could result in lower gross profit margin, but greater profit and cash flow.

    Expand plasma collection platform to support growth.    In order to enhance the predictability, sustainability and profitability of our plasma supply, we plan to grow and integrate our raw material supply chain through the expansion of our plasma collection platform. As a result of our acquisition of plasma collection centers from IBR and our multistage program to open new centers, we currently operate 26 licensed plasma collection centers and 20 centers that are open but have not yet been licensed. We are also developing additional centers, both through properties we acquired

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      from IBR and our internal program. As we may not use plasma from a collection center until it is licensed (a process that can take many months to complete), we are working with the FDA to expeditiously license all of our centers. We have also entered into agreements with third parties to develop and operate plasma centers dedicated to supplying plasma to us, which we will have the option to purchase. We expect to collect approximately half of our plasma supply from our own centers in 2007 and as much as 80% by 2009.

    Manage product life cycles to maximize profitability.    We manage the life cycles of our products by allocating research, development and marketing resources to extend the commercial life of our products and brands. We continually evaluate new therapeutic indications, new methods of administration, and new formulations to maintain or increase our products' sales potential. For example, we successfully developed and introduced Gamunex IGIV as a higher-yield, well tolerated successor version of our Gamimune IGIV product. In addition, we have under development Alpha-1 MP IV, an A1PI product derived from a process designed to achieve higher yield as well as higher purity than Prolastin A1PI; an aerosolized A1PI product; a subcutaneously administered formulation of Gamunex IGIV; and a new indication for Thrombate III antithrombin III. Through these methods, we believe we can leverage our brand equity, market position, know-how and production assets to continue our growth in the near- and mid-term.

    Optimize geographic presence.    We intend to maintain a leading share of sales for Prolastin A1PI and Gamunex IGIV in North America and Germany while selectively expanding sales into other countries. We completed Mutual Recognition Procedures for both Prolastin A1PI and Gamunex IGIV in 2006 with ten European Union member states, allowing us access to sell Prolastin A1PI and Gamunex IGIV in those countries. We are negotiating reimbursement rates for these countries before beginning sales. We also make opportunistic sales to other countries, usually through government bidding processes, where we can achieve favorable pricing. We have established new entities in both Canada and Germany to directly manage all commercial activities in the key markets. We have also established distribution networks in the rest of Europe and other key international markets. This new international business structure provides us an essential platform for optimizing our international revenue and profitability as additional product becomes available.

    Invest in the development of Plasmin and Recombinant Plasmin.    Plasmin represents a significant longer-term opportunity to expand into a new market. We are developing Plasmin as a therapeutic for restoring blood flow through arteries and veins that have become obstructed by blood clots. Pre-clinical and Phase I clinical studies indicate that Plasmin may result in a safer, faster, and more effective treatment than current therapies. We are also developing a recombinant version of Plasmin as a potential treatment for ischemic stroke. We believe that the potential of Plasmin as a thrombolytic agent offers us an opportunity to provide a therapy from a previously unutilized fraction of plasma, as well as a significant new recombinant product.

Certain Risk Factors

        Our business is subject to numerous risks, including without limitation the following:

    We may be unable to obtain adequate quantities of FDA-approved plasma.

    Government or third-party payors may decrease or otherwise limit the amount, scope or other eligibility requirements for reimbursement for the purchasers of our products.

    Our manufacturing processes, plasma supply and products may be susceptible to contamination.

    Our plasma collection and manufacturing processes are subject to FDA regulation, oversight and inspection, which in the event of non-compliance could adversely impact operations.

7


    We are dependent on third parties to provide crucial supplies, service our equipment, and to sell, distribute and deliver our products.

These and other risks are more fully described in the section entitled "Risk Factors." We urge you to carefully consider all the information presented in the section entitled "Risk Factors" beginning on page 15.

Our Corporate Information

        We were incorporated under the laws of the State of Delaware on March 11, 2005 and commenced operations on April 1, 2005, upon completion of our acquisition on March 31, 2005 of substantially all of the assets and specified liabilities of the Bayer Plasma Products Business Group, a unit of the Biological Products division of Bayer Healthcare LLC, which is a subsidiary of Bayer AG. Our principal executive offices are located at 4101 Research Commons, 79 T.W. Alexander Drive, Research Triangle Park, North Carolina 27709 and our telephone number is (919) 316-6300. Our website address is http://www.talecris.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

        We are a majority owned subsidiary of Talecris Holdings, LLC. 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. Upon the consummation of this offering, Talecris Holdings, LLC will own approximately    % of our shares of common stock (assuming the underwriters do not exercise their option to purchase additional shares).

8



THE OFFERING

Common stock we are offering                           shares
Common stock being offered by the selling stockholders                           shares
Common stock to be outstanding after this offering                           shares
Use of proceeds   We estimate that the net proceeds to us from this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $                  per share, which is the midpoint of the price range on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We expect to use (i) $        of the net proceeds from this offering to repay outstanding indebtedness, including prepayment penalties, (ii)  $         million of the net proceeds from this offering to pay earned and unpaid dividends on our outstanding Series A and B convertible preferred stock, and (iii)  $         million of the net proceeds from this offering to pay the termination fee under our management agreement. We intend to use the balance, if any, for working capital and other general corporate purposes. We will not receive any proceeds from the sale of shares by the selling stockholders. See "Use of Proceeds."
Risk factors   You should read the "Risk Factors" section of this prospectus for a discussion of the factors to consider carefully before deciding to purchase any shares of our common stock.
Proposed Nasdaq Global Market symbol   TLCR

        The number of shares of our common stock to be outstanding immediately after this offering is based on            shares of common stock outstanding as of June 30, 2007, including an aggregate of            unvested shares outstanding under the 2006 Restricted Stock Plan as of the closing of this offering and an additional            shares of common stock issuable upon the conversion of all of our outstanding shares of our preferred stock prior to the closing of this offering. The number of shares of common stock to be outstanding after this offering excludes:

    shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2007 at a weighted average exercise price of $            per share; and

    an aggregate            of shares of common stock reserved for future issuance under our 2005 stock option and incentive plan and our 2006 Restricted Stock Plan as of the closing of this offering.

        Unless otherwise noted, all information in this prospectus assumes:

    no exercise of the outstanding options described above;

    no exercise by the underwriters of their option to purchase up to an aggregate of additional            shares of common stock from us and the selling stockholders; and

    the conversion of all of the outstanding shares of our preferred stock into an aggregate of            shares of common stock prior to the closing of this offering.

9



SUMMARY HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA

        The following is a summary of our consolidated historical financial data and the combined financial data for Bayer Plasma Products Business Group (Bayer Plasma or Predecessor), our business predecessor, for the periods ended and at the dates indicated below. You should read this information together with our consolidated financial statements and the combined financial statements for Bayer Plasma and the related notes appearing at the end of this prospectus along with the "Selected Historical Consolidated and Combined Financial Data," and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this prospectus.

        We have derived the audited historical financial data as of and for the fiscal year ended December 31, 2004 and as of and for the three months ended March 31, 2005 from the audited combined financial statements for Bayer Plasma, which are included elsewhere in this prospectus, and we derived the audited consolidated historical financial data as of December 31, 2005 and December 31, 2006 and for the period from our inception to December 31, 2005 and for the year ended December 31, 2006 from our audited consolidated financial statements included elsewhere in this prospectus.

        The unaudited financial data as of March 31, 2007 and for the three months ended March 31, 2006 and 2007 have been derived from our unaudited interim consolidated financial statements, which are included elsewhere in this prospectus. The unaudited financial data as of March 31, 2006 has been derived from our unaudited interim financial statements, which are not included in this prospectus. These unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for those periods. Operating results for the three months ended March 31, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007.

        The financial statements of Bayer Plasma are presented on a carve-out basis from the historical financial statements of Bayer AG and its affiliates. As Predecessor, we participated in Bayer's centralized cash management system and our net cash funding requirements were met by Bayer. We were not allocated interest costs from Bayer for use of these funds. The Predecessor's combined results of operations include all net revenue and costs directly attributable to our operations as Bayer Plasma, including all costs for supporting functions and services used by us at shared sites and performed by centralized Bayer organizations, presented on a carve-out basis, prior to our March 31, 2005 formation transaction. In Predecessor periods, the expenses for these services were charged to us based on a determination of the services provided primarily using activity-based allocation methods based primarily on revenue, headcount, or square footage. In Predecessor periods, Bayer also provided certain manufacturing services to us for the production of certain products at established transfer prices, which have been included in cost of goods sold.

        We acquired certain assets and liabilities of Bayer Plasma on March 31, 2005. Successor operations began on April 1, 2005 as the successor business (Successor). On April 12, 2005, we acquired Precision Pharma Services, Inc., or Precision Pharma, which supplied intermediate paste principally to our predecessor and us. Precision Pharma was owned by affiliates of Ampersand, which are investors in Talecris Holdings, LLC.

10


        We believe that the comparability of our financial results between Successor and Predecessor periods presented is significantly impacted by the following items, which are more fully described under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability."

    Acquisition of Bayer Plasma net assets and related purchase accounting

    Distribution and transition services agreements with Bayer affiliates

    Transition related activities

    Management fees

    Share-based compensation awards

    Special recognition bonus plan

    Capital structure

    Gamunex IGIV production incident

    Acquisition of plasma collection centers

11



Summary Financial Data

 
 
Predecessor

  Successor
 
 
  Year
Ended
December 31,
2004

  Three
Months
Ended
March 31,
2005

  Inception
Through
December 31,
2005

  Year
Ended
December 31,
2006

  Three
Months
Ended
March 31,
2006

  Three
Months
Ended
March 31,
2007

 
 
  (audited)

  (audited)

  (audited)

  (audited)

  (unaudited)

  (unaudited)


 
 
  (in thousands)

   
   
 
Income (Loss) Statement Data:                                      

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net product revenue   $ 846,500   $ 245,500   $ 654,939   $ 1,114,489   $ 282,416   $ 296,894  
  Other             13,039     14,230     3,947     5,545  
   
 
 
 
 
 
 
Total net revenue     846,500     245,500     667,978     1,128,719     286,363     302,439  
Cost of goods sold     661,500     209,700     561,111     684,750     191,377     181,793  
   
 
 
 
 
 
 
Gross profit     185,000     35,800     106,867     443,969     94,986     120,646  
Operating expenses:                                      
  SG&A     102,200     27,500     89,205     241,448     40,109     42,638  
  R&D     59,000     14,800     37,149     66,801     12,246     13,876  
   
 
 
 
 
 
 
Total operating expenses     161,200     42,300     126,354     308,249     52,355     56,514  
   
 
 
 
 
 
 
Income (loss) from operations     23,800     (6,500 )   (19,487 )   135,720     42,631     64,132  
Other income (expense):                                      
  Equity in earnings of affiliate             197     684     209     171  
  Interest expense, net             (21,224 )   (40,867 )   (7,936 )   (27,952 )
  Loss on extinguishment of debt                 (8,924 )        
   
 
 
 
 
 
 
Income (loss) before income taxes and extraordinary items     23,800     (6,500 )   (40,514 )   86,613     34,904     36,351  
Provision for income taxes     (18,500 )   (5,100 )   (2,251 )   (2,222 )   (915 )   (2,055 )
   
 
 
 
 
 
 
(Loss) income before extraordinary items     5,300     (11,600 )   (42,765 )   84,391     33,989     34,296  
Extraordinary items:                                      
  Gain (loss) from unallocated negative goodwill             252,303     (306 )   (306 )    
  Gain from settlement of contingent consideration due Bayer             13,200     3,300     3,300      
   
 
 
 
 
 
 
Net (loss) income   $ 5,300   $ (11,600 ) $ 222,738   $ 87,385   $ 36,983   $ 34,296  
   
 
 
 
 
 
 

Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 


 

 


 

$

10,887

 

$

11,042

 

$

16,562

 

$

27,465

 
Total assets   $ 1,115,200   $ 1,040,800   $ 705,249   $ 903,474   $ 717,497   $ 923,701  
Long-term debt and redeemable preferred stock           $ 270,997   $ 1,213,455   $ 280,877   $ 1,233,341  
Total stockholders' equity (deficit) parent's net investment   $ 987,000   $ 943,600   $ 152,835   $ (528,980 ) $ 189,727   $ (498,418 )

Other Financial Data and Ratios (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Liters of plasma processed     3,016     905     2,493     2,983     846     664  
Gross profit margin     21.9 %   14.6 %   16.0 %   39.3 %   33.2 %   39.9 %
EBITDA(1)(2)   $ 56,500   $ 1,500   $ (18,056 ) $ 140,680   $ 43,382   $ 65,777  
Adjusted EBITDA(1)(2)   $ 56,500   $ 1,500   $ (574 ) $ 264,058   $ 59,555   $ 75,039  

(1)
We define EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, extraordinary items, equity in earnings of affiliate, and gains on sales of equipment. We define Adjusted EBITDA as EBITDA, further adjusted to exclude transition and other non-recurring expenses, management fees paid to our sponsors, non-cash share-based compensation expense, and special recognition bonus expense, which we

12


    believe are not indicative of our ongoing core operations. These items are described in more detail in the reconciliation below.

    We use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our U.S. GAAP results and the following reconciliation, we believe provide a more complete understanding of factors and trends affecting our business than U.S. GAAP measures alone. EBITDA and Adjusted EBITDA assist in comparing our operating performance on a consistent basis because they remove the impact of our capital structure (primarily interest charges and amortization of debt issuance costs), asset base (primarily depreciation and amortization) and items outside the control of our management team (taxes) from our operations. We use Adjusted EBITDA as a supplemental measure to assess our performance because it excludes certain non-cash equity compensation expenses, management fees paid to our sponsors, transition and other non-recurring costs associated with establishing our infrastructure as an independent company, and special recognition bonuses which provided cash awards to certain of our employees, senior executives and members of our Board of Directors. EBITDA and Adjusted EBITDA serve as measures in evaluating annual incentive compensation awards to our employees and senior executives and for the calculation of financial covenants in our credit facilities. We present EBITDA and Adjusted EBITDA because we believe it is useful for investors to analyze our operating results on the same basis as that used by our management.

    EBITDA and Adjusted EBITDA are considered "non-GAAP financial measures" under SEC rules and should not be considered substitutes for net income (loss) or income (loss) from operations, as determined in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, including, but not limited to the following:

    EBITDA does not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments;

    EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

    EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreements;

    EBITDA does not reflect income tax expense or the cash requirements to pay our taxes;

    Adjusted EBITDA has all the inherent limitations of EBITDA. In addition, you should be aware that there is no certainty that we will not incur similar expenses in the future, which are eliminated in the calculation of Adjusted EBITDA;

    Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

    Because of these limitations, EBITDA and Adjusted EBITDA should not be considered the primary measures of the operating performance of our business. We strongly encourage you to review the U.S. GAAP financial statements included elsewhere in this prospectus, and not to rely on any single financial measure to evaluate our business.

13


(2)
The following is a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:

 
 
Predecessor

  Successor
 
 
  Year
Ended
December 31,
2004

  Three
Months
Ended
March 31,
2005

  Inception
Through
December 31,
2005

  Year
Ended
December 31,
2006

  Three
Months
Ended
March 31,
2006

  Three
Months
Ended
March 31,
2007

 
 
  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)


 
 
  (in thousands)

 
Net (loss) income   $ 5,300   $ (11,600 ) $ 222,738   $ 87,385   $ 36,983   $ 34,296  
  Extraordinary items             (265,503 )   (2,994 )   (2,994 )    
   
 
 
 
 
 
 
(Loss) income before extraordinary items     5,300     (11,600 )   (42,765 )   84,391     33,989     34,296  
  Gain on sale of equipment                         (320 )
  Loss on extinguishment of debt                 8,924          
  Provision for income taxes     18,500     5,100     2,251     2,222     915     2,055  
  Equity in earnings of affiliate             (197 )   (684 )   (209 )   (171 )
  Interest expense, net             21,224     40,867     7,936     27,952  
  Depreciation and amortization     32,700     8,000     1,431     4,960     751     1,965  
   
 
 
 
 
 
 
EBITDA     56,500     1,500     (18,056 )   140,680     43,382     65,777  
  Transition and other non- recurring expenses(a)             12,809     73,203     14,437     2,651  
  Management fees(b)             3,350     5,645     1,425     1,512  
  Non-cash stock option expense(c)             1,323     2,244     311     1,558  
  Non-cash restricted stock expense(c)                 435         1,305  
  Non-cash unrestricted stock expense(c)                 3,960          
  SRB(d)                 37,891         2,236  
   
 
 
 
 
 
 
Adjusted EBITDA   $ 56,500   $ 1,500   $ (574 ) $ 264,058   $ 59,555   $ 75,039  
   
 
 
 
 
 
 

    (a)
    Represents the expense associated with the development of our internal capabilities to operate as a standalone company apart from Bayer, consisting primarily of consulting services associated with developing our corporate infrastructure. We believe these costs are non-recurring once the related infrastructure has been established and we have completed our overall transition from Bayer.

    (b)
    Represents the advisory fees paid to Talecris Holdings, LLC, our sponsor, under the Management Agreement, as amended. This agreement will be terminated in connection with this offering.

    (c)
    Represents our non-cash equity compensation expense associated with our stock options, restricted stock, and unrestricted stock. The restricted stock we issued was in lieu of a future cash bonus to senior management executives. The unrestricted stock was issued to our Chairman in lieu of a cash bonus.

    (d)
    Represents compensation expense associated with special recognition bonus awards granted to our employees and senior executives. These awards were granted to reward past performance and were provided to these individuals in recognition of the extraordinary value realized by us and our stockholders due to the efforts of such individuals since inception of our operating activities on April 1, 2005. We do not anticipate granting similar awards in the future.

14



RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information included in this prospectus, including the financial statements and related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occur, they may materially harm our business, prospects, financial condition and results of operations. In this event, the market price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business

We would become further supply-constrained and our financial performance would suffer if we could not obtain adequate quantities of FDA-approved source plasma from our own collection centers or from third parties.

        Third-party suppliers.    Until our acquisition of plasma collection centers from IBR in November 2006, we relied 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 competitors. The plasma obtained under a supply arrangement with a major competitor is anticipated to end in 2008. This supplier provided approximately 31% of our plasma in 2006. In addition, plasma volumes obtained under arrangements with independent third parties have not always met expectations.

        Several of the independent plasma suppliers with which we maintain long-term supply arrangements are companies that are small and may lack financial resources, which may make them more vulnerable to adverse events, such as business cycles in our industry. If these suppliers lack adequate capital to operate or expand their businesses, they may be unable to fulfill their commitments to us in a timely manner, if at all. Although we provide financial support to certain of our suppliers through loans and working capital advances, this support may not be sufficient for them to meet their future capital requirements. An inability of any of our suppliers to operate their business and satisfy their obligations in a timely manner may cause a disruption in our plasma supply, which could materially adversely affect our business.

        Talecris plasma centers.    In order to reduce our dependence on third-party plasma suppliers, we plan to significantly increase our supplies of source plasma for use in our manufacturing processes through the expansion of our own plasma collection centers. Our acquisition of plasma collection centers from IBR was part of this strategy. In addition, we are opening additional plasma collection centers ourselves. We also continue to pursue opportunities to purchase additional plasma collection centers.

        The plasma collection centers that we acquired from IBR included FDA-licensed centers, opened but unlicensed centers and centers that are under development. The licensed and unlicensed centers require various improvements in order to increase their plasma collection potential. In addition, the unlicensed centers are in varying degrees of readiness for FDA inspection and certain centers that we acquired will need to be relocated.

        Certain of the centers acquired from IBR were understaffed and had experienced significant turnover of personnel. We have implemented a number of measures to address personnel issues at our plasma collection centers, including improved compensation and benefit programs, extensive hiring of additional center and regional staff, the establishment of a centralized training program, and a plan to automate recordkeeping for donor processing and shipping with industry standard software. In addition, we have also organized and staffed a corporate infrastructure to support our plasma center collection activities, including the development of new plasma collection centers. The creation of the corporate infrastructure, including regional management, has significantly increased our per liter cost for plasma. Until our plasma collection centers reach intended operating capacities, we will continue to charge unabsorbed overhead costs directly to cost of goods sold. If we are unable to open and operate a sufficient number of additional centers, these costs may cause us to have higher costs of operations, lower margins and lower cash flow than our competitors.

15



        The successful development of new plasma centers depends upon a number of factors, including area demographics, access to public transportation, ability to attract and retain donors with satisfactory customer service, ability to obtain facilities with the appropriate square footage and floor plan, lease terms, available parking, ability to hire, train and retain competent staff, our ability to reduce employee turnover (which is currently above industry norms), our ability to improve business processes related to quality and compliance, and proximity to competitors, among other factors. Our plans include an extensive new center development program throughout the United States which will require significant managerial and capital resources.

        Successful development of a plasma collection center also depends on obtaining FDA licensure of the center, as well as the approval of foreign regulatory authorities, including the German Health Authority. We begin the collection of source plasma at a new plasma center location under a FDA registration number and under FDA regulatory guidelines, but prior to obtaining FDA licensure for that specific center. We may not sell products made from plasma collected in a plasma collection center until the collection center obtains a license from the FDA. In the event that we determine that plasma was not collected in compliance with current Good Manufacturing Practice (cGMP) regulations or that the center is unable to obtain FDA licensure, we would be required to destroy the collected plasma and write off its inventory value.

        Obtaining adequate supplies of source plasma is dependent upon our ability to open a significant number of new centers, to obtain FDA approval for existing unlicensed centers and future centers, to maintain a cGMP compliant environment in all plasma centers and to expand production across all centers. There is no assurance that the FDA will inspect and license plasma collection centers in a timely manner consistent with our production plans. As part of the licensing process, the FDA performs a cGMP audit of a center's operations and any compliance issues noted during the inspection must be addressed before the FDA will issue a license for the center. Licensed centers are also inspected by the FDA, typically every two years, and must maintain compliance with cGMP regulations. As part of the FDA licensing process, we have received, and may in the future receive, warning letters from the FDA regarding particular centers. If we fail to address issues raised by the FDA or otherwise fail to maintain compliance with cGMP, we may lose our license to operate the relevant centers.

        Industry-wide disruptions.    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 a consolidation in the industry as several plasma derivatives manufacturers have acquired plasma collectors and reduced capacity. Plasma availability worldwide declined from approximately 19.4 million liters in 2000 to approximately 18 million liters in 2005, while the number of plasma collection centers declined from 416 to 296 during the same period. As a result, it is becoming more difficult, and could be impossible, to resolve any significant disruption in 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 derivative products, including the United States, restrict the use of plasma collected from specific countries and regions in the manufacture of plasma derivative 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.

        We believe that our existing plasma supply constraints have limited our ability to meet global customer demand and have resulted in lower sales and market share. If we are unable to appropriately locate, open, manage and obtain licensure of the requisite number of plasma collection centers and achieve sufficient

16


plasma volumes from our own FDA licensed centers as well as our third party suppliers, we would be limited in our ability to maintain or grow our current levels of production. This could result in product shortages, stock-outs and lack of product for us to sell to our customers. If any of those events occurred, we could experience a substantial decrease in net sales or profit margins, a loss of customers and a negative effect on our reputation as a reliable supplier of plasma-derived products.

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 the production capacity available in the industry, 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, and plasma supply and manufacturing capacity do not expand, prices tend to increase.

        The industry is currently experiencing a favorable pricing environment for plasma products, in part as a result of a reduction in fractionation capacity and reduced availability of source plasma since 2003. The current robust demand, particularly for IGIV, is resulting 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. 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.

Our business relies heavily upon the sales of Gamunex | IGIV and Prolastin A1PI and any adverse market event with respect to either product could have a material adverse effect on us.

        We rely heavily upon the sales of two of our products: Gamunex | IGIV and Prolastin A1PI. Sales of Gamunex | IGIV and Prolastin A1PI comprised approximately 72.5% and 75.8% of our total net revenue for the fiscal year ended December 31, 2006 and the three months ended March 31, 2007, respectively. Sales of Gamunex | IGIV comprised over 50% of our total net revenue in each of these periods. If either Gamunex | IGIV or Prolastin A1PI lost significant share of market sales, or were substantially or completely displaced in the market, due to a competing product which has superior efficacy or which is less expensive, we would lose a significant and material source of our net revenue. Similarly, if either Gamunex | IGIV or Prolastin A1PI were to become the subject of litigation and/or an adverse FDA ruling requiring us to cease sales of either product, our business would be adversely affected.

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, two companies launched liquid IGIV products, and producers of two more liquid products are currently seeking approval. Due in part to the limited competition in liquid IGIV products, our Gamunex IGIV has been historically priced at a premium compared to most other IGIV products in North America. We expect, and our strategy contemplates, that our IGIV product will continue to be priced at a premium compared to most of our competitors in North America. If additional liquid IGIV competition results in this premium being reduced or eliminated, or if third party payors, group purchasing organizations and physicians, or others, demand the lower-priced products of some of our competitors, we may lose sales or be forced to lower our prices.

        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. Certain Canadian provinces have stated their goal of diversifying the suppliers providing plasma products

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and services under these contracts. Our contracts with the Canadian blood system are renewable every three to five years, following a competitive bidding process, with new contracts expected to be awarded in 2007 and to be effective April 1, 2008. We derive significant revenue and profits under these contracts, and a failure to obtain a new contract or any diminution in the volume or price under future contracts could have a material adverse effect on our financial results.

        Until December 2002, our A1PI product, Prolastin A1PI, was the only plasma product licensed and marketed for therapy of congenital AAT deficiency-related emphysema in the United States. Accordingly, until that time, Prolastin A1PI had virtually 100% market share in its category. In December 2002 and July 2003, two companies received licenses for competitive products which they launched in the United States in 2003, and a third company received marketing authorization in Spain in 2003. The competing products were introduced at significantly higher prices than Prolastin A1PI. These and other future competitors may increase their sales, lower their prices or change their distribution model, which may harm our product sales and financial condition. In addition, another competitor is completing clinical trials for licensure in the U.S. and Europe.

        At least two companies are in early stages of development for a recombinant form of A1PI (recA1PI). A successful 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 (since the recA1PI would not be sourced from plasma). If a new formulation of A1PI is developed that has a significantly improved rate of administration, such as aerosol inhalation, prior to our developing a similar product, the market share of Prolastin 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 therapeutics face competition from non-plasma products and other courses of treatments. For example, two RhD hyperimmune globulins for intravenous administration are now approved for use to treat ITP, and we expect our competitors to launch thrombopoietin inhibitors targeting ITP patients in 2008 and 2009 that may significantly 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 has been perceived by many 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.

        See "Business—Competition" for an additional discussion of the competitive environment for our products.

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

        We have experienced and expect to experience pricing pressures on our current products and pipeline products from initiatives aimed at reducing healthcare costs by governmental and private third-party payors, the increasing influence of health maintenance organizations, and regulatory proposals, both in the United States and in foreign markets. In addition, prices in many European countries are subject to local regulation. 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 market place, or where a shift in dispensation site could concentrate pricing power. For example, in 2005, the Medicare physician payment methodology changed to Average Sales Price (ASP) plus 6%, while hospital reimbursement changed at the beginning of 2006 to ASP plus 6%. This payment

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was based on a volume-weighted average of all brands under a common billing code. As a result, 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 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 in 2005 for physicians resulted in a shift of patient care to hospitals from physicians' offices. After 2006 hospitals also began to refuse providing IGIV to Medicare patients due to reimbursement rates that were below their acquisition cost. While subsequent changes have improved these Medicare reimbursement issues, similar reimbursement changes for our products could materially impact our financial results.

        Additionally, 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, or "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 majority of our IGIV volume, and a similar proportion of the IGIV produced by our competitors, is 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, the Centers for Medicare & Medicaid Services (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.

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 blood plasma 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 and other blood-borne pathogens through plasma-derived products. There are also concerns about the future transmission of H5N1 virus, or "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.

        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, however, as a means of identifying potentially contaminated plasma units.

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        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. The manufacturing, screening and purification processes for our products may differ, and some products, such as Koate | DVI, may use less advanced purification methods. 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 be appropriately utilized and will adequately screen for, and inactivate, infectious agents in the plasma used in the production of our products.

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

        Plasma is a raw material that is susceptible to damage and contamination and may contain active pathogens. Improper storage of plasma, by us or third party suppliers, may require us to destroy some of our raw material, or if the damaged plasma is not detected, result in the destruction of product.

        The manufacture of our plasma products is an extremely complex process of fractionation, purification, filling and finishing. Although we attempt to maintain high standards for product testing, manufacturing, process controls and quality assurance, our products can become non-releasable or otherwise fail to meet our stringent specifications through a failure of one or more of these processes. Extensive testing is performed throughout the process to ensure the safety and effectiveness of our products. We may, however, detect instances in which an unreleased product was produced without adherence to our manufacturing procedures. Such an event of noncompliance would likely result in our determination that the product should not be released and therefore would 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.

        Once we have manufactured our plasma derivative 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 and the reserves we have established for these purposes. 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.

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Our ability to continue manufacturing and distributing our products depends on our and our suppliers' continued adherence to current Good Manufacturing Practice (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. While we believe that our manufacturing facilities are currently in substantial compliance with cGMP regulations, we cannot assure you that we will not 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 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.

        We expect to spend approximately $200 million over the next five years to upgrade our manufacturing facilities to maintain compliance with cGMP. We cannot be certain that these upgrades 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. 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. 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 our facilities. In order to provide such a comparative analysis, both the existing 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. 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.

        Additionally, manufacturing of our antithrombin III product is currently being produced for us at Bayer's Berkeley, California, biologics manufacturing facility. The failure of Bayer or of our other suppliers to comply with cGMP standards or disagreements between us and Bayer as to requirements could result in our product being rejected, production being slowed down or halted, or product releases being delayed.

        A number of inspections by the FDA and foreign control authorities, including the German Health Authority, have been conducted or are expected at our plasma collection centers in 2007. 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.

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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 plant located in Clayton, North Carolina. In addition, a substantial portion of our plasma supply is stored at facilities in Benson, North Carolina, Walton, Kentucky, and our Clayton facility. Although we believe we have adopted and maintain adequate safety precautions, including separate areas for different manufacturing processes, 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, business interruption and other insurance, it 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 in Texas and approximately 20% of our internally sourced plasma comes from collection centers located on the United States border with Mexico. 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 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. Alternative sources for key component parts 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.

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 rely on two companies to supply nearly all of our specialty plasma required for the production of hyperimmunes, which represented $60.1 million, or 5.3%, of our net revenue in 2006. 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. Both of these companies have

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announced that they are selling, or evaluating a sale of, their businesses. If either of these companies is purchased, it is uncertain whether we could negotiate a competitive supply contract with the new business entity. If either of these companies were to stop providing us with specialty plasma, it is unlikely that we could make up the supply from another source in the short term. 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 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 connection with our formation transaction, we entered into a number of foreign distribution agreements with Bayer affiliates pursuant to which we sell products to these Bayer affiliates at discounts to market price. We continue to utilize Bayer affiliates for certain supply and distribution services in Europe. We expect to finalize the transition to independent third parties during the second half of 2007. In addition, we will be required to transition our European packaging, labeling and testing operations from Bayer Rosia to a new qualified third party by the end of 2008. We have developed our distribution strategy in all these jurisdictions and have obtained or expect to obtain foreign regulatory approvals allowing us to distribute our products in these countries directly. If we are unable to obtain these approvals or develop an effective foreign distribution strategy, we may be unable to secure or continue foreign distribution of our products on favorable terms, if at all.

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 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 the defendant in litigation alleging that thimerosal, a

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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 either 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.

        The amount of insurance that we currently hold 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.

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.

        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. 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.

        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 implicated 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 of hemolysis and/or hemolytic anemia among some patients being treated with Gamunex IGIV. Hemolysis and hemolytic anemia are known potential side-effects of intravenous immune globulin products generally, and they are specifically noted in the labeling for Gamunex IGIV. Since 2005, a disproportionate number of these reports have been received from Canada, where highly sensitive transfusion safety and pharmacovigilence systems have been established. It is possible that Health Canada, Hema Quebec and the Canadian Blood Service will conclude that the incidents of hemolysis are specifically attributable to Gamunex IGIV and not a class effect common to all intravenous immune globulin products. An adverse finding by Health Canada or any other regulatory authority in this regard 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

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pervasive and produce results such as reduced efficacy or other adverse effects, the reputation of our products in the market place may suffer.

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

        Our products, and our advertising and promotional activities for such products, are subject to regulatory requirements, ongoing review, and periodic inspections by the FDA, the Office of the Inspector General of the Department of Health and Human Services and other regulatory bodies. In addition, the manufacture and packaging of plasma products are regulated by the FDA and comparable regulatory bodies in Canada, Europe and elsewhere and must be conducted in accordance with the FDA's cGMP regulations and comparable requirements of foreign regulatory bodies, including the German Health Authority.

        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.

Certain of our other business practices are subject to scrutiny by regulatory authorities.

        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 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. Certain business practices, such as entertainment and gifts for healthcare providers, sponsorship of educational or research grants, charitable donations, and support for continuing medical education programs, must be conducted within narrowly prescribed and controlled limits to avoid any possibility of influencing healthcare providers to prescribe particular products. Where such practices have been found to be improper incentives to use such products, government investigations and assessments of penalties against manufacturers have resulted. Many manufacturers have been required to enter into consent decrees or orders that prescribe allowable corporate conduct. We have developed and implemented a comprehensive Healthcare Compliance Program and provide an initial and annual refresher training for all employees whose activities may be subject to these requirements. There can be no assurance, however, that our marketing activities will not come under the scrutiny of regulators and other government authorities or that our practices will not be found to violate applicable laws rules and regulations.

        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 U.S., 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 U.S.), 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.

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        Promotion of unapproved drugs or unapproved indications for a drug 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. Violations or allegations of violation of the foregoing restrictions could materially and adversely affect our business.

        To market and sell our products outside of the U.S., 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 our products in those markets. For example, while we completed a Mutual Recognition Procedure in the European Union, facilitating our ability to sell Prolastin A1PI into ten selected countries in the European Union, we are in the process of negotiating reimbursement on a country-by-country basis prior to commercializing A1PI in each country.

        In addition, some countries, particularly the countries of the European Union, regulate the pricing of prescription pharmaceuticals. In these countries, pricing negotiations 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 our 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 costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.

We are required to provide accurate pricing information to the U.S. government for the purpose of calculating reimbursement levels by the Center for Medicare and Medicaid Services (CMS) and for calculating federal price schedules.

        We are required to report detailed pricing information, net of all discounts, rebates and other considerations, to CMS for the purpose of calculating national reimbursement levels. 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 or its federal price schedules, which could negatively impact us compared to current calculations.

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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.

        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.

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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, to strengthen our plasma collection system and technology. 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.

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

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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 at a prospective trial site;

    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 noncompliance 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 of 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 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;

    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

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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 preclinical 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 assure you 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.

If we fail to remedy our material weaknesses or otherwise maintain effective internal control over financial reporting, there is more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected by our internal controls.

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

        In connection with the preparation of our 2006 consolidated financial statements as of December 31, 2006 we and our independent registered public accountants have identified the following material weaknesses in our internal control over financial reporting, specifically relating to effective controls over our payroll and related compensation accruals and payroll expense accounts:

    Inadequate internal human resources staffing and skills;

    Ineffective controls over the calculation and recording of the "pay for performance" bonus accrual;

    Inadequate supervision of payroll processes for recording withholdings and deductions and the accumulation and review of proper support for payroll changes and the review of accrued payroll expense relative to the completeness and accuracy of the recording of its payroll expense and related accruals; and

    Absence of timely reviews of human resource issues or payroll related reconciliations.

        Each of these controls could result in a misstatement of the aforementioned financial statement accounts and disclosures that would result in a material misstatement of the annual or interim consolidated financial statements.

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        Under the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to include a report by our management on the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2008. This report must contain an assessment by management of the effectiveness of our internal control over financial reporting as of the end of our fiscal year and a statement as to whether or not our internal control over financial reporting is effective and our annual report for the fiscal year ending December 31, 2008 must also contain a statement that our independent registered public accountants have issued an attestation report on the effectiveness of our internal control over financial reporting. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accountants are unable to attest to the effectiveness of our internal control over financial reporting, the market's perception of our financial condition and the trading price of our stock may be adversely affected. Our inability to conclude that our internal control over financial reporting is effective would also adversely affect the results of the periodic management evaluations of our disclosure controls and procedures and internal control over financial reporting that will be required under the Sarbanes-Oxley Act of 2002.

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. We do not maintain "key person" insurance on any of our other executive officers.

        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, compatibility 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.

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, including plasma suppliers, 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 plasma collection centers in varying stages of completion and assumed certain liabilities from IBR, a supplier of source plasma. The IBR acquisition entailed certain issues which are discussed above, under "—We could become supply-constrained and our financial

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performance would suffer if we could not obtain adequate quantities of FDA-approved source plasma from our own collection centers or from third parties." In addition, 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.

        In addition, we may not realize the anticipated benefits from any business combination we may undertake in the future. 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.

Risks Related to Our Financial Position

We are substantially leveraged, which could result in the need for refinancing or new capital.

        As a result of our debt recapitalization, completed December 6, 2006, we have in place credit facilities aggregating $1.355 billion in total borrowing availability. The credit facilities consist of:

    a $700.0 million First Lien Term Loan Credit Agreement with Morgan Stanley ("Morgan Stanley First Lien Term Loan") due December 6, 2013;

    a $330.0 million Second Lien Term Loan Credit Agreement with Morgan Stanley ("Morgan Stanley Second Lien Term Loan") due December 6, 2014; and

    a $325.0 million Revolving Credit Agreement with Wachovia Bank N.A. ("Wachovia Bank Revolver") due December 6, 2011.

        As a result of our entry into these credit facilities, we are highly leveraged and have significant outstanding indebtedness and debt service requirements, both in absolute terms and in relation to stockholders' deficit. At March 31, 2007, we had total outstanding indebtedness of approximately $1.13 billion, and stockholders' deficit of approximately $498.4 million. Although we expect to use a portion of the net proceeds to us from this offering to repay debt outstanding under the Morgan Stanley First Lien Term Loan and the Morgan Stanley Second Lien Term Loan, we will continue to be highly leveraged after this offering and expect to have indebtedness of approximately $            after this offering.

        Our ability to make payments on our indebtedness, including the Morgan Stanley First Lien Term Loan, the Morgan Stanley Second Lien Term Loan and the Wachovia Bank Revolver, and to fund planned capital expenditures, will depend on our ability to generate cash in the future. Our ability to generate cash in the future will be subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control.

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        There can be no assurance that our business will generate sufficient cash flows from operations or that we will have future borrowings available under the Wachovia Bank Revolver in amounts sufficient to enable us to pay our indebtedness, including under the Morgan Stanley First Lien Term Loan and the Morgan Stanley Second Lien Term Loan, or to fund other liquidity needs. We may need to raise additional funds through the sale of additional equity securities, the refinancing of all or part of our indebtedness, including the Morgan Stanley First Lien Term Loan and the Morgan Stanley Second Lien Term Loan, on or before the maturity thereof, or the sale of assets. Each of these alternatives is dependent upon financial, business and other general economic factors affecting our business, many of which are beyond our control, and we can make no assurances that any such alternatives would be available to us, if at all, on satisfactory terms. While we believe that consolidated cash flow generated by our operations will provide adequate sources of long-term liquidity, a significant drop in operating cash flow resulting from economic conditions, competition or other uncertainties beyond our control could increase the need for refinancing or new capital.

As a result of our high leverage, we are subject to operating and financial restrictions that could adversely impact our activities and operations.

        Our leveraged position may limit our ability to obtain additional financing in the future on terms and subject to conditions deemed acceptable by our management, and the agreements governing our debt impose significant operating and financial restrictions on us. The most significant restrictions relate to our capital expenditures, debt incurrence, investments, sales of assets and cash distributions. The failure to comply with any of these restrictions could result in an event of default under the various operative documents, giving our lenders the ability to accelerate the repayment of our obligations.

        As a result, our leveraged position could have important consequences to our stockholders. For example, it could:

    increase our vulnerability to general adverse economic and industry conditions;

    subject us to covenants that limit our ability to fund future working capital, capital expenditures, research and development costs and other general corporate requirements;

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

    limit our ability to obtain additional financing to fund future acquisitions of key assets;

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

    impede our ability to obtain the necessary approvals to operate our business in compliance with the numerous laws and regulations to which we are subject;

    place us at a competitive disadvantage relative to our competitors that have less debt outstanding; and

    limit our ability to borrow additional funds, among other things, under the financial and other restrictive covenants in our indebtedness.

Our business requires substantial capital and operating expenditures to operate and grow.

        We plan on spending substantial sums in capital and operating expense over the next five years 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.

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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. In addition, we expect to invest over $200 million over the next five years to upgrade our manufacturing facilities, including replacing certain equipment, but we may be required to expend additional capital in this effort if the cost of the upgrade exceeds the anticipated requirements. If we are unable to fund these activities, we may face unscheduled plant shut-downs, product rejections, product contamination and unfavorable regulatory inspections. A lack of research and development funds could result in a failure to identify, produce and market new products and respond to competitors' product offerings. 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, if at all.

Risks Related to Our Common Stock and This Offering

Talecris Holdings, LLC and its affiliated entities will continue to have control over us after this offering and could delay or prevent a change in corporate control.

        We are a majority owned subsidiary of Talecris Holdings, LLC. 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. Upon the consummation of this offering, Talecris Holdings, LLC will own approximately    % of our shares of common stock (assuming the underwriters do not exercise their option to purchase additional shares). As long as Talecris Holdings, LLC owns or controls at least a majority of our outstanding voting power, it has 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, irrespective of how our other stockholders may vote, including:

    the election of directors;

    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.

A majority of our board of directors will not be considered "independent" under the rules of The Nasdaq Stock Market, Inc.

        Talecris Holdings, LLC will own a majority of our common stock following the completion of this offering. As a result, we will certify that we are a "Controlled Company" under Nasdaq's rules and we intend to rely on the "Controlled Company" exception to the board of directors and committee composition requirements under Nasdaq's rules. Under this exception, we will be exempt from the rule that requires that (i) our board of directors be comprised of a majority of "independent directors"; (ii) our compensation committee be comprised solely of "independent directors"; and (iii) our nominating committee be comprised solely of "independent directors," as these terms are defined under Nasdaq's rules. Immediately following this offering, we expect that            of our directors will be "independent."

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Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

        Provisions in our corporate charter and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions:

    establish a classified board of directors such that not all members of the board are elected at one time;

    allow the authorized number of our directors to be changed only by the affirmative vote of two-thirds of our shares of capital stock or by resolution of our board of directors;

    limit the manner in which stockholders can remove directors from the board;

    establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

    require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

    impose a "fair price" requirement that prohibits an acquiror attempting to effect a takeover of our company from utilizing a two tier price structure as part of a two stage acquisition of our outstanding stock;

    limit who may call stockholder meetings; and

    authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a "poison pill" that would work to dilute the stock ownership of a potential hostile acquiror, effectively preventing acquisitions that have not been approved by our board of directors.

        For example, our certificate of incorporation authorizes the board of directors to issue up to 10,000,010 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights, and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent, or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders' control.

        Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. The restrictions contained in Section 203 are

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not applicable to any of our existing stock holders that will own 15% or more of our outstanding voting stock upon the closing of this offering.

If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

        We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent outstanding options are exercised, you will incur further dilution. Based on an assumed initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, you will experience immediate dilution of $            per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately      % of the aggregate price paid by all purchasers of our stock but will own only approximately      % of our common stock outstanding after this offering. See "Dilution" for more detail.

We cannot guarantee that an active trading market for our common stock will develop, which will limit your ability to sell shares.

        There is currently no existing public market for our common stock. We will apply to have our common stock quoted on the Nasdaq Global Market under the symbol "TLCR" and, if approved, expect that such quotation will commence at the same time that the registration statement that contains this prospectus becomes effective. A public trading market having the desirable characteristics of depth, liquidity, and orderliness depends upon the existence of willing buyers and sellers at any given time, the presence of which is dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. Accordingly, we cannot assure you that an active and liquid trading market for our common stock will develop or that, if developed, it will continue. The failure of an active and liquid trading market to develop would likely have a material adverse effect on the value of our common stock.

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 in the future as a publicly traded company. A number of factors, many of which are not within our control, could subject our operating results and stock price to volatility, including:

    contamination of products or material that does not meet specifications in production and related write-offs and other costs;

    prices of and demand for plasma, which constitutes approximately half of our cost of goods sold;

    FDA and regulatory approvals of plasma centers;

    changes or anticipated changes in Medicare and private payor reimbursement rates applicable to our products;

    introduction of competing products or the announcement by our competitors of their plans to do so;

    variations in product demand;

    regulatory developments in the United States and elsewhere;

    the departure of key personnel;

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    the results of ongoing and planned clinical trials of our pipeline products;

    the results of regulatory reviews relating to the approval of our pipeline products; and

    general and industry-specific economic conditions that may affect our research and development expenditures or otherwise 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.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

        Our stock price is likely to be volatile. The stock market has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

    results of clinical trials of our product candidates or those of our competitors;

    new therapeutic technologies that may replace plasma-derived proteins;

    regulatory or legal developments in the United States and other countries;

    variations in our financial results or those of companies that are perceived to be similar to us;

    changes in the structure of healthcare payment systems;

    pricing fluctuations due to changing market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts' reports or recommendations;

    general economic, industry and market conditions; and

    other factors described in this "Risk Factors" section.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

        Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding                        shares of common stock based on the number of shares outstanding as of                , 2007. This includes the shares that we are selling in this offering, which may be resold in the public market immediately. Of the remaining shares,                        shares are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the "Shares Eligible for Future Sale" section of this prospectus. Moreover, after this offering, holders of an aggregate of                        shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the "Underwriters" section of this prospectus.

37



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus, 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:

    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;

    our and our suppliers' ability to adhere to cGMP regulations;

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

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

    the timing of, and our ability to receive and maintain, the appropriate regulatory licenses for our plasma collection centers, which impacts our ability to use the source plasma in our manufacturing processes;

    possible U.S. legislation or regulatory action affecting, among other things, pharmaceutical pricing and reimbursement, including Medicaid and Medicare;

    the potential impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003;

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

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

    the impact of competitive products and pricing;

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

    interest rate fluctuations impacting our floating rate debt instruments and foreign currency exchange rate fluctuations in the international markets in which we operate;

    our ability to successfully transition and establish internal operational, supply, and distribution capabilities, which were previously provided to us by Bayer affiliates under the terms of various transition services, supply, and distribution agreements;

    any changes in business, political, and economic conditions due to the threat of terrorist activity in the U.S. and other parts of the world, and related U.S. military action oversees; and

    other factors identified elsewhere in this prospectus and in other filings we make with the United States Securities and Exchange Commission.

38


        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. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. 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.


USE OF PROCEEDS

        We estimate that the net proceeds to us from our issuance and sale of            shares of common stock in this offering will be approximately $            million, assuming an initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) our net proceeds from this offering by approximately $            million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds to us from this offering will be approximately $            million, assuming an initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.

        We intend to use the net proceeds we receive from this offering as follows:

    $            million and $            million for the repayment of principal and premium under our First and Second Lien Term Loans, respectively, as well as any prepayment penalty (See the description of these agreements under the heading, "Description of Certain Indebtedness—Morgan Stanley First Lien Term Loan Credit Agreement" and "Description of Certain Indebtedness—Morgan Stanley Second Lien Term Loan Credit Agreement");

    $            million and $            million for the payment of earned and unpaid dividends on our then outstanding, Series A and B convertible preferred stock which is held by Talecris Holdings, LLC, an entity owned by (i) Cerberus-Plasma Holdings LLC and (ii) limited partnerships affiliated with Ampersand Ventures;

    $            million for the payment of a termination fee relating to the then outstanding management agreement with Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures; and

    the balance, if any, to fund working capital, capital expenditures and other general corporate purposes, which may include the acquisition or licensing of complementary technologies, products or businesses.

        This expected use of net proceeds of this offering represents our intentions based upon our current plans and business conditions. Our management will retain broad discretion over the allocation of any net proceeds used for capital expenditures or other general corporate purposes. While we continually evaluate potentially material acquisitions of businesses, assets and products and new licenses of technologies, we have no current agreements or commitments for any such material acquisitions or new licenses.

        Pending use of the proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments.

39




DIVIDEND POLICY

        The payment of dividends is within the discretion of our board of directors and will depend upon our earnings, capital requirements and operating and financial position, among other factors. We declared a $73.2 million dividend to our stockholders on December 30, 2005 and a $760.0 million dividend to our stockholders on December 6, 2006. We expect to retain all of our earnings to finance the expansion and development of our business, and we currently have no plans to pay cash dividends to our stockholders after this offering. Our senior credit facility limits, and our future debt agreements may restrict our ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Sources of Credit and Contractual and Commercial Commitments" and "Description of Certain Indebtedness."

40



CAPITALIZATION

        The following table sets forth our cash and cash equivalents and short-term investments and our capitalization as of June 30, 2007:

    on an actual basis;

    on a pro forma basis to give effect to the conversion of all of the outstanding shares of our preferred stock into an aggregate of            shares of common stock upon the closing of this offering; and

    on a pro forma as adjusted basis to give further effect to (i) our issuance and sale of            shares of common stock in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, and (ii) the use of proceeds from this offering to repay $            million and $            million of principal and premium under our First and Second Lien Term Loans, respectively, and the payment of $            million and $            million of accrued and unpaid dividends on our then outstanding Series A and B convertible preferred stock, respectively, and the payment of $            million as a termination fee under our management agreement.

        The pro forma information below is illustrative only and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes appearing at the end of this prospectus.

 
  As of June 30, 2007
 
  Actual
  Pro Forma
  Pro Forma As
Adjusted

 
  (in thousands, except shares)

Short-term debt:              
  Current portion of debt              
Long-term debt:              
  First Lien Term Loan              
  Second Lien Term Loan              
  Revolving Credit Facility              
   
       
Total debt   $          
   
 
 
Redeemable series A and B senior convertible preferred stock, par value $0.01 per share; 10,000,010 shares authorized; 1,192,310 shares issued and outstanding   $          
Obligation under common stock put/call option              

Stockholders' deficit:

 

 

 

 

 

 

 
Common stock, par value $0.01 per share, 100,000,000 shares authorized; 569,566 shares issued and outstanding              
Additional paid-in capital(1)              
Accumulated other comprehensive loss              
Accumulated deficit              
   
       
Total stockholders' deficit(1)              
   
 
 
Total capitalization   $          
   
 
 

(1)
A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) each of additional paid-in capital, total stockholders' deficit and total

41


    capitalization by approximately $            million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

        The table above does not include:

    shares of common stock issuable upon exercise of options outstanding as of June 30, 2007 at a weighted average exercise price of $            per share; and

    an aggregate of            shares of common stock reserved for future issuance under our 2005 stock option and incentive plan and our 2006 Restricted Stock Plan as of the closing of this offering.

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DILUTION

        If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

        The historical net tangible book value of our common stock as of June 30, 2007 was approximately $            million or $            per share, based on              shares of common stock outstanding as of June 30, 2007. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding.

        Our pro forma net tangible book value as of June 30, 2007 was approximately $            million, or $            per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding after giving effect to the conversion of all outstanding shares of our preferred stock into an aggregate of            shares of common stock upon the closing of this offering.

        After giving effect to our issuance and sale of            shares of common stock in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, less the estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of June 30, 2007 would have been approximately $            million or $            per share. This represents an immediate increase in pro forma net tangible book value of $            per share to our existing stockholders and immediate dilution in pro forma net tangible book value of $            per share to new investors purchasing common stock in this offering at the initial public offering price. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share paid by a new investor. Sales of shares by our selling stockholders in this offering do not affect our net tangible book value. The following table illustrates this dilution on a per share basis:

Assumed initial public offering price per share:   $  
  Historical net tangible book value per share as of June 30, 2007   $  
  Increase attributable to the conversion of outstanding preferred stock      
  Pro forma net tangible book value per share as of June 30, 2007      
  Increase per share attributable to new investors      
Pro forma net tangible book value per share after this offering      
Dilution per share to new investors   $  

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) our pro forma net tangible book value after the offering by approximately $            million, our pro forma net tangible book value per share after this offering by approximately $            and dilution per share to new investors by approximately $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

        The following table summarizes as of June 30, 2007 the number of shares purchased from us after giving effect to the conversion of all outstanding shares of our preferred stock into an aggregate of            shares of common stock upon the closing of this offering, the total consideration paid and the average price per share paid, or to be paid, to us by existing stockholders and by new investors in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range listed

43



on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 
  Shares Purchased
  Total Consideration
   
 
  Average Price
per Share

 
  Number
  Percentage
  Amount
  Percentage
Existing stockholders                    
New investors                    
  Total                    

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the total consideration paid by new investors by $            million, and increase (decrease) the percentage of total consideration paid by new investors by approximately    %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

        The table above is based on            shares of common stock outstanding as of June 30, 2007, including an aggregate of            unvested shares outstanding under the 2006 Restricted Stock Plan and an additional            shares of common stock issuable upon the conversion of all of the outstanding shares of our preferred stock prior the closing of this offering and excludes:

    shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2007 at a weighted average exercise price of $            per share; and

    an aggregate of            shares of common stock reserved for future issuance under our 2005 stock option and incentive plan and our 2006 Restricted Stock Plan as of the closing of this offering.

        If the underwriters exercise their option to purchase additional shares or if any shares are issued in connection with outstanding options you will experience further dilution. If the underwriters exercise their option to purchase additional shares in full, the following will occur:

    the percentage of shares of common stock held by existing stockholders will decrease to approximately    % of the total number of shares of our common stock outstanding after this offering; and

    the pro forma as adjusted number of shares held by new investors will be increased to            , or approximately    %, of the total pro forma as adjusted number of shares of our common stock outstanding after this offering.

44



SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA

        You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The consolidated income statement data for the three months ended March 31, 2007 and 2006, and the balance sheet data as of March 31, 2007 are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The consolidated statements of income data for the year ended December 31, 2006 and the nine months ended December 31, 2005 and the consolidated balance sheet data at December 31, 2006 and 2005 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of March 31, 2006 was derived from our unaudited interim consolidated financial statements, which are not included in this prospectus. The combined statements of income (loss) data for the three months ended March 31, 2005 and for the years ended December 31, 2004 and the combined balance sheet data at March 31, 2005 and at December 31, 2004 are derived from the audited financial statements of Bayer Plasma Products Business Group (Bayer Plasma or Predecessor), which are included in this prospectus. The combined statement of income (loss) data for the year ended December 31, 2003 and 2002 and the combined balance sheet data at December 31, 2003 and 2002 are derived from the unaudited financial statements of Bayer Plasma, which are not included in this prospectus. The historical results are not necessarily indicative of results to be expected for future periods, and the results for the three months ended March 31, 2007 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2007. The selected historical consolidated and combined financial data set forth below should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated and combined financial statements and related notes thereto appearing elsewhere in this prospectus.

        The unaudited financial data as of March 31, 2006 and 2007 and for the three months ended March 31, 2006 and 2007 have been derived from our unaudited consolidated financial statements. These unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for those periods. Operating results for the three months ended March 31, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007.

        The financial statements of Bayer Plasma are presented on a carve-out basis from the historical financial statements of Bayer AG and its affiliates. As Predecessor, we participated in Bayer's centralized cash management system and our net cash funding requirements were met by Bayer. We were not allocated interest costs from Bayer for use of these funds. The Predecessor's combined results of operations include all net revenue and costs directly attributable to our operations as Bayer Plasma, including all costs for supporting functions and services used by us at shared sites and performed by centralized Bayer organizations, presented on a carve-out basis, prior to our March 31, 2005 formation transaction. In Predecessor periods, the expenses for these services were charged to us based on a determination of the services provided primarily using activity-based allocation methods based primarily on revenue, headcount, or square footage. In Predecessor periods, Bayer also provided certain manufacturing services to us for the production of certain products at established transfer prices, which have been included in cost of goods sold.

        We acquired certain assets and liabilities of Bayer Plasma on March 31, 2005. Successor operations began on April 1, 2005 as the successor business (Successor). On April 12, 2005, we acquired Precision Pharma Services, Inc., or Precision Pharma, which was owned by affiliates of Ampersand and which supplied intermediate paste principally to our predecessor and us. These affiliates of Ampersand are investors in Talecris Holdings, LLC.

45


        We believe that the comparability of our financial results between Successor and Predecessor periods presented is significantly impacted by the following items, which are more fully described under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Matters Affecting Comparability."

    Acquisition of Bayer Plasma net assets and related purchase accounting

    Distribution and transition services agreements with Bayer affiliates

    Transition related activities

    Management fees

    Share-based compensation awards

    Special recognition bonus plan

    Capital structure

    Gamunex IGIV production incident

    Acquisition of plasma collection centers

46



Selected Financial Data

 
   
   
   
   
 
 
  Predecessor
  Successor
 
 
  Year Ended
December 31,
2002

  Year Ended
December 31,
2003

  Year Ended
December 31,
2004

  Three
Months
Ended
March 31,
2005

  Inception
Through
December 31,
2005

  Year Ended
December 31,
2006

  Three
Months
Ended
March 31,
2006

  Three
Months
Ended
March 31,
2007

 
 
  (unaudited)

  (unaudited)

  (audited)

  (audited)

  (audited)

  (audited)

  (unaudited)

  (unaudited)

 
 
  (in thousands, except per share amounts)

 
Income (Loss) Statement Data:                                                  
Net revenue:                                                  
  Net product revenue   $ 671,400   $ 719,900   $ 846,500   $ 245,500   $ 654,939   $ 1,114,489   $ 282,416   $ 296,894  
  Other                     13,039     14,230     3,947     5,545  
   
 
 
 
 
 
 
 
 
Total net revenue     671,400     719,900     846,500     245,500     667,978     1,128,719     286,363     302,439  
Cost of goods sold     646,200     613,100     661,500     209,700     561,111     684,750     191,377     181,793  
   
 
 
 
 
 
 
 
 
Gross profit     25,200     106,800     185,000     35,800     106,867     443,969     94,986     120,646  
Operating expenses:                                                  
  SG&A     80,700     94,900     102,200     27,500     89,205     241,448     40,109     42,638  
  R&D     41,100     49,900     59,000     14,800     37,149     66,801     12,246     13,876  
   
 
 
 
 
 
 
 
 
Total operating expenses     121,800     144,800     161,200     42,300     126,354     308,249     52,355     56,514  
   
 
 
 
 
 
 
 
 
(Loss) income from operations     (96,600 )   (38,000 )   23,800     (6,500 )   (19,487 )   135,720     42,631     64,132  
Other income (expense):                                                  
  Equity in earnings of affiliate                     197     684     209     171  
  Interest expense, net                     (21,224 )   (40,867 )   (7,936 )   (27,952 )
  Loss on extinguishment of debt                         (8,924 )        
   
 
 
 
 
 
 
 
 
(Loss) income before income taxes and extraordinary items     (96,600 )   (38,000 )   23,800     (6,500 )   (40,514 )   86,613     34,904     36,351  
Provision for income taxes     (9,900 )   (14,900 )   (18,500 )   (5,100 )   (2,251 )   (2,222 )   (915 )   (2,055 )
   
 
 
 
 
 
 
 
 
(Loss) income before extraordinary items     (106,500 )   (52,900 )   5,300     (11,600 )   (42,765 )   84,391     33,989     34,296  
   
 
 
 
 
 
 
 
 
Extraordinary items:                                                  
  Gain (loss) from unallocated negative goodwill                     252,303     (306 )   (306 )    
  Gain from settlement of contingent consideration due Bayer                     13,200     3,300     3,300      
   
 
 
 
 
 
 
 
 
Net (loss) income   $ (106,500 ) $ (52,900 ) $ 5,300   $ (11,600 ) $ 222,738   $ 87,385   $ 36,983   $ 34,296  
   
 
 
 
 
 
 
 
 

(Loss) income before extraordinary items per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $ (106.50 ) $ (52.90 ) $ 5.30   $ (11.60 ) $ (120.75 ) $ (958.67 ) $ 32.81   $ 392.87  
  Diluted   $ (106.50 ) $ (52.90 ) $ 5.30   $ (11.60 ) $ (120.75 ) $ (958.67 ) $ 3.15   $ 3.00  
Cash dividends declared per common share:                                                  
  Basic                   $ 66.96   $ 1,070.53          
  Diluted                   $ 66.96   $ 68.87          

Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash and cash equivalents                   $ 10,887   $ 11,042   $ 16,562   $ 27,465  
Total assets   $ 924,300   $ 1,054,100   $ 1,115,200   $ 1,040,800   $ 705,249   $ 903,474   $ 717,497   $ 923,701  
Long-term debt and redeemable preferred stock                   $ 270,997   $ 1,213,455   $ 280,877   $ 1,233,341  
Total stockholders' equity (deficit)/parent's net investment   $ 810,700   $ 913,000   $ 987,000   $ 943,600   $ 152,835   $ (528,980 ) $ 189,727   $ (498,418 )

Other Financial Data and Ratios (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Liters of plasma processed     2,404     2,573     3,016     905     2,493     2,983     846     664  
Gross profit margin     3.8 %   14.8 %   21.9 %   14.6 %   16.0 %   39.3 %   33.2 %   39.9 %
EBITDA(1)(2)   $ (66,000 ) $ (6,200 ) $ 56,500   $ 1,500   $ (18,056 ) $ 140,680   $ 43,382   $ 65,777  
Adjusted EBITDA(1)(2)   $ (66,000 ) $ (6,200 ) $ 56,500   $ 1,500   $ (574 ) $ 264,058   $ 59,555   $ 75,039  

(1)
We define EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, extraordinary items, equity in earnings of affiliate, and gains on sales of equipment. We define Adjusted EBITDA as EBITDA, further adjusted to exclude transition and other non-recurring expenses, management fees paid to our sponsors, non-cash share-based compensation expense, and special recognition bonus

47


    expense, which we believe are not indicative of our ongoing core operations. These items are described in more detail in the reconciliation below.


We use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our U.S. GAAP results and the following reconciliation, we believe provide a more complete understanding of factors and trends affecting our business than U.S. GAAP measures alone. EBITDA and Adjusted EBITDA assist in comparing our operating performance on a consistent basis because they remove the impact of our capital structure (primarily interest charges and amortization of debt issuance costs), asset base (primarily depreciation and amortization) and items outside the control of our management team (taxes) from our operations. We use Adjusted EBITDA as a supplemental measure to assess our performance because it excludes certain non-cash equity compensation expenses, management fees paid to our sponsors, transition and other non-recurring costs associated with establishing our infrastructure as an independent company, and special recognition bonuses which provided cash awards to certain of our employees and senior executives. EBITDA and Adjusted EBITDA serve as measures in evaluating annual incentive compensation awards to our employees and senior executives and for the calculation of financial covenants in our credit facilities. We present EBITDA and Adjusted EBITDA because we believe it is useful for investors to analyze our operating results on the same basis as that used by our management.


EBITDA and Adjusted EBITDA are considered "non-GAAP financial measures" under SEC rules and should not be considered substitutes for net (loss) income or (loss) income from operations, as determined in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, including, but not limited to the following:

EBITDA does not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments;

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreements;

EBITDA does not reflect income tax expense or the cash requirements to pay our taxes;

Adjusted EBITDA has all the inherent limitations of EBITDA. In addition, you should be aware that there is no certainty that we will not incur similar expenses in the future, which are eliminated in the calculation of Adjusted EBITDA;

Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.


Because of these limitations, EBITDA and Adjusted EBITDA should not be considered the primary measures of the operating performance of our business. We strongly encourage you to review the U.S. GAAP financial statements included elsewhere in this prospectus, and not to rely on any single financial measure to evaluate our business.

48


(2)
The following is a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA:

 
   
   
   
   
 
 
  Predecessor
  Successor
 
 
  Year Ended
December 31,
2002

  Year Ended
December 31,
2003

  Year Ended
December 31,
2004

  Three
Months
Ended
March 31,
2005

  Inception
Through
December 31,
2005

  Year Ended
December 31,
2006

  Three
Months
Ended
March 31,
2006

  Three
Months
Ended
March 31,
2007

 
 
  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

 
 
  (in thousands)

 
Net (loss) income   $ (106,500 ) $ (52,900 ) $ 5,300   $ (11,600 ) $ 222,738   $ 87,385   $ 36,983   $ 34,296  
  Extraordinary items                     (265,503 )   (2,994 )   (2,994 )    
   
 
 
 
 
 
 
 
 
(Loss) Income before extraordinary items     (106,500 )   (52,900 )   5,300     (11,600 )   (42,765 )   84,391     33,989     34,296  
  Gain on sale of equipment                                 (320 )
  Loss on extinguishment of debt                         8,924          
  Provision for income taxes     9,900     14,900     18,500     5,100     2,251     2,222     915     2,055  
  Equity in earnings of affiliate                     (197 )   (684 )   (209 )   (171 )
  Interest expense, net                     21,224     40,867     7,936     27,952  
  Depreciation and amortization     30,600     31,800     32,700     8,000     1,431     4,960     751     1,965  
   
 
 
 
 
 
 
 
 
EBITDA     (66,000 )   (6,200 )   56,500     1,500     (18,056 )   140,680     43,382     65,777  
  Transition and other non-recurring expenses(a)                     12,809     73,203     14,437     2,651  
  Management fees(b)                     3,350     5,645     1,425     1,512  
  Non-cash stock option expense(c)                     1,323     2,244     311     1,558  
  Non-cash restricted stock expense(c)                         435         1,305  
  Non-cash unrestricted stock expense(c)                         3,960          
  SRB(d)                         37,891         2,236  
   
 
 
 
 
 
 
 
 
Adjusted EBITDA   $ (66,000 ) $ (6,200 ) $ 56,500   $ 1,500   $ (574 ) $ 264,058   $ 59,555   $ 75,039  
   
 
 
 
 
 
 
 
 

    (a)
    Represents the expense associated with the development of our internal capabilities to operate as a standalone company apart from Bayer, consisting primarily of consulting services associated with developing our corporate infrastructure. We believe these costs are non-recurring once the related infrastructure has been established and we have completed our overall transition from Bayer.

    (b)
    Represents the advisory fees paid to Talecris Holdings, LLC, our sponsor, under the Management Agreement, as amended. This agreement will be terminated in connection with this offering.

    (c)
    Represents our non-cash equity compensation expense associated with our stock options, restricted stock, and unrestricted stock. The restricted stock we issued was in lieu of a future cash bonus to senior management executives. The unrestricted stock was issued to our Chairman in lieu of a cash bonus.

    (d)
    Represents compensation expense associated with special recognition bonus awards granted to our employees and senior executives. These awards were granted to reward past performance and were provided to these individuals in recognition of the extraordinary value realized by us and our stockholders due to the efforts of such individuals since inception of our operating activities on April 1, 2005. We do not anticipate granting similar awards in the future.

49



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 financial statements, the financial statements of Bayer Plasma Products Business Group (Bayer Plasma) and the financial statements of International BioResources, L.L.C. (IBR) and related footnotes appearing at the end of this prospectus. This discussion and analysis contains forward looking statements that involve risks and uncertainties. See "Risk Factors" included elsewhere in this prospectus 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 prospectus.

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

        Unless otherwise stated or the context otherwise requires, references to "Talecris," "we," "us," "our" and similar references refer to Talecris Biotherapeutics Holdings Corp. and its wholly owned subsidiaries for the period subsequent to our formation on March 31, 2005, and refer to Bayer Plasma Products Business Group, an operating unit of the Biological Products division of Bayer Healthcare LLC, which is a subsidiary of Bayer AG, for the period prior to our formation. Unless otherwise stated or the context requires otherwise, "Bayer" means Bayer AG, or any of its directly or indirectly wholly-owned subsidiaries.

Business Overview

        We develop, produce, market and distribute protein-based therapies that extend and enhance the lives of people suffering from chronic and acute, often life-threatening, conditions, such as immune deficiency disorders, alpha-1 antitrypsin (AAT) deficiency, infectious diseases, hemophilia and severe burns. We are one of the largest producers and marketers in our industry. Our products are derived from human plasma, the liquid component of blood, which is sourced from our plasma collection centers, or purchased from third parties, primarily located 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 vials for distribution.

        We operate in an industry that has experienced significant consolidation over the past two decades. Specifically, the number of major plasma-derived product manufacturers has declined and we believe some of our competitors have reduced their plasma fractionation capacity. Our industry has also experienced significant consolidation of the plasma supply chain as many plasma collection organizations have closed or have been acquired by manufacturers of plasma-derived products related to their efforts to vertically integrate plasma sourcing. In addition to the consolidation within our industry, the volume demand for plasma-derived therapies has increased, both in the United States and worldwide. As a result of the increase in demand for plasma-derived therapies and the decline in production and collection capacities, the cost of procuring plasma has increased, and pricing for plasma-derived products has generally increased as well. We intend to service the overall growth in demand for plasma-derived products through continued development of our internal plasma procurement capabilities and with incremental increases in our fractionation and purification capacities, including enhanced efficiency, increased yields, and reduced product rejects and cycle times.

        We believe that plasma supply constraints will continue to be pervasive in our industry in the near term, impacting our ability to satisfy demand for our core products. We anticipate that our costs of production will continue to increase as a result of higher costs of raw materials, particularly plasma, due to limited third party supply and the development of our Talecris Plasma Resources, Inc. (TPR) infrastructure

50



until such time as we are able to increase TPR internal production volumes and absorb related overhead. We believe that growth in demand, continued constrained production capacity, and increasing production costs are likely to result in higher product prices. We anticipate implementing measured price increases for most of our products in the near term. Longer term, we anticipate increases in plasma collection and manufacturing capacities, which will result in a balance of supply and demand, which is likely to moderate future pricing.

        Our ability to execute our strategic plans is highly dependent upon our ability to obtain adequate quantities of Food and Drug Administration (FDA) approved plasma, the key raw material used in our manufacturing processes. Until our acquisition of plasma collection centers from International BioResources, L.L.C. and affiliated entities (IBR) in November 2006, 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. In an effort to improve the predictability and sustainability of our plasma supply, we pursued a strategy of partial vertical integration of our plasma supply chain through the acquisition of a number of plasma collection centers in various stages of development from IBR, our then largest third party supplier. In June 2007, we acquired one licensed and two unlicensed plasma collection centers from IBR to further strengthen our plasma collection capabilities. We received the license for one of these centers in July and expect to receive the license for the second during 2007.

        We have 26 licensed plasma collection centers and 20 opened but unlicensed plasma collection centers. Successful development of a plasma collection center depends on a number of factors, including our ability to obtain licensure by the FDA. We can not sell products made from plasma collected from a plasma collection center until the collection center obtains licensure from the FDA. In the event that we determine that plasma was not collected in a cGMP compliant fashion or that the center is unable to obtain FDA licensure, we would be required to destroy any collected plasma from that center, which would be recorded as a charge to cost of goods sold during the period the inventories are determined to be unrealizable. At March 31, 2007, our raw material inventories included $23.8 million of unlicensed plasma, which we believe are realizable. We intend to continue to work with the FDA to obtain regulatory approvals for our unlicensed collection centers and to explore additional opportunities to expand our human plasma supply.

        We believe that we have important competitive advantages that will serve us well and distinguish us from other companies in our industry. We have a strong product portfolio with notable brand recognition which establishes us as an industry leader, particularly with respect to our Gamunex IGIV and Prolastin A1PI therapies. Since our formation as Talecris, we have undertaken a number of initiatives designed to enhance our operating results. In 2005 and 2006, we rationalized our distribution networks and simultaneously entered into long-term distribution agreements with major hospital group purchasing organizations, homecare and specialty pharmacy providers and distributors, which we believe grant us favorable volume, pricing and payment terms including, in certain cases, financial penalties if they fail to purchase agreed volumes of products. In addition, during the fourth quarter of 2005, we formalized an internal plan designed to further enhance our operating results by, among other things, improving production processes to enhance efficiency, increasing production yields, reducing product reject rates, reducing cycle times, and improving utilization of human plasma and other raw materials.

        As a result of our past and continuing investment in research and development, we believe that we are positioned to continue as an industry leader in the plasma-derived therapies business. Near term, our focus is on life cycle management initiatives to extend the commercial life of our products and brands. Longer term, our most exciting pipeline product is Plasmin, a patent-protected therapy for restoring blood flow through arteries and veins that have become obstructed by blood clots.

        Upon the commencement of our operations as Talecris, we entered into various transition services, supply and distribution agreements with Bayer under which Bayer affiliates provided us with certain operational, information technology and distribution services for various periods of time in a number of

51



geographic locations. We believe that the most significant transition and other non-recurring expenditures necessary to establish our internal infrastructure apart from Bayer have been made, but anticipate that we will continue to incur costs associated with the termination of the remaining transition services and distribution agreements and further development of our internal infrastructure.

        We established an independent capital structure upon our formation as Talecris on March 31, 2005, which consisted of a $400.0 million asset-based credit facility, $27.8 million of 12% Second Lien Notes, and $90.0 million of 14% Junior Secured Convertible Notes. In March 2006, we entered into an additional $40.0 million term loan. In December 2006, we completed a debt recapitalization transaction in which we repaid, retired or converted all outstanding principal and interest amounts owed under our then existing debt instruments, with new borrowings aggregating $1.355 billion in total availability. As a result of the recapitalization transaction, our interest expense has increased significantly in periods subsequent to December 2006.

        We anticipate that our cash needs will be significant and that, subsequent to the completion of this offering and the application of proceeds to repay debt, we will need to increase our borrowings under our credit facilities in order to fund our operations and strategic initiatives. Our planned capital expenditures, which will include the design and construction of a new fractionation facility, are significant, and are likely to approach or exceed $90.0 million annually over the next five years. To the extent that our existing sources of cash are insufficient to fund our activities, we may need to raise additional funds through debt or equity financing.

Principal Products

        As Successor and Predecessor, the majority of our sales are concentrated in two key therapeutic areas: Immunology, primarily through our intravenous immune globulin (IGIV) product for the treatment of primary immune deficiency and autoimmune diseases, 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 brand IGIV (Gamunex IGIV) and Prolastin brand A1PI (Prolastin A1PI), respectively. We also have a line of hyperimmune therapies that provide treatment for tetanus, rabies, hepatitis B 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 were in the United States and Canada during the periods presented.

        Our Gamunex IGIV is produced with a viral inactivation process that uses caprylate. We believe this technology differentiates our IGIV product from our competitors. Our Gamunex IGIV was launched in 2003 as the next generation therapy to our Gamimune brand IGIV (Gamimune IGIV) which utilized a solvent detergent process for viral inactivation. We discontinued manufacturing and selling Gamimune IGIV in 2006. Our Prolastin A1PI was the first A1PI product licensed and, consequently, has enjoyed a first-mover advantage in market share. Two competitors have recently launched competing A1PI products in the U.S., the primary market for such therapies. This has resulted in a loss of market share and has increased competition for new patients. In addition, we constantly experience A1PI patient losses due to the nature of the disease.

Subsidiaries

        In April 2006, we formed Talecris Biotherapeutics, Ltd. (Talecris, Ltd.) in Canada and in December 2006, we formed Talecris Biotherapeutics GmbH (Talecris, GmbH) in Germany, to support our international sales and marketing activities, and to replace certain functions which were previously provided to us by Bayer affiliates under various transition and distribution services agreements.

52



        Our manufacturing facilities currently have the capacity to fractionate, purify, fill, and finish approximately 4.2 million liters of human plasma per year. Until recently, we relied upon third party contracts for the supply of plasma. The number of third party plasma collection centers has declined significantly in recent years through closure or acquisition by our competitors. Consequently, a significant portion of our plasma supply has been through companies owned or controlled by our competitors. A number of those contracts ended in 2007, while the most significant contract will terminate at the end of 2008. In order to ensure a predictable and sustainable supply of plasma, we formed TPR in September 2006 to create a platform for the partial vertical integration of our plasma supply chain. In November 2006, we acquired plasma collection centers in various stages of development from IBR through an asset purchase agreement. In June 2007, we acquired three additional plasma collection centers from IBR through a separate asset purchase agreement to further support our plasma collection capabilities. We plan to complete the development of acquired centers and open new centers, as required to meet our business needs.

Basis of Presentation

        As Predecessor, we participated in Bayer's centralized cash management system and our net cash funding requirements were met by Bayer. We were not allocated interest costs from Bayer for use of these funds.

        The Predecessor's combined results of operations include all net revenue and costs directly attributable to our operations as Bayer Plasma, including all costs for supporting functions and services used by us at shared sites and performed by centralized Bayer organizations, presented on a carve-out basis, prior to our March 31, 2005 formation transaction. In Predecessor periods, the expenses for these services were charged to us based on a determination of the services provided, primarily using activity-based allocation methods based primarily on revenue, headcount, or square footage. In Predecessor periods, Bayer also provided certain manufacturing services to us for the production of certain products at established transfer prices, which have been included in cost of goods sold.

        During Successor periods, our results of operations include the results of Precision, Talecris, Ltd., TPR, the plasma collection centers acquired from IBR, and Talecris, GmbH from the respective dates noted above.

        The following items, as defined more fully in the section titled, "—Matters Affecting Comparability," represent some of the key differences when comparing Successor and Predecessor periods:

    Successor results of operations reflect the application of purchase accounting;

    Successor results of operations include the deferral of gross profit on inventories sold through certain international distribution channels provided by Bayer affiliates until such time as the inventories are sold to unaffiliated third parties;

    Successor results of operations reflect certain significant transition and other non-recurring costs associated with the establishment of internal capabilities to operate as a standalone company;

    Successor results of operations reflect a strategic change in 2006 to create a platform for the partial vertical integration of our plasma supply;

    Successor results of operations include management fees charged by Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures;

    Successor results of operations include costs associated with share-based compensation awards;

    Successor results of operations include the impact of certain special recognition bonus awards;

53


    Successor results of operations reflect the impact of interest expense resulting from debt financing of Successor's business, where as Predecessor, Bayer did not allocate interest costs to us; and

    Successor accounts reflect an independent capital structure reflecting a combination of debt and equity instruments to finance our formation transaction, distributions to shareholders, and operations.

Critical Accounting Policies and Estimates

        The preparation of 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, estimates and assumptions is included in the footnotes to our financial statements appearing at the end of this prospectus. Our significant accounting policies, estimates and assumptions have not changed materially since the date of the financial statements.

        We believe that certain of our accounting policies are critical because they are the most important to the preparation of our 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 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 financial statements.

Revenue Recognition

        Revenue from product sales and the related cost of goods sold are generally recognized when title and risk of loss are transferred to customers, collection is reasonably assured, and we have no further performance obligations, in accordance with the SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," as amended by SAB No. 104, "Revenue Recognition."

        Allowances against revenue for estimated discounts, rebates, administrative fees, and chargebacks 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.

        Sales allowances are established based upon consideration of a variety of factors, including, but not limited to, our sales terms which generally provide for a 2% prompt pay discount, 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. 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.

        Our estimates for discounts, customer and government rebates, and administrative fees are by their nature more predictable and less subjective. Estimates for chargebacks are more subjective and, consequently, may be more variable. We enter into agreements with certain 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

54



wholesaler, we provide the wholesaler with a credit referred to as a chargeback. 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. Our estimates of inventory levels at the wholesalers are subject to inherent limitations, as our estimates rely on third party data, and their data may itself rely on estimates, and be subject to other limitations. 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.

        We entered into a number of distribution agreements with Bayer in connection with our formation transaction. Under the terms of certain of these distribution agreements, Bayer affiliates earn a minimum gross margin on sales of our products which varies by region. Under certain of these distribution agreements, Bayer has the right to require us to buy back saleable inventories with specified dating held at the time distribution services terminate. Revenue related to such distribution agreements is deferred until such time as the related products are sold to unaffiliated third parties.

        Under the terms of certain of our international distribution agreements with Bayer, we have agreed to reimburse Bayer affiliates for their selling, general, and administrative expenses (SG&A). In Successor periods, we have reflected these charges as a reduction of net revenue in accordance with the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (including a reseller of the vendor's products)." As Predecessor, similar costs were appropriately recorded as SG&A.

        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.

        We evaluate revenue from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting as defined in EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." To recognize a delivered item in a multiple element arrangement, EITF Issue No. 00-21 requires that the delivered items have value to the customer on a standalone basis, that there is objective and reliable evidence of fair value of the undelivered items and that delivery or performance is probable and within our control for any delivered items that have a right of return.

55


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

 
   
   
  Successor
 
 
  Predecessor
 
 
   
   
  Three Months
Ended March 31,

 
 
   
  Three
Months Ended
March 31,
2005

  Nine
Months Ended
December 31,
2005

   
 
 
  Year Ended
December 31,
2004

  Year Ended
December 31,
2006

 
 
  2006
  2007
 
Gross product revenue   $ 906,159   $ 258,068   $ 713,044   $ 1,175,200   $ 299,034   $ 310,840  
  Chargebacks     (26,203 )   (6,668 )   (17,418 )   (13,611 )   (4,342 )   (2,880 )
  Cash discounts     (7,301 )   (2,346 )   (7,718 )   (11,462 )   (2,821 )   (2,795 )
  Rebates and other     (26,155 )   (3,554 )   (16,068 )   (18,645 )   (3,635 )   (7,268 )
  SG&A reimbursements to Bayer affiliates             (16,901 )   (16,993 )   (5,820 )   (1,003 )
   
 
 
 
 
 
 
Net product revenue   $ 846,500   $ 245,500   $ 654,939   $ 1,114,489   $ 282,416   $ 296,894  
   
 
 
 
 
 
 
 
   
   
  Successor
 
 
  Predecessor
 
 
   
   
  Three Months
Ended March 31,

 
 
   
  Three
Months Ended
March 31,
2005

  Nine
Months Ended
December 31,
2005

   
 
 
  Year Ended
December 31,
2004

  Year Ended
December 31,
2006

 
 
  2006
  2007
 
Gross product revenue   100.0   % 100.0   % 100.0   % 100.0   % 100.0   % 100.0   %
  Chargebacks   (2.9 )% (2.6 )% (2.4 )% (1.2 )% (1.5 )% (0.9 )%
  Cash discounts   (0.8 )% (0.9 )% (1.1 )% (1.0 )% (0.9 )% (0.9 )%
  Rebates and other   (2.9 )% (1.4 )% (2.3 )% (1.6 )% (1.2 )% (2.3 )%
  SG&A reimbursements to Bayer affiliates       (2.4 )% (1.4 )% (1.9 )% (0.3 )%
   
 
 
 
 
 
 
Net product revenue   93.4   % 95.1   % 91.8   % 94.8   % 94.5   % 95.6   %
   
 
 
 
 
 
 

Concentration of Credit Risk

        As Successor, our sales and accounts receivable, net, have been concentrated to Bayer affiliates, as our distributor in most major regions outside of the U.S., and to a limited number of large pharmaceutical distributors and wholesalers in the U.S. A loss of any one of these customers, or deterioration in their ability to make payments timely, could have a significant adverse affect on our operating results and our liquidity. The following table summarizes our accounts receivable, net, concentrations with Bayer affiliates and other customers that represented more than 10% of our accounts receivable, net, for the Successor periods:

 
   
  December 31,
 
 
  March 31,
2007

 
 
  2006
  2005
 
Bayer affiliates   16.7 % 9.2 % 31.9 %
Customer A     14.6 %  
Customer B     13.7 % 10.7 %
Customer C       12.1 %

Income Taxes

        We record a valuation allowance, when appropriate, to reduce our deferred income tax assets to the amount that is more likely than not to be realized. We consider our ability to carry back net operating losses, future expected taxable income and ongoing prudent and feasible tax planning strategies when determining the required valuation allowance. In the event that we were to determine that we would be able to realize all or part of our deferred income tax assets in the future, an adjustment to the valuation allowance would be reflected in the income statements in the period such determination was made.

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        FASB Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," provides authoritative guidance as to when a valuation allowance is required, but does not provide direct guidance as to when a valuation allowance is required to be released. SFAS No. 109 requires, for example, that a valuation allowance be considered when there is negative evidence such as a pretax accounting loss in a recent year or cumulative losses in recent years. The phrase "cumulative losses in recent years" is not specifically defined but is left to the judgment of management. Upon completion of this offering, the reduction of interest expense realized from the application of our net proceeds to reduce debt will increase the likelihood that we will have the future earnings potential to realize the U.S. deferred tax assets. A reversal of the deferred tax asset valuation allowance would have no effect on our payment of cash taxes, but would provide a one-time tax benefit in the period of reversal.

        In the normal course of business, we are audited by federal, state and foreign tax authorities, and are periodically challenged regarding the amount of taxes due. These challenges typically relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. We believe that our tax positions comply with applicable tax laws. In evaluating the exposure associated with various tax filing positions, we may record reserves for uncertain tax positions, based upon the technical support for the positions, our past audit experience with similar situations, and potential interest and penalties related to the matters. We believe that any recorded reserves represent our best estimate of the amount, if any, that we will ultimately be required to pay to settle such matters.

        The Internal Revenue Service (IRS) is currently in the process of conducting an audit of our 2005 federal income tax return. Our effective income tax rate in any given period could be impacted if, upon final resolution with taxing authorities, we prevailed in positions for which reserves had been established, or are required to pay amounts in excess of established reserves.

        Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives.

        We adopted FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-An Interpretation of Financial Accounting Standards Board (FASB) Statement No. 109," on January 1, 2007. The adoption of FIN No. 48 did not have a material impact on our consolidated financial statements. The resolution of our uncertain income tax positions is dependent on uncontrollable factors such as law changes, new case law, the willingness of the income tax authorities to settle, including the timing thereof and other factors. Although we do not anticipate significant changes to our uncertain income tax positions in the next twelve months, items outside of our control could cause our uncertain income tax positions to change in the future, which would be recorded within income tax expense.

Share-Based Compensation

        We account for share-based compensation under the provisions of SFAS No. 123R, "Share-Based Payment." Under SFAS No. 123R, we are required to value share-based compensation at the grant date using a fair value model and recognize this value as expense over the employees' requisite service period, typically the period over which the share-based compensation vests.

        The fair value of our common stock on the grant date is a significant factor in determining the fair value of share-based compensation awards and the ultimate non-cash compensation cost that we will be required to expense over the requisite service period. Given the absence of an active trading market for our common stock on the 2006 and 2005 share-based award grant dates, our Board of Directors estimated the fair value of our common stock on the grant date using a number of factors.

        We then estimated the fair value of stock options using a Black-Scholes pricing model, which requires the use of a number of assumptions related to the risk-free interest rate, average life of options (expected term), expected volatility, and dividend yield. There was no trading market for our common stock or stock

57



options on the 2006 and 2005 grant dates; therefore, our application of the Black-Scholes pricing model incorporated historical volatility measures of similar public companies in accordance with SAB No. 107, "Share-Based Payment." A forfeiture rate is based upon historical attrition rates of award holders and is used in estimating the granted awards not expected to vest. If actual forfeitures differ from the expected rate, we may be required to make additional adjustments to compensation expense in future periods. We do not intend to pay cash dividends to common stockholders in the future. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options on their grant dates. Estimates of the values of these grants are not intended to predict actual future events or the value ultimately realized by employees who receive such awards.

        We are evaluating various alternative share-based compensation programs for the post-offering period.

Special Recognition Bonuses

        Effective October 1, 2006, the compensation committee of our Board of Directors approved the creation of our Special Recognition Bonus Plan, an unfunded, non-qualified retirement plan (as defined in the Internal Revenue Code of 1986, as amended) and an unfunded deferred compensation plan for purposes of the Employee Retirement Income Security Act of 1974 (ERISA), as a means of recognizing the performance of a group of employees, senior executives, and members of our Board of Directors. Awards that have been granted under this plan are designed to reward past performance and have been provided to these individuals in recognition of the extraordinary value realized by our company and our stockholders due to the efforts of such individuals since inception of our operating activities on April 1, 2005. These awards under this plan, totaling approximately $7.3 million, are to be paid in five installments to eligible participants. The first installment under the plan, totaling $2.5 million, was paid in October 2006, a second installment of $1.2 million was paid on March 15, 2007, and subsequent installments of equal amounts of $1.2 million will be paid annually on March 15, 2008 through 2010, adjusted for employee forfeitures. We record compensation cost over the vesting period consistent with the classification of each recipient's salary. Individuals eligible for awards under this plan must be employed by us at the time payments are made, or they forfeit any unpaid portion of their award, except in the case of death and disability. Vesting in the future payments will be accelerated for a "change of control" as defined, and may be accelerated by the Board of Directors in the case of death or disability. No similar bonus awards are currently contemplated. Upon the event of a change in control (as defined in the plan), each participant will receive a pro rata share of the bonus award for the performance period during which the change of control occurs (such amount to be determined by our compensation committee in its sole discretion), unless a succeeding corporation assumes the plan or establishes a substantially similar plan.

        Concurrent with our debt recapitalization in December 2006, the compensation committee of our Board of Directors approved a cash recognition award to certain employees, senior executives, and members of our Board of Directors. Awards that have been granted under this plan are designed to reward past performance and have been provided to these individuals in recognition of the extraordinary value realized by our company and our stockholders due to the efforts of such individuals since inception of our operating activities on April 1, 2005. Under the terms of the award, eligible participants were awarded cash awards aggregating $57.2 million, payable in four installments. The first installment of the cash award, totaling $34.2 million, was paid in December 2006. The remaining $23.0 million of the cash award will be paid in equal installments on March 31, 2008 through 2010, adjusted for employee forfeitures. We funded an irrevocable trust for our remaining obligation under this award. The assets within the trust are segregated from our assets and are protected from our creditors. Any interest income earned on trust assets accrues for the benefit of the eligible participants. We bear all administrative expenses for maintenance of the trust. Individuals eligible for awards under this plan must be employed by us at the time payments are made, or they forfeit any unpaid portion of their award. We have recorded deferred compensation on our consolidated balance sheet, which we recognize as cost over the vesting period consistent with the classification of each recipient's salary. Vesting in the future payments will be accelerated for a "change in

58



control" as defined, as well as for death or disability. No similar cash recognition awards are currently contemplated.

        We refer to the two plans described above as special recognition bonuses throughout Management's Discussion and Analysis of Financial Results and Operations.

Inventories

        Inventories consist primarily of raw material, work-in-process, and finished goods held for sale and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. In evaluating whether inventories are stated at the lower of cost or market, we consider such factors as the amount of inventories on hand and in the distribution channel, the estimated time required to sell such inventories, remaining shelf life, and current and expected market conditions, including levels of competition. As appropriate, provision is recorded to reduce inventories to their net realizable value. We record provision for work-in-process inventories when we believe the inventories do not meet all criteria to permit release to the market. Provision is recorded for finished goods that do not have sufficient remaining shelf lives.

Pre-Approval Plasma Inventories

        Licensed centers are those plasma collection centers that have received all regulatory approvals from the FDA for source plasma to be used in our products. These centers are currently procuring plasma from donors that can be used in our manufacturing processes. Opened but unlicensed centers are those plasma collection centers that are currently procuring plasma from donors and are pending regulatory approval in order for the plasma to be used in our products. Undeveloped centers are those centers that are in an earlier stage of development and have not begun to procure plasma.

        Plasma procured from licensed centers is initially recorded as raw material and is subsequently released to work-in-process and finished goods, based upon the stage in the manufacturing process. Our accounting for plasma that has been procurred at opened but unlicensed centers, which we refer to as unlicensed plasma, requires us to make judgments regarding the regulatory approval and licensure of the unlicensed collection centers, which is required before we can use the plasma within our manufacturing processes. Our accounting for unlicensed plasma also requires us to make judgments regarding the ultimate net realizable value of the inventories. This assessment is based upon an analysis of various factors, including the remaining shelf life of the inventories, current and expected market conditions, amount of inventories on hand, and our ability to obtain the requisite regulatory approvals. As a result of periodic assessments, we could be required to expense previously capitalized inventories through cost of goods sold upon an unfavorable change in such judgments.

        We capitalize the cost of unlicensed plasma when, based on our judgment, future economic benefit is probable. While unlicensed plasma cannot be sold to third parties or used in our manufacturing processes to make finished product until all regulatory approvals have been obtained, we have determined that it is probable that our plasma inventories are realizable. As part of the FDA licensing process for plasma collection centers, we are initially permitted to collect plasma utilizing the procedures and Quality Systems implemented and approved under our existing Biologics License Application (BLA) until such time as the FDA inspectors have conducted a pre-license inspection of the site and approved the site for inclusion in the BLA. At the conclusion of this process, we are permitted to sell or utilize previously collected plasma in the manufacturing of final product. We believe that our cumulative knowledge of the industry, standard industry practices, experience working with the FDA, established Quality Systems, and consistency with achieving licensure support our capitalization of unlicensed plasma. Total unlicensed plasma included in our raw material inventories was $23.8 million at March 31, 2007.

Recent Accounting Pronouncements Applicable to Our Company

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," providing enhanced guidance on the use of fair value to measure assets and liabilities. SFAS No. 157 also provides for expanded

59



information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard does not expand the use of fair value, but applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 157 on January 1, 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact of SFAS No. 157 on our consolidated financial statements.

        In July 2006, FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109," was issued. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. FIN No. 48 also prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN No. 48 on January 1, 2007 did not have a material impact on our consolidated financial statements.

Matters Affecting Comparability

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

Acquisition of Bayer Plasma Net Assets and Related Purchase Accounting

        We acquired certain net assets of Bayer Plasma on March 31, 2005. We allocated the purchase price to the net assets acquired based upon their estimated fair values at the date of the acquisition. This allocation resulted in a net upward non-cash adjustment of $45.3 million to the historical cost basis of inventories acquired, which we reflected as cost of goods sold as the related inventories were sold to unaffiliated third parties. As Successor, the non-cash impact to our cost of goods sold for the release of the opening balance sheet adjustment related to inventories was an increase of $45.5 million for the nine months ended December 31, 2005. Minimal non-cash charges were recorded in subsequent Successor periods. At March 31, 2007, a net fair value adjustment credit of $0.4 million was unamortized as the related inventories have not been sold to unaffiliated third parties.

        In connection with our application of purchase accounting for the Bayer Plasma net assets, we recorded property, plant, equipment, and all other intangible assets at zero value because of negative goodwill discussed in the following paragraph. This resulted in significantly lower depreciation and amortization expense in Successor periods as compared to Predecessor periods. As Successor, our results of operations include depreciation and amortization expense of $1.4 million for the nine months ended December 31, 2005, $5.0 million for the year ended December 31, 2006, $0.8 million for the first quarter of 2006, and $2.0 million for the first quarter of 2007. As Predecessor, we recorded depreciation and amortization expense of $8.0 million for the three months ended March 31, 2005 and $32.7 million for the year ended December 31, 2004. Depreciation and amortization expense for all periods presented is recorded primarily within cost of goods sold.

        As Successor, our application of purchase accounting at March 31, 2005 and during the nine months ended December 31, 2005 resulted in an extraordinary gain of $252.3 million as the net fair value of the Bayer Plasma net assets acquired was higher than the purchase price, including working capital adjustments, resulting in unallocated negative goodwill. The Predecessor was not a core business for Bayer, and was not part of Bayer's long-term strategic plans. Our evaluation of the Bayer Plasma business concluded that significant resources would be required to create a standalone entity and to grow the business. In addition, a substantial investment would be required in order to maintain and expand manufacturing capacities as well as fund R&D initiatives. The Predecessor business had also experienced relatively low margins due to excess supply of plasma-derived products and significant provision for rejected products as a result of cGMP issues. Consequently, we purchased the Bayer Plasma net assets at a discount to their historical carrying values, and net fair value.

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        During the nine months ended December 31, 2005, we recognized an extraordinary gain related to the settlement of contingent consideration due to Bayer when we repurchased 80% of Bayer's one share of Junior Preferred Stock at a discount to its carrying value, resulting in an extraordinary gain of $13.2 million. During the first quarter of 2006, we repurchased the remaining 20% of Bayer's one share of Junior Preferred Stock at a discount to its carrying value, resulting in an extraordinary gain of $3.3 million.

Distribution and Transition Services Agreements with Bayer Affiliates

        We entered into a number of international distribution and transition services agreements with Bayer affiliates under which these affiliates provide us with distribution and other services for various periods of time in a number of geographic locations outside of the United States. Under the terms of certain of these agreements, we agreed to reimburse the Bayer affiliates for their SG&A. We reflect these reimbursements as a reduction of net revenue. We recorded $16.9 million for the nine months ended December 31, 2005, $17.0 million for the year ended December 31, 2006, $5.8 million for the first quarter of 2006, and $1.0 million for the first quarter of 2007, as a reduction of net revenue related to such reimbursements. Amounts paid to Bayer for these services will be further reduced as we complete the establishment of our own distribution channels or contract with third parties for these services. As Predecessor, similar costs were appropriately recorded as SG&A.

        Under the terms of certain international distribution agreements with Bayer affiliates, we are obligated to repurchase inventories from Bayer affiliates upon termination of such agreements, if Bayer so elects. As a result, under U.S. GAAP, we are required to defer revenue recognition for sales under such distribution agreements until the inventories are sold to unaffiliated third parties. We deferred margin related to sales to these Bayer affiliates of $27.1 million at December 31, 2005, $10.6 million at December 31, 2006, $14.9 million at March 31, 2006, and $15.0 million at March 31, 2007. We have terminated a number of the international distribution agreements that we previously had with Bayer affiliates as we have established our own distribution channels or contracted with third parties for these services. Amounts that we are required to defer will be reduced as we terminate the remaining international distribution agreements with these Bayer affiliates, so long as the replacement contracts do not have similar rights of return.

        During April 2006, we launched operations in Canada to support our Canadian sales and marketing activities, which resulted in the termination of certain services that Bayer affiliates provided under various transition services and distribution agreements. Under the terms of certain of these agreements, we previously reimbursed Bayer affiliates for their SG&A, which we recorded as a reduction of net revenue. In periods subsequent to the termination of these agreements, we incur similar costs internally, which we record as SG&A. The terms of the distribution agreements that we had with Bayer affiliates also granted Bayer a right of return in certain circumstances, and therefore, we deferred revenue recognition for sales until such time as the inventories were sold to unaffiliated third parties. Under our current Canadian distribution model, we sell product directly to patients and do not grant a right of return. Thus, in periods subsequent to April 2006, we no longer defer revenue recognition for sales in the Canadian marketplace. The establishment of our operations in Canada benefited our gross profit by $4.8 million and $2.2 million for the year ended December 31, 2006 and for the first quarter of 2007, respectively.

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        During December 2006, we launched operations in Germany to support our European sales and marketing activities, which resulted in the termination or scope reduction of certain services that Bayer affiliates previously provided under various transition services and distribution agreements. Under the terms of these agreements, we previously reimbursed Bayer affiliates for their SG&A, which we recorded as a reduction of net revenue. In periods subsequent to the termination of these agreements, we incur similar costs internally, which we record as SG&A. The terms of the distribution agreements that we had with Bayer affiliates also granted Bayer a right of return in certain circumstances, and therefore, we deferred revenue recognition until such time as the inventories were sold to unaffiliated third parties. We replaced these distribution agreements primarily with distribution agreements that do not grant a right of return with unaffiliated third parties, resulting in lower deferred revenue subsequent to December 2006. The establishment of our operations in Germany benefited our gross profit by $2.5 million for the first quarter of 2007.

        During the year ended December 31, 2006 and nine months ended December 31, 2005, we provided Bayer with services related to operations such as collections, facilities use, quality, regulatory affairs, and sales and marketing. This agreement expired on December 31, 2006. Fees for these services totaled $1.2 million and $7.1 million for the year ended December 31, 2006 and nine months ended December 31, 2005, respectively, and have been included in other revenue.

Transition-Related Activities

        As Successor, we incurred costs associated with the development of our internal capabilities to operate as a standalone company apart from Bayer, which we refer to as transition and other non-recurring costs. These costs relate primarily to consulting services associated with the development of an internal infrastructure to assume international sales and marketing, customer service, contract administration and government price reporting, human resources, finance, information technology, regulatory, and compliance functions. We believe these costs will not recur once the related infrastructure has been established and we have completed our overall transition from Bayer. We incurred transition and other non-recurring costs of $12.8 million for the nine months ended December 31, 2005, $73.2 million for the year ended December 31, 2006, $14.4 million for the first quarter of 2006, and $2.7 million for the first quarter of 2007, which are primarily recorded within SG&A and R&D, depending on the nature of the service provided.

Management Fee

        In connection with our formation transaction, we entered into a Management Agreement, as amended, with Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures. Under the terms of this agreement, we are charged a management fee equal to 0.5% of net sales for advisory services related to a number of topics, including strategy, acquisition, financing and operational matters. In Successor periods, we incurred management fees related to this agreement totaling $3.4 million for the nine months ended December 31, 2005, $5.6 million for the year ended December 31, 2006, $1.4 million for the first quarter of 2006, and $1.5 million for the first quarter of 2007, which are included in SG&A. These costs are non-recurring and will be eliminated upon termination of the Management Agreement, as amended, which will occur upon completion of this offering. As a result of the completion of this offering and the termination of the Management Agreement, as amended, we will be required to pay Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures a termination fee which will be expensed and calculated as the sum of (a) five times the management fee payable in respect to our four most recently completed fiscal quarters, plus (b) all reasonable out-of-pocket costs and expenses incurred in connection with our offering.

Share-Based Compensation Awards

        As Predecessor, we did not grant share-based compensation awards.

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        As Successor, we granted options, restricted share awards and unrestricted share awards of our common stock to certain officers, employees, and members of our Board of Directors, pursuant to the Talecris Biotherapeutics Holdings Corp. 2005 Stock Option and Incentive Plan (Stock Option Plan), as amended, and the 2006 Restricted Stock Plan. The 2006 restricted and unrestricted share awards were granted in lieu of cash as part of our Special Recognition Bonuses discussed below. The following tables summarize expenses associated with our share-based compensation programs:

 
   
   
  Three Months Ended
March 31,

 
  Nine Months
Ended
December 31,
2005

   
 
  Year Ended
December 31,
2006

Stock Options
  2006
  2007
SG&A   $ 1,239   $ 1,894   $ 253   $ 1,352
R&D     84     194     17     123
   
 
 
 
Total operating expense     1,323     2,088     270     1,475
Cost of goods sold         156     41     83
   
 
 
 
Total expense   $ 1,323   $ 2,244   $ 311   $ 1,558
   
 
 
 
Restricted and Unrestricted Stock Awards
  Year Ended
December 31,
2006

  Three Months
Ended
March 31,
2007

SG&A   $ 4,350   $ 1,171
R&D     45     134
   
 
Total operating expense     4,395     1,305
Cost of goods sold        
   
 
Total expense   $ 4,395   $ 1,305
   
 

        The stock options we granted have service-based and performance-based components. The service-based component of the stock options vests annually in equal amounts over the vesting period. The performance-based component of the stock options vests annually upon the achievement of corporate objectives which are established by our Board of Directors.

        In accordance with SFAS No. 123R, we initially value share-based compensation at the stock option grant date using a fair value model and subsequently recognize this amount as expense over the employees' requisite service periods. Under SFAS No. 123R, we are required to calculate the fair value of the performance-based component whenever our Board of Directors approves or modifies the factors that influence the vesting of the performance-based component (e.g., approve annual corporate performance objectives). During the first quarter of 2007, our Board of Directors established and approved the 2007 corporate objectives related to the performance-based component of our Stock Option Plan, which, coupled with additional grants during the fourth quarter of 2006, resulted in higher stock option expense during 2007 as compared to the other Successor periods.

        At March 31, 2007, the remaining estimated unrecognized compensation cost related to unvested stock options was $34.5 million, which we expect to recognize over a weighted average period of 3.0 years and the remaining estimated unrecognized compensation cost related to unvested restricted stock awards was $18.1 million, which we also expect to recognize over a weighted average period of 3.0 years. The amount of share-based compensation expense that we will ultimately be required to record could change in the future as a result of additional grants, changes in the fair value of shares for performance-based options, and other actions by our Board of Directors (e.g., establishment of future period's corporate performance objectives).

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        In July 2007, we entered into a new employment agreement with our Chief Executive Officer. Our share-based compensation expense in future periods will be substantially higher as a result of additional share awards that will be granted pursuant to this new employment agreement. Incremental costs associated with grants under this agreement will be recorded in SG&A in future periods.

Special Recognition Bonuses

        In October 2006, the compensation committee of our Board of Directors approved our Special Recognition Bonus program which granted awards totaling $7.3 million to eligible employee and Board of Director stockholders related to the $73.2 million dividend declared in December 2005, payable in five installments, which we will fund through operations. In December 2006, the compensation committee of our Board of Directors approved a cash recognition award of $57.2 million to eligible employee and Board of Director stockholders, payable in four installments, concurrent with a cash dividend of $760.0 million paid to Talecris Holdings, LLC, our principal stockholder. Both the cash recognition award and the dividend to Talecris Holdings, LLC, were funded by our December 6, 2006 debt recapitalization transaction. Additional information regarding the Special Recognition Bonus and cash recognition award are included in the section above titled, "—Critical Accounting Policies and Estimates—Special Recognition Bonuses." The following table summarizes expenses associated with these bonuses:

 
  Year Ended
December 31,
2006

  Three Months
Ended
March 31,
2007

SG&A   $ 29,849   $ 2,007
R&D     3,395     229
   
 
Total operating expense     33,244     2,236
Cost of goods sold     4,647    
   
 
Total expense   $ 37,891   $ 2,236
   
 

        During the year ended December 31, 2006, we made special recognition bonus payments totaling $36.7 million. At March 31, 2007, the remaining unrecognized compensation cost associated with these bonuses was $25.8 million, which we expect to recognize over approximately 3.0 years. We have funded an irrevocable trust for $23.0 million related to these bonuses. No similar cash recognition awards are currently contemplated.

Capital Structure

        As Predecessor, we did not maintain an independent capital structure apart from Bayer, and Bayer did not allocate the cost of capital to us. Therefore, our results of operations during the Predecessor periods do not reflect interest charges.

        As Successor, we established an independent capital structure upon our formation on March 31, 2005, which consisted of a $400.0 million five-year asset-based credit facility, $27.8 million of 12% Second Lien Notes, and $90.0 million of 14% Junior Secured Convertible Notes. On March 30, 2006, we entered into the Fourth Amendment to our $400.0 million asset-based credit facility, which provided for an additional $40.0 million term loan.

        On December 6, 2006, we completed a debt recapitalization transaction in which we repaid and retired all outstanding principal and interest amounts owed under our then existing $440.0 million asset-based credit facility, as amended, with new facilities aggregating $1.355 billion in total borrowing availability. In connection with the recapitalization, we also repaid and retired all outstanding principal and interest amounts owed to Cerberus and Ampersand under our then existing 12% Second Lien Notes. Further, on December 6, 2006, we paid accrued interest of $23.4 million owed to Talecris Holdings, LLC

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under the terms of our then outstanding 14% Junior Secured Convertible Notes and, at the election of Talecris Holdings, LLC, converted them into 900,000 shares of Redeemable Series A Senior Convertible Preferred Stock (series A preferred stock). As a result of the recapitalization transaction, our interest expense has significantly increased in periods subsequent to December 6, 2006.

Gamunex IGIV Production Incident

        In March 2005, prior to our formation transaction, a production incident occurred at our Clayton, North Carolina facility, that resulted in a write-off of Gamunex IGIV which had elevated levels of IgM antibodies. As Predecessor, we recorded $11.5 million as a charge to cost of goods sold during the three months ended March 31, 2005 for quantities of Gamunex IGIV that were processed prior to our overall formation as Talecris. As Successor, we recorded a charge of $11.5 million to cost of goods sold for the nine months ended December 31, 2005 related to the same production incident for quantities of Gamunex IGIV which were processed post-acquisition. As Successor, in March 2007, we reached an agreement with Bayer under which we recovered $9.0 million related to this production incident which we recorded as a reduction of cost of goods sold in the first quarter of 2007.

Acquisition of Plasma Collection Centers

        In September 2006, we formed Talecris Plasma Resources, Inc. (TPR) to create a platform for the partial vertical integration of our plasma supply chain. In November 2006, we acquired plasma collection centers in various stages of development from IBR as the first step of our plasma supply chain vertical integration plans. Our financial position, results of operations, and cash flows reflect the acquired IBR plasma collection centers from the date of acquisition and the results of TPR from the date of formation.

        Our cost of goods sold reflect $0.4 million and $11.1 million for the year ended December 31, 2006 and for the first quarter of 2007, respectively, related to the unabsorbed TPR infrastructure and start-up costs associated with the development of our plasma collection center platform.

Results of Operations

        The following discussion and analysis of our results of operations includes certain references to our financial results on a "combined" basis. The combined results of operations for the year ended December 31, 2005 were prepared by adding our results as Successor for the period from when we commenced operations on March 31, 2005 through December 31, 2005, to those of Predecessor for the three months ended March 31, 2005. The results of the two periods combined are not necessarily comparable due to changes in the basis of accounting resulting from the impact of our formational activities. Differences in the basis of accounting are more fully discussed in the sections titled "—Basis of Presentation," and "—Matters Affecting Comparability."

        The presentation of our combined results of operations for the year ended December 31, 2005 is considered to be "non-GAAP" under SEC rules. We believe that the combined basis presentation provides useful supplemental information in comparing Predecessor and Successor trends and operating results. The combined results of operations for the year ended December 31, 2005 are not necessarily indicative of what our results of operations may have been had our formational transaction been consummated earlier, nor should they be construed as being a representation of our future results of operations.

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        We have included Successor and Predecessor results of operations in the following table:

 
 
 
  Predecessor
  Successor
  Combined
  Successor
 
 
   
  Three
Months
Ended
March 31,
2005

   
   
   
  Three Months Ended
March 31,

 
 
   
  Nine Months
Ended
December 31,
2005

   
   
 
 
  Year Ended
December 31,
2004

  Year Ended
December 31,
2005

  Year Ended
December 31,
2006

 
 
  2006
  2007
 
Net revenue:                                            
  Net product revenue   $ 846,500   $ 245,500   $ 654,939   $ 900,439   $ 1,114,489   $ 282,416   $ 296,894  
  Other             13,039     13,039     14,230     3,947     5,545  
   
 
 
 
 
 
 
 
Total net revenue     846,500     245,500     667,978     913,478     1,128,719     286,363     302,439  
  Cost of goods sold     661,500     209,700     561,111     770,811     684,750     191,377     181,793  
   
 
 
 
 
 
 
 
Gross profit     185,000     35,800     106,867     142,667     443,969     94,986     120,646  
Operating expenses:                                            
  SG&A     102,200     27,500     89,205     116,705     241,448     40,109     42,638  
  R&D     59,000     14,800     37,149     51,949     66,801     12,246     13,876  
   
 
 
 
 
 
 
 
Total operating expenses     161,200     42,300     126,354     168,654     308,249     52,355     56,514  
   
 
 
 
 
 
 
 
Income (loss) from operations     23,800     (6,500 )   (19,487 )   (25,987 )   135,720     42,631     64,132  
Other income (expense):                                            
  Equity in earnings of affiliate             197     197     684     209     171  
  Interest expense, net             (21,224 )   (21,224 )   (40,867 )   (7,936 )   (27,952 )
  Loss on extinguishment of debt                     (8,924 )        
   
 
 
 
 
 
 
 
Total other income (expense)             (21,027 )   (21,027 )   (49,107 )   (7,727 )   (27,781 )
   
 
 
 
 
 
 
 
Income (loss) before income taxes and extraordinary items     23,800     (6,500 )   (40,514 )   (47,014 )   86,613     34,904     36,351  
  Provision for income taxes     (18,500 )   (5,100 )   (2,251 )   (7,351 )   (2,222 )   (915 )   (2,055 )
   
 
 
 
 
 
 
 
Income (loss) before extraordinary items     5,300     (11,600 )   (42,765 )   (54,365 )   84,391     33,989     34,296  
Extraordinary items:                                            
  Gain (loss) from unallocated negative goodwill             252,303     252,303     (306 )   (306 )    
  Gain from settlement of contingent consideration due Bayer             13,200     13,200     3,300     3,300      
   
 
 
 
 
 
 
 
Total extraordinary items             265,503     265,503     2,994     2,994      
   
 
 
 
 
 
 
 
Net income (loss)   $ 5,300   $ (11,600 ) $ 222,738   $ 211,138   $ 87,385   $ 36,983   $ 34,296  
   
 
 
 
 
 
 
 

Primary Revenue and Expense Components

        The following is a description of the primary components of our revenue and expenses:

    Net product revenue—Our product revenue is presented net of allowances for estimated discounts, rebates, administrative fees, chargebacks and sales allowances. During Successor periods, our product revenue is also presented net of SG&A that we agreed to reimburse Bayer affiliates under certain distribution agreements outside of the United States.

    Cost of goods sold—Our cost of goods sold includes material costs for the products we sell, which primarily consists of plasma and other costs associated with the manufacturing process, such as personnel costs, utilities, consumables, and overhead. In addition, our cost of goods sold includes royalty and licensing expenses for licensed technologies, packaging costs and distribution expenses. The most significant component of our cost of goods sold is plasma, which is the common raw material for our primary products, and represents approximately half of our cost of goods sold for the periods presented. Due to our long manufacturing cycle times, which range from 100 days to in excess of 400 days, the cost of plasma is not expensed through cost of goods sold until a significant

66


      period of time subsequent to its acquisition. Specialty plasmas, due to their nature, can often have cycle times in excess of one year.

    Gross profit—Our gross profit is impacted by the volume, pricing and mix of net product revenue, including the geographic location of sales, as well as the related cost of goods sold. Our profitability is significantly impacted by the efficiency of our utilization of plasma including, but not limited to, the production yields we obtain, the product reject rates that we experience, and the product through-put that we achieve.

    SG&A—Our SG&A consists primarily of salaries and related employee benefit costs for personnel in executive, sales and marketing, finance, information technology, human resources, and other administrative functions, as well as fees for professional services, facilities costs, and other general and administrative costs.

    R&D—Our R&D includes the costs directly attributable to the conduct of research and development programs for new products and life cycle management. Such costs include salaries and related employee benefit costs; materials (including the material required for clinical trials); supplies; depreciation on and maintenance of R&D equipment; various services provided by outside contractors related to clinical development, trials and regulatory services; and the allocable portion of facility costs such as rent, depreciation, utilities, insurance and general support services. R&D expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects.

    Interest expense, net—As Successor, our interest expense, net, consists of interest expense incurred on outstanding debt and amortization of debt issuance costs, offset by interest income, capitalized interest associated with the construction of plant and equipment, and derivative income associated with changes in the fair value of derivatives not designated as hedges and the ineffective portion of cash flow hedges. The amount of interest expense that we incur is predominantly driven by our outstanding debt levels and associated interest rates. As Predecessor, we did not have an independent capital structure apart from Bayer, and we were not allocated interest costs from Bayer.

    Income tax expense—Our income tax expense includes United States federal, state, local and foreign income taxes, and is based on reported pre-tax income.

        In the following subsections, we have included discussion and analysis of our results of operations. We have described the significant items impacting the comparability of our results of operations in the sections titled "—Matters Affecting Comparability," and "—Basis of Presentation." Therefore, we have not repeated discussion of these items in their entirety below.

67



First Quarter 2007 As Compared to First Quarter 2006

        The following table contains information regarding our results of operations for the first quarter of 2007 as compared to the first quarter of 2006:

 
  Three Months Ended
March 31,

  Percent of Total
Net Revenue

 
 
  2007
  2006
  2007
  2006
 
Net revenue:                      
  Net product revenue   $ 296,894   $ 282,416   98.2 % 98.6 %
  Other     5,545     3,947   1.8 % 1.4 %
   
 
 
 
 
Total net revenue     302,439     286,363   100.0 % 100.0 %
  Cost of goods sold     181,793     191,377   60.1 % 66.8 %
   
 
 
 
 
Gross profit     120,646     94,986   39.9 % 33.2 %

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 
  SG&A     42,638     40,109   14.1 % 14.0 %
  R&D     13,876     12,246   4.6 % 4.3 %
   
 
 
 
 
Total operating expenses     56,514     52,355   18.7 % 18.3 %
   
 
 
 
 
Income from operations     64,132     42,631   21.2 % 14.9 %

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 
  Equity in earnings of affiliate     171     209   0.1 % 0.1 %
  Interest expense, net     (27,952 )   (7,936 ) (9.3 )% (2.8 )%
   
 
 
 
 
Total other income (expense)     (27,781 )   (7,727 ) (9.2 )% (2.7 )%
   
 
 
 
 
Income before income taxes and extraordinary items     36,351     34,904   12.0 % 12.2 %
  Provision for income taxes     (2,055 )   (915 ) (0.7 )% (0.3 )%
   
 
 
 
 
Income before extraordinary items     34,296     33,989   11.3 % 11.9 %
Extraordinary items:                      
  Loss from unallocated negative goodwill         (306 )   (0.1 )%
  Gain from settlement of contingent consideration due Bayer         3,300     1.1 %
   
 
 
 
 
Total extraordinary items         2,994     1.0 %
   
 
 
 
 
Net income   $ 34,296   $ 36,983   11.3 % 12.9 %
   
 
 
 
 

68


Net Revenue

        The following table contains information regarding our net revenue:

 
  Three Months Ended
March 31,

  Percent of Total
Net Revenue

 
 
  2007
  2006
  2007
  2006
 
Net product revenue:                      
  IGIV (Gamunex and Gamimune)   $ 162,642   $ 179,225   53.8 % 62.6 %
  Prolastin brand A1PI     66,567     53,319   22.0 % 18.6 %
  Albumin     18,812     16,179   6.2 % 5.6 %
  Other     48,873     33,693   16.2 % 11.8 %
   
 
 
 
 
Total net product revenue     296,894     282,416   98.2 % 98.6 %
  Other net revenue     5,545     3,947   1.8 % 1.4 %
   
 
 
 
 
Total net revenue   $ 302,439   $ 286,363   100.0 % 100.0 %
   
 
 
 
 

United States

 

$

195,644

 

$

195,961

 

64.7

%

68.4

%
International     106,795     90,402   35.3 % 31.6 %
   
 
 
 
 
Total net revenue   $ 302,439   $ 286,363   100.0 % 100.0 %
   
 
 
 
 

        Our net revenue was $302.4 million for the three months ended March 31, 2007 as compared to $286.4 million for the three months ended March 31, 2006, representing an increase of $16.1 million, or 5.6%. This increase consisted of improved pricing of $38.8 million, including foreign exchange of $2.7 million, offset by volume decreases of $22.7 million.

        Our Gamunex IGIV net product revenue consisted of improved pricing of $13.7 million, offset by volume decreases of $16.2 million, particularly within the United States where volumes decreased $19.1 million, during the first quarter of 2007. We experienced higher Gamunex IGIV volumes of $2.9 million in Canada and Europe, which benefited from the international sales and marketing offices that we launched in April 2006 and December 2006, respectively. Although we continued to experience strong demand for Gamunex IGIV, our sales volumes declined period over period as a result of lower releases of finished product into our distribution channels due to plasma supply constraints. Sales of Gamimune IGIV decreased $14.1 million as we completed the conversion of this product to Gamunex IGIV.

        Prolastin A1PI volume and price increased $2.3 million and $10.9 million, respectively, in the first quarter of 2007 as compared to the first quarter of 2006. Prolastin A1PI price and volume improvements occurred in both the U.S. and Europe. Increases in Prolastin A1PI volumes are largely a function of our ability to identify and enroll new patients.

        Increases in albumin prices contributed $7.2 million to our net revenue growth during the first quarter of 2007. The benefit of the price increases was partially offset by lower albumin volumes of $4.6 million in the first quarter of 2007 resulting primarily from the termination of a distribution agreement with a Bayer affiliate in the Japan, which was not replaced.

        Our other net product revenue consists primarily of revenue related to the Canadian blood system, where, in addition to our commercial sales of Gamunex, we have toll manufacturing contracts with the two national Canadian blood system operators, Canadian Blood Services and Hema Quebec, as well as sales of Koate DVI Factor VIII (human), hyperimmunes, cryoprecipitate, Thrombate III antithrombin III (human), and PPF powder to a Bayer affiliate, less SG&A reimbursements to Bayer affiliates under certain international distribution agreements. The increase in other net product revenue resulted primarily from higher volumes and pricing related to our tolling contracts with the Canadian blood system, which increased $4.9 million in aggregate, additional volumes of cryoprecipitate, an intermediate product, and the absence of $4.8 million of SG&A reimbursements due to Bayer affiliates under various distribution

69



agreements outside of the U.S. Our hyperimmunes comprised $15.4 million and $14.9 million of our other net product revenue for the first quarter of 2007 and 2006, respectively. We procure specialty human plasma used in the production of our hyperimmunes from several suppliers but do not have long-term supply arrangements; accordingly, we have initiated plans to develop internal hyperimmune plasma collection capabilities, which may result in higher costs in the near term.

        We increased prices for substantially all of our products in most of our markets as a result of our higher costs and market demand. Our net product revenue was positively impacted by approximately $2.7 million, or 0.9%, as a result of favorable foreign currency exchange rate fluctuations in relation to the U.S. dollar during the first quarter of 2007.

        Although we sell our products worldwide, the majority of our sales were concentrated in the U.S. and Canada for the periods presented. During the first quarter of 2006, the majority of our international revenue was through various distribution channels provided by Bayer affiliates, many of which have been terminated, as we have either developed our own internal distribution capabilities, or contracted with third party distributors. In April 2006, we formed Talecris Biotherapeutics, Ltd., to support our sales and marketing activities in Canada, and in December 2006 we formed Talecris Biotherapeutics, GmbH in Germany to support our sales and marketing activities in Germany and, ultimately, in the rest of Europe. Our international net revenue growth was partially offset by the termination of our distribution arrangement with a Bayer affiliate in Japan which was not replaced.

Cost of Goods Sold and Gross Profit

        Our cost of goods sold was $181.8 million for the three months ended March 31, 2007 as compared to $191.4 million for the three months ended March 31, 2006, representing a decrease of $9.6 million, or 5.0%. This decrease includes reductions in costs associated with lower volumes of $16.6 million and $2.8 million due to improved leverage of our operations, including yield improvements, production volume changes, and other operating efficiencies. In the first quarter of 2007, our acquisition cost of plasma per liter increased 3.0% as compared to the same period in 2006, excluding the impact of TPR as described below.

        In addition, our cost of goods sold was impacted by our rejected product provision, TPR underutilization, and other items. Our rejected product provision, net, was $2.6 million for the three months ended March 31, 2007 and $9.8 million for the three months ended March 31, 2006. The decrease was primarily driven by a $9.0 million recovery from Bayer related to the Gamunex IGIV production incident, which we recorded as a reduction of cost of goods sold during the first quarter of 2007. During the first quarter of 2007, our cost of goods sold was negatively impacted by unabsorbed TPR infrastructure and start-up costs of $11.1 million associated with the development of our plasma collection center platform, for which there were no comparable costs during the first quarter of 2006.

        Our gross profit was $120.6 million for the first quarter of 2007 and $95.0 million for the first quarter of 2006, resulting in gross margin of 39.9% and 33.2%, respectively. Our gross profit is impacted by the volume, pricing, and mix of our net product revenue, as well as the related cost of goods sold as discussed above. The net impact of these items resulted in more favorable gross margin during the first quarter of 2007 as compared to the first quarter of 2006.

        We anticipate that spending to support our development of plasma collection capabilities will increase in subsequent periods which will result in higher cost of goods sold and, correspondingly, lower gross profit and gross margin.

Operating Expenses

        Our SG&A was $42.6 million for the three months ended March 31, 2007 as compared to $40.1 million for the three months ended March 31, 2006, representing an increase of $2.5 million, or

70



6.3%. As a percentage of net revenue, SG&A was 14.1% and 14.0% for the first quarter of 2007 and 2006, respectively. The increase in SG&A was driven by operating costs associated with our Canadian and German operations and costs associated with our special recognition bonuses, for which there were no comparable costs during the first quarter of 2006. Incremental costs associated with our share-based compensation programs also contributed to the period over period increase in SG&A, as did costs associated with our information technology initiatives and other finance, corporate communications and public policy, human resources, and compliance transformation activities, which contributed an aggregate of $7.0 million to the period over period net increase. These items were partially offset by a $11.7 million reduction of transition and other non-recurring costs associated with our development of internal capabilities to operate as a standalone company apart from Bayer during the first quarter of 2007 as compared to the same prior year period. The overall increase in SG&A was further partially offset by a reduction of costs of approximately $5.1 million related to services that Bayer affiliates provided to us under various transition services agreements which have been subsequently terminated or reduced in scope.

        R&D was $13.9 million for the three months ended March 31, 2007 as compared to $12.2 million for the three months ended March 31, 2006, representing an increase of $1.6 million, or 13.3%. As a percentage of net revenue, R&D was 4.6% and 4.3% for the first quarter of 2007 and 2006, respectively. The increase in R&D reflects the growth of our core R&D organization as well as increased development costs associated with a number of key projects. Increased project expenditures supported the Alpha-1 MP IV clinical trials, Alpha-1 Aerosol toxicology studies, development of Gamunex IGIV subcutaneous administration for development of both 10% and 17% concentrations, and co-development with Bausch & Lomb to develop a recombinant Plasmin product. Additional costs associated with our share-based compensation and special recognition bonuses also impacted the period over period increase in R&D.

        We expect our operating expenses to increase in subsequent periods as a result of additional marketing programs, activities to evaluate and improve our internal controls related to financial reporting, and planned increases in R&D spending.

Other Income (Expense), Net

        The primary component of our other income (expense), net, for both periods was interest expense, net, which amounted to $28.0 million and $7.9 million for the first quarter of 2007 and 2006, respectively. As a result of our December 2006 debt recapitalization, our average outstanding debt levels increased significantly, and correspondingly, we recorded higher interest expense during the 2007 period.

Income Taxes

        Our income tax expense was $2.1 million and $0.9 million for the first quarter of 2007 and 2006, respectively, resulting in an effective income tax rate of 5.7% and 2.6%, respectively. The effective income tax rate in each period is lower than the expected federal income tax rate of 35% due to the realization of a portion of our deferred tax assets in each of the respective periods, which were subject to the previously recognized valuation allowance.

Extraordinary Items

        We had no extraordinary items during the first quarter of 2007. The extraordinary items that we recorded during the first quarter of 2006 included a final working capital adjustment from the Bayer Plasma net asset acquisition for which we recorded an extraordinary loss of $0.3 million and an extraordinary gain of $3.3 million as a result of our repurchase of the remaining 20% of Bayer's one share of Junior Preferred Stock at a discount to its carrying value.

71



Net income

        Our net income was $34.3 million for the first quarter of 2007 and $37.0 million for the first quarter of 2006. The significant factors and events contributing to the change in our net income are discussed above.

        We expect that our net income will decrease in subsequent periods as a result of higher cost of goods sold primarily related to increased plasma collection spending as well as higher operating expenses as discussed above.

Successor Year Ended December 31, 2006 as Compared to Predecessor Three Months Ended March 31, 2005 and Successor Nine Months Ended December 31, 2005

        The following discussion and analysis of our results of operations for 2006 and 2005 includes certain references to our financial results on a "combined" basis. The combined results of operations for the year ended December 31, 2005 were prepared by adding our results as Successor from when we commenced operations on March 31, 2005 through December 31, 2005, to those of Predecessor for the three months ended March 31, 2005. The results of the two periods combined are not necessarily comparable due to changes in the basis of accounting resulting from the impact of our formational activities. Differences in the basis of accounting are more fully discussed in the sections titled "—Basis of Presentation," and "—Matters Affecting Comparability."

        The presentation of our combined results of operations for the year ended December 31, 2005 is considered to be "non-GAAP" under SEC rules. We believe that the combined basis presentation provides useful supplemental information in comparing to Predecessor and Successor trends and operating results. The combined results of operations for the year ended December 31, 2005 are not necessarily indicative of

72



what our results of operations may have been, had our formational transaction been consummated earlier, nor should they be construed as being a representation of our future results of operations.

 
 
 
   
   
   
   
  Percent of Total Net Revenue
 
 
  Successor
  Predecessor
  Combined
  Successor
  Combined
 
 
   
   
  Three
Months
Ended
March 31,
2005

   
  Year Ended
December 31,

 
 
   
  Nine Months
Ended
December 31,
2005

  Year
Ended
December 31,
2005

 
 
  Year Ended
December 31,
2006

 
 
  2006
  2005
 
Net revenue:                                  
  Net product revenue   $ 1,114,489   $ 654,939   $ 245,500   $ 900,439   98.7 % 98.6 %
  Other     14,230     13,039         13,039   1.3 % 1.4 %
   
 
 
 
 
 
 
Total net revenue     1,128,719     667,978     245,500     913,478   100.0 % 100.0 %
  Cost of goods sold     684,750     561,111     209,700     770,811   60.7 % 84.4 %
   
 
 
 
 
 
 
Gross profit     443,969     106,867     35,800     142,667   39.3 % 15.6 %

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  SG&A     241,448     89,205     27,500     116,705   21.4 % 12.7 %
  R&D     66,801     37,149     14,800     51,949   5.9 % 5.7 %
   
 
 
 
 
 
 
Total operating expenses     308,249     126,354     42,300     168,654   27.3 % 18.4 %
   
 
 
 
 
 
 
Income (loss) from operations     135,720     (19,487 )   (6,500 )   (25,987 ) 12.0 % (2.8 )%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Equity in earnings of affiliate     684     197         197   0.1 %  
  Interest expense, net     (40,867 )   (21,224 )       (21,224 ) (3.7 )% (2.3 )%
  Loss on extinguishment of debt     (8,924 )             (0.8 )%  
   
 
 
 
 
 
 
Total other income (expense)     (49,107 )   (21,027 )       (21,027 ) (4.4 )% (2.3 )%
   
 
 
 
 
 
 

Income (loss) before income taxes and extraordinary items

 

 

86,613

 

 

(40,514

)

 

(6,500

)

 

(47,014

)

7.6

%

(5.1

)%
  Provision for income taxes     (2,222 )   (2,251 )   (5,100 )   (7,351 ) (0.2 )% (0.8 )%
   
 
 
 
 
 
 

Income (loss) before extraordinary items

 

 

84,391

 

 

(42,765

)

 

(11,600

)

 

(54,365

)

7.4

%

(5.9

)%
Extraordinary items:                                  
  (Loss) gain from unallocated negative goodwill     (306 )   252,303         252,303     27.6 %
  Gain from settlement of contingent consideration due Bayer     3,300     13,200         13,200   0.3 % 1.4 %
   
 
 
 
 
 
 
Total extraordinary items     2,994     265,503         265,503   0.3 % 29.0 %
   
 
 
 
 
 
 
Net income (loss)   $ 87,385   $ 222,738   $ (11,600 ) $ 211,138   7.7 % 23.1 %
   
 
 
 
 
 
 

73


Net Revenue

        The following table contains information regarding our net revenue:

 
   
   
   
   
  Percent of Total
Net Revenue

 
 
  Successor
  Predecessor
  Combined
  Successor
  Combined
 
 
   
   
  Three
Months
Ended
March 31,
2005

   
  Year Ended December 31,
 
 
   
  Nine Months
Ended
December 31,
2005

  Year
Ended
December 31,
2005

 
 
  Year Ended
December 31,
2006

 
 
  2006
  2005
 
Net product revenue:                                  
  IGIV (Gamunex and Gamimune)   $ 617,939   $ 372,683   $ 134,892   $ 507,575   54.7 % 55.6 %
  Prolastin brand A1PI     225,986     139,517     55,432     194,949   20.0 % 21.3 %
  Albumin     62,692     33,976     16,943     50,919   5.6 % 5.6 %
  Other     207,872     108,763     38,233     146,996   18.4 % 16.1 %
   
 
 
 
 
 
 
Total net product revenue     1,114,489     654,939     245,500     900,439   98.7 % 98.6 %
  Other net revenue     14,230     13,039         13,039   1.3 % 1.4 %
   
 
 
 
 
 
 
Total net revenue   $ 1,128,719   $ 667,978   $ 245,500   $ 913,478   100.0 % 100.0 %
   
 
 
 
 
 
 
United States   $ 770,270   $ 518,498   $ 159,222   $ 677,720   68.2 % 74.2 %
International     358,449     149,480     86,278     235,758   31.8 % 25.8 %
   
 
 
 
 
 
 
Total net revenue   $ 1,128,719   $ 667,978   $ 245,500   $ 913,478   100.0 % 100.0 %
   
 
 
 
 
 
 

        Our net revenue for the year ended December 31, 2006 was $1,128.7 million, representing an increase of $215.2 million, or 23.6%, over the 2005 combined year of $913.5 million, which consisted of $245.5 million for Predecessor three months ended March 31, 2005 and $668.0 million for Successor nine months ended December 31, 2005. The increase consisted of volume improvements of $138.9 million and higher prices of $76.3 million, including foreign exchange of $0.9 million. In Successor periods, we have reduced our other net product revenue for SG&A reimbursements that we agreed to pay Bayer affiliates under the terms of various international distribution agreements, which amounted to $17.0 million for the year ended December 31, 2006 and $16.9 million for the nine months ended December 31, 2005. There were no comparable reductions of net product revenue during the Predecessor three months ended March 31, 2005 as such agreements did not exist.

        IGIV net revenue was $617.9 million for the year ended December 31, 2006, representing an increase of $110.4 million, or 21.7%, over the 2005 combined year of $507.6 million, which consisted of $134.9 million for Predecessor three months ended March 31, 2005 and $372.7 million for Successor nine months ended December 31, 2005. The growth in Gamunex IGIV net revenue was driven by higher volumes of $81.8 million and higher pricing of $36.7 million. Market demand for IGIV remained strong in 2006 and, specifically, the demand for Gamunex IGIV continued to be in excess of our ability to produce the product due to plasma supply constraints. Sales of Gamimune IGIV decreased $8.1 million as we completed the conversion from this product to Gamunex IGIV.

        Prolastin A1PI net revenue was $226.0 million for the year ended December 31, 2006, representing an increase of $31.0 million, or 15.9%, over the 2005 combined year of $194.9 million, which consisted of $55.4 million for Predecessor three months ended March 31, 2005 and $139.5 million for Successor nine months ended December 31, 2005. The growth in Prolastin A1PI net revenue was driven by $22.9 million in higher volumes and $8.1 million in higher pricing.

        Albumin net product revenue was $62.7 million for the year ended December 31, 2006, representing an increase of $11.8 million, or 23.1%, over the 2005 combined year of $50.9 million, which consisted of $16.9 million for Predecessor three months ended March 31, 2005 and $34.0 million for Successor nine months ended December 31, 2005. The growth in albumin net revenue was driven by higher pricing which was primarily due to a recovery of worldwide market demand from previously reduced levels as substitute products became less favored.

74



        Our other net product revenue was $207.9 million for the year ended December 31, 2006, representing an increase of $60.9 million, or 41.4%, over the 2005 combined year of $147.0 million, which consisted of $38.2 million for Predecessor three months ended March 31, 2005 and $108.8 million for Successor nine months ended December 31, 2005. Our other net product revenue consists primarily of revenue related to our Canadian blood system contracts, where in addition to our commercial sales of Gamunex, we have toll manufacturing contracts with two national Canadian blood system operators, Canadian Blood Services and Hema Quebec, as well as sales of Koate DVI Factor VIII (human), hyperimmunes, cryoprecipitate, Thrombate III antithrombin III (human), and PPF powder to a Bayer affiliate, less SG&A reimbursements to Bayer affiliates under certain international distribution agreements in Successor periods. Net revenue related to the Canadian blood system tolling contracts amounted to $43.3 million for the year ended December 31, 2006, representing an increase of $20.0 million, or 86.1%, over the 2005 combined year of $23.3 million, which consisted of $7.6 million for Predecessor three months ended March 31, 2005 and $15.7 million for Successor nine months ended December 31, 2005. Net revenue from cryoprecipitate, an intermediate product, was $25.1 million for the year ended December 31, 2006, $3.2 million for the nine months ended December 31, 2005, and no amounts for the three months ended March 31, 2005. The growth in cryoprecipitate net revenues during Successor periods resulted from the identification of opportunities to sell intermediates to other manufacturers. We are uncertain whether such opportunities will be available in the future.

        We increased prices for substantially all of our products in most of our markets as a result of our higher costs and market demand. As discussed in the section titled, "—Matters Affecting Comparability," as Successor, we deferred margin recognition for sales to certain Bayer affiliated distributors in international locations until the products are sold to unaffiliated third parties. Revenue and cost of goods sold deferred totaled $66.1 million and $39.0 million, respectively, for the 2005 combined year, of which the majority was related to Prolastin A1PI and Gamunex IGIV. During April 2006 and December 2006, we formed Talecris, Ltd. in Canada and Talecris GmbH in Germany, respectively, which reduced the impact of deferred margin during the year ended December 31, 2006 as compared to the 2005 combined year.

Cost of Goods Sold and Gross Profit

        Our cost of goods sold was $684.8 million for the year ended December 31, 2006, representing a decrease of $86.1 million, or 11.2%, over the 2005 combined year of $770.8 million, which consisted of $209.7 million for Predecessor three months ended March 31, 2005 and $561.1 million for Successor nine months ended December 31, 2005.

        The reduction in cost of goods sold was largely due to reduced rejected product provisions during the year ended December 31, 2006 as compared to the 2005 combined year. Our rejected product provision was $18.5 million for the year ended December 31, 2006 and $73.0 million for the 2005 combined year, which consisted of $27.9 million for Predecessor three months ended March 31, 2005 and $45.1 million for Successor nine months ended December 31, 2005. In addition to operational improvements resulting in lower product reject rates in 2006, our 2005 combined rejected product provision included $23.0 million related to the March 2005 Gamunex IGIV incident described previously, of which Predecessor recorded $11.5 million for the three months ended March 31, 2005 and Successor recorded $11.5 million for the nine months ended December 31, 2005. Our Successor cost of goods sold for the nine months ended December 31, 2005 also included $45.5 million related to the release of the non-cash step-up in inventory basis due to purchase accounting associated with inventories that we acquired from Bayer during our formation transaction which were subsequently sold to third parties during the respective period. Our cost of goods sold for the year ended December 31, 2006 was negatively impacted by $4.6 million related to our SRB programs, for which there were no comparable costs during the 2005 combined year.

        During the year ended December 31, 2006, we incurred higher costs of $63.7 million associated with additional volumes, offset by reduced costs of $9.3 million due to improved leverage of our operations, including yield improvements, production volume changes and other operating efficiencies, lower rejected

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product provisions, and other items. In 2006, our acquisition cost of plasma per liter increased 4.9% as compared with the 2005 combined year.

        In connection with our application of purchase accounting for the Bayer Plasma net assets, we recorded property, plant, equipment, and all other intangible assets at zero value upon our formation as Talecris on March 31, 2005, which resulted in significantly lower depreciation and amortization expense in Successor periods as compared to Predecessor periods. Depreciation and amortization expense was $5.0 million for the year ended December 31, 2006 as compared to $9.4 million for the 2005 combined year, which consisted of $8.0 million for Predecessor three months ended March 31, 2005 and $1.4 million for Successor nine months ended December 31, 2005, the majority of which was recorded within cost of goods sold for all periods.

        Our gross profit was $444.0 million for the year ended December 31, 2006, representing an increase of $301.3 million over the 2005 combined year of $142.7 million, which consisted of $35.8 million for Predecessor three months ended March 31, 2005 and $106.9 million for Successor nine months ended December 31, 2005. Our gross margin was 39.3% for the year ended December 31, 2006 and 15.6% for the 2005 combined year, which consisted of 14.6% for Predecessor three months ended March 31, 2005 and 16.0% for Successor nine months ended December 31, 2005. Our gross profit is impacted by the volume, pricing and mix of our net product revenue, as well as the related cost of goods sold as discussed above. The net impact of these items resulted in more favorable gross margin during the year ended December 31, 2006 as compared to the 2005 combined year.

Operating Expenses

        Our SG&A was $241.4 million for the year ended December 31, 2006, representing an increase of $124.7 million over the 2005 combined year of $116.7 million, which consisted of $27.5 million for Predecessor three months ended March 31, 2005 and $89.2 million for Successor nine months ended December 31, 2005. Successor SG&A includes significant transition and other non-recurring expenses associated with establishing an independent corporate infrastructure apart from Bayer. We incurred $73.2 million and $12.8 million for the year ended December 31, 2006 and for the nine months ended December 31, 2005, respectively, related to these activities. Successor SG&A also includes the impact of expenses associated with our share-based compensation programs and management fees paid to Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures, for which we had no such costs during the Predecessor period. Our SG&A for the year ended December 31, 2006 includes $6.2 million and $5.6 million related to share-based compensation and management fees, respectively. For the nine months ended December 31, 2005, our SG&A includes $1.2 million and $3.4 million related to share-based compensation and management fees, respectively. Our SG&A for the year ended December 31, 2006 includes $29.8 million of expense associated with our SRB programs, for which there was no comparable expense during the 2005 combined year. During Successor year ended December 31, 2006 and nine months ended December 31, 2005, we reimbursed Bayer affiliates for their SG&A in the amount of $17.0 million and $16.9 million, respectively, which we recorded as a reduction of net revenue. As Predecessor, similar costs were appropriately recorded as SG&A. Other than these items, our SG&A increased period over period as a result of additional employee headcount, which increased from 168 at December 31, 2005 to 262 at December 31, 2006, and higher costs reflective of a standalone entity and to meet our business needs.

        Our R&D was $66.8 million for the year ended December 31, 2006, representing an increase of $14.9 million, or 28.6%, over the 2005 combined year of $51.9 million, which consisted of $14.8 million for Predecessor three months ended March 31, 2005 and $37.1 million for Successor nine months ended December 31, 2005. Successor R&D for the year ended December 31, 2006 includes $3.4 million associated with our SRB programs, for which there were no comparable expenses during the 2005 combined year. Other than the SRB expenses, our R&D increased $11.5 million, or 22.2%, during the year ended December 31, 2006 as compared to the 2005 combined year, representing growth of our R&D

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organization as well as development costs associated with Alpha-1 Aerosol, Gamunex IGIV subcutaneous administration, and our co-development efforts with Bausch & Lomb to develop a recombinant Plasmin product.

Other Income (Expense), Net

        Our other income (expense), net, for the year ended December 31, 2006 was $49.1 million, representing an increase of $28.1 million over the 2005 combined year, which consisted of $21.0 million for Successor nine months ended December 31, 2005 and no amounts for Predecessor three months ended March 31, 2005. As a result of our December 2006 debt recapitalization, our average outstanding debt levels were higher during the 2006 period as compared to the nine months ended December 31, 2005, resulting in higher interest expense during the year ended December 31, 2006. As a result of our debt recapitalization transaction, we incurred $1.1 million of termination fees for retiring certain debt instruments early, and we wrote off debt issuance costs of $7.8 million associated with the retired debt, which we recorded as "Loss on extinguishment of debt," for the year ended December 31, 2006.

        As Predecessor, we did not have an independent capital structure apart from Bayer, and we were not allocated interest costs from Bayer during the three months ended March 31, 2005.

Income Taxes

        Our income tax expense was $2.2 million for the year ended December 31, 2006 and $7.4 million for the 2005 combined year, which consisted of $2.3 million for the Successor nine months ended December 31, 2005 and $5.1 million for the Predecessor three months ended March 31, 2005.

        We experienced a negative effective tax rate of 78.5% and 5.6% during Predecessor and Successor periods of 2005, respectively, resulting from income tax expense despite a pre-tax book loss. For the 2005 Predecessor period, income tax expense primarily resulted from tax losses for which no current benefit was recorded and taxes paid in profitable foreign jurisdictions. For the 2005 Successor period, tax expense resulted primarily from an extraordinary book gain of $265.5 million disregarded for tax purposes, the non-deductibility of interest on the Junior Preferred Convertible Notes, recognition of taxable income on sales to Bayer affiliates that was deferred for book purposes, and lower cost of goods sold as the book step-up to inventory pursuant to purchase accounting was not recognized for tax purposes. As Successor, except for an amount equal to current federal tax expense, we have not established that it is more likely than not that we will realize the benefits associated with the $84.9 million and $102.8 million net deferred tax assets as of December 31, 2006 and 2005, respectively. Consequently, we have recorded a valuation allowance of $60.2 million and $93.2 million with respect to these net deferred tax assets at December 31, 2006 and 2005, respectively.

        The lower effective tax rate of 2.6% for the year ended December 31, 2006 is primarily attributable to the realization of a portion of the deferred tax asset. Realization of the deferred tax asset is driven by two items, the net decrease in the deferred tax asset resulting from reversing temporary differences and the ability, for federal tax purposes, to carryback future losses to the extent that taxable income producing current federal tax expense is generated. The net decrease in the deferred tax asset was primarily attributable to previously deferred profits on Bayer affiliate sales sold through to third parties, disposal of inventories previously reserved for in prior periods and tax depreciation in excess of book depreciation stemming from the carryover basis in long-term assets obtained for tax purposes upon our formation that was not recorded for book purposes. Additionally, taxable income within the two-year carryback period provided by the federal tax law can be used to realize an equivalent amount of the deferred tax asset. As such, our current federal tax liability is offset by realization of a portion of the valued net deferred tax asset. As substantially all of our state tax liability is attributable to states which do not provide for a carryback, current state income tax expense is not offset by realization of a portion of the deferred tax

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asset. We will continue to monitor this position in 2007 and depending on ongoing operating results and other considerations, some or all of the valuation allowance may be released in 2007 or 2008.

Extraordinary Items

        We recorded net extraordinary gains of $3.0 million for the year ended December 31, 2006 and $265.5 million for the 2005 combined year, all of which related to Successor nine months ended December 31, 2005.

        As Successor, our application of purchase accounting during the nine months ended December 31, 2005 resulted in an extraordinary gain of $252.3 million, as the net fair value of Bayer Plasma's net assets that we acquired during our formation on March 31, 2005 was higher than the purchase price including working capital adjustments, resulting in unallocated negative goodwill. During the nine months ended December 31, 2005, we also recorded an extraordinary gain of $13.2 million as a result of our repurchase of 80% of Bayer's one share of Junior Preferred Stock at a discount to its carrying value.

        The acquisition of the Bayer Plasma net assets resulted in a final working capital adjustment during the year ended December 31, 2006 for which we recognized an extraordinary loss of $0.3 million. During the year ended December 31, 2006, we also recorded an extraordinary gain of $3.3 million as a result of our repurchase of the remaining 20% of Bayer's one share of Junior Preferred Stock at a discount to its carrying value.

        As Predecessor, we had no extraordinary items.

Net income (loss)

        Our net income was $87.4 million for the year ended December 31, 2006 and $211.1 million for the 2005 combined year, which consisted of net income of $222.7 million for Successor nine months ended December 31, 2005 and a net loss of $11.6 million for Predecessor three months ended March 31, 2005. The significant factors and events contributing to our net income (loss) for the respective periods are discussed above.

Predecessor Three Months Ended March 31, 2005 and Successor Nine Months Ended December 31, 2005 as Compared to Predecessor Year Ended December 31, 2004

        The following discussion and analysis of our results of operations for 2005 and 2004 includes certain references to our financial results on a "combined" basis. The combined results of operations for the year ended December 31, 2005 were prepared by adding our results as Successor from when we commenced operations through December 31, 2005, to those of Predecessor, for the three months ended March 31, 2005. The results of the two periods combined are not necessarily comparable due to changes in the basis of accounting resulting from the impact of our formational activities. Differences in the basis of accounting are more fully discussed in the sections titled "—Basis of Presentation," and "—Matters Affecting Comparability."

        The presentation of our combined results of operations for the year ended December 31, 2005 is considered to be "non-GAAP" under SEC rules. We believe that the combined basis presentation provides useful supplemental information in comparing Predecessor and Successor trends and operating results. The combined results of operations for the year ended December 31, 2005 are not necessarily indicative of

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what our results of operations may have been, had our formational transaction been consummated earlier, nor should they be construed as being a representation of our future results of operations.

 
   
 
 
   
   
   
   
  Percent of Total Net Revenue
 
 
  Predecessor
  Successor
  Combined
  Predecessor
  Combined
  Predecessor
 
 
  Three
Months
Ended
March 31,
2005

   
   
   
  Year Ended December 31,
 
 
  Nine Months
Ended
December 31,
2005

  Year
Ended
December 31,
2005

  Year
Ended
December 31,
2004

 
 
  2005
  2004
 
Net revenue:                                  
  Net product revenue   $ 245,500   $ 654,939   $ 900,439   $ 846,500   98.6 % 100.0 %
  Other         13,039     13,039       1.4 %  
   
 
 
 
 
 
 
Total net revenue     245,500     667,978     913,478     846,500   100.0 % 100.0 %
Cost of goods sold     209,700     561,111     770,811     661,500   84.4 % 78.1 %
   
 
 
 
 
 
 
Gross profit     35,800     106,867     142,667     185,000   15.6 % 21.9 %
Operating expenses:                                  
  SG&A     27,500     89,205     116,705     102,200   12.7 % 12.1 %
  R&D     14,800     37,149     51,949     59,000   5.7 % 7.0 %
   
 
 
 
 
 
 
Total operating expenses     42,300     126,354     168,654     161,200   18.4 % 19.1 %
   
 
 
 
 
 
 
(Loss) income from operations     (6,500 )   (19,487 )   (25,987 )   23,800   (2.8 )% 2.8 %
Other income (expense):                                  
  Equity in earnings of affiliate         197     197          
  Interest expense, net         (21,224 )   (21,224 )     (2.3 )%  
   
 
 
 
 
 
 
Total other income (expense)         (21,027 )   (21,027 )     (2.3 )%  
   
 
 
 
 
 
 
(Loss) income before income taxes and extraordinary items     (6,500 )   (40,514 )   (47,014 )   23,800   (5.1 )% 2.8 %
Provision for income taxes     (5,100 )   (2,251 )   (7,351 )   (18,500 ) (0.8 )% (2.2 )%
   
 
 
 
 
 
 
(Loss) Income before extraordinary items     (11,600 )   (42,765 )   (54,365 )   5,300   (5.9 )% 0.6 %
Extraordinary items:                                  
  Gain from unallocated negative goodwill         252,303     252,303       27.6 %  
  Gain from settlement of contingent consideration         13,200     13,200       1.4 %  
   
 
 
 
 
 
 
Total extraordinary items         265,503     265,503       29.0 %  
   
 
 
 
 
 
 
Net (loss) income   $ (11,600 ) $ 222,738   $ 211,138   $ 5,300   23.1 % 0.6 %
   
 
 
 
 
 
 

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Net Revenue

        The following table contains information regarding our net revenue:

 
   
 
 
   
   
   
   
  Percent of Total Net Revenue
 
 
  Predecessor
  Successor
  Combined
  Predecessor
  Combined
  Predecessor
 
 
  Three
Months
Ended
March 31,
2005

   
   
   
  Year Ended
December 31,

 
 
  Nine Months
Ended
December 31,
2005

  Year
Ended
December 31,
2005

  Year
Ended
December 31,
2004

 
 
  2005
  2004
 
Net product revenue:                                  
  IGIV (Gamunex and Gamimune)   $ 134,892   $ 372,683   $ 507,575   $ 427,148   55.6 % 50.5 %
  Prolastin brand A1PI     55,432     139,517     194,949     206,872   21.3 % 24.4 %
  Albumin     16,943     33,976     50,919     64,198   5.6 % 7.6 %
  Other     38,233     108,763     146,996     148,282   16.1 % 17.5 %
   
 
 
 
 
 
 
Total net product revenue     245,500     654,939     900,439     846,500   98.6 % 100.0 %
  Other net revenue         13,039     13,039       1.4 %  
   
 
 
 
 
 
 
Total net revenue   $ 245,500   $ 667,978   $ 913,478   $ 846,500   100.0 % 100.0 %
   
 
 
 
 
 
 
United States   $ 159,222   $ 518,498   $ 677,720   $ 514,627   74.2 % 60.8 %
International     86,278     149,480     235,758     331,873   25.8 % 39.2 %
   
 
 
 
 
 
 
Total net revenue   $ 245,500   $ 667,978   $ 913,478   $ 846,500   100.0 % 100.0 %
   
 
 
 
 
 
 

        Our net revenue for Predecessor three months ended March 31, 2005 was $245.5 million and for Successor nine months ended December 31, 2005 was $668.0 million. Our 2005 combined year net revenue was $913.5 million as compared to $846.5 million for the year ended December 31, 2004, representing an increase of $67.0 million, or 7.9%. The increase in the 2005 combined year net revenue consisted of volume improvements of $62.0 million and higher pricing of $21.9 million, less $16.9 million of SG&A reimbursements we agreed to pay Bayer under certain international distribution agreements, which we reflected as a reduction of other net product revenue during the Successor nine months ended December 31, 2005. There were no comparable reductions of net product revenue during the Predecessor periods due to a different operating structure.

        IGIV net revenue was $134.9 million and $372.7 million for Predecessor three months ended March 31, 2005 and Successor nine months ended December 31, 2005, respectively, resulting in 2005 combined year net revenue of $507.6 million, as compared to $427.1 million for the year ended December 31, 2004, representing an increase of $80.4 million, or 18.8%. The growth in IGIV net revenue was driven by higher Gamunex IGIV volumes of $123.6 million and higher pricing of $21.2 million for this product, launched in 2003, offset by a $64.4 million decline in Gamimune IGIV net revenue due to product conversion. As discussed in the section titled, "Matters Affecting Comparability," as Successor, we defer the recognition of revenue and cost of goods sold for products shipped to certain Bayer affiliated distributors in various international locations until the products are sold to unaffiliated third parties. During the nine months ended December 31, 2005, we deferred revenue of $32.1 million related to Gamunex IGIV sold to Bayer affiliated distributors. No such deferral was necessary in Predecessor periods.

        Prolastin A1PI net revenue was $55.4 million and $139.5 million for Predecessor three months ended March 31, 2005 and Successor nine months ended December 31, 2005, respectively, resulting in 2005 combined year net revenue of $194.9 million, as compared to $206.9 million for the year ended December 31, 2004, representing a decrease of $11.9 million, or 5.8%. The decrease in Prolastin A1PI net revenue was driven by lower volumes of $23.6 million, partially offset by higher pricing of $11.7 million. The U.S. pricing increased $14.4 million. During the nine months ended December 31, 2005, we deferred

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revenue of $28.5 million related to Prolastin A1PI sold to Bayer affiliated distributors. No such deferral occurred in Predecessor periods.

        In the United States, the volume of Prolastin A1PI was flat year over year due to increased competition in 2005. In Europe, the other primary market, volume decreased $23.5 million, primarily due to the deferral of revenue as Successor of $28.5 million for sales to Bayer affiliated distributors. No such deferral occurred in Predecessor periods.

        Albumin net revenue was $16.9 million and $34.0 million for Predecessor three months ended March 31, 2005 and Successor nine months ended December 31, 2005, respectively, resulting in 2005 combined year net revenue of $50.9 million, as compared to $64.2 million for the year ended December 31, 2004, representing a decrease of $13.3 million, or 20.7%. The decrease in albumin net revenue reflected lower pricing of $10.8 million and lower volumes of $2.5 million. Volumes declined within the Canadian and Japanese markets, partially offset by higher volumes in the U.S. and other international markets.

        Our other net product revenue was $38.2 million and $108.8 million for Predecessor three months ended March 31, 2005 and Successor nine months ended December 31, 2005, respectively, resulting in 2005 combined year net revenue of $147.0 million, as compared to $148.3 million for the year ended December 31, 2004, representing a decrease of $1.3 million, or 0.9%. Our other product net revenue includes primarily revenue related to our Canadian blood system contracts, where in addition to our commercial sales of Gamunex, we have toll manufacturing contracts with the two national Canadian blood system operators, Canadian Blood Services and Hema Quebec, as well as sales of Koate DVI Factor VIII (human), hyperimmunes, cryoprecipitate, Thrombate III antithrombin III (human), and PPF powder to a Bayer affiliate. Our 2005 combined year other net product revenue benefited from increased sales of PPF powder to Bayer of $17.7 million and higher sales of $3.2 million of cryoprecipitate, an intermediate product, offset by $16.9 million of SG&A reimbursements to Bayer affiliated distributors.

Cost of Goods Sold and Gross Profit

        Our cost of goods sold for Predecessor three months ended March 31, 2005 was $209.7 million and for Successor nine months ended December 31, 2005 was $561.1 million. Our 2005 combined year cost of goods sold was $770.8 million, compared to $661.5 million for the year ended December 31, 2004, representing an increase of $109.3 million, or 16.5%. This increase was driven by higher costs associated with additional volumes of $32.0 million, partially offset by reduced costs of $8.0 million due to improved leverage of our operations, including yield improvements, production volume changes, and other operating efficiencies. In the 2005 combined year, our acquisition cost of plasma per liter was flat as compared to 2004.

        Our cost of goods sold was negatively impacted during the 2005 combined year by our provision for rejected products, the release of the purchase accounting adjustments related to inventories previously discussed, and other items. Our rejected product provision was $73.0 million for the combined year ended December 31, 2005, comprised of $27.9 million and $45.1 million for the 2005 Predecessor three months ended March 31, 2005 and Successor nine months ended December 31, 2005, respectively, and $60.8 million for the year ended December 31, 2004. Our 2005 combined year rejected product provision included $23.0 million related to the March 2005 Gamunex IGIV incident described previously, of which Predecessor recorded $11.5 million for the three months ended March 31, 2005 and Successor recorded $11.5 million for the nine months ended December 31, 2005. During the Successor nine months ended December 31, 2005, our cost of goods sold includes a $45.5 million non-cash charge related to the release of the non-cash step-up in inventory basis due to purchase accounting associated with inventories that we acquired from Bayer during our formation transaction which were subsequently sold to third parties during the period.

        Our gross profit for Predecessor three months ended March 31, 2005 was $35.8 million and for Successor nine months ended December 31, 2005 was $106.9 million. Our gross profit was $142.7 million for the 2005 combined year and $185.0 million for year ended December 31, 2004, resulting in gross

81



margin of 15.6% and 21.9%, respectively. Our gross profit is impacted by the volume, pricing and mix of our net product revenue, as well as the related cost of goods sold as discussed above. The net impact of these items resulted in less favorable gross margin during the 2005 combined year as compared to 2004.

Operating Expenses

        Our SG&A was $116.7 million for the 2005 combined year, consisting of $27.5 million for Predecessor three months ended March 31, 2005 and $89.2 million for Successor nine months ended December 31, 2005, which represented an increase of $14.5 million, or 14.2%, over the year ended December 31, 2004 SG&A of $102.2 million. Successor SG&A for the nine months ended December 31, 2005 includes $12.8 million of transition and other non-recurring costs associated with establishing an independent corporate infrastructure apart from Bayer. Successor SG&A also includes the impact of costs associated with our share-based compensation programs and management fees paid to Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures of $1.2 million and $3.4 million, respectively, for which we had no such costs during Predecessor periods. During Successor nine months ended December 31, 2005, we reimbursed Bayer affiliates for their SG&A in the amount of $16.9 million associated with various distribution and transition services agreements, which we recorded as a reduction of net revenue. As Predecessor, similar costs were appropriately recorded as SG&A. Aside from these items, our SG&A increased period over period as a result of additional employee headcount and other costs reflective of a standalone entity to meet our business needs.

        Our R&D was $51.9 million for the 2005 combined year, consisting of $14.8 million for Predecessor three months ended March 31, 2005 and $37.1 million for Successor nine months ended December 31, 2005, which represented a decrease of $7.1 million, or 12.0%, over the year ended December 31, 2004 R&D of $59.0 million. During 2004, we incurred higher R&D primarily associated with IGIV program spending than during the 2005 combined year. The reduced R&D project spend was partially offset by higher costs associated with the overall growth of our R&D organization during the 2005 Successor period.

Other Income (Expense), Net

        Our other income (expense), net for the 2005 combined year was $21.0 million, all of which related to Successor nine months ended December 31, 2005. For Successor nine month's ended December 31, 2005, the primary component of our other income (expense), net, was interest expense, net, which amounted to $21.2 million.

        As Predecessor, we did not have an independent capital structure apart from Bayer, and we were not allocated interest costs from Bayer during the three months ended March 31, 2005 and year ended December 31, 2004.

Income Taxes

        Our income tax expense was $7.4 million for the 2005 combined year, consisting of $2.3 million for the Successor nine months ended December 31, 2005 and $5.1 million for the Predecessor three months ended March 31, 2005, compared to $18.5 million for the year ended December 31, 2004.

        We experienced a negative effective tax rate of 78.5% and 5.6% during the Predecessor and Successor periods of 2005, respectively, resulting from tax expense despite a pre-tax book loss due to book-tax timing differences. For the 2005 Predecessor period, tax expense primarily resulted from tax losses for which no current benefit was recorded and taxes paid in profitable foreign jurisdictions. For the 2005 Successor period, tax expense resulted primarily from current state tax expense. As Successor, except for an amount equal to current federal tax expense, we have not established that it is more likely than not that we will realize the benefits associated with the $102.8 million net deferred tax asset established as of December 31, 2005. Given the significant operating losses incurred in 2002 and 2003, minimal profitability in 2004, and continued operating losses in 2005, we have recorded a valuation allowance of $93.2 million with respect to this net deferred tax asset.

        As Predecessor in 2004, we experienced an effective tax rate of 77.7%, significantly above the 35% federal income tax rate. The tax expense primarily resulted from tax losses for which no current benefit was recorded and taxes paid in profitable foreign jurisdictions.

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Extraordinary Items

        We recorded an extraordinary gain of $265.5 million for the 2005 combined year, all of which related to Successor nine months ended December 31, 2005.

        As Successor, our application of purchase accounting during the nine months ended December 31, 2005 resulted in an extraordinary gain of $252.3 million as the net fair value of Bayer Plasma's net assets that we acquired was higher than the purchase price, including working capital adjustments, resulting in unallocated negative goodwill. During the nine months ended December 31, 2005, we also recorded an extraordinary gain of $13.2 million as a result of our repurchase of 80% of Bayer's one share of Junior Preferred Stock at a discount to its carrying value.

        As Predecessor, we had no extraordinary items.

Net income (loss)

        Our net income was $211.1 million for the 2005 combined year, which consisted of net income of $222.7 million for Successor nine months ended December 31, 2005 and a net loss of $11.6 million for Predecessor three months ended March 31, 2005. Our net income was $5.3 million for the year ended December 31, 2004. The significant factors and events contributing to our net income (loss) for the respective periods are discussed above.

Selected Unaudited Quarterly Financial Data

        The following table summarizes our unaudited quarterly financial results for the Successor periods presented:

 
  Unaudited
 
 
  2006
  2007

 
 
  1Q
  2Q
  3Q
  4Q
  Total
  1Q
 
Net revenue   $ 286,363   $ 291,463   $ 279,088   $ 271,805   $ 1,128,719   $ 302,439  
Cost of goods sold     191,377     170,540     151,514     171,319     684,750     181,793  
   
 
 
 
 
 
 
Gross profit     94,986     120,923     127,574     100,486     443,969     120,646  
Operating expenses     52,355     55,096     76,794     124,004     308,249     56,514  
   
 
 
 
 
 
 
Operating income (loss)     42,631     65,827     50,780     (23,518 )   135,720     64,132  
Other income (expense), net     (7,727 )   (7,743 )   (9,108 )   (24,529 )   (49,107 )   (27,781 )
   
 
 
 
 
 
 
Income (loss) before taxes and extraordinary items     34,904     58,084     41,672     (48,047 )   86,613     36,351  
(Provision) benefit for income taxes     (915 )   (1,555 )   (1,070 )   1,318     (2,222 )   (2,055 )
   
 
 
 
 
 
 
Income (loss) before extraordinary items     33,989     56,529     40,602     (46,729 )   84,391     34,296  
Extraordinary items     2,994                 2,994      
   
 
 
 
 
 
 
Net income (loss)   $ 36,983   $ 56,529   $ 40,602   $ (46,729 ) $ 87,385   $ 34,296  
   
 
 
 
 
 
 

        As compared to our other 2006 quarters, our 2006 fourth quarter reflects higher interest expense and the impact of our special recognition bonuses and restricted stock, as more fully discussed in the section above, titled, "—Matters Affecting Comparability."

Liquidity and Capital Resources

        As Predecessor, we participated in Bayer's centralized cash management system and our cash funding requirements were met by Bayer. We were not allocated interest costs from Bayer for the use of funds.

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        As Successor, we have financed our operations through a combination of equity funding and debt financing, and through internally generated funds. We established an independent capital structure upon our formation on March 31, 2005, which consisted of a $400.0 million asset-based credit facility, $27.8 million of 12% Second Lien Notes, and $90.0 million of 14% Junior Secured Convertible Notes. On December 30, 2005, we declared a cash dividend of $73.2 million, making payments of $23.4 million and $49.8 million on December 30, 2005 and January 3, 2006, respectively. On March 30, 2006 we entered into an additional $40.0 million term loan.

        In December 2006, we completed a debt recapitalization transaction in which we repaid, retired or converted all outstanding principal and interest amounts owed under our then existing debt instruments, with the new borrowings aggregating $1.355 billion in total availability. We used the remaining proceeds from this recapitalization to fund a cash dividend to Talecris Holdings, LLC of $760.0 million; to pay a special recognition bonus cash award of $34.2 million to certain employees and members of our Board of Directors; to fund an irrevocable trust in the amount of $23.0 million associated with future cash payments under this special recognition bonus award; and for general corporate purposes. Our interest expense has increased significantly in periods subsequent to our debt recapitalization. Our current borrowing facilities contain default provisions and financial covenants, and impose restrictions on annual corporate expenditures and future cash dividends.

        In addition to the financing activities referred to above, we repurchased and retired, for $23.5 million, common stock originally issued to Bayer during our formation transaction.

Cash Flows from Operating Activities

        The following items represent the most significant factors contributing to our net cash provided by operating activities since our formation:

    Accounts receivable, net, were $119.8 million, $113.6 million and $111.5 million at March 31, 2007, December 31, 2006 and December 31, 2005, respectively. Accounts receivable, net, balances are influenced by the timing of net revenue and customer collections. We did not acquire receivables in connection with our acquisition of Bayer Plasma's net assets on March 31, 2005. Consequently, the increase in accounts receivable, net, for the nine months ended December 31, 2005 represents our accounts receivable, net, growth during the period from a zero balance at March 31, 2005. Since our formation we have rationalized our product distribution channels and reduced payment terms in the U.S. from approximately 90 days to approximately 30 days during 2005. Our days sales outstanding (DSO) have improved from 39 days at December 31, 2005, to 36 days at December 31, 2006, and to 35 days at March 31, 2007. Our international sales terms can range from 30 to 90 days due to industry and national practices outside the U.S., which can impact our overall DSO results. We calculate DSO's as our period end accounts receivable, net, divided by our prior three month's net sales, multiplied by 90 days. Our calculation of DSO's may not be consistent with similar calculations performed by other companies.

    Inventories were $487.3 million, $509.3 million and $491.3 million at March 31, 2007, December 31, 2006 and December 31, 2005, respectively. Our inventories fluctuate based upon our ability to acquire plasma, production mix and cycle times, our production capacities, normal production shut-downs, finished product releases, targeted safety stock levels, and demand for our products. Our biological manufacturing processes result in relatively long inventory cycle times ranging from 100 days to 400 days in addition to a required 60 day pre-production holding period for plasma. Specialty plasmas, due to their nature, can often have cycle times in excess of one year. Consequently, we have a significant investment in raw material and work in process inventories for extended periods, which are relatively illiquid. Finished goods days on hand generally range from 30 days to 60 days in the U.S. and higher for regions outside of the U.S. We anticipate that the opening of additional plasma collection centers and the collection of unlicensed plasma will result

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      in higher plasma inventories. We do not use such plasma in the manufacturing process until the related plasma collection centers receive FDA approval.

    Total current liabilities were $163.8 million, $206.7 million and $269.6 million at March 31, 2007, December 31, 2006 and December 31, 2005, respectively. Total current liabilities fluctuate as a result of our cash management strategies and the varying due dates and other terms of accounts payable, accrued expenses, and other current liabilities. Our current liabilities were $42.9 million lower at March 31, 2007 as compared to December 31, 2006, the decrease of which resulted primarily from the payment of accrued management and profit sharing bonuses in the amount of $23.6 million and the payments for inventories repurchased from Bayer affiliates as provided for in our transaction services agreements of approximately $19.0 million, both of which were accrued at December 31, 2006. These items were partially offset by higher interest payable accruals associated with our recapitalized debt. Our current liabilities were $62.9 million lower at December 31, 2006 as compared to December 31, 2005, the decrease of which resulted primarily from the first quarter 2006 dividend payment of $49.8 million and the settlement of contingent consideration due to Bayer for $10.0 million, both of which were accrued at December 31, 2005.

Cash Flows from Investing Activities

        The following table contains information regarding our cash flows from investing activities:

 
  Predecessor
  Successor
 
 
   
   
   
   
  Three Months Ended
March 31,

 
 
   
  Three Months
Ended
March 31,
2005

  Nine Months
Ended
December 31,
2005

   
 
 
  Year Ended
December 31,
2004

  Year Ended
December 31,
2006

 
 
  2007
  2006
 
Business acquisitions, net of cash acquired   $   $   $ (263,845 ) $ (114,146 ) $ (101 ) $  
Purchase of property, plant, and equipment     (24,100 )   (3,900 )   (26,517 )   (38,853 )   (11,073 )   (3,292 )
Other     600     100     (164 )   802     320      
   
 
 
 
 
 
 
Net cash flows from investing activities   $ (23,500 ) $ (3,800 ) $ (290,526 ) $ (152,197 ) $ (10,854 ) $ (3,292 )
   
 
 
 
 
 
 

        During the first quarter of 2007, our capital expenditures reflect investments in our Clayton, North Carolina and Melville, New York facilities to create a platform for future growth and efficiency improvements. Our first quarter 2007 capital expenditures also reflect significant investment in our TPR infrastructure to support our plasma collection efforts.

        During the first quarter of 2006, our net cash used in investing activities consisted of capital investments for property, plant, and equipment, primarily at our Clayton, North Carolina and Melville, New York facilities.

        During the year ended December 31, 2006, our net cash used in investing activities consisted primarily of capital investments for property, plant, and equipment, and information technology, primarily at our Clayton, North Carolina and Melville, New York facilities, as well as the cash purchase price associated with the IBR plasma collection centers that we acquired on November 18, 2006.

        During the nine months ended December 31, 2005, our net cash used in investing activities consisted primarily of capital investments for property, plant and equipment, primarily at our Clayton, North Carolina facility, as well as the cash purchase price associated with the Bayer Plasma net assets that we acquired from Bayer on March 31, 2005.

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        Prior to our formation, our capital expenditures primarily reflect investments in our Clayton, North Carolina facility.

Cash Requirements and Availability

        We expect our cash flows from operations combined with availability of our revolving credit facility to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital expenditures for at least the next twelve months. Our asset-based revolving credit facility has $222.1 million available at March 31, 2007. The revolving credit agreement contains default provisions, imposes restrictions on annual capital expenditures, and contains financial covenants.

        Our working capital, which is driven primarily by our accounts receivable turnover and inventory production times, can vary significantly period to period. Our capital requirements will depend on many factors, including our rate of sales growth, acceptance of our products, cost of securing access to adequate manufacturing capacities, the timing and extent of research and development activities, and changes in operating expenses, including costs of production and sourcing of plasma, all of which are subject to uncertainty. We anticipate that our cash needs will be significant and that, subsequent to the completion of this offering and the application of proceeds to repay debt, we may need to increase our borrowings under our credit facilities in order to fund our operations and strategic initiatives. Our planned capital expenditures, which will include the design and construction of a new fractionation facility and to develop our plasma collection platform, are significant, and are likely to approach or exceed $90.0 million annually over the next five years. To the extent that our existing sources of cash are insufficient to fund our future activities, we may need to raise additional funds through debt or equity financing. Additional funds may not be available on terms favorable to us, or at all.

Sources of Credit and Contractual and Commercial Commitments

Sources of Credit

    Morgan Stanley First Lien Term Loan Credit Agreement

        On December 6, 2006, we entered into a $700.0 million seven year First Lien Term Loan Credit Agreement administered and arranged by Morgan Stanley Senior Funding, Inc. ("Morgan Stanley"), of which $698.3 million was outstanding at March 31, 2007.

        The terms of this facility require principal payments of $1.75 million quarterly with the balance due at maturity on December 6, 2013. We are required to make additional mandatory principal prepayments equal to 50% of the excess cash flow, as defined, within 95 days after each fiscal year end. In the event that our leverage ratio, as defined, falls below 3.50 to 1.00, our mandatory prepayments would be reduced to 25% of the excess cash flow. If our leverage ratio, as defined, falls below 2.25 to 1.00, we are not required to make mandatory prepayments under the terms of this agreement. There were no such prepayments due for fiscal year 2006. Our leverage ratio was 3.91 to 1.00 for the three months ended March 31, 2007.

        Borrowings under this facility bear interest at a rate based upon either the Alternate Base Rate ("ABR") or the London Interbank Offered Rate ("LIBOR"), at our option, plus applicable margins. The ABR represents the greater of the Federal Funds Effective Rate plus 0.50% or the Prime Rate. The First Lien Term Loan accrues interest at the ABR plus 2.25% or LIBOR plus 3.50%.

        The First Lien Term Loan Credit Agreement is secured by a Pledge and Security Agreement dated December 6, 2006 under which substantially all of our real estate, manufacturing equipment, accounts receivable, inventories and stock are pledged as security.

        The agreement requires that we enter into interest rate protection agreements within 90 days of the effective date for at least 50% of the aggregate outstanding principal for a period of at least three years from the effective date. We entered into a derivative program during the first quarter of 2007.

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        The First Lien Term Loan Credit Agreement contains default provisions, imposes restrictions on annual capital expenditures, and contains financial covenants which require us to maintain a maximum leverage ratio initially equal to 5.75 to 1.00 which decreases over the term and a minimum interest coverage ratio initially equal to 1.65 to 1.00 which increases over the term.

        In connection with the closing of this offering, we expect to enter into an amendment to the First Lien Term Loan Credit Agreement so that borrowings will accrue interest at the ABR plus       % or LIBOR      %.

    Morgan Stanley Second Lien Term Loan Credit Agreement

        On December 6, 2006, we entered into a $330.0 million eight year Second Lien Term Loan Credit Agreement administered and arranged by Morgan Stanley, which was fully drawn at March 31, 2007.

        Outstanding principal under this facility is due and payable on the maturity date at December 6, 2014. Under the terms of the agreement, we are required to make additional mandatory principal prepayments equal to 50% of the excess cash flow, as defined, within 95 days after each fiscal year end. In the event that our leverage ratio, as defined, falls below 3.50 to 1.00, our mandatory prepayments would be reduced to 25% of the excess cash flow. If our leverage ratio, as defined, falls below 2.25 to 1.00, we are not required to make mandatory principal prepayments under the terms of this agreement. Our leverage ratio was 3.91 to 1.00 for the three months ended March 31, 2007. The additional mandatory principal prepayment associated with the Second Lien Term Loan is only required after termination of the Morgan Stanley First Lien Term Loan.

        Borrowings under this facility bear interest at a rate based upon either ABR or LIBOR, at our option, plus applicable margins. The ABR represents the greater of the Federal Funds Effective Rate plus 0.50% or the Prime Rate. The Second Lien Term Loan accrues interest at the ABR plus 5.25% or LIBOR plus 6.50%.

        The Second Lien Term Loan Credit Agreement is secured by a Pledge and Security Agreement dated December 6, 2006 under which substantially all of our real estate, manufacturing equipment, accounts receivable, inventories and stock are pledged as security.

        The agreement requires that we enter into interest rate protection agreements within 90 days of the effective date for at least 50% of the aggregate outstanding principal for a period of at least three years from the effective date. We entered into a derivative program during the first quarter of 2007.

        The Second Lien Term Loan Credit Agreement contains default provisions, imposes restrictions on annual capital expenditures, and contains financial covenants which require us to maintain a maximum leverage ratio initially equal to 7.20 to 1 which decreases over the term and a minimum interest coverage ratio initially equal to 1.40 to 1 which increases over the term.

        We anticipate that we will use the proceeds from this initial public offering of our equity securities to repay outstanding principal and interest amounts, plus a prepayment penalty, under our Second Lien Term Loan Credit Agreement. As a result of the early termination of the Second Lien Term Loan Credit Agreement, we will be required to write-off unamortized debt issuance costs which approximated $13.0 million at March 31, 2007.

    Wachovia Bank Revolving Credit Agreement

        On December 6, 2006 we entered into a $325.0 million five year asset-based credit agreement administered by Wachovia Bank N.A. ("Wachovia") and arranged by Morgan Stanley. As of March 31, 2007, $101.6 million was drawn for revolving loans and $1.3 million was being utilized for letters of credit, and $222.1 million was unused and available.

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        Borrowings under this facility bear interest at a rate based upon either ABR or LIBOR, at our option, plus applicable margins based upon borrowing availability. The ABR represents the greater of the Federal Funds Effective Rate plus 0.50% or the Prime Rate. Interest accrues on the revolving loan at the ABR plus 0.25 - 0.75% or LIBOR plus 1.50 - 2.00%.

        The revolving credit agreement is secured by a Pledge and Security Agreement dated December 6, 2006 under which substantially all of our real estate, manufacturing equipment, accounts receivable, inventories and stock are pledged as security.

        The revolving credit agreement contains default provisions, imposes restrictions on annual capital expenditures, and contains financial covenants.

    Interest Rate Swaps and Caps

        On February 14, 2007 we executed six variable-to-fixed interest rate swaps in an aggregate notional principal amount of $700.0 million. Under the interest rate swap contracts, we make interest payments on the underlying debt based on LIBOR and receive interest payments based on a fixed rate ranging from 5.16% to 5.35% with a weighted average rate of 5.23% over various swap terms. The effect of these swaps is to convert floating rates to fixed rates on a portion of our long-term debt portfolio. The interest rate swaps mature on various dates from November 2007 through February 2013. In accordance with SFAS No. 133, the interest rate swaps are designated as cash flow hedges. The counterparty to the interest rate swap agreements is Morgan Stanley Capital Services, Inc.

        On February 14, 2007 we executed two interest rate caps in an aggregate notional principal amount of $175.0 million. The interest rate caps at 6.0%, effectively placing an upper limit on the floating interest rate for a portion of our long-term debt. The interest rate caps mature on February 14, 2010. In accordance with SFAS No. 133, the interest rate caps are designated as cash flow hedges. The counterparty to the interest rate cap agreements is Morgan Stanley Capital Services, Inc.

        As a result of the equity offering, we intend to unwind these swaps and caps. If we were to unwind some or all of the interest rate swaps and caps, there will be an associated benefit or breakage cost based upon the three-month LIBOR curve at the time of breakage. While as of June 30, 2007 the benefit of unwinding the entire program would be $4.3 million, there is a risk that the forward curve will change and there will be an associated cost to break all or some of the program.

Contractual and Commercial Commitments

        The following table summarizes our significant contractual and commercial commitments as of December 31, 2006:

 
  Total
  Less than
1 year

  1-3 Years
  4-5 Years
  More than
5 Years

Long-term debt   $ 1,109,920   $ 7,000   $ 21,000   $ 93,920   $ 988,000
Operating lease obligations     40,887     11,122     22,561     5,493     1,711
Source plasma purchase commitments     1,030,624     171,891     396,969     186,359     275,405
Other purchase commitments     68,179     26,579     24,960     16,640    
Unfunded deferred compensation programs     4,852     1,213     3,639        
   
 
 
 
 
  Total   $ 2,254,462   $ 217,805   $ 469,129   $ 302,412   $ 1,265,116
   
 
 
 
 

        Future contractual and commercial commitments at March 31, 2007 were not materially different than at December 31, 2006.

        For the purposes of the table above, the long-term debt contractual obligations include only the principal maturities as required by SFAS No. 47, "Disclosure of Long-Term Obligations." Information

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regarding the interest component of our long-term debt is included in the subsection above titled, "—Sources of Credit."

        Under the terms of our First and Second Lien Term Loan Credit Agreements, we could be required to make mandatory principal prepayments on an annual basis under certain circumstances. Additional information regarding the mandatory principal prepayment clause is included in the subsection above titled, "Sources of Credit."

        We have committed to provide future financing to one of our unaffiliated third party plasma suppliers for their use in the development of additional plasma collection centers which will be used to source additional plasma for us. Under the terms of the agreement, we have committed aggregate financings up to $3.0 million of which no amounts are advanced. Our commitment to this third party is not reflected in the table above.

        We have a Management Agreement, as amended, with Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures under which we are charged a management fee of 0.5% of net sales. This Management Agreement, as amended, will be terminated upon completion of this offering. As a result of the completion of this offering and the termination of the Management Agreement, as amended, we will be required to pay Cerberus-Plasma Holdings LLC and an affiliate of Ampersand Ventures a termination fee which will be expensed and calculated as the sum of (i) five times the management fee payable in respect to our four most recently completed fiscal quarters, plus (ii) all reasonable out-of-pocket costs and expenses incurred with our offering. Our obligations under this Management Agreement, as amended, are not reflected in the table above.

        We have entered into employment agreements with certain of our employees which require payments generally ranging from 100% to 150% of the employee's annual compensation if employment is terminated not for cause by us, or by the employee, for good reason, as defined. The impact of these employment agreements is not reflected in the table above.

        We entered into a development agreement with an unaffiliated third party under which the third party will obtain independent financing to acquire and develop real estate for use as plasma collection centers. The term of the agreement is one year (subject to automatic renewal annually, unless either party provides the other with notice of termination). Under the terms of this agreement, we will pay the third party various fees for its services in identifying and developing the sites. We will then lease the developed sites under separate lease agreements for initial 10-year periods with a renewal option for an additional ten years. Under the terms of the development agreement, we are obligated to authorize the development of a minimum of four sites per year. The impact of leases under this agreement is not reflected in the table above, as no sites are currently developed.

        On June 9, 2007, we acquired three plasma collection centers from IBR for a cash purchase price of approximately $16.3 million. The impact of this acquisition is not reflected in the table above.

        Concurrent with the execution of the June 9, 2007 purchase agreement with IBR, we entered into an amendment to our November 18, 2006 Asset Purchase Agreement with IBR. Under the terms of the November 18, 2006 agreement, we were required to pay additional consideration of up to $35.0 million in aggregate to IBR upon the achievement of certain production volume milestones or upon the achievement of FDA licensure or other approvals at certain acquired plasma collection centers that were licensed or under development at the acquisition date. The June 9, 2007 amendment provides for the acceleration of all validation and milestone amounts payable to IBR. Pursuant to the accelerated payment provisions under the amendment, we issued 268,279 shares of our common stock to IBR on June 9, 2007, of which 68,071 shares were immediately delivered to IBR and 200,208 shares have been placed in escrow. We placed these 200,208 shares in escrow to secure against breaches of represenations and warranties under the November 2006 purchase agreement, and the balance of any shares not forfeited as a result of any breach of such representations and warranties will be released to IBR on May 6, 2009. Following the

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consummation of this offering, the escrowed shares will be valued at fair market value and to the extent that the value of the escrowed shares exceeds the applicable escrow cap amount, which is $25.0 million during the first eighteen months of the agreement and $15.0 million during the final twelve months of the agreement, during the escrow term, shares will be eligible for release to IBR. IBR has the right to put the shares back to us for cash under certain circumstances prior to June 30, 2008, which we have not reflected in the table above. The put right will expire upon the consummation of this offering, assuming this offering is completed by December 31, 2007.

Non-GAAP Financial Measures

        We define EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, extraordinary items, equity in earnings of affiliate, and gains on sales of equipment. We define Adjusted EBITDA as EBITDA, further adjusted to exclude transition and other non-recurring expenses, management fees paid to our sponsors, non-cash share-based compensation expense and special recognition bonus expense, which we believe are not indicative of our ongoing core operations. These items are described in more detail in the reconciliation below.

        We use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our U.S. GAAP results and the following reconciliation, we believe provide a more complete understanding of factors and trends affecting our business than U.S. GAAP measures alone. EBITDA and Adjusted EBITDA assist in comparing our operating performance on a consistent basis because they remove the impact of our capital structure (primarily interest charges and amortization of debt issuance costs), asset base (primarily depreciation and amortization) and items outside the control of our management team (taxes) from our operations. We use Adjusted EBITDA as a supplemental measure to assess our performance because it excludes certain non-cash equity compensation expenses, management fees paid to our sponsors, transition and other non-recurring costs associated with establishing our infrastructure as an independent company, and special recognition bonuses which provided cash awards to certain of our employees and senior executives. EBITDA and Adjusted EBITDA serve as measures in evaluating annual incentive compensation awards to our employees and senior executives and for the calculation of financial covenants in our credit facilities. We present EBITDA and Adjusted EBITDA because we believe it is useful for investors to analyze our operating results on the same basis as that used by our management.

        EBITDA and Adjusted EBITDA are considered "non-GAAP financial measures" under SEC rules and should not be considered substitutes for net income (loss) or income (loss) from operations, as determined in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, including, but not limited to the following:

    EBITDA does not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments;

    EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

    EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreements;

    EBITDA does not reflect income tax expense or the cash requirements to pay our taxes;

    Adjusted EBITDA has all the inherent limitations of EBITDA. In addition, you should be aware that there is no certainty that we will not incur similar expenses in the future, which are eliminated in the calculation of Adjusted EBITDA;

    Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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        Because of these limitations, EBITDA and Adjusted EBITDA should not be considered the primary measures of the operating performance of our business. We strongly encourage you to review the U.S. GAAP financial statements included elsewhere in this prospectus, and not to rely on any single financial measure to evaluate our business.

        In the following table, we have presented a reconciliation of EBITDA and Adjusted EBITDA to the most comparable U.S. GAAP measure, net income (loss):

 
  Predecessor
  Successor
  Combined
  Successor
 
 
   
   
   
   
   
  Three Months Ended
March 31,

 
 
   
  Three Months
Ended
March 31,
2005

  Nine Months
Ended
December 31,
2005

  Year
Ended
December 31,
2005

   
 
 
  Year Ended
December 31,
2004

  Year Ended
December 31,
2006

 
 
  2006
  2007
 
Net income (loss)   $ 5,300   $ (11,600 ) $ 222,738   $ 211,138   $ 87,385   $ 36,983   $ 34,296  
  Extraordinary items             (265,503 )   (265,503 )   (2,994 )   (2,994 )    
   
 
 
 
 
 
 
 
Income (loss) income before extraordinary items     5,300     (11,600 )   (42,765 )   (54,365 )   84,391     33,989     34,296  
  Interest expense, net             21,224     21,224     40,867     7,936     27,952  
  Income taxes     18,500     5,100     2,251     7,351     2,222     915     2,055  
  Depreciation and amortization     32,700     8,000     1,431     9,431     4,960     751     1,965  
  Equity in earnings of affiliate             (197 )   (197 )   (684 )   (209 )   (171 )
  Loss on extinguishment of debt                     8,924          
  Gain on sale of equipment                             (320 )
   
 
 
 
 
 
 
 
EBITDA     56,500     1,500     (18,056 )   (16,556 )   140,680     43,382     65,777  
  Transition and other non-recurring expense(a)             12,809     12,809     73,203     14,437     2,651  
  Management fees(b)             3,350     3,350     5,645     1,425     1,512  
  Non-cash stock option expense(c)             1,323     1,323     2,244     311     1,558  
  Non-cash restricted stock expense(c)                     435         1,305  
  Non-cash unrestricted stock expense(c)                     3,960          
  SRB expense(d)                     37,891         2,236  
   
 
 
 
 
 
 
 
Adjusted EBITDA   $ 56,500   $ 1,500   $ (574 ) $ 926   $ 264,058   $ 59,555   $ 75,039  
   
 
 
 
 
 
 
 

(a)
Represents the expense associated with the development of our internal capabilities to operate as a standalone company apart from Bayer, consisting primarily of consulting services associated with developing our corporate infrastructure. We believe these costs are non-recurring once the related infrastructure has been established and we have completed our overall transition from Bayer.

(b)
Represents the advisory fees paid to Talecris Holdings, LLC, our sponsor, under the Management Agreement, as amended. This agreement will be terminated in connection with this offering.

(c)
Represents our non-cash equity compensation expense associated with our stock options, restricted stock, and unrestricted stock. The restricted stock we issued was in lieu of a cash bonus to senior management executives and other eligible employees. The unrestricted stock was issued to our Chairman in lieu of a future cash bonus.

(d)
Represents compensation expense associated with special recognition bonus awards granted to our employees and senior executives. These awards were granted to reward past performance and were provided to these individuals in recognition of the extraordinary value realized by us and our stockholders due to the efforts of such individuals since inception of our operating activities on April 1, 2005. We do not anticipate granting similar awards in the future.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. As of March 31, 2007 we had cash and cash equivalents and short-term investments of $27.5 million. A portion of our investments may be subject to interest rate risk and could decline in value if market interest rates increase. However, because our investments are short-term in duration, we believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of our investment portfolio. We actively monitor changes in interest rates.

Interest Rate Risk

        We are exposed to interest rate risk through our floating rate debt instruments. At March 31, 2007, our indebtedness totaled $1,129.8 million, all of which exposed us to floating interest rates. Based upon the average floating rate debt levels outstanding during the first quarter of 2007, which are not covered by our swaps and caps, a 100 basis point increase in interest rates would have impacted our interest expense by approximately $0.7 million.

        We utilize derivative financial instruments as part of our overall financial risk management policy, but do not use derivative financial instruments for speculative or trading purposes. We have partially hedged risks associated with our floating rate debt by entering into various interest rate swap and cap arrangements which are intended to convert variable interest rates to fixed interest rates on a portion of our long-term indebtedness. At March 31, 2007, we had 6 variable-to-fixed rate swaps outstanding in the aggregate notional principal amount of $700.0 million, which mature on various dates through February, 2013. At March 31, 2007, we also had 2 interest rate caps outstanding in the aggregate notional principal amount of $175.0 million which mature on February 14, 2010. We account for our derivative financial instruments as effective cash flow hedges under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended.

Foreign Currency Risk

        For most international operations, local currencies have been determined to be the functional currencies. We translate the financial statements of international subsidiaries to their U.S. dollar equivalents at end-of-period currency exchange rates for assets and liabilities and at average currency exchange rates for revenue and expenses. We record these translation adjustments as a component of other comprehensive income (loss) within stockholders' deficit. We recognize transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency as incurred in our consolidated income statements. We incurred transaction losses of $0.3 million for the first quarter of 2007. Since we operate internationally and approximately 35.3% of our 2007 first quarter net revenue was generated outside of the United States, foreign currency exchange rate fluctuations could significantly impact our financial position, results of operations, cash flows and competitive position. Our net product revenue was positively impacted by $2.7 million, or 0.9%, as a result of favorable foreign currency exchange rate fluctuations in relation to the U.S. dollar during the first quarter of 2007.

Commodity Risk

        Plasma is the key raw material used in the production of our products, which has historically accounted for more than half of our cost of goods sold. We procure source plasma from our own plasma collection centers and from external suppliers, all located within the United States. In periods of rising demand for these materials, we may experience increased costs and/or limited supply. These conditions can

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potentially result in our inability to acquire key production materials on a timely basis, or at all, which could impact our ability to produce products and satisfy incoming sales orders on a timely basis resulting in the breach of distribution contracts, or otherwise harm our business prospects, financial condition, results of operations and cash flows. In addition, increased costs of materials or the inability to source materials could result in higher costs of production resulting in compressed profit margins, loss of customers, a negative effect on our reputation as a reliable supplier of plasma-derived products, or a substantial delay in our production growth plans. We believe that adequate sources of supply are currently available. Where appropriate, we lock into longer-term supply contracts as a basis to guarantee supply reliability. We continue to pursue a strategy of integrating a portion of our source plasma supply chain.

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INDUSTRY

Overview of the Plasma Products Industry

        Market Dynamics.    The human plasma-derived products industry has demonstrated total sales growth at a compound annual rate of approximately 7% globally over the past 15 years with worldwide sales of approximately $7.0 billion in 2005. U.S. sales have grown at a compound annual rate of approximately 9% over the past 16 years with sales of $3.1 billion in 2006. Consistent worldwide growth in demand and favorable supply/demand dynamics have generally provided a basis for price increases over the past three years. The key factors driving demand include population growth, the expansion of labeled indications for existing products, the discovery of new applications for plasma-based products, and the improvement in diagnosis of patients who will benefit from the therapies.

        Significant consolidation over the past five years has reduced the number of major producers of plasma products to five companies, including us. Three companies, including us, currently collectively account for over 82% of U.S. sales. This consolidation accompanied the exit of major non-profits, such as the American Red Cross, from the industry. The exiting non-profits operated under a different business model than commercial fractionators, viewing the plasma business as a way to offset costs of whole blood collection. The resulting industry has fewer participants, which tend to be larger, vertically integrated and more profit driven, with the economics necessary to permit them to invest in the development of new therapies and indications, and new more efficient and compliant facilities to serve the patient community.

        The outlook for the demand of plasma-derived products is positive. Demand for plasma-derived products is expected to grow at a compound annual rate of 6% to 8% for the next five to seven years. From 2005 to 2010 sales are anticipated to grow significantly, driven by the following factors:

    population growth;

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

    growth of diagnosed cases (especially in A1PI and IGIV where the majority of patients are thought to be undiagnosed);

    increased treatment of untreated but diagnosed patients;

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

    geographic market expansion.

        In addition, improved yields and production efficiency are driving margin expansion. We believe that growth in demand will sustain a favorable pricing environment.

        There are significant barriers to entry into the plasma derivatives manufacturing business, including the operationally complex nature of the business, which requires a highly skilled workforce with specialized know-how; significant intellectual property, including trade secrets relating to purification of products and pathogen safety; and the ability to comply with extensive regulation by the FDA and comparable authorities worldwide. Additionally, the construction and maintenance, including regular improvements necessitated by evolving standards of current good manufacturing practices (cGMP), of production facilities requires extensive capital expenditures and may involve long lead times to obtain necessary governmental approval. For example, we have invested over $466 million in our primary manufacturing facility since 1995. In addition, any new competitors in the U.S. would need to secure an adequate supply of U.S. plasma since, as a practical matter, although plasma collected in the U.S. may be certified for use in products sold in Europe, only plasma collected in the U.S. is certified for use in products sold in the U.S. Since there are currently a limited number of independent plasma suppliers, any new competitor would likely have to develop their own U.S. based plasma collection centers and related infrastructure.

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Plasma-Derived Products Market

        The three most important plasma proteins, which together constituted approximately 69% of the world's plasma-derived products in 2005, as measured by sales, and their therapeutic properties are:

    IGIV products, which are antibody-rich plasma therapies that have long been used in the treatment of primary immune deficiencies (to provide antibodies a patient is unable to make) and certain autoimmune disorders (e.g., idiopathic thrombocytopenic purpura or ITP) where IGIV is thought to act as an immune modulator. Physicians frequently prescribe IGIV for a wide variety of diseases even though these uses are not described in the product's labeling and differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. These unapproved, or "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 majority of IGIV volume is used to fill physician prescriptions for indications not approved by the FDA or similar regulatory authorities. Demand for IGIV has increased rapidly in recent years, and it now represents the largest plasma-derived product by value. It is one of the key growth drivers of the sector largely due to the increasing number of medical conditions for which IGIV is used. Global demand is expected to grow between 8% and 10% per annum, by volume, over the next three years with similar or higher expected growth in the U.S. Because IGIV is a complex mixture of antibody molecules, no recombinant (or synthetic) means of production currently exists, and IGIV can only be derived from human plasma. Our largest product, Gamunex Immune Globulin Intravenous (Human), is one of the leading products in the IGIV market with a reputation as a premium product within the intravenous immune globulin, or IGIV, category.

    Factor VIII, which is a blood coagulation factor for the treatment of Hemophilia A. A recombinant substitute has been developed for Factor VIII. Recombinant Factor VIII is currently priced higher than plasma-derived Factor VIII because recombinants have generally been perceived in the market to be safer. Worldwide demand for Factor VIII is expected to increase to approximately 2,376 million international units by 2010. In 2005, worldwide sales of plasma-derived FVIII were $936 million and comprised 13% of the global plasma products. Recombinant FVIII sales in 2005 were $2.5 billion worldwide. Recombinant FVIII dominated in North America in 2005 with 88% of total FVIII sales and 80% of units. In Europe, recombinant FVIII had 71% of sales and 60% of the units. Within the Asia Pacific market, plasma-derived and recombinant FVIII each had about 50% of the market in sales and units. The plasma-derived FVIII market is forecasted to grow 1% per year through 2009, and the recombinant market is expected to grow 6% to 7% per year through 2009. We produce and market plasma-derived Factor VIII under our Koate DVI Antihemophilic Factor (Human) brand.

    Albumin, which is used as an expander of plasma volume after significant blood losses during surgery or trauma, for severe burns or for patients with acute liver or kidney failures. Prices of, and demand for, albumin have stabilized recently as the market has recognized that albumin has therapeutic significance and cannot be substituted simply by synthetic volume expanders. The demand for albumin has increased since 2000 and is projected to grow moderately over the next few years. Prices for albumin have increased significantly since 2005, although they have not reached historical highs, as the average selling price for albumin reached $50.15 in 1998. The average selling price in 2006 was $24.00, which exceeded the average selling price of $15.58 in 2005. We produce and market albumin under a variety of brand names, including our Plasbumin albumin (human) and Plasmanate plasma protein factor (human) brands in the U.S.

        A fourth fraction, A1PI, is financially important to us and is growing in sales. From December 1987 to December 2002 we had the only FDA approved A1PI product, Prolastin A1PI, which had annual sales of $226.0 million in 2006. In December 2003, two competing A1PI products were introduced into the market.

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We expect that increased spending on patient identification and physician education, as well as product introduction in additional countries will increase the demand for A1PI products. Demand globally is expected to grow at 8% over the next three years.

        The following chart presents a breakdown of worldwide sales of plasma derivatives by product category in 2005.

2005 Plasma Derivative Worldwide Sales by Category

GRAPHIC

Plasma-Derived Products Sales by Geographic Region

        Due to the high demand and cost of plasma-based treatments, the majority of plasma sales are derived from the more economically developed regions in the world. Compared to the U.S. and Canada, where the industry is open, though highly regulated, Europe is characterized by local fractionators, considerable government control, and divergent health care systems. Japan is mainly supplied by local producers. The following chart presents a breakdown of the global sales of plasma derivatives by region in terms of sales in 2005.

Estimated 2005 Plasma Derivative Worldwide Sales by Region

         GRAPHIC

Plasma Collection and Testing

        Plasma may be obtained in two different ways. The traditional method is through the separation of plasma from blood obtained from a blood donation. This is referred to as "recovered plasma." This plasma

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is the by-product of donations made at blood banks or transfusion centers because the main objective of these banks and centers is to obtain the blood cells and platelets.

        The second method for obtaining plasma is through a process called "plasmapheresis" whereby plasma is mechanically separated from the cellular elements of blood (such as red and white cells and platelets) through centrifugation or membrane filtration at the time the donation is made. These cellular elements are then returned to the donor as part of the same procedure. Because blood cells are returned, it is possible for individuals to donate plasma more frequently than whole blood. Plasma obtained through plasmapheresis is referred to as "source plasma."

        In order to prevent the deterioration of coagulation factors, plasma is typically frozen as soon as possible after collection. Source plasma is generally frozen within six (6) hours following donation, whereas recovered plasma must first be separated from the blood cells. Freezing must be carried out within 24 to 72 hours if intended for the fractionation and purification of proteins.

        U.S. and European regulatory authorities impose stringent requirements to avoid the transmission of blood borne diseases. Each donation is typically tested for the following infections: Hepatitis A, Hepatitis B, Hepatitis C, Parvo B-19 and HIV. Then it is sent to a fractionator, where it undergoes additional viral marker testing as well as nucleic acid testing in the production environment. Thereafter, it is broken down into its constituent parts, or "fractions." "Bulk" fractions are further refined into final products through various purification processes, formulation and aseptic filling.

        As a practical matter, although plasma collected in the U.S. may be certified for use in products sold in Europe, only plasma collected in the U.S. is certified for use in products sold in the U.S.

Production of Plasma-Derived Products (Fractionation)

        Three principle techniques are used to separate proteins into bulk fractions: the Cohn, Kistler-Nitschmann and Chromatography techniques.

    Cohn.    Cohn, the most widely employed technique and the one we use, subjects plasma to varying conditions of alcohol concentration, pH level and temperature, to separate specific protein fractions from the plasma. The fractions are then collected using centrifugation or filtration. Following fractionation, the protein pastes are purified using steps such as solvent detergent treatment, caprylate incubation, column chromatography, and various methods of filtration. In 2003, we began use of the more advanced chromatography technique for purification of fraction II and III paste to produce our Gamunex IGIV product.

    Kistler-Nitschmann.    Kistler-Nitschmann is derived from the Cohn process and is often used in smaller fractionation facilities. This technique produces a limited product range, consisting of primarily immunoglobulins and albumin.

    Chromatography.    Chromatography separates plasma proteins by specifically targeting the unique characteristics of each protein, which include: molecular size, using gel filtration; charge, using ion exchange chromatography; and known reactions with specific molecules, using affinity chromatography. Chromatography has higher product purity and superior product yields compared to the Cohn technique. However, regulatory hurdles, including the approval process for the procedure and the type of production facility required, has made the cost of switching to chromatography very expensive. As a result, few plasma fractionators have adopted this technique for fractionation, although many use it for purification.

        Once the plasma has been broken down into bulk fractions using one of these separation techniques, each fraction undergoes a series of production steps including purification, filling, freeze-drying (for those products requiring lyophilisation), packaging and distribution. Purification involves the further isolation of

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the fraction, as well as viral removal/inactivation steps, using a variety of technologies. The specific procedures used differentiate the end product and are generally proprietary to each fractionator.

Plasma Supply Consolidation and Rationalization

        Plasma-derived product manufacturers secure human plasma from either external (e.g., a blood bank or external plasma collection center) or internal (e.g., self run plasma collection centers) sources. We obtain about half of our plasma through our own collection centers and our remaining plasma through contracts with various collection centers and other external sources. Historically, there had been an oversupply of plasma in the United States, but recently this trend has reversed. All three major producers are either fully integrated or, like Talecris, have a significant percent of their total plasma collection internalized as a result of vertical integration. The number of U.S. plasma centers declined 35% from 454 in 1996 to 296 in 2004 and then began to increase in 2005 reaching 315 centers at the end of 2006. Estimates predict a total of 340 centers by the end of 2007. There has also been a 7% decrease in the total volume of plasma collected worldwide, from 19.4 million liters of plasma collected in 2000 to 18 million liters collected in 2005. Prices of source plasma have increased over the past decade, driven by increased collection and testing costs, as well as some growth in demand. Volume demand in key products, however, has increased steadily for over 20 years. As a result, prices for key plasma-derived products have generally increased over the past three years.

        In addition to the overall reduction in plasma supply discussed above, this industry consolidation has reduced the number of suppliers. As a result, it is becoming increasingly difficult to resolve any significant disruption in supply of plasma or an increased demand for plasma with plasma from alternative sources.

Fractionation and Purification Capacity Rationalization

        As overall plasma supply was reduced in recent years, industry utilization of facilities and in some cases capacity for fractionation was also reduced. Currently, product production capacity may be limited by fractionation capacity or purification capacity. As plasma supply increases, we expect industry-wide fractionation capacity utilization to increase and reach near maximum by 2012. We believe that some manufacturers are currently constrained by lack of purification capacity, but that over this time period, purification capacity will also be increasing as planned new facilities come on line. We believe that beyond 2012, any significant increases in output will require significant investment in new facilities throughout the industry.

Industry Consolidation

        We believe that, in addition to the capacity reductions described above, the plasma products industry has been transformed in the past decade by an exit of traditional pharmaceutical companies, such as Aventis S.A., Bayer AG and Mitsubishi Pharma Corporation, and of major non-profits, such as the American Red Cross, from the plasma proteins business. Major pharmaceuticals exited for a number of reasons, including the high capital requirements of the plasma business and the desire to increase management focus on the traditional "small molecule" pharmaceutical business. Non-profits operated under a different business model than commercial fractionators, viewing the plasma business as a way to offset costs of whole blood collection. As such, non-profits were more inclined to maintain low finished product prices. Over the same period, the industry had undergone sudden restrictions in product supply, with the imposition of consent decrees resulting from regulatory action by the FDA against certain manufacturers, which limited their ability to release product for sale. These restrictions on product release were lifted in relatively close proximity in 2000 and 2001 resulting in a flood of pent-up inventory on the market, creating an excess supply environment. In response, the remaining producers subsequently rationalized production and plasma collection capacity and began to vertically integrate. The number of major producers of plasma products globally decreased from 13 in 1990 to 8 in 2002 and to 5 in 2005. Three major producers, including us, currently collectively account for over 82% of U.S. sales. The

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resulting industry has fewer participants, that tend to be larger, vertically integrated and more profit driven.

Recombinant Manufacturing

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

        Recombinant products have taken a significant share of Factor VIII sales due to their independence from human plasma. Of the 4.7 billion units of Factor VIII sold in 2004, approximately 53% were recombinant. On a per unit basis, recombinants cost approximately 50% to 60% more than plasma-derived products and have been adopted more rapidly in the U.S. and industrialized nations. The high cost of recombinant products prevents their use in developing markets where plasma derivatives are the standard.

        Although recombinant technology could be used to produce any of the coagulation proteins found in blood, its use is limited to larger, more developed markets, which have the demand to sustain the high cost of development. Most other plasma products, such as IGIV and A1PI, are not currently produced using recombinant technologies for human therapeutic use.

        In the case of IGIV, this is due to its nature as a collection of different types of antibodies, which makes the development of a recombinant version very difficult. In the case of A1PI, we believe that no recombinant competitor has been developed, based on the limited number of currently identified patients.

        We have begun work to develop a recombinant version of Plasmin. We have secured intellectual property rights around this product and hope to eventually commercialize recombinant Plasmin for the treatment of ischemic stroke.

U.S. Plasma Products Distribution

        Historically, manufacturers of plasma-derived products sought to distribute their finished product through the same distribution channels as pharmaceuticals, typically through wholesalers, which purchased products at fixed prices, re-sold them at contract prices and charged the difference to the manufacturer. The plasma therapeutics market, however, has evolved from wholesalers to highly specialized plasma distributors, including:

    "Group Purchasing Organizations," or GPOs, which are umbrella buying groups representing inpatient and outpatient hospitals and non-acute members who benefit through consolidated supply contracts. GPOs do not purchase products directly, rather, they select authorized distributors which purchase inventory and handle all product logistics for their members. GPOs typically carry two or more of each brand of product under multi-year purchase contracts.

    Wholesalers/Distributors either provide product direct to, or enter into distribution agreements with, hospitals, GPOs, and physician offices. The distributor is generally paid service fees for "encumbered" products on a GPO contract, or they purchase "unencumbered" products directly from manufacturers which are not part of a GPO contract and generally sold at a higher price than the GPO contract price. Distributors determine which customers receive this "unencumbered" product.

    Homecare and specialty pharmacy providers are a growing segment which provides patient treatment in the home, either through self-medication or with the assistance of a nurse. Some homecare companies are extensions of hospital outpatient services and have the logistical support of the hospitals. Generally, homecare companies include the cost of other services rendered to patients at home, in addition to pdFVIII, IGIV, A1PI or other drugs, including nursing, physical

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      therapy, and psychological support. These providers either purchase products direct from manufacturers or through GPOs.

    Manufacturing Direct programs distribute products directly to a physician's office or patients.

        The distribution by product line and type may be summarized as follows:

    It is estimated that 70% of the IGIV sold in the U.S. in 2005 was purchased by hospitals through contracts negotiated with GPOs; physician offices represented about 15% of IGIV volume; and homecare companies represented 15% of the IGIV volume.

    Albumin is generally used in surgical and trauma settings and is generally sold to hospital groups along with IGIV.

    Clotting factors, such as Factor VIII, generally are self administered by patients and are mainly channeled from manufacturers to patients through home care companies and similar agencies.

    A1PI is generally administered by a nurse at home or at a hospital infusion suite. In the U.S., Prolastin A1PI is sold directly to patients through our Talecris Direct program and is fulfilled by Centric Health Resources, in which we hold a 33% equity interest. Competing products in the U.S. generally sell to homecare providers.

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BUSINESS

Overview

        We are a biopharmaceutical company that 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 immune deficiency disorders, alpha-1 antitrypsin (AAT) deficiency, infectious diseases, hemophilia and severe burns. In 2006, our internal estimates show that we ranked second in the North American market with a 27% share of combined product sales and contract manufacturing. In 2005, we ranked third in the $7.0 billion global market with a 14% share of product sales.

        We began operations as an independent company on April 1, 2005, upon the completion of our acquisition of substantially all of the assets and specified liabilities of the Bayer Plasma Products Business Group, an operating unit of the Biological Products division of Bayer Healthcare LLC, which is a subsidiary of Bayer AG. During the year ended December 31, 2006, we generated net revenue and net income of $1.1 billion and $87.4 million, respectively, and EBITDA and adjusted EBITDA of $140.7 million and $264.1 million, respectively.

        Our largest product, Gamunex Immune Globulin Intravenous (Human), is one of the leading products in the IGIV market with a reputation as a premium product within the intravenous immune globulin, or IGIV, category. Our second largest product, Prolastin Alpha 1 Proteinase Inhibitor (Human), was granted "orphan drug" status and has the largest share of sales in the United States and European Union and a high degree of brand recognition within the alpha-1 proteinase inhibitor, or A1PI, category, which is one of the fastest growing categories of this industry. Our six key products categories and their indications are given in the table below:


Segment and Talecris Key Products
  Our Indications
  Talecris Share of Sales
  Market Historic Growth Rate GAGR
  Talecris Net Revenue 2006(000's)

IGIV
    
Gamunex IGIV
  U.S. and EU—Primary Immune Deficiency Idiopathic Thrombocytopenic Purpura.
EU only—Guillain Barre Syndrome, Chronic Lymphocytic Leukemia, Post Bone Marrow Transplant
  26%—U.S.(1)


19%—Worldwide(2)
  15%—U.S.(3)


11%—Worldwide(4)
  $460,036—U.S.


$649,903(7)—Worldwide

A1PI
Prolastin A1PI
  AAT Deficiency related emphysema   71%—U.S.(1)
78%—Worldwide(2)
  16%—U.S.(3)
15%—Worldwide(4)
  $157,732—U.S.
$225,986—Worldwide

Albumin
Plasbumin-5 (Human) 5% USP Plasbumin-20 (Human) 25% USP Plasmanate, Plasma Protein Fraction 5% USP
  Plasma expanders, severe burns, acute liver and kidney failures   15%—U.S.(1)


7%—Worldwide(2)
  21%—U.S.(5)


5%—Worldwide(4)
  $33,536—U.S.


$73,768(7)—Worldwide

Factor VIII
Koate DVI
  Hemophilia A   3%—U.S.(1)
3%—Worldwide(2)
  6%—U.S.(6)
0.3%—Worldwide(4)
  $4,536—U.S.
$40,880—Worldwide

Antithrombin III
Thrombate III
antithrombin III
  Anticoagulant   100%—U.S.(1)
7%—Worldwide(2)
  2%—U.S.(8)
-4%—Worldwide(4)
  $12,037—U.S.
$12,037—Worldwide

Hyperimmunes
GamaStan, HyperHepB,
HyperRho,
HyperRab,
HyperTet
  Hepatitis A, Hepatitis B, Rabies, RH Sensitization, Tetanus   17%—U.S.(1)

10%—Worldwide(2)
  3%—U.S.(5)

5%—Worldwide(4)
  $45,578—U.S.

$60,107—Worldwide

(1)
For the 2006 calendar year, according to MRB.

(2)
For the 2005 calendar year, according to MRB.

(3)
Represents the compound annual growth rate from 1996 to 2006, calculated based on data from MRB.

(4)
Represents the compound annual growth rate from 1994 to 2005, calculated based on data from MRB.

(5)
Represents the compound annual growth rate from 2003 to 2006, calculated based on data from MRB.

(6)
Represents the compound annual growth rate from 1986 to 2006, calculated based on data from MRB.

(7)
Includes tolling revenues from Canadian blood system.

(8)
Represents the compound annual growth rate from 2000 to 2006, calculated based on data from MRB.

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        We established our leading market positions through a history of innovation including developing the first ready-to-use 10% liquid IGIV product in North America and the first A1PI product globally. We continue to develop products to address unmet medical needs and employ over 220 scientists and support staff to develop new products, expand the uses of our existing products, and enhance our process technologies. 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 discovery of new products. Our research and development expenditures amounted to $66.8 million for the year ended December 31, 2006.

        Our business is supported by a fully integrated infrastructure including 46 plasma collection centers, two owned and operated manufacturing facilities, a differentiated distribution network and sales and marketing organizations in the U.S., Canada and Germany. Our heritage of patient care innovations in therapeutic proteins dates back to Cutter Laboratories, which began to produce plasma-derived products in the early 1940s, and its successor companies, including Miles Inc., Bayer Corporation and Bayer Healthcare LLC. Our long experience as a producer and marketer of plasma-derived protein therapies has enabled us to forge strong ties with members of the medical community, patient advocacy groups and our distributors.

Competitive Strengths

        We believe that the following strengths position us to compete effectively in the plasma products industry:

    Premium Global Liquid 10% IGIV product.    Our brand, Gamunex IGIV, launched in North America in 2003 as a premium ready-to-use liquid IGIV product, is one of the leading products in the IGIV market. We believe Gamunex IGIV is considered to be the industry benchmark due to a comprehensive set of differentiated product characteristics that have positioned it as the premium product in its category since its launch. Gamunex IGIV is a ready-to-use 10% liquid product with no sugar, which makes it a product of choice for many at risk patients. We are the preferred liquid IGIV of allergists/immunologists in the United States (source: Harris Interactive Report January 2007). As a measure of our focus on continued enhancement of product safety, we are the only IGIV therapy labeled with respect to prion removal. We also use a patented caprylate process that preserves more of the fragile IgG proteins compared to prior generation IGIV products made with a harsher solvent detergent purification process. As a result of its differentiated characteristics, Gamunex IGIV achieves a price premium compared to most other IGIV products. We focus on enhancing this position in this attractive product class through continued innovation. We are currently pursuing an indication for Gamunex IGIV in CIDP (chronic inflammatory demyelinating polyneurophathy) and have been granted fast track review and orphan drug designation by the FDA. In addition, we are also developing various subcutaneous administration concentrations of Gamunex IGIV.

    Leading Producer of A1PI with Strong Brand Recognition.    We are the world's largest producer of A1PI, which is used for the treatment of AAT deficiency-related emphysema. Prolastin A1PI has the leading share of sales in the United States, and is the only A1PI product licensed in Canada, Germany, Italy and Austria. While other manufacturers began selling A1PI products in the United States and Spain beginning in 2003, we continue to benefit from having been the first provider in this product class and from our strong relationships with the primary patient advocacy groups. Our Talecris Direct direct-to-patient delivery system with a sophisticated disease state management program provides us a competitive advantage through increased patient loyalty, a high degree of channel integrity, proprietary customer and sales data, and a predictable revenue stream with better economics than indirect channels. We remain committed to expanding our A1PI presence globally. In 2006 we became the first producer of an A1PI therapy to complete a Mutual Recognition Procedure giving us the regulatory approval necessary to sell Prolastin A1PI in ten additional European countries where, based upon our internal estimates, we believe approximately 30% of the global patient population may reside and where there is no other licensed A1PI product. We are

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      currently in reimbursement negotiations in these countries. In addition, we are developing additional product enhancements, including Alpha-1 MP A1PI, providing for increased yield and purity, and an inhaled version of our A1PI product.

    Leader and Innovator in the Global Plasma Products Industry with a Well-Established, Integrated Platform.    We are one of the largest producers and marketers of plasma-derived protein therapies in the world. We have a successful history of product innovation and commercialization, and we possess specific expertise and core competencies in the development, purification, large-scale manufacture and sale of protein therapeutics. Our longstanding infrastructure, processes and expertise have enabled us to develop a stable of growing marketed products and create a robust pipeline of potential new products.

    Process Innovation: We are the developer of the first ready-to-use 10% liquid IGIV product in North America and the first A1PI product. We have applied new developments in protein purification, including caprylate and chromatography technologies, to develop the next generation of industry leading products, and are now selling a third generation IGIV product while many of our competitors have only begun to produce their first generation liquid.

    R&D Pipeline: Our current research and development consists of a range of programs that aim to obtain new therapeutic indications for existing products, enhance product delivery, improve purity and safety, and increase product yields. In addition, our Phase I/II candidate, Plasmin, represents an opportunity to expand into a new market addressing the dissolution of blood clots including acute peripheral arterial occlusion (aPAO) and ischemic stroke.

    Enhancing future growth through recombinant protein technologies: Our protein products expertise is also applicable beyond plasma-derived products, as shown by the patents we received regarding our recombinant version of Plasmin. We are currently developing a commercial process to produce recombinant Plasmin and plan to pursue the development of recombinant Plasmin to treat ischemic stroke.

    Established Infrastructure Supported by Proven Operating Expertise.    Fractionating and purifying therapeutic proteins from human plasma is a complex and difficult process due to the fragility of the proteins and the potential for contamination. Our many years of reliably producing and supplying quality plasma therapeutics demonstrate our expertise in this field. There has never been a documented or confirmed transmission of disease through our IGIV or A1PI products. Our facilities at Clayton, North Carolina have benefited from approximately $466 million in capital investment since 1995, including compliance enhancements, general site infrastructure upgrades, capacity expansions, and new facilities, such as our chromatographic purification facility and our high-capacity sterile filling facility. Our Clayton site is one of the world's largest integrated protein manufacturing sites, including fractionation, purification and aseptic filling and finishing of plasma-derived proteins. Together with our facility in Melville, New York, we have a combined fractionation capacity of 4.2 million liters of plasma per year.

    Favorable Distribution Arrangements.    We enjoy favorable distribution arrangements, particularly in North America for our IGIV products.

    Our size, history and reputation in the industry have enabled our sales force to establish direct and indirect channels for the distribution of our products, and have provided us with experience in appropriately addressing our key regulators, doctors, patient advocacy groups and plasma protein policy makers.

    Since the late 1980s, we have been the "supplier of record" for the Canadian blood system. We have contracts with the two national Canadian blood system operators, Canadian Blood Services and Hema Quebec, to provide plasma-derived products. Under these contracts, we process plasma and supply a majority of the Canadian requirements for IGIV. These three to five year contracts are currently the largest government contracts for IGIV units globally, some of which are toll manufactured from plasma collected in Canada.

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      Since 2005, we have rationalized our distribution network and simultaneously entered into long-term distribution agreements with major hospital group purchasing organizations, or GPOs, home care and specialty pharmacy providers and distributors which we believe grant us favorable volume, pricing, and payment terms, including financial penalties if they fail to purchase the agreed volume of products. We have made appropriate commitments to the Public Health Service and Federal Supply Schedule programs as part of our distribution system.

    Project Management Expertise and Execution.    We have consistently demonstrated a core competence in managing complex projects. For example, we successfully planned and executed the complex carve-out of the acquired assets from Bayer and the establishment of a stand-alone corporate entity while simultaneously rationalizing our distribution channels and implementing a number of production efficiency initiatives. Key functional areas that we developed include executive leadership, human resources, information technology, finance and accounting, treasury, tax, risk management, contract management and government price reporting, customer service, sales and operational planning, and global drug safety. In parallel with these activities, we successfully launched our Canadian and German entities and transitioned the distribution from Bayer. By utilizing best project management practices, we were able to effectively create a standalone corporate entity with the business processes and controls necessary to drive profitable growth.

    Plasma Collection Center Process.    In support of our vertical integration efforts, we are relying on our proven project management skills and demonstrated ability to manage complex activities. We are focused on the development of a plasma collection center platform consisting of human resources, training, information technology, accounting, regulatory and compliance, as well as quality control and assurance. This new platform has supported the successful integration of the plasma collection centers acquired from IBR, the opening of new centers, and increased efficiencies and capacities at existing centers. We have developed a formalized multistage process for opening and achieving licensure for new collection centers. We have created a new functional group dedicated exclusively to the efforts of locating, sizing, staffing, marketing, opening, operating and licensing plasma centers. To date, we have opened ten new plasma centers and received licenses for four centers. We believe this process will assist us in efficiently scaling-up our plasma collection center expansion.

    Experienced, Proven Management Team.    Our business is led by an experienced management team, with our executive officers having an average of nearly 8 years of experience in the plasma/protein therapeutics business and an average of over 16 years of experience in healthcare-related businesses, as well as a broad spectrum of general business experience. Our management team has been effective and successful in transitioning our business from a division of Bayer to a stand-alone company, a process that required sophisticated planning and the development of extensive infrastructure. We have both the complex technical knowledge required in the protein therapeutic products industry and proven competency in commercializing protein therapeutic products. As a partially vertically integrated company we have the technical knowledge and competence required in the plasma-derived products industry, from plasma collection through product development, manufacturing and commercialization of therapeutic protein products.

Business Strategy

        Our goal is to be the recognized global leader in developing and delivering premium protein therapies to extend and enhance the lives of individuals suffering from chronic, acute and life-threatening conditions. The key elements of our strategy for achieving this goal are as follows:

    Capitalize on favorable industry dynamics.    The plasma-derived protein therapeutics industry is enjoying favorable conditions. As a result of the long-term increase in demand for our plasma-derived products and limits in production and collection capacity, pricing has increased steadily for

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      our key plasma-derived products since 2004. We intend to serve the overall market growth with incremental increases in production capacity and expect to implement measured price increases for most of our products in 2007 and 2008. Price increases may be influenced by a number of considerations, including increases in costs, the need to maintain patient access to products, the rate of inflation and the need for capital and other investments.

    Realize operating leverage.    We seek to improve our profitability by capitalizing on the operating leverage in our business model. During 2005, we formalized a five-year operations improvement program which currently encompasses over 70 active projects focused on enhancing efficiency, increasing yield, reducing product rejects, lowering cycle times, and improving utilization of plasma and other raw materials. As a result, in part, of these efforts, our gross profit margin has increased from 22.4% in the quarter ended September 30, 2005 to 39.9% in the quarter ended March 31, 2007. A significant portion of our cost structure, other than raw materials, is relatively fixed and therefore incremental volume contributes significant additional profit. As we expand our supply of plasma, we intend to increase production and leverage our existing operations, intellectual property, expertise, distribution channels and infrastructure. Over the longer term, we plan to leverage available capacity in Gamunex IGIV purification even if we do not produce added quantities of other therapies. If successful, this plan could result in lower gross profit margin, but greater profit and cash flow. Maintaining our profitability will assist us in meeting the need for additional research and development, increasing raw material costs, and the significant investments necessary to maintain and expand production to preserve access to the therapies.

    Expand plasma collection platform to support growth.    In order to enhance the predictability, sustainability and profitability of our plasma supply, we plan to grow and integrate our raw material supply chain through the expansion of our plasma collection platform. As a result of our aquisition of plasma collection centers from IBR and our multistage program to open new centers, we currently operate 26 licensed plasma collection centers and 20 centers that are open but have not yet been licensed. We are also developing additional centers, both through properties we acquired from IBR and our internal program. As we may not use plasma from a collection center until it is licensed (a process that can take many months to complete), we are working with the FDA to expeditiously license all of our centers. We have also entered into agreements with third parties to develop and operate plasma centers dedicated to supplying plasma to us, which we will have the option to purchase. We expect to collect approximately half of our plasma supply from our own centers in 2007 and as much as 80% by 2009.

    Manage product life cycles to maximize profitability.    We manage the life cycles of our products by allocating research, development and marketing resources to extend the commercial life of our products and brands. We continually evaluate new therapeutic indications, new methods of administration, and new formulations to maintain or increase our products' sales potential. For example, we successfully developed and introduced Gamunex IGIV as a higher-yield, well tolerated successor version of our Gamimune IGIV product. In addition, we have under development Alpha-1 MP IV, an A1PI product derived from a process designed to achieve higher yield as well as higher purity than Prolastin A1PI; an aerosolized A1PI product; a subcutaneously administered formulation of Gamunex IGIV; and a new indication for Thrombate III antithrombin III. Through these methods, we believe we can leverage our brand equity, market position, know-how and production assets to continue our growth in the near- and mid-term.

    Optimize geographic presence.    We intend to maintain a leading share of sales for Prolastin A1PI and Gamunex IGIV in North America and Germany while selectively expanding sales into other countries. We completed Mutual Recognition Procedures for both Prolastin A1PI and Gamunex IGIV in 2006 with ten European Union member states, allowing us access to sell Prolastin A1PI and Gamunex IGIV in those countries. We are negotiating reimbursement rates for these countries before beginning sales. We also make opportunistic sales to other countries, usually through government bidding processes, where we can achieve favorable pricing. We have established new entities in both Canada and Germany to directly manage all commercial activities in the key

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      markets. We have also established distribution networks in the rest of Europe and other key international markets. This new international business structure provides us an essential platform for optimizing our international revenue and profitability as additional product becomes available.

    Invest in the development of Plasmin and Recombinant Plasmin.    Plasmin represents a significant longer-term opportunity to expand into a new market. We are developing Plasmin as a therapeutic for restoring blood flow through arteries and veins that have become obstructed by blood clots. Pre-clinical and Phase I clinical studies indicate that Plasmin may result in a safer, faster, and more effective treatment than current therapies. We are also developing a recombinant version of Plasmin as a potential treatment for ischemic stroke. We believe that the potential of Plasmin as a thrombolytic agent offers us an opportunity to provide a therapy from a previously unutilized fraction of plasma, as well as a significant new recombinant product.

Our Products

        We have a strong product portfolio with over ten licensed products focused on what we believe to be the fastest growing and most attractive areas of the plasma-derived products industry. Our sales are driven primarily by IGIV and A1PI products, which collectively accounted for approximately 74.8% and 75.8% of our total net revenue for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively. The following is a discussion of our key products or product classes:

IGIV—Gamunex

        IGIV products are antibody-rich plasma therapies that have long been used in the treatment of primary immune deficiencies and certain autoimmune disorders (e.g., idiopathic thrombocytopenic purpura (ITP)). 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 IGIV market 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 that we are well positioned to benefit from any upside IGIV demand particularly as we have completed a placebo controlled phase III study for treatment of chronic inflammatory demyelinating polyneuropathy (CIDP) and plan to file for the first IGIV neurological indication in CIDP in 2007. We have been granted orphan drug and fast track designation for this indication by the FDA. We believe demand for IGIV products will generally increase as a result of new European Agency for the Evaluation of Medicinal Products (EMEA) 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 compliance program is focused on having the systems in place to respond appropriately to regulatory restrictions on off-label promotion.

        In 2003, we became the first producer to commercialize a high concentration 10% chromatographically purified liquid version of IGIV. The majority of competing IGIV products are either lyophilized powders that require time consuming reconstitution or lower concentrated liquids, most of which contain high levels of sugars and salt that pose increased risk of adverse events particularly in patients with cardiovascular risk factors and/or renal insufficiency. Gamunex IGIV provides a combination of characteristics that are important to physicians, nurses and patients. It is a ready-to-use 10% liquid, which simplifies infusions by eliminating the need for time consuming reconstitution processes necessary with lyophilized (freeze dried) products. Gamunex IGIV has been shown to be effective and well tolerated in the treatment of PID (immune deficiency) and ITP (autoimmune disorder) in the largest clinical trials ever conducted with an IGIV product for these indications. Gamunex IGIV has a sugar-free formulation, which makes it the product of choice for many at-risk patients. We use a patented caprylate purification process in the production of Gamunex IGIV, which results in higher yields of the fragile IgG proteins, compared to harsher purification processes. The caprylate process maintains the integrity of the IgG protein by allowing it to remain in solution during processing, maximizing biologic integrity and purity. Our high yield allows us to produce more IGIV doses per liter of plasma, improving our gross margin. We believe it is this comprehensive set of features, together with our history as the first producer of a

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ready-to-use liquid IGIV product in North America and our reputation for quality and innovation, that has resulted in a high level of brand recognition among prescribing physicians and the patient community and has contributed to our holding a leading position in sales of IGIV since the mid-1990s, currently with Gamunex IGIV and previously with its predecessor, Gamimune IGIV.

        The approved indications for Gamunex IGIV in the U.S. are Primary Immunodeficiency and Idiopathic Thromobocytopenia Purpura. Gamunex IGIV is also approved in the European Union for Guillain Barre Syndrome, Chronic Lymphocytic Leukemia and post bone morrow transplant.

        In 2005, our liquid Gamunex IGIV was the worldwide market leader with 19% share and reported sales totaling $488.4 million. In 2006, we had a 26% share of the U.S. market in sales and 24% share in unit volume. Since 2005, we have not been able to produce enough IGIV to fill all of our orders for the product to meet global demand, due to limitations on our plasma supply. From 1994 to 2005, global IGIV unit volume grew at a compound annual rate of 9% while U.S. IGIV unit volume grew at a compound annual rate of 17% from 1986 to 2006. Over the next five to seven years, we expect global unit demand for IGIV to grow at a compound annual rate of approximately 6% to 8%.

        For the year ended December 31, 2006 and the three months ended March 31, 2007, Gamunex IGIV net revenue was $592.6 million and $162.6 million, respectively.

A1PI—Prolastin

        A1PI is a naturally occurring, self-defensive protein produced in the liver. A1PI is used to treat congenital AAT deficiency-related emphysema. This deficiency may predispose an individual to several illnesses but most commonly appears as emphysema in adults. Sales of A1PI are one of the fastest growing of any plasma product, with an expected compound annual growth rate in sales of 10% to 13% worldwide per year over the next five years. U.S. sales of A1PI have experienced a compound annual growth rate of 16% since 1996 and totaled $226.0 million in 2006. Average A1PI pricing in the United States has increased 5.4% from $286.1 per gram in 2005 to $290.0 per gram in 2006. Our Prolastin A1PI product represented 78% of worldwide A1PI sales in 2005 and 71% of U.S. A1PI sales in 2006.

        Prolastin A1PI has the leading market share in the U.S., and is the only A1PI product licensed in Canada, Germany, Italy and Austria. From 1987 when our A1PI product, Prolastin A1PI, was granted orphan drug status, until December 2002, our product was the only A1PI therapy licensed for sale in the U.S. As a result, sales growth in the U.S. was constrained by our ability to supply Prolastin A1PI. Since 2003, two competitors have obtained approval for sale of their A1PI products in the U.S. As a result of our first-mover advantage, pricing, brand strength and direct-to-patient distribution model, we lost very few of our patients to competitors, which rely on identification of new patients to establish their market share. Globally, we continue to focus on access to new markets and patient identification efforts, including developing diagnostic kits, as a way to increase sales of A1PI.

        The number of U.S. patients undergoing A1PI treatment has increased from 2,080 in 2002 to approximately 3,571 in 2006. There are an estimated 200,000 individuals with AAT in North America and Europe, but only approximately 27% have symptomatic lung disease. Many individuals with symptoms are misdiagnosed before receiving a diagnosis of AAT deficiency-related emphysema. Based on patient registries in twelve European countries, we believe that severe AAT 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 as only approximately ten percent 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 A1P1 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 A1P1. In 2006, we became the first producer of A1PI therapy to receive approval under a Mutual Recognition Procedure to sell product in ten additional European countries. We are in reimbursement

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discussions in these countries and expect expanded international sales to be a near- and mid-term driver of our growth.

        Our distribution approach for Prolastin A1PI leverages on our brand recognition, customer loyalty and our relationship with AlphaNet, a patient advocacy group. Unlike our competitors, our Prolastin A1PI product is shipped directly to the patient through Centric Health Resources, a prescription fulfillment provider. We own 33% of Centric's common stock. This approach is designed to enhance user convenience and ensure the patient of an uninterrupted supply of Prolastin A1PI. In addition, every patient on Prolastin A1PI receives disease management support through the Talecris Direct program that has proven to significantly reduce respiratory exacerbations and improve patient care.

        We believe we are well suited to maintain a leading position in, and further penetrate the market for, A1PI due to a number of factors, including the following:

    We have a well-established and respected brand—Prolastin A1PI—supported by direct to patient service systems in the U.S. and Germany.

    In 2006, we completed a Mutual Recognition Procedure to sell product in ten additional European countries with significant identified patient populations. We are in reimbursement discussions in these countries and expect expanded international sales to be a near- and mid-term driver of our growth. Competitors are currently only licensed in the U.S. or Spain.

    We have strong physician and patient community relationships developed over 20 years.

    We continue to devote resources to increase disease awareness and support diagnostic testing to increase the identified patient population.

        For the year ended December 31, 2006 and for the three months ended March 31, 2007, Prolastin A1PI net revenue was $226.0 million and $66.6 million, respectively.

    Hyperimmunes

        Hyperimmunes are antibody rich preparations, the majority of which are used to provide antibodies to counter specific antigens. Traditional "gamma globulin," which one might receive prior to foreign travel, is one example. 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, rabies, tetanus and treatment of Rh negative women pregnant with Rh positive children.

        In 2005, sales of hyperimmunes worldwide were $586 million and comprised 8.4% of global plasma products. Worldwide hyperimmune sales are forecasted to grow 5% to 6% a year through 2009. In the U.S., hyperimmunes sales totaled $273.1 million in 2006. Our hyperimmune net revenue was $60.1 million in 2006 and $15.4 million for the three months ended March 31, 2007. We had a 17% share of U.S. sales in 2006.

    Albumin

        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. Recent studies have indicated the therapeutic benefit of albumin in some surgical settings compared to alternatives such as starch solutions, which has helped increase demand for albumin recently after a period of declining demand and depressed prices.

        Since 2005, pricing for albumin has strengthened considerably, although it still remains below historical peaks. In 2005, sales of albumin were $898 million worldwide. Sales in the U.S. were $221.2 in 2006, with a 61.4% annual increase in average price per unit and a 7.7% decrease in volume in the U.S. We had 15% of U.S. sales in 2006.

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        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 renewed commercial efforts for low aluminum albumin in 2005. Low aluminum albumin is needed for patients who may be at high risk for aluminum toxicity from parenteral treatments. These individuals include newborns and premature infants, the elderly, patients with impaired renal function, patients receiving total parenteral nutrition, and burn patients. This improvement allows us to offer health care professionals one albumin product for all of their patients. Currently, approximately 12% of our global sales of albumin is low aluminum.

        We are licensed to produce and market albumin under a variety of brand names, including our Plasbumin albumin (human) and Plasmanate plasma protein factor (human) brands in the U.S. We believe that the advent of substitute products has acted to commoditize prices in sales of albumin.

        We had $62.7 million and $18.8 million in net revenue from the sale of albumin products for the year ended December 31, 2006 and for the three months ended March 31, 2007, respectively.

Plasma-Derived Hemostasis Products

        Plasma-derived hemostasis 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, or pdFVIII. Factor VIII is the primary treatment for Hemophilia A, a congenital bleeding disorder caused by a deficiency of coagulation agents in the blood. We had $40.9 million in pdFVIII net revenue for the year ended December 31, 2006 and $8.1 million in net revenue for the three months ended March 31, 2007, under our Koate DVI Antihemophilic Factor (Human) brand. Sales of plasma-derived hemostasis products in 2006 were $353.8 million in the U.S. In 2005 sales were $1.5 billion worldwide (includes plasma-derived FVIII, FIX, ATIII, and vwD&FVII). Plasma-derived Factor VIII faces significant competition from higher priced recombinant products that are not derived from plasma. PDFactor VIII has lost market share to recombinant products, which have generally been perceived to have lower risk of disease transmission than our non-recombinant Factor VIII product. These recombinant products, however, currently lack proteins essential for the treatment of certain conditions.

    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, pregnancy or childbirth. Our ATIII product, Thrombate III antithrombin III (human) is the only product licensed in the U.S. to treat patients suffering from ATIII deficiency. For the year ended December 31, 2006, we had $12.0 million in ATIII net revenue under the Thrombate III ATIII brand and we had $3.5 million in net revenue for the three months ended March 31, 2007. Our ATIII product is currently produced for us by Bayer pursuant to a manufacturing agreement. We anticipate shifting production of ATIII to our facilities in 2011, which we expect will allow for further volume increases.

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PPF-powder

        We provide PPF-powder used by Bayer for the fermentation of Kogenate, Bayer's recombinant Factor VIII product that Bayer retained at the time of our formation transaction. Recombinant Factor VIII, or rFVIII, is a factor VIII product produced by fermentation of cells transfected with human genes. We will continue to provide PPF-powder to the Bayer Kogenate business through 2008 pursuant to a supply agreement with potential extensions to 2012. We had $40.6 million in PPF-powder net revenue for the year ended December 31, 2006 and net revenue of $9.9 million for the three months ended March 31, 2007.

Research and Development

        We have a strong commitment to science and technology with a track record of accomplishments and pipeline opportunities. Our research and development expenditures amounted to $66.8 million for the year ended December 31, 2006 and $13.9 million for the three months ended March 31, 2007. We have approximately 220 scientists and support staff involved in various research and development projects and support for technical operations.

        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 discovery 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.

        The following information presents the clinical development stage of various product candidates currently in our development pipeline. The content of our development portfolio will change over time as new plasma products progress from pre-clinical proof of principle 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 but including later stage candidates as well, to be terminated or delayed as they progress through development.

        We cannot assure you that any of the products listed below will eventually be approved and marketed. The fact that a product candidate is at a late stage of development does not necessarily mean that clinical testing will ultimately succeed or the product will eventually pass that phase and be approved for

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marketing. We may at any time discontinue the development of any of these products due to the occurrence of an unexpected side effect or for any other reason.

Product

  Therapeutic area
  Product type
  Use
  Development phase
Gamunex IGIV (TAL-05-0004)   Immunology and Neurology   intravenous   neurology/CIDP   phase III

Gamunex IGIV—10% (TAL-05-0002)

 

Immunology and Neurology

 

subcutaneous

 

primary immune deficiency

 

open IND

Gamunex IGIV—concentrated (TAL-05-0002)

 

Immunology and Neurology

 

subcutaneous

 

primary immune deficiency

 

preclinical

Plasmin (TAL-05-00013)

 

Thrombolytic

 

plasma-derived Plasmin

 

peripheral arterial occlusion

 

phase I

recPlasmin

 

Thrombolytic

 

recombinant Plasmin

 

vascular occlusions

 

preclinical

Prolastin Alpha-1 MP A1PI

 

Respiratory

 

modified process

 

AAT deficiency

 

phase III

Prolastin A1PI Aerosol (Alpha-1 Aerosol) (TAL-6005)

 

Respiratory

 

aerosol delivery

 

AAT deficiency

 

preclinical

Thrombate III Antithrombin III

 

Hemostasis

 

intravenous

 

delayed graft function

 

preclinical

Gamunex IGIV (TAL-05-0004)

        We are investigating an indication for Gamunex IGIV for CIDP (chronic inflammatory demyelinating polyneuropathy). This neurological disorder is characterized by progressive weakness and impaired sensory function in the legs and arms. If successful, this would be the first neurological indication for an IGIV product. We completed a clinical trial in 2006 to evaluate the effectiveness of Gamunex IGIV in treating CIDP and expect to submit amendments to our marketing authorizations to include this indication. We are also developing subcutaneous administration 10% and 17% (TAL-06-0002) concentrations of Gamunex IGIV to meet a growing market demand for subcutaneous self-administration of immunoglobulin for PID (Primary Immune Deficiency) patients. We are developing this administration for Gamunex 10% concurrent with the development of a high concentration product.

Plasmin (TAL-05-00013)

        Plasmin, a 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 of such attempts required potentially toxic additives. We have avoided these difficulties by converting plasminogen to Plasmin, the active form of the enzyme, and placing it in a patent protected reversibly inactivated acidified solution that allows us to administer it directly into patients at high doses and low toxicity to dissolve blood clots. Plasmin is being produced for clinical trials at our R&D clinical manufacturing facilities in Clayton, North Carolina.

        Plasmin has several features which differentiate it from thrombolytics currently marketed or in development. 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's activity

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is focused on fibrin, which is the major component of clots, by means of fibrin binding sites present on the surface of the Plasmin molecule. Plasmin bound to fibrin is partially protected from inhibition by molecules found in the blood and once bound to fibrin, is free to degrade the clot. Once the fibrin clot is dissolved, free Plasmin is rapidly inactivated by its natural, fast-acting inhibitor a2-antiplasmin, thereby preventing active Plasmin from circulating and causing bleeding at distal sites within the body. The balance between fibrin binding and systemic inhibition provides the basis for differentiation of our 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. Studies have found that current treatment of clotting involving intravenous injection of tissue plasminogen activator, or tPA, has a 1% to 2% chance of causing a stroke. Plasminogen activators continue to carry significant risk of bleeding complication even when delivered through intravascular catheters. Based on our pre-clinical in vivo studies, our local delivery concept for Plasmin may result in a safer, faster, and more effective therapy.

        Potential applications of catheter delivered thrombolytics include aPAO (acute peripheral arterial occlusion), 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. Current indications being pursued are for the treatment of tractional maculopathy and diabetic retinopathy. We are also evaluating the use of Plasmin for the treatment of clotting for stroke, post-surgical adhesions and wound healing.

        We filed an IND with the FDA in early 2003 and conducted a phase 1 safety trial in hemodialysis patients who have clogged synthetic arterial-venous shunts. This study started in September 2003 and were completed in 2005. Plasmin was safe and well-tolerated 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 filed an IND to evaluate Plasmin in the treatment of peripheral arterial occlusion (PAO). We are now proceeding with a clinical trial for PAO, or clots in leg arteries. The phase I/II clinical trial commenced in the fourth quarter of 2006.

        In patients with acute PAO, arterial blood flow to extremities, usually the legs, becomes blocked by a blood 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 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.

        Deep vein thrombosis, also known at "DVT," happens when a blood clot develops in the large veins of the legs. Some DVT's may cause no pain, whereas others can be quite painful. With prompt diagnosis and treatment, the majority of DVT's are not life threatening. A blood clot that forms in the "deep veins," however, can be an immediate threat to one's life. A clot that forms in the large, deep veins is more likely to break free and travel through the vein. It is then called an embolus. When an embolus travels from the legs and lodges in a lung artery, the condition is known as a "pulmonary embolism," or PE, a potentially fatal condition if not immediately diagnosed and treated.

        Approximately 2 million Americans each year will experience DVT. It is seen most often in adults over the age of 40, and more frequently in elderly patients. Women in the later stages of pregnancy or around

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the time of delivery are at increased risk. We have an open IND for Plasmin in DVT and are planning to conduct studies in this disease.

        It is estimated that 1 million to 1.5 million patients suffering from ischemic stroke are admitted into hospitals in the U.S. and Europe each year. Activase (tPA) is currently approved for use in the treatment of ischemic stroke and systemic thrombolysis is the standard of care. Although tPA has shown positive efficacy benefits in this indication, there are two weaknesses of this product which reduce the populations of stroke patients eligible for treatment. First, tPA is indicated for use only within 3 hours of onset of stroke and hemorrhagic stroke must be excluded prior to therapy. Second, treatment with tPA is associated with symptomatic intracranial hemorrhage, which can be fatal and whose management, at best, is problematic. Half of these intracranial hemorrhages are fatal and one-quarter cause permanent disability. As a result of these limitations, less than 10% of stroke patients are eligible for treatment with current thrombolytic therapy and less than 5% actually receive it. There is an urgent, unmet medical need for safe thrombolytic therapy for patients with acute stroke; the vast majority of stroke victims are essentially untreated. Occlusions in the middle cerebral artery are the primary cause of clinical stroke and will be the target for Plasmin therapy.

        Recombinant or recPlasmin represents our expansion into the development and manufacture of recombinant therapies. In cooperation with Bausch & Lomb, we have entered into a Co-Development Agreement to develop recPlasmin and have granted an exclusive worldwide license to Bausch & Lomb for the recPlasmin technology for use in ophthalmology. We expect to pursue development of the technology in non-ocular application, specifically for treatment of thrombolytic indications. We are sharing all development costs up to production of bulk product with Bausch & Lomb, and we have contracted with Diosynth Biotechnology for process development and production of clinical trial material.

Alpha-1 MP A1PI

        We are currently developing Alpha-1 MP A1PI, a key product life cycle enhancement to Prolastin A1PI. Like Prolastin A1PI, Alpha-1 MP A1PI will be indicated for AAT deficiency, an inherited disorder that causes a significant reduction in the naturally occurring protein AAT. This modified production process will allow for increased yield and purity, over our current Prolastin A1PI product. We have completed pivotal clinical studies and regulatory submissions are being prepared. We expect to receive approval for Alpha-1 MP A1PI as a license modification to our existing Prolastin A1PI product. Alpha-1 MP A1PI is currently in phase 3 development.

A1PI Aerosol (Alpha-1 Aerosol) (TAL-6005)

        Alpha-1 Aerosol is an inhaled version of our A1PI product, which, if successful, is expected to provide an important advancement in the convenience and speed of delivery of therapy to AAT-deficient patients, as well as a potential platform for other respiratory indications. An inhaled version may also allow for effective treatment of dosages lower than those for current treatment and facilitate administration to a larger patient population. Progress includes the development of a commercial scale manufacturing process, an exclusive partnership for a highly efficient nebulizing device, and the initiation of toxicology studies. High levels of enzymes known as neutrophil elastase are present in the respiratory secretion of patients suffering from AAT deficiency. These enzymes can lead to degradation of the lung tissue. Future clinical studies will assess the ability of aerosolized A1PI to suppress airway neutrophil inflammation as well as accelerate bacterial clearance from the lung. Progress includes the development of a commercial scale manufacturing process, an exclusive partnership for a highly efficient nebulizing device, and the initiation of toxicology studies.

Thrombate III | Antithrombin III

        We are exploring the possibility that Thrombate III | Antithrombin III provides clinical benefit to patients undergoing kidney transplant procedures by reducing the rate of delayed graft function. Delayed graft function (DGF) is a term used to describe the lack of acceptable autonomous function in a kidney

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which, after transplantation, requires intervention in the form of dialysis. DGF is correlated with adverse outcomes including graft survival and patient survival. A clinical program is under evaluation that would be designed to ascertain the benefit of Thrombate III | Antithrombin III in the treatment of kidney transplant patients who are at higher risk for DGF. The scope of the program includes a pilot study to evaluate therapeutic dose range and a follow up Phase III program to obtain an indication for reducing the rate of DGF.

Technical Support of Manufacturing Operations

        As part of the R&D function, staff members are allocated to support production of commercial products currently on the market. This support includes, but is not limited to, the following:

    troubleshooting production issues, especially relating to plasma pooling and fractionation, downstream protein purification processes, and filling and freeze drying operations;

    providing technical expertise for evaluation and implementation of improvements to existing licensed processes, including driving process changes for improved quality and throughput, and leading process evaluations to mitigate potential failure modes;

    tracking and trending of production operational parameters to identify opportunities that can improve gross margins;

    supporting transfer of production processes into the manufacturing setting, evaluating commercial opportunities for existing production intermediates, and implementing lifecycle management programs. Examples include, Thrombate III Antithrombin transfer, conversion of Hyperimmunes to chromatography process, implementation of latex free stoppers; and

    supporting throughput capability increases by evaluation of new vendor pastes and plasma sources, such as the Canadian blood system plasma collection method conversion, and evaluation of recovered plasma sources.

        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 product Thrombate III Antithrombin III from Bayer, with whom we have a supply agreement through 2008, with an option to extend through 2009. We anticipate shifting production of Thrombate III Antithrombin III to our facilities by 2011, which we expect will allow for further volume increases. We are continuing to assess Thrombate III Antithrombin III for potential therapies in the areas of cardiovascular, transplant, and sepsis.

Contract Services

        Apart from the contracts with the Canadian blood system discussed elsewhere, including under "Business—Competitive Strengths—Favorable Distribution Arrangements," we also provide a variety of contract manufacturing or process services, including plasma fractionation, manufacturing, sterile filling, 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

        Our sales and marketing department consists of approximately 150 employees as of March 31, 2007. Within the U.S. Region, our core market, we have a developed a "push-pull" distribution network comprised of both direct and indirect channels. Our direct channel consists of 47 Talecris employed sales representatives managed by five regional sales managers. Our sales representatives are experienced professionals with a combination of extensive commercial and healthcare related experience who call on a

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variety of "touch points" including physicians, pharmacists, homecare companies, and leading key opinion leaders.

        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, patients, GPOs, distributors, home healthcare and specialty pharmacy providers. In the U.S., our Talecris Direct Program has engaged a prescription fulfillment provider to ensure that Prolastin 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 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, facilitating our ability to sell Prolastin A1PI into ten additional European countries.

    Distribution relationship with Bayer affiliates

        In connection with our formation transaction, we also entered into a number of agreements with Bayer affiliates for distribution in Canada, Japan, several European countries, and a number of other countries in the rest of the world. We replaced most of these agreements with new agreements with third-party distributors, or through the establishment of subsidiaries to handle these functions. The only remaining distribution agreement with Bayer covers a few European countries other than Germany. The distribution agreements with Bayer in the other European markets will be lapsing at various points throughout 2007, with an anticipated completion date of December 31, 2007. At that point, Talecris GmbH will have assumed all commercial operations responsibilities in Europe.

    Distribution Contracts

        Since 2005, we have reduced the number of our distributors from 16 to 5 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 believe grant us favorable volume, pricing, and payment terms, including in certain cases financial penalties if they fail to purchase the agreed volume of products.

    Certain IGIV Reimbursement Considerations

        IGIV in the U.S. is reimbursed by private or commercial payers, Medicare, Medicaid and Federal Programs. IGIV is usually adequately reimbursed by most private payers and by federal programs; however, there have been reimbursement issues for Medicare due to changes in its reimbursement methodology. Prior to 2005, Medicare reimbursed IGIV under the Average Wholesale Price (AWP) formula, which provided relatively easy access of IGIV to Medicare patients in all settings of care. After the 2003 Medicare Modernization Act physician payment changed in 2005 to Average Sales Price (ASP) plus 6%, while hospital reimbursement changed at the beginning of 2006 to ASP plus 6%. This payment was based on a volume-weighted average of all brands under a common billing code. As a result, 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 IGIV. Medicare payments to hospitals fell 45% for powder IGIV and 30% for liquid IGIV between fourth-quarter 2005 and first-quarter 2006.

        These reimbursement changes caused access problems for mostly Medicare patients resulting in site of care shifts. The Medicare reimbursement changes in 2005 for physicians drove patient care to hospitals. After 2006 hospitals also began to refuse providing IGIV to Medicare patients due to reimbursement rates that were below their acquisition cost.

        The U.S. Centers for Medicare and Medicaid Services (CMS) has made subsequent changes, which have improved the Medicare reimbursement issues. Effective January 1, 2006 CMS provided add-on payments of $69 to physicians and $75 to hospital outpatient departments per infusion for the substantial

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additional resources associated with locating and acquiring adequate IGIV product and preparing for an office infusion. This fee, intended for only one year, was continued into 2007.

        In addition, effective July 1, 2007, Medicare has issued temporary product/brand specific billing codes (Q-codes) that will shift payment from the current volume-weighted ASP for IGIV liquid to the brand's own ASP-based reimbursement. As long as the temporary Q-codes remain in place, this will allow improved reimbursement for each brand based on the product's ASP vs. weighted-average payment. We believe this was an important development that supports appropriate access to IGIV in the United States market.

Facilities, Manufacturing and Supply

        The majority of our products are manufactured at our facilities in Clayton, North Carolina. The Clayton manufacturing site is fully integrated, containing fractionation, purification, filling, freeze-drying and packaging capabilities as well as freezer storage, cGMP pilot plant, and testing laboratories. In addition, selected operations are performed by Bayer for us via supply agreements, most notably, production of ATIII in Berkeley, California and the secondary packaging, testing and distribution in Rosia, Italy of product to be distributed within Europe. We also utilize a leased facility for cold storing/freezing plasma, which is in close proximity to the Clayton facility. This facility allows for expanded inventory capacity while providing the automation and data handling capabilities necessary to manage more than three million liters of plasma per year.

        Currently, the Clayton site fractionates approximately 2.5 million liters per year. As part of our manufacturing strategy, we expect to increase Clayton's fractionation capacity to 2.7 million liters with the expectation that 2.5 million liters will be slated for internal production requirements and the remainder for contract fractionation on behalf of Canadian Blood Services. We also have a manufacturing facility located in Melville, New York as a result of our Precision acquisition. The 100,000 square foot FDA-licensed facility currently has a fractionation capacity of approximately 1.0 million liters of plasma per year increasing to 1.5 million liters per year as well as capacity for other contract manufacturing services. We expect this increase in overall fractionation capacity to 4.2 million liters to be driven by capping albumin production at 2.3 million liters. In addition, we plan to invest in a new fractionation facility. The new facility is planned for a capacity of 4 million liters for all fractions, with a potential for 6 million liters in the case of IGIV.

Plasma and Raw Material Sourcing

        Plasma is the key raw material used in the production of plasma-derived biological products, representing approximately 50% of our cost of goods sold. Human plasma can be secured through internal or external collection networks or sources. We expect to use approximately 2.6 million liters of plasma in 2007, of which we anticipate approximately 50% will come from plasma collection centers we own and approximately 50% will come from third-party plasma supply contracts.

        In November 2006, we acquired 21 licensed plasma centers, 12 unlicensed operating centers, and 25 development sites from IBR through an asset purchase agreement. We acquired these centers to provide a platform for the partial vertical integration of our raw material supply chain in an effort to enhance the predictability, sustainability, and profitability of our plasma supply. Since the acquisition, we have received FDA licenses for three of those plasma centers and we opened ten additional plasma centers. In June 2007 we acquired an additional three centers, one of which was licensed. In July, we received a license for a second one of those centers. We operate 26 licensed plasma centers and 20 operating but unlicensed plasma centers, and are in various stages of developing the remaining locations acquired from IBR. We also entered into a five-year plasma supply agreement with IBR pursuant to which we agreed to (i) purchase all plasma produced at up to ten plasma collection centers approved by us, (ii) finance the development of up to ten additional plasma collection centers, and (iii) have the option to purchase up to ten of such plasma collection centers.

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        We plan to source our plasma supply through the continued growth of our plasma collection centers, through opportunistic acquisitions of existing collection centers, or through strategic partnerships with existing collection centers in order to secure additional plasma and potentially increase our gross margin. In addition to the procurement of plasma, we also purchase 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.

        To support our growth plans, we plan to control a significant portion of our plasma supply internally, but also to continue to purchase some plasma from third parties. We believe that this strategy will:

    reduce our reliance on third-party suppliers for plasma;

    enhance our flexibility in procuring plasma;

    increase the efficiency of our operations; and

    improve our gross margins and profitability.

        To open new plasma collection centers, we will be required to obtain the necessary regulatory approvals and licenses on a center-by-center basis, which may be time-consuming and require additional resources, including the attention of our management. In addition, our plans to open new plasma centers will require additional capital investment.

Pathogen safety

        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. Our plasma suppliers provide a large portion of our serological testing, though we have increased the amount we perform ourselves to mitigate our dependence.

        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, 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, which is the only other licensed laboratory for NAT testing of human plasma. We perform these tests in a 76,000 square foot testing facility, located in Raleigh, North Carolina. The facility is leased through December 2007, with an option for two additional years. The laboratory tests 3.5 million samples annually and is operated by 106 operations and quality employees.

        Once a unit of plasma passes strict donor qualification procedures, the initial round of serological testing and NAT, the unit is held for a period of time to monitor for additional pathogen development. Following the inventory hold period, acceptable units are combined into fractionation pools and a second round of selected serological testing and NAT is performed on the fractionation pool. As further purification of the target proteins occurs, viral particles can be partitioned as a result of the fractionation process. In addition, all products undergo specific virus elimination and/or inactivation steps in the manufacturing process that are distinct to the particular product being produced. Our safety efforts include use of a zoning concept at our Clayton fractionation site to tightly control air, material, and personnel flow throughout production. Furthermore, we have received certification from the industry's trade association, the Plasma Protein Therapeutics Association, as a result of our voluntary adoption of safety standards beyond those required by government regulators.

Company History

        Our heritage of patient care innovations in therapeutic proteins dates back to Cutter Laboratories, which began to produce plasma-derived products in the early 1940s, and its successor companies, including Miles Inc., Bayer Corporation and Bayer Healthcare LLC. Talecris Biotherapeutics Holdings Corp. began

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operations through its wholly-owned subsidiary, Talecris Biotherapeutics Inc., on April 1, 2005 as a result of the March 31, 2005 purchase of substantially all of the assets and specified liabilities of the Bayer Plasma Products Business Group (Bayer Plasma), a unit of the Biological Products division of Bayer Healthcare LLC, which is a wholly-owned (indirect) subsidiary of Bayer AG, (collectively or individually, Bayer). The acquisition was effected by Talecris Holdings, LLC, an entity 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 discussed below, we also acquired the stock of Precision Pharma Services, Inc. (Precision) on April 12, 2005 from an Ampersand affiliate as part of our overall formation. Precision's business prior to our acquisition was primarily to supply intermediate plasma fractions to Bayer. We acquired Precision in order to increase our fractionation capacity. We refer to our formation, the acquisition of the Bayer Plasma net assets and the acquisition of Precision collectively as our "formation transaction."

        Bayer Plasma Acquisition.    On March 31, 2005, we acquired certain assets, properties and operations of Bayer Plasma and assumed certain liabilities from Bayer pursuant to the terms of an Amended and Restated Joint Contribution Agreement. The purchase price per the Restated Joint Contribution Agreement of $409.3 million was later adjusted for the estimated values of foreign inventories retained by Bayer and the final determination of working capital, as described below. The total consideration consisted of $303.5 million in cash, 1,000,000 shares of our common stock and one share of Junior Preferred Stock (both of which we subsequently repurchased).

        The cash portion of the acquisition was partially financed by $125 million in funding provided by affiliates of Cerberus and Ampersand. The remainder was financed by $199.9 million borrowed under a secured credit facility. Cerberus and Ampersand received 12% Second Lien Notes with a fair value equal to their face amount of $25 million, 14% Junior Secured Convertible Notes with a fair value equal to their face amount of $90 million and 100,000 shares of series A preferred stock with a fair value of $7.1 million (face value of $10 million), all in exchange for the $125 million cash. On December 6, 2006, we repaid and retired the 12% second lien notes payable to Cerberus and Ampersand and all associated accrued interest. We paid Cerberus and Ampersand a prepayment penalty totaling $1.1 million associated with this retirement. The $90 million of 14% Junior Secured Convertible Notes were converted in accordance with the terms of such notes into 900,000 shares of series A preferred stock. Each share of series A preferred stock is convertible into nine shares of common stock.

        As discussed above, the determination of the purchase price was also subject to a working capital adjustment. We determined an adjustment in September 2005, at which time, through agreement with Bayer, we reduced the purchase price by an additional $54.2 million. An additional net adjustment of $0.6 million was agreed upon with Bayer in 2006. The working capital adjustments included, among other items, $10.7 million related to inventories acquired from Bayer which did not meet product release specifications due to a pre-acquisition production incident which we detected post-acquisition. An additional $11.5 million of inventories processed after the acquisition date were also identified as impaired due to the same production issue. In March 2007, we reached an agreement with Bayer under which we recovered approximately $9.0 million related to this pre-acquisition production issue which was recorded as a reduction of cost of goods sold during the first quarter of 2007.

        Precision Acquisition.    On April 12, 2005, we acquired 100% of the stock of Precision from Ampersand Plasma Holdings, L.L.C. for $16.8 million including the assumption of $3.3 million in debt. We acquired Precision to increase our manufacturing capacity. The acquisition was financed through the issuance to Ampersand of $2.8 million in 12% Second Lien Notes with a fair value equal to their face value and 192,310 shares of series B preferred stock to Talecris Holdings LLC with a fair value of $13.6 million at March 31, 2005 (face value of $11 million). As discussed above, on December 6, 2006, we repaid and retired the 12% Second Lien Notes. Each share of series B preferred stock is convertible into nine shares of common stock.

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        International BioResources Acquisition.    In order to further our vertical integration strategy, in November 2006 we acquired plasma collection centers, together with related assets and assumed certain liabilities from International BioResources, L.L.C. and affiliated entities (IBR). The centers we acquired included 21 FDA-licensed centers, 12 centers that were opened but not yet licensed, and 25 that were in development. Prior to this acquisition, we sourced all of our plasma supply from third parties and IBR was our largest independent supplier.

        Subsequently, under a purchase and sale of assets agreement, dated as of June 9, 2007, we purchased three plasma collection centers from IBR, of which one collection center was licensed by the FDA and two collection centers were unlicensed. The purchase price consisted of $13.8 million in cash plus additional amounts estimated at $2.5 million at the acquisition date for (a) the costs of soft goods and medical supplies on hand at the acquired centers, plus (b) the cost of human plasma acquired meeting certain specifications, plus (c) cash on hand at the acquired centers, all subject to a working capital adjustment. We paid $15.2 million directly to IBR on June 9, 2007 and placed $1.0 million of funds in escrow, pending FDA licensure of the two unlicensed centers acquired.

        Concurrently with the execution of the June 9th agreement, we entered into a five-year plasma supply agreement with IBR pursuant to which we (i) purchase all plasma produced at up to ten plasma collection centers approved by us, (ii) finance the development of up to ten additional plasma collection centers, and (iii) have the option to purchase up to ten of such plasma collection centers. Also, concurrent with the execution of the June 9th agreement, we entered into an amendment to the asset purchase agreement of November 2006. This amendment provided for the acceleration of all validation and milestone payments to be made by us to IBR following the closing of the acquisition under the asset purchase agreement of November 2006 upon (i) the FDA licensure of and/or Quality Plasma Program (QPP) certification of certain plasma collection centers acquired under that agreement and (ii) the achievement of certain plasma production volumes at plasma collection centers acquired under that agreement. Pursuant to the accelerated payment provision under the amendment, we issued 268,279 shares of our common stock to IBR, of which 68,071 shares were immediately delivered to IBR and 200,208 shares have been placed in escrow. We placed these 200,208 shares in escrow to secure against breaches of represenations and warranties under the November 2006 purchase agreement, and the balance of any shares not forfeited as a result of any breach of such representations and warranties will be released to IBR on May 6, 2009. Following the consummation of this offering, the escrowed shares will be valued at fair market value and to the extent that the value of the escrowed shares exceeds the applicable escrow cap amount, which is $25 million during the first eighteen months of the agreement and $15 million during the final twelve months of the agreement, during the escrow term, shares will be eligible for release to IBR. The balance of any shares not forfeited as a result of any breach of such representations and warranties will be released to IBR on May 6, 2009. IBR has the right to put the shares back to us for cash under certain circumstances prior to June 30, 2008. The put right will expire upon the consummation of this offering, assuming this offering is completed by December 31, 2007.

Competition

        The plasma products industry is highly competitive with changing competitive dynamics. We face, and will continue to face, intense competition from both U.S.-based and foreign producers of plasma products, some of which have 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 markets from smaller entities. In Europe, where the industry is more highly regulated than in the U.S. and health care systems vary from country to country, local companies may have greater knowledge of local health care systems and have existing regulatory approvals or a better understanding of the local regulatory process, allowing them to market their products more quickly. Moreover, plasma therapy generally faces competition from non-plasma products and other courses of treatments. For example, recombinant Factor VIII products compete with plasma-derived products in the treatment of Hemophilia A.

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