Talecris Biotherapeutics Holdings second-quarter 2010 net revenue increases 7.3% to $402.8 million

Jul 29 2010

Talecris Biotherapeutics Holdings Corp. ("Talecris") (Nasdaq: TLCR) today announced its financial results for the three and six months ended June 30, 2010 and filed its 2010 Form 10-Q with the U.S. Securities and Exchange Commission (SEC).

Second quarter 2010 net revenue increased by $27.3 million or 7.3% to $402.8 million from $375.6 million in the second quarter of 2009.  Higher revenues from Talecris' principal products Gamunex®, Immune Globulin Intravenous (Human), 10% Caprylate/Chromatography Purified (IGIV) and Prolastin® Alpha-1 Proteinase Inhibitor (Human) (A1PI) as well as albumin and Koate® DVI Factor VIII (Human) in the second quarter of 2010 were partially offset by lower sales of hyperimmunes and contract manufacturing compared to the second quarter of 2009.  Second quarter 2010 gross margin was 44.6% compared to 40.4% in the second quarter of 2009.  Second quarter 2010 income from operations was $87.7 million versus $70.5 million for the second quarter of 2009, a 24.4% increase.  Net income was $47.6 million for the second quarter of 2010, a decrease of $35.6 million compared to net income of $83.3 million for the second quarter of 2009.  Diluted earnings per share were $0.37 in the second quarter of 2010, including an after-tax charge of $5.2 million ($0.04 per diluted share) for costs associated with Talecris' definitive merger agreement with Grifols S.A. and Grifols, Inc. (Grifols), compared to diluted earnings per share of $0.89 (pro forma diluted EPS of $0.68) for the second quarter of 2009.  Talecris' second quarter 2009 results included the after-tax income from the CSL merger termination fee of $48.8 million ($0.52 per diluted share), which was partially offset by an after-tax charge of $2.1 million ($0.02 per diluted share) for CSL merger-related expenses.  

On a non-GAAP basis excluding merger-related items in both periods, Talecris' net income was $52.8 million for the second quarter of 2010, an increase of 44.3% compared to $36.6 million for the second quarter of 2009.  On the same basis, diluted earnings per share for the 2010 second quarter were $0.41, an increase of 41.4% from $0.29 for the second quarter of 2009.  Additional information regarding the computation of non-GAAP financial measures is included in Exhibit B.

For the first six months of 2010, Talecris' net revenue increased by $36.4 million or 4.9% to $783.8 million compared to $747.4 million for the prior year driven by the same sales factors cited above.  The first six months 2010 gross margin was 43.8% compared to 42.0% in the first six months of 2009, an increase of 180 basis points.  Net income for the first six months of 2010 was $93.0 million, a decrease of $23.7 million compared to net income of $116.7 million for the first six months of 2009.  Diluted EPS for the first half of 2010 was $0.73 compared to $1.24 (pro forma diluted EPS of $0.96) for the first six months of 2009.  Talecris' first six months 2010 results included an after-tax charge of $5.2 million ($0.04 per diluted share) for costs associated with the Grifols acquisition.  The first six months 2009 diluted EPS included the $48.8 million after-tax benefit of the CSL merger termination fee ($0.52 per diluted share) which was partially offset by an after-tax charge of $7.8 million ($0.08 per diluted share) for CSL merger-related expenses.

On a non-GAAP basis excluding merger-related items in both periods, Talecris' net income was $98.1 million for the first six months of 2010, a 29.4% increase compared to $75.8 million for the first six months of 2009.  On the same basis, diluted EPS was $0.77 for the first six months of 2010 compared to $0.61 for the first six months of 2009, a 26.2% increase.  Additional information regarding the computation of non-GAAP financial measures is included in Exhibit B.

"During the quarter, we announced the next step in our company's transformation - our proposed combination with Grifols to create a world-leading provider of plasma protein therapies," said Lawrence D. Stern, Talecris' chairman and chief executive officer.  "The combined company will have a more diversified and balanced product portfolio, a global footprint to provide more life saving and life enhancing therapies to the patients we serve and an innovative R&D pipeline that will provide continued value to our shareholders well into the future."

Mr. Stern continued, "For the second quarter, our performance was driven primarily by the solid demand for both Gamunex and Prolastin in the U.S. market.  Despite our results, we believe U.S. and international volumes for the IGIV industry grew below our long term view of 6-8%.  We expect that the combination of lower IGIV demand growth rate, Canadian Blood Services' multi-source strategy and increased global competitive pressures will result in the deceleration of Gamunex growth.  These factors combined with lower demand for intermediate products that support the production of albumin and Factor VIII may curb our near term growth rate."

Discussion of Second Quarter 2010 Financial and Operating Results

Net revenue for the 2010 second quarter was $402.8 million compared to $375.6 million in the second quarter of 2009, an increase of $27.3 million or 7.3%.  Gamunex IGIV revenue increased $9.8 million or 4.8%, which consisted primarily of $9.6 million in higher volumes partially offset by unfavorable foreign exchange.  Gamunex experienced higher volumes of $17.7 million in the U.S. and Europe, which were partially offset by lower volumes of $8.1 million in Canada and other international regions.  U.S. Gamunex revenue grew 11.8% for the second quarter of 2010 compared to the second quarter of 2009.  During the period, pull through continued to grow faster than sales into the distribution channel which led to the continued decline in days-on-hand of channel inventories for Gamunex in the U.S.  Canadian Gamunex volumes were negatively impacted by lower sales to Canadian Blood Services due to their IGIV multi-source strategy.  Pricing was essentially flat for the period as price improvements in the U.S. were mostly offset by lower pricing in Europe and other international regions resulting from country mix, competitive pressures as well as unfavorable foreign exchange.  U.S. pricing was also impacted by increased Medicaid rebates as a result of the healthcare reform legislation enacted in the first quarter of 2010, higher Medicaid utilization and GPO administration fees during the second quarter of 2010 compared to the second quarter of 2009.  

Prolastin A1PI revenues increased $11.2 million or 14.5%, which primarily consisted of $10.2 million in higher volumes partially offset by $1.8 million of unfavorable foreign exchange.  Growth in volume was driven by increased number of patients on Prolastin A1PI in both the U.S. and European markets.  Koate Factor VIII revenues increased $5.7 million or 59.3% and albumin revenue increased by $2.6 million or 12.5%. These increases were offset primarily by reduced contract manufacturing for Canadian Blood Services due to their multi-source strategy and lower sales of hyperimmunes due to a customer system issue.  Revenues were also negatively impacted by competitive pressures, lingering effects of internal FCPA investigations and political tensions with Iran.  

Gross profit increased to $179.6 million for the 2010 second quarter compared to $151.6 million in the second quarter of 2009.  This increase was primarily due to lower unabsorbed infrastructure and start-up costs related to Talecris Plasma Resources, Inc. (TPR), which is Talecris' plasma collection platform, and higher Gamunex IGIV and Prolastin A1PI revenue.  Unabsorbed TPR infrastructure and start-up costs declined by $9.3 million or 84.5% to $1.7 million for the second quarter of 2010 compared to $11.0 million for the second quarter of 2009.  This improvement in gross profit was partially offset by a $4.2 million increase in non-capitalizable project expenses principally related to construction of the new fractionation facility in the second quarter of 2010 as well as single product fractionation.  Gross margin was 44.6% during the second quarter of 2010 compared to 40.4% for the 2009 second quarter, an increase of 420 basis points.  

Operating expenses for the second quarter of 2010 were $91.9 million which represented an increase of $10.9 million or 13.4% versus $81.0 million incurred during the prior year period.  The increase was largely due to $14.0 million in higher selling, general and administrative expenses driven by $6.4 million of unfavorable foreign exchange during the second quarter of 2010 compared to favorable foreign exchange of $4.0 million during the same prior year period, as well as $4.6 million in higher sales and marketing expense in the second quarter of 2010 as the result of the sales force expansion implemented in the second half of 2009.  In addition, the company incurred $8.4 million in expenses related to the company's merger agreement with Grifols in the second quarter of 2010 compared to $2.1 million in CSL merger-related expenses in the second quarter of 2009.  These increases were partially offset by a $5.2 million reduction in share-based compensation expense and a $3.1 million decrease in R&D due in large part to the cancellation of the A1PI aerosol project.

Operating income was $87.7 million during the second quarter of 2010, which represents a 24.4% increase over the $70.5 million reported during the second quarter of 2009.  Operating margin was 21.8% in the 2010 second quarter compared to 18.8% in the 2009 second quarter, an increase of 300 basis points.

Net interest expense was $12.1 million in the 2010 second quarter compared to $20.5 million in the prior year period, a decrease of $8.4 million primarily due to lower debt levels.  Income tax expense during the second quarter of 2010 was $28.2 million resulting in a 37.2% effective tax rate compared to $41.8 million for the second quarter of 2009 or a 33.4% effective tax rate.

Net income was $47.6 million for the 2010 second quarter including an after-tax charge of $5.2 million for costs associated with the announced acquisition of the company by Grifols.  This compares to $83.3 million in the second quarter of 2009, which includes the after-tax income from the CSL merger termination fee of $48.8 million which was partially offset by an after-tax charge of $2.1 million for CSL merger-related expenses.

Diluted EPS for the 2010 second quarter was $0.37 compared to $0.89 (pro forma diluted EPS of $0.68) for the 2009 second quarter.  The 2010 period included an after-tax charge of $0.04 per share related to costs associated with the Grifols acquisition, while the 2009 period included income of $0.52 per diluted share related to the after-tax effect of the CSL merger termination fee, as well as a charge of $0.02 per diluted share for merger-related expenses. Total diluted shares outstanding were 127,875,232 for the 2010 second quarter and 93,873,032 for the 2009 second quarter.

On a non-GAAP basis excluding merger-related expenses in both periods, Talecris' net income of $52.8 million for the second quarter of 2010 increased 44.3% compared to $36.6 million for the second quarter of 2009.  On the same basis, earnings per diluted share, excluding merger-related expenses, for the 2010 second quarter were $0.41, an increase of 41.4% from $0.29 for the second quarter of 2009.  Additional information regarding the computation of non-GAAP financial measures is included in Exhibit B.

The 2010 second quarter EBITDA was $96.7 million compared to $152.8 million in the 2009 second quarter.  Adjusted EBITDA was $108.7 million in the 2010 second quarter compared to adjusted EBITDA of $169.2 million in the 2009 second quarter.  Both 2009 EBITDA and Adjusted EBITDA included the $75.0 million CSL termination fee.

Discussion of First Six Months of 2010 Financial and Operating Results

Net revenue was $783.8 million for the first six months of 2010 compared to $747.4 million during the same period of 2009, representing an increase of $36.4 million or 4.9%.  The increase was mainly due to $15.3 million in higher Gamunex IGIV revenue, consisting of $18.2 million in higher volumes, partially offset by $2.9 million in lower pricing.  Gamunex revenue growth was driven primarily by U.S. sales which grew 8.4% in the first half of 2010 compared to the first half of 2009.  The first six months 2010 results also reflected $18.8 million in higher Prolastin sales and higher revenues related to albumin, Koate Factor VIII and Thrombate III, partially offset by reduced contract manufacturing for Canadian Blood Services due to their multi-source strategy and lower sales of hyperimmunes.

Gross profit during the first six months 2010 totaled $343.2 million compared to $314.2 million during the first six months of 2009, an increase of $29.1 million or 9.3%, driven primarily by higher Gamunex IGIV revenue and reduced unabsorbed TPR infrastructure and start-up costs, partially offset by increases in inventory impairment provisions and non-capitalizable capital expenditures.  Unabsorbed TPR infrastructure and start-up costs decreased $21.7 million or 85.4% to $3.7 million in the first six months of 2010 compared to $25.4 million for the same period of 2009.  Inventory impairment provisions during the first six months of 2010 increased $6.8 million to $22.9 million primarily driven by higher provisions for work-in-process inventories.  Non-capitalizable capital expenditures during the first six months of 2010 were $23.0 million compared to $13.2 million during the first six months of 2009.  Gross margin was 43.8% during the period, an increase of 180 basis points from the gross margin of 42.0% for the first half of 2009.

Operating expenses totaled $175.8 million for the first six months of 2010, a 3.4% increase over the $170.0 million incurred during the first six months of 2009.  The $5.8 million increase included $9.2 million in higher selling, general and administrative expenses driven by $10.3 million of unfavorable foreign exchange during the first six months of 2010 compared to favorable foreign exchange of $0.2 million during the first six months of 2009, as well as higher sales and marketing expenses of $10.7 million due to the sales force expansion.  The company also incurred $8.4 million in expenses related to the Grifols merger agreement.  These increases were partially offset by lower share-based compensation expense of $8.5 million and the absence of $10.0 million in legal and retention expenses related to the company's merger termination agreement with CSL which occurred in the first six months of 2009.  R&D spending decreased $3.4 million during the first six months of 2010 due in large part to the cancellation of the A1PI aerosol project.

Operating income during the first six months of 2010 was $167.4 million compared to $144.2 million during the first six months of 2009, representing an increase of $23.3 million or 16.1%.  Operating margin was 21.4% in the first six months of 2010 compared to 19.3% in the first six months of 2009.

Net interest expense was $23.4 million in the first six months of 2010 compared to $41.9 million in the prior year period, a decrease of $18.5 million due largely to lower debt levels.  Income tax expense during the first six months of 2010 was $51.4 million resulting in a 35.6% effective tax rate compared to $60.8 million for the first six months of 2009 or a 34.2% effective tax rate.

Net income for the first six months 2010 was $93.0 million, a decrease of $23.7 million compared to net income of $116.7 million for the first six months of 2009.  The 2010 period includes an after-tax charge of $5.2 million for costs associated with the Grifols acquisition, while the 2009 period includes the after-tax income from the CSL merger termination fee of $48.8 million which was partially offset by an after-tax charge of $7.8 million for CSL merger-related expenses.

Diluted EPS for the first six months of 2010 was $0.73 including an after-tax charge of $0.04 per diluted share for costs associated with the Grifols acquisition.  This compares to $1.24 (pro forma diluted EPS of $0.96) in the first six months of 2009, which includes income of $0.52 per diluted share related to the after-tax effect of the CSL merger termination fee as well as a charge of $0.08 per diluted share for merger-related expenses.  Total diluted shares outstanding were 127,829,089 for the first six months of 2010 compared to diluted shares outstanding of 93,862,960 for the first six months of 2009.

On a non-GAAP basis excluding merger-related items in both periods, Talecris' net income of $98.1 million for the first six months of 2010 increased 29.4% compared to $75.8 million for the first six months of 2009.  On the same basis, earnings per diluted share, excluding merger-related expenses, for the first six months of 2010 were $0.77, an increase of 26.2% from $0.61 for the first six months of 2009.  Additional information regarding the computation of non-GAAP financial measures is included in Exhibit B.

EBITDA for the first six months of 2010 was $184.6 million, a decrease of $48.7 million from $233.3 million in the first six months of 2009 including income of $75.0 million related to the CSL merger termination. Adjusted EBITDA was $205.3 million in the first six months of 2010 compared to $267.9 million in the first six months of 2009, including income of $75.0 million related to the CSL merger termination fee, a decrease of $62.6 million.

Recent Events

Talecris achieved a number of financial and commercial milestones in the second quarter of 2010 and since the conclusion of the second quarter.  These include:

• On June 15, 2010, Talecris entered a co-promotion arrangement with Novartis Vaccines to jointly market and sell their respective post-exposure rabies products;

• On June 6, 2010, Talecris entered into a definitive merger agreement with Grifols under which Grifols will acquire, through merger transactions, all of the common stock of Talecris for a combination of $19.00 in cash and 0.641 of a newly-issued non-voting Grifols' (Class B) ordinary share for each outstanding Talecris share (the merger consideration). The 0.641 exchange ratio is subject to revision under specific circumstances.  The Grifols non-voting shares will be listed on the NASDAQ in the form of American Depositary Shares and the Madrid, Barcelona, Bilbao and Valencia stock exchanges and quoted on the Automated Quotation System of the Spanish Stock Exchanges.  Grifols non-voting shares will carry the same economic rights as Grifols ordinary shares. Additionally, Talecris share-based compensation will generally be converted into the right to receive the merger consideration, or, in the case of employee stock options, the right to acquire the merger consideration, as described in the merger agreement in lieu of Talecris common stock. The leading shareholders of Grifols have entered into an agreement with Talecris, subject to conditions, to vote their Grifols shares in favor of the transaction and, separately, an affiliate of Cerberus Capital Management, L.P., which owns approximately 49% of the outstanding Talecris common stock, has entered into an agreement with Grifols, subject to conditions, to vote its Talecris shares in favor of the transaction.  Under the terms of the agreement, completion of the transaction is subject to obtaining certain regulatory approvals, shareholder approvals, as well as other customary conditions;

• On May 24, 2010, Talecris common stock (Nasdaq: TLCR) was added to the NASDAQ Biotechnology Index (Nasdaq: NBI).  The Index is designed to track the performance of a set of NASDAQ listed securities that are classified as either biotechnology or pharmaceutical according to the Industry Classification Benchmark;

• On May 13, 2010, Talecris received approval from Health Canada to launch Gamunex for subcutaneous administration in Canada, giving Gamunex the broadest set of indications for any approved subcutaneous product in Canada.  The company anticipates launching subcutaneous administration in Canada in the second half of 2010;

• Talecris is essentially complete with the conversion of U.S. patients to Prolastin-C A1PI (its next generation A1PI product) which the company launched in the U.S. in March 2010.  Talecris plans to launch Prolastin-C A1PI in Canada in the 2010 third quarter.