Derivative Instruments

6 Months Ended

Jun. 30, 2011

Derivative Instruments [Abstract]

Derivative Instruments

Note 6. Derivative Instruments

The Company has established a foreign currency hedging program to mitigate the foreign exchange risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. Dollar denominated currencies and reduce volatility in the Company’s cash flow and earnings. The Company hedges a certain portion of anticipated Nexavar-related cash flows owed to the Company with foreign currency and option contracts, typically no more than one year into the future. The underlying exposures, both revenue and expenses, in the Nexavar program are denominated in currencies other than the U.S. Dollar, primarily the Euro and Japanese Yen. For purposes of calculating the cash flows due to or due from the Company each quarter, the foreign currencies are converted into U.S. dollars based on average exchange rates for the reporting period. The Company does not enter into derivative financial contracts for speculative purposes. As of June 30, 2011 and December 31, 2010, foreign currency derivative contracts that were not settled are recorded at fair value on the Condensed Balance Sheet.

The Company’s foreign currency options used to hedge anticipated cash flows, where the underlying exposures are the net of Euro-denominated revenues and expenses, are not designated as hedging instruments under ASC 815. The changes in the fair value of these foreign currency options are included in the “Other expense” line item in the Condensed Consolidated Statements of Operations.

The Company’s foreign currency options used to hedge anticipated cash flows, where the underlying exposures are Japanese Yen denominated royalties are designated as hedging instruments under ASC 815. The effective component of the hedged instrument is recorded in accumulated other comprehensive income (loss) (“OCI”) within stockholders’ equity as an unrealized gain or loss on the hedging instrument. When the hedged forecasted transactions occur and the hedge instrument matures, the unrealized gains and losses are reclassified into the “Other expense” line item in the Condensed Consolidated Statement of Operations. The majority of the gains and losses related to the hedged forecasted transactions reported in accumulated OCI at June 30, 2011 are expected to be reclassified to other income (expense) within 6 months.

At June 30, 2011, the fair value carrying amount of the Company’s derivative instruments were recorded as follows:

	Asset Derivatives			Liability Derivatives
	June 30, 2011			June 30, 2011
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value
		(In thousands)			(In thousands)
Derivatives designated as hedges:
Foreign currency option contracts	Other current assets	$	2	Accrued liabilities	$	—
Total derivatives designated as hedges			2			—
Derivatives not designated as hedges:
Foreign currency option contracts	Other current assets	$	110	Accrued liabilities	$	—
Total derivatives not designated as hedges			110			—
Total derivatives		$	112		$	—

The effect of derivative instruments on the Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 was as follows:

	Foreign Currency			Foreign Currency
	Options Contracts			Options Contracts
	Three Months Ended			Six Months Ended
	June 30, 2011			June 30, 2011
	(In thousands)			(In thousands)
Derivatives designated as hedges:
Net loss recognized in accumulated other comprehensive loss (effective portion)	$	(17	)	$	(3	)
Net loss reclassified from accumulated other comprehensive loss to net loss (effective portion) (1)		(51	)		(84	)
Net gain (loss) recognized in net loss (ineffective portion) (1)		—			—
Derivatives not designated as hedges:
Net loss recognized in net loss (1)	$	(205	)	$	(633	)

⁽¹⁾ Classified in “Other expense” on the Condensed Consolidated Statement of Operations

The Company is exposed to counterparty credit risk on all of its derivative financial instruments. The Company has established and maintained strict counterparty credit guidelines and enters into derivative instruments only with financial institutions that are investment grade to minimize the Company’s exposure to potential defaults. The Company does not generally require collateral to be pledged under these agreements.