Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 7. Fair Value Measurements

In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company measures certain assets and liabilities at fair value on a recurring basis using the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers include:

• Level 1, defined as observable inputs such as quoted prices for identical assets in active markets;

• Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

• Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring management to develop its own assumptions based on best estimates of what market participants would use in pricing an asset or liability at the reporting date.

The Company’s fair value hierarchies for its financial assets and liabilities (cash equivalents, current and non-current marketable securities, derivative instruments, convertible senior notes and current and non-current liabilities for contingent consideration), which require fair value measurement on a recurring basis are as follows:

	As of June 30, 2011
	(In thousands)
	As reflected on
	the unaudited
	balance sheet		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	6,715	$	6,715	$	—	$	—	$	6,715
Corporate and financial institutions debt		205,589		—		205,589		—		205,589
Auction rate securities		28,053		—		—		28,053		28,053
U.S. government agencies		100,533		—		100,533		—		100,533
U.S. treasury bills		57,976		57,976		—		—		57,976
Municipal bonds		40,545		—		40,545		—		40,545
Foreign currency option contracts designated as hedges		2		—		2		—		2
Foreign currency option contracts not designated as hedges		110		—		110		—		110
Total	$	439,523	$	64,691	$	346,779	$	28,053	$	439,523
Liabilities:
Liability for contingent consideration	$	270,708	$	—	$	—	$	270,708	$	270,708
Convertible senior notes due 2016 (face value $230,000)		157,645		—		271,400		—		271,400
Total	$	428,353	$	—	$	271,400	$	270,708	$	542,108

	As of December 31, 2010
	(In thousands)
	As reflected on
	the balance
	sheet		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	20,932	$	20,932	$	—	$	—	$	20,932
Corporate and financial institutions debt		197,813		—		197,813		—		197,813
Auction rate securities		31,280		—		2,725		28,555		31,280
U.S. government agencies		99,294		—		99,294		—		99,294
U.S. treasury bills		78,916		78,916		—		—		78,916
Municipal bonds		37,160		—		37,160		—		37,160
Foreign currency option contracts designated as hedges		89		—		89		—		89
Foreign currency option contracts not designated as hedges		188		—		188		—		188
Total	$	465,672	$	99,848	$	337,269	$	28,555	$	465,672
Liabilities:
Liability for contingent consideration	$	253,548	$	—	$	—	$	253,548	$	253,548
Convertible senior notes due 2016 (face value $230,000)		152,701		—		271,768		—	$	271,768
Total	$	406,249	$	—	$	271,768	$	253,548	$	525,316

Marketable Securities

Level 2 assets consist of debt securities issued by corporate and financial institutions and U.S. government and municipal agencies. The fair value of these securities is estimated using a weighted average price based on market prices from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources.

Level 3 assets include securities with an auction reset feature (“auction rate securities”), which are classified as available-for-sale securities and reflected at estimated fair value. In February 2008, auctions began to fail for these securities and each auction for the majority of these securities since then has failed. As of June 30, 2011, the fair value of each of these securities is estimated utilizing a discounted cash flow analysis that considers interest rates, the timing and amount of cash flows, credit and liquidity premiums, and the expected holding periods of these securities. The following table provides a summary of changes in fair value of the auction rate securities:

	Auction Rate Securities
	Six Months Ended June 30,
	2011			2010
	(In thousands)
Fair value at beginning of period	$	28,555		$	37,174
Redemptions		(700	)		(5,600	)
Transfer to Level 2		—			—
Change in valuation		198			59
Fair value at end of period	$	28,053		$	31,633

During the six months ended June 30, 2011, as a result of the decline in fair value of the Company’s auction rate securities, which the Company believes is temporary and attributes to liquidity rather than credit issues, the Company has recorded an unrealized loss of $1.2 million included in the accumulated OCI line of stockholders’ equity. All of the auction rate securities held by the Company as of June 30, 2011 consist of securities collateralized by student loan portfolios, which are substantially guaranteed by the United States government. Any future fluctuation in fair value related to the auction rate securities that the Company deems to be temporary, including any recoveries of previous write-downs, will be recorded in accumulated other comprehensive income (loss). If the Company determines that any decline in fair value is other than temporary, it will record a charge to earnings as appropriate. The Company does not intend to sell these securities and management believes it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost bases.

Foreign Currency Option Contracts

Level 2 assets and liabilities include foreign currency option contracts, which are reflected at fair value. The Company has established a foreign currency hedging program to manage the economic risk of its exposure to fluctuations in foreign currency exchange rates from the Nexavar program. Refer to Derivative Instruments in Note 6 for further information.

Liability for Contingent Consideration

Level 3 liabilities include the acquisition-related non-current liability for contingent consideration the Company recorded representing the amounts payable to former Proteolix stockholders upon the achievement of specified regulatory approvals within pre-specified timeframes for carfilzomib. The fair value of this Level 3 liability is estimated using a probability-weighted discounted cash flow analysis and a discount rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption. Subsequent changes in the fair value of this liability are recorded to the “Contingent consideration” expense line item in the Condensed Consolidated Statements of Operations under operating expenses. During the three and six months ended June 30, 2011, the Company recorded contingent consideration expense of $5.7 million and $17.2 million, respectively, compared to $92.0 million and $95.5 million in the same period last year. The change was primarily associated with the change in the PTRS, a significant input in the discounted cash flow analysis used to calculate the fair value of the non-current liability, and also the passage of time. Refer to Liability for Contingent Consideration in Note 5 for further details.

The following table provides a summary of the changes in the fair value of the non-current liability for contingent consideration:

	Liability for Contingent Consideration
	Six Months Ended June 30,
	2011		2010
	(In thousands)
Fair value at beginning of period	$	253,458	$	200,528
Payments		—		(40,000	)
Change in valuation		17.250		95,485
Fair value at end of period	$	270,708	$	256,013

Transfers of these liabilities between Levels are recognized when the Company becomes aware of changes in the circumstances causing the transfer. Refer to Liability for Contingent Consideration in Note 10 for further details.

Convertible Senior Notes due 2016

Level 2 liabilities consist of the Company’s convertible senior notes due 2016. The fair value of these convertible senior notes is estimated by computing the fair value of a similar liability without the conversion option. Refer to Note 10 for further details on the fair value. In accordance with ASC 825-10, Financial Instruments, the estimated market value of the Company’s convertible senior notes as of June 30, 2011 was $271.4 million. The Company’s convertible senior notes are not marked-to-market and are shown at their original issuance value net of the amortized discount and the portion of the value allocated to the conversion option is included in stockholders’ equity in the accompanying unaudited Condensed Consolidated Balance Sheet June 30, 2011.