Derivative Instruments And Hedging Strategies

9 Months Ended

Sep. 30, 2011

Derivative Instruments And Hedging Strategies [Abstract]

Derivative Instruments And Hedging Strategies

(9) DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES

The Company uses hedging contracts to manage the risk of its overall exposure to fluctuations in foreign currency exchange rates. The Company considers all of its designated hedging instruments to be cash flow hedges.

Foreign Currency Exchange Rate Exposure

The Company uses forward foreign currency exchange contracts to hedge certain operational exposures resulting from changes in foreign currency exchange rates. Such exposures result from portions of the Company's forecasted revenues being denominated in currencies other than the U.S. dollar, primarily the Euro.

The Company designates certain of these forward foreign currency exchange contracts as hedging instruments and enters into some forward foreign currency exchange contracts that are considered to be economic hedges that are not designated as hedging instruments. Whether designated or undesignated, these forward foreign currency exchange contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from Naglazyme and Firdapse product revenues, Aldurazyme royalty revenues and net asset or liability positions designated in currencies other than the U.S. dollar. The fair values of forward foreign currency exchange contracts are estimated using current interest rates and take into consideration the current creditworthiness of the counterparties or the Company, as applicable. Details of the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations follow below. See Note 11 for additional discussion regarding the fair value of forward foreign currency exchange contracts.

At September 30, 2011, the Company had 142 forward foreign currency exchange contracts outstanding to sell a total of 80.9 million Euros with expiration dates ranging from October 31, 2011 through June 30, 2013. These hedges were entered into to protect against the fluctuations in Euro denominated Naglazyme, Firdapse and Aldurazyme revenues. The Company has formally designated these forward foreign currency exchange contracts as cash flow hedges and expects them to be highly effective within the meaning of FASB ASC Subtopic 815-30, Derivatives and Hedging-Cash Flow Hedges, in offsetting fluctuations in revenues denominated in Euros related to changes in the foreign currency exchange rates.

The Company also enters into forward foreign currency exchange contracts that are not designated as hedges for accounting purposes. The changes in fair value of these forward foreign currency exchange contracts are included as a part of selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. At September 30, 2011, separate from the 142 contracts discussed above, the Company had one outstanding forward foreign currency exchange contract to sell 25.9 million Euros that was not designated as a hedge for accounting purposes.

The maximum length of time over which the Company is hedging its exposure to the reduction in value of forecasted foreign currency cash flows through forward foreign currency exchange contracts is through June 30, 2013. Over the next twelve months, the Company expects to reclassify $0.4 million from accumulated other comprehensive income to earnings as related forecasted revenue transactions occur.

At September 30, 2011 and December 31, 2010, the fair value carrying amounts of the Company's derivative instruments were as follows:

	Asset Derivatives September  30, 2011				Liability  Derivatives September 30, 2011
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Forward foreign currency exchange contracts		Other current assets	$	777		Accounts payable and accrued liabilities	$	926
Forward foreign currency exchange contracts		Other assets		748		Other long-term liabilities		0
Total			$	1,525			$	926
Derivatives not designated as hedging instruments
Forward foreign currency exchange contracts		Other current assets	$	13		Accounts payable and accrued liabilities	$	0
Total			$	13			$	0
Total derivative contracts			$	1,538			$	926
	Asset Derivatives December 31, 2010				Liability Derivatives December  31, 2010
	Balance  Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Forward foreign currency exchange contracts		Other current assets	$	1,221		Accounts payable and accrued liabilities	$	1,596
Forward foreign currency exchange contracts		Other assets		275		Other long-term liabilities		0
Total			$	1,496			$	1,596
Derivatives not designated as hedging instruments
Forward foreign currency exchange contracts		Other current assets	$	0		Accounts payable and accrued liabilities	$	77
Total			$	0			$	77
Total derivative contracts			$	1,496			$	1,673

The effect of the Company's derivative instruments on the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2011 and 2010 was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Derivatives Designated as Hedging Instruments
Net gain (loss) recognized in Other Comprehensive Income (OCI) (1)	$	7,913		$	(11,095	)	$	1,705		$	(858	)
Net gain (loss) reclassified from accumulated OCI into income (2)		(1,740	)		1,693			(3,854	)		3,802
Net gain (loss) recognized in income (3)		(1,164	)		197			(1,016	)		517
Derivatives Not Designated as Hedging Instruments
Net gain (loss) recognized in income (4)	$	1,770		$	(2,370	)	$	(961	)	$	892

(1) Net change in the fair value of the effective portion classified as OCI

(2) Effective portion classified as net product revenue

(3) Ineffective portion and amount excluded from effectiveness testing classified as selling, general and administrative expense

(4) Classified as selling, general and administrative expense

At September 30, 2011 and December 31, 2010, accumulated other comprehensive income/loss associated with foreign currency forward contracts qualifying for hedge accounting treatment was a gain of $1.6 million and a loss of $0.2 million, respectively.

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 hedges only with financial institutions that are investment grade or better to minimize the Company's exposure to potential defaults. The Company does not require collateral to be pledged under these agreements.