Financial Instruments and Risk Management

The Company is exposed to certain financial risks relating to its ongoing business operations. The primary financial risks that are managed by using derivative instruments are foreign currency risk and interest rate risk.

Foreign Currency Risk Management

In order to manage foreign currency risk, the Company enters into foreign exchange forward contracts to mitigate risk associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities. The foreign exchange forward contracts are measured at fair value and reported as current assets or current liabilities on the Condensed Consolidated Balance Sheets. Any gains or losses on the foreign exchange forward contracts are recognized in earnings in the period incurred in the Condensed Consolidated Statements of Operations.

In order to economically hedge the foreign currency exposure associated with the expected payment of the Swedish krona-denominated cash portion of the purchase price of the Offer, the Company entered into a series of non-designated foreign exchange forward and option contracts with a total notional amount of 45.2kr billion. During the three and nine months ended September 30, 2016, the Company recognized losses of $44.4 million and $128.6 million for the changes in fair value related to these contracts which is included in other expense, net in the Condensed Consolidated Statements of Operations. These contracts settled during the three months ended September 30, 2016.

The Company has also entered into forward contracts to hedge forecasted foreign currency denominated sales from certain international subsidiaries. These contracts are designated as cash flow hedges to manage foreign currency transaction risk and are measured at fair value and reported as current assets or current liabilities on the Condensed Consolidated Balance Sheets. Any changes in fair value are included in earnings or deferred through accumulated other comprehensive earnings (“AOCE”), depending on the nature and effectiveness of the offset. Any ineffectiveness in a cash flow hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations.

Following the acquisition of Meda, the Company designated certain Euro borrowings as a hedge of its investment in certain Euro-functional currency subsidiaries in order to manage foreign currency translation risk. The notional amount of the net investment hedges was €288 million and consists primarily of Euro denominated debt which has a maturity date in August 2017. Borrowings designated as net investment hedges are marked to market using the current spot exchange rate as of the end of the period, with gains and losses included in the foreign currency translation component of AOCE until the sale or substantial liquidation of the underlying net investments. The Company recorded no ineffectiveness from its net investment hedges for the three or nine months ended September 30, 2016.

Interest Rate Risk Management

The Company enters into interest rate swaps in order to manage interest rate risk associated with the Company’s fixed-rate and floating-rate debt. These derivative instruments are measured at fair value and reported as current assets or current liabilities in the Condensed Consolidated Balance Sheets.

Cash Flow Hedging Relationships

The Company’s interest rate swaps designated as cash flow hedges fix the interest rate on a portion of the Company’s variable-rate debt or hedge part of the Company’s interest rate exposure associated with variability in future cash flows attributable to changes in interest rates. Any changes in fair value are included in earnings or deferred through AOCE, depending on the nature and effectiveness of the offset. Any ineffectiveness in a cash flow hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations.

Following the acquisition of Meda, the Company designated certain interest rate swaps with a notional amount of €750 million as cash flow hedges. The maturity date of these swaps is June 2017.

In September 2015, the Company entered into a series of forward starting swaps to hedge against changes in interest rates related to future debt issuances. These swaps were designated as cash flow hedges of expected future issuances of long-term bonds. The Company executed $500 million of notional value swaps with an effective date of June 2016 and an additional $500 million of notional value swaps with an effective date of November 2016. Both sets of swaps had a maturity of 10 years. As discussed further in Note 12 Debt, during the second quarter of 2016, the Company issued $2.25 billion in an aggregate principal amount of 3.950% Senior Notes due 2026 and the Company terminated these swaps. As a result of this termination, the Company recorded losses of $64.9 million in AOCE, which are being amortized over the life of the 3.950% Senior Notes due 2026. In addition, during the second quarter of 2016, approximately $2.1 million of hedge ineffectiveness related to these forward starting swaps was recorded in interest expense on the Condensed Consolidated Statements of Operations.

Fair Value Hedging Relationships

The Company’s interest rate swaps designated as fair value hedges convert the fixed rate on a portion of the Company’s fixed-rate senior notes to a variable rate. Any changes in the fair value of these derivative instruments, as well as the offsetting change in fair value of the portion of the fixed-rate debt being hedged, is included in interest expense.

The Company regularly reviews the creditworthiness of its financial counterparties and does not expect to incur a significant loss from the failure of any counterparties to perform under any agreements. The Company is not subject to any obligations to post collateral under derivative instrument contracts. Certain derivative instrument contracts entered into by the Company are governed by master agreements, which contain credit-risk-related contingent features that would allow the counterparties to terminate the contracts early and request immediate payment should the Company trigger an event of default on other specified borrowings. The Company records all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. Accordingly, there are no offsetting amounts that net assets against liabilities.

The Effect of Derivative Instruments on the Condensed Consolidated Balance Sheets

Fair Values of Derivative Instruments

Derivatives Designated as Hedging Instruments



	Asset Derivatives
	September 30, 2016			December 31, 2015
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Prepaid expenses and other current assets	$	66.4	Prepaid expenses and other current assets	$	36.3
Foreign currency forward contracts	Prepaid expenses and other current assets	27.2		Prepaid expenses and other current assets	8.4
Total		$	93.6		$	44.7



	Liability Derivatives
	September 30, 2016			December 31, 2015
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Other current liabilities	$	1.7	Other current liabilities	$	10.5
Total		$	1.7		$	10.5

The Effect of Derivative Instruments on the Condensed Consolidated Balance Sheets

Fair Values of Derivative Instruments

Derivatives Not Designated as Hedging Instruments



	Asset Derivatives
	September 30, 2016			December 31, 2015
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Prepaid expenses and other current assets	$	7.2	Prepaid expenses and other current assets	$	20.0
Total		$	7.2		$	20.0



	Liability Derivatives
	September 30, 2016			December 31, 2015
(In millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Other current liabilities	$	23.5	Other current liabilities	$	9.3
Total		$	23.5		$	9.3

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

Derivatives in Fair Value Hedging Relationships



	Location of (Loss) Gain Recognized in Earnings on Derivatives	Amount of (Loss) Gain Recognized in Earnings on Derivatives
(In millions)		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2016			2015		2016		2015
Interest rate swaps	Interest expense	$	(9.7	)	$	29.5	$	30.2	$	34.1
Total		$	(9.7	)	$	29.5	$	30.2	$	34.1



	Location of Gain (Loss) Recognized in Earnings on Hedged Items	Amount of Gain (Loss) Recognized in Earnings on Hedged Items
(In millions)		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2016		2015			2016			2015
2023 Senior Notes (3.125% coupon)	Interest expense	$	9.7	$	(25.0	)	$	(30.2	)	$	(20.4	)
Total		$	9.7	$	(25.0	)	$	(30.2	)	$	(20.4	)

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Comprehensive Earnings

Derivatives in Cash Flow Hedging Relationships



	Amount of Gain (Loss) Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2016			2015			2016			2015
Foreign currency forward contracts	$	2.9		$	(21.3	)	$	(16.3	)	$	(36.5	)
Interest rate swaps	(0.9		)	(40.3		)	(38.0		)	(37.0		)
Total	$	2.0		$	(61.6	)	$	(54.3	)	$	(73.5	)

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Comprehensive Earnings

Derivatives in Net Investment Hedging Relationships



	Amount of Loss Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In millions)	2016			2015		2016			2015
Foreign currency borrowings and forward contracts	$	(8.1	)	$	—	$	(8.1	)	$	—
Total	$	(8.1	)	$	—	$	(8.1	)	$	—

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

Derivatives in Cash Flow Hedging Relationships



	Location of Loss Reclassified from AOCE into Earnings (Effective Portion)	Amount of Loss Reclassified from AOCE into Earnings (Effective Portion)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(In millions)		2016			2015			2016			2015
Foreign currency forward contracts	Net sales	$	(10.7	)	$	(8.1	)	$	(34.2	)	$	(30.4	)
Interest rate swaps	Interest expense	(2.3		)	(0.2		)	(6.6		)	(0.5		)
Total		$	(13.0	)	$	(8.3	)	$	(40.8	)	$	(30.9	)



	Location of Gain Excluded from the Assessment of Hedge Effectiveness	Amount of Gain Excluded from the Assessment of Hedge Effectiveness
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(In millions)		2016		2015		2016		2015
Foreign currency forward contracts	Other expense, net	$	8.9	$	11.7	$	26.0	$	35.1
Total		$	8.9	$	11.7	$	26.0	$	35.1

At September 30, 2016, the Company expects that approximately $27.8 million of pre-tax net losses on cash flow hedges will be reclassified from AOCE into earnings during the next twelve months.

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

Derivatives Not Designated as Hedging Instruments



	Location of (Loss) Gain Recognized in Earnings on Derivatives	Amount of (Loss) Gain Recognized in Earnings on Derivatives
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(In millions)		2016			2015			2016			2015
Foreign currency option and forward contracts	Other expense, net	$	(36.8	)	$	22.2		$	(98.3	)	$	29.8
Cash conversion feature of Cash Convertible Notes	Other expense, net	—			1,689.3			—			1,853.5
Purchased cash convertible note hedge	Other expense, net	—			(1,689.3		)	—			(1,853.5		)
Total		$	(36.8	)	$	22.2		$	(98.3	)	$	29.8

Fair Value Measurement

Fair value is based on the price that would be received from the sale of an identical asset or paid to transfer an identical liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy has been established that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:


•	Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.


•	Level 2: Observable market-based inputs other than quoted prices in active markets for identical assets or liabilities.


•	Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considers counterparty credit risk in its assessment of fair value.

Financial assets and liabilities carried at fair value are classified in the tables below in one of the three categories described above:



	September 30, 2016
(In millions)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements
Financial Assets
Cash equivalents:
Money market funds	$	859.9	$	—	$	—	$	859.9
Total cash equivalents	859.9		—		—		859.9
Trading securities:
Equity securities — exchange traded funds	28.7		—		—		28.7
Total trading securities	28.7		—		—		28.7
Available-for-sale fixed income investments:
U.S. Treasuries	—		6.5		—		6.5
Corporate bonds	—		17.6		—		17.6
Agency mortgage-backed securities	—		4.5		—		4.5
Asset backed securities	—		1.5		—		1.5
Other	—		3.9		—		3.9
Total available-for-sale fixed income investments	—		34.0		—		34.0
Available-for-sale equity securities:
Marketable securities	57.6		—		—		57.6
Total available-for-sale equity securities	57.6		—		—		57.6
Foreign exchange derivative assets	—		34.4		—		34.4
Interest rate swap derivative assets	—		66.4		—		66.4
Total assets at recurring fair value measurement	$	946.2	$	134.8	$	—	$	1,081.0
Financial Liabilities
Foreign exchange derivative liabilities	$	—	$	23.5	$	—	$	23.5
Interest rate swap derivative liabilities	—		1.7		—		1.7
Contingent consideration	—		—		651.5		651.5
Total liabilities at recurring fair value measurement	$	—	$	25.2	$	651.5	$	676.7



	December 31, 2015
(In millions)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements
Financial Assets
Cash equivalents:
Money market funds	$	923.3	$	—	$	—	$	923.3
Total cash equivalents	923.3		—		—		923.3
Trading securities:
Equity securities — exchange traded funds	22.8		—		—		22.8
Total trading securities	22.8		—		—		22.8
Available-for-sale fixed income investments:
U.S. Treasuries	—		4.7		—		4.7
Corporate bonds	—		15.7		—		15.7
Agency mortgage-backed securities	—		3.9		—		3.9
Asset backed securities	—		2.3		—		2.3
Other	—		1.4		—		1.4
Total available-for-sale fixed income investments	—		28.0		—		28.0
Available-for-sale equity securities:
Marketable securities	26.0		—		—		26.0
Total available-for-sale equity securities	26.0		—		—		26.0
Foreign exchange derivative assets	—		28.4		—		28.4
Interest rate swap derivative assets	—		36.3		—		36.3
Total assets at recurring fair value measurement	$	972.1	$	92.7	$	—	$	1,064.8
Financial Liabilities
Foreign exchange derivative liabilities	$	—	$	9.3	$	—	$	9.3
Interest rate swap derivative liabilities	—		10.5		—		10.5
Contingent consideration	—		—		526.4		526.4
Total liabilities at recurring fair value measurement	$	—	$	19.8	$	526.4	$	546.2

For financial assets and liabilities that utilize Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including the LIBOR yield curve, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities:


•	Cash equivalents — valued at observable net asset value prices.


•	Trading securities — valued at the active quoted market price from broker or dealer quotations or transparent pricing sources at the reporting date.


•	Available-for-sale fixed income investments — valued at the quoted market price from broker or dealer quotations or transparent pricing sources at the reporting date.


•	Available-for-sale equity securities — valued using quoted stock prices from public exchanges at the reporting date and translated to the U.S. Dollar at prevailing spot exchange rates, as applicable.


•	Interest rate swap derivative assets and liabilities — valued using the LIBOR/EURIBOR yield curves at the reporting date. Counterparties to these contracts are highly rated financial institutions.


•	Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices and spot rates at the reporting date. Counterparties to these contracts are highly rated financial institutions.

The fair value measurement of contingent consideration is determined using Level 3 inputs. The Company’s contingent consideration represents a component of the total purchase consideration for the respiratory delivery platform, the acquisition of Agila, the acquisition of Jai Pharma Limited, the acquisition of the Topicals Business and certain other acquisitions. The measurement is calculated using unobservable inputs based on the Company’s own assumptions. For the respiratory delivery platform, Jai Pharma Limited and certain other acquisitions, significant unobservable inputs in the valuation include the probability and timing of future development and commercial milestones and future profit sharing payments. A discounted cash flow method was used to value contingent consideration at September 30, 2016 and December 31, 2015, which was calculated as the present value of the estimated future net cash flows using a market rate of return. Discount rates ranging from 1.4% to 9.8% were utilized in the valuations. For the contingent consideration related to the acquisition of Agila and the acquisition of the Topicals Business, significant unobservable inputs in the valuation include the probability of future payments to the seller of amounts withheld at the closing date. Significant changes in unobservable inputs could result in material changes to the contingent consideration liability. During the three and nine months ended September 30, 2016, accretion of $10.4 million and $30.7 million, respectively, was recorded in interest expense in the Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2015, accretion of $9.7 million and $28.5 million, respectively, was recorded in interest expense in the Condensed Consolidated Statements of Operations.

Although the Company has not elected the fair value option for other financial assets and liabilities, any future transacted financial asset or liability will be evaluated for the fair value election.