Derivative Instruments and Hedging Activities

Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency option contracts, foreign currency forward contracts, treasury rate lock agreements and interest rate swap contracts. In instances where these financial instruments are accounted for as cash flow hedges or fair value hedges we may from time to time terminate the hedging relationship. If a hedging relationship is terminated we generally either settle the instrument or enter into an offsetting instrument.

Foreign Currency Risk Management

We maintain a foreign exchange exposure management program to mitigate the impact of volatility in foreign exchange rates on future foreign currency cash flows, translation of foreign earnings and changes in the fair value of assets and liabilities denominated in foreign currencies.

Through our revenue hedging program, we endeavor to reduce the impact of possible unfavorable changes in foreign exchange rates on our future U.S. Dollar cash flows that are derived from foreign currency denominated sales. To achieve this objective, we hedge a portion of our forecasted foreign currency denominated sales that are expected to occur in the foreseeable future, typically within the next three years, with a maximum of five years. We manage our anticipated transaction exposure principally with foreign currency forward contracts and occasionally foreign currency put and call options.

Foreign Currency Forward Contracts: We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.

We manage a portfolio of foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries. The foreign currency forward hedging contracts outstanding at June 30, 2016 and December 31, 2015 had settlement dates within 54 months and 36 months, respectively. The spot rate components of these foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses are reported in other comprehensive income (OCI) and reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. If a hedging relationship is terminated with respect to a foreign currency forward contract, accumulated gains or losses associated with the contract remain in OCI until the hedged forecasted transaction occurs and are reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. Any ineffectiveness on these foreign currency forward contracts is reported on the Consolidated Statements of Income in Other income (expense), net. The forward point components of these foreign currency forward contracts are not designated as cash flow hedges and all fair value adjustments of forward point amounts are recorded to Other income (expense), net. Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at June 30, 2016 and December 31, 2015:



	Notional Amount
Foreign Currency	June 30, 2016		December 31, 2015
Australian Dollar	$	50.9	$	45.1
British Pound	230.9		289.3
Canadian Dollar	217.8		135.9
Euro	2,284.8		2,934.3
Japanese Yen	762.1		510.4
Swedish Krona	7.6		—
Total	$	3,554.1	$	3,915.0

We consider the impact of our own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis. As of June 30, 2016, credit risk did not materially change the fair value of our foreign currency forward contracts.

We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. These foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in Other income (expense), net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at June 30, 2016 and December 31, 2015 were $901.1 million and $920.0 million, respectively.

Foreign Currency Option Contracts: From time to time, we may hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in that local currency. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and local currency notional amounts but with different strike prices. This combination of transactions is generally referred to as a “collar.” The expiration dates and notional amounts correspond to the amount and timing of forecasted foreign currency sales. The foreign currency option contracts outstanding at June 30, 2016 and December 31, 2015 had settlement dates within 54 months and 36 months, respectively. If the U.S. Dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. Dollar equivalent value of our anticipated foreign currency cash flows; however, this benefit would be capped at the strike level of the written call, which forms the upper end of the collar. The premium collected from the sale of the call option is equal to the premium paid for the purchased put option, resulting in a net zero cost for each collar. Outstanding foreign currency option contracts entered into to hedge forecasted revenue were as follows at June 30, 2016 and December 31, 2015:



	Notional Amount¹
	June 30, 2016		December 31, 2015
Foreign currency option contracts designated as hedging activity:
Purchased Put	$	1,001.6	$	641.5
Written Call	$	1,109.4	$	690.0

¹ U.S. Dollar notional amounts are calculated as the hedged local currency amount multiplied by the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activities are equal to each other.

Interest Rate Risk Management

Forward Starting Interest Rate Swaps and Treasury Rate Locks: In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the forward starting swaps or treasury rate locks are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.

During 2014, we entered into forward starting swaps that were designated as cash flow hedges to hedge against changes in interest rates that could impact an anticipated issuance of debt in 2015. During 2015, we entered into additional forward starting swaps and treasury rate locks. Forward starting swaps and treasury rate locks with a combined aggregate notional amount of $2.900 billion were settled upon the issuance of debt in August 2015, when the net fair value of the forward starting swaps and treasury rate locks in accumulated OCI was in a loss position of $21.6 million. The net loss will be recognized as interest expense over the life of the associated senior notes. At June 30, 2016 and December 31, 2015, we had outstanding forward starting swaps with effective dates in 2017 and 2018 and maturing in ten years that were designated as cash flow hedges with notional amounts as shown in the table below:



	Notional Amount
	June 30, 2016		December 31, 2015
Forward starting interest rate swap contracts:
Forward starting swaps with effective dates in 2017	$	500.0	$	200.0
Forward starting swaps with effective dates in 2018	$	500.0	$	—

Interest Rate Swap Contracts: From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swap are recorded on the Consolidated Balance Sheets with no net impact recorded in income. Any net interest payments made or received on interest rate swap contracts are recognized as interest expense. If a hedging relationship is terminated for an interest rate swap contract, accumulated gains or losses associated with the contract are measured and recorded as a reduction or increase of current and future interest expense associated with the previously hedged debt obligations.

The following table summarizes the notional amounts of our outstanding swap contracts at June 30, 2016 and December 31, 2015:



	Notional Amount
	June 30, 2016		December 31, 2015
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
1.900% senior notes due 2017	$	300.0	$	300.0
2.300% senior notes due 2018	200.0		200.0
2.250% senior notes due 2019	500.0		500.0
3.950% senior notes due 2020	500.0		500.0
3.250% senior notes due 2022	1,000.0		1,000.0
4.000% senior notes due 2023	700.0		700.0
3.625% senior notes due 2024	100.0		100.0
3.875% senior notes due 2025	300.0		250.0
Total	$	3,600.0	$	3,550.0

In July 2016, we terminated the hedging relationship for $3.600 billion notional amount of interest rate swaps by settling such swap contracts. The settlement of swap contracts resulted in the receipt of net proceeds of $195.6 million which will be accounted for as a reduction of current and future interest expense associated with these notes. See Note 11 for additional details related to reductions of current and future interest expense.

The following tables summarize the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of June 30, 2016 and December 31, 2015:



		June 30, 2016
		Fair Value
Instrument	Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	$	299.0	$	28.4
	Other non-current assets	128.6		52.6
	Accrued expenses and other current liabilities	1.3		8.5
	Other non-current liabilities	29.5		44.4
Interest rate swap agreements	Other current assets	33.8		—
	Other non-current assets	162.5		38.3
	Other non-current liabilities	2.1		7.6
Derivatives not designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	49.8		16.1
	Accrued expenses and other current liabilities	—		1.7
Interest rate swap agreements	Other current assets	2.4		2.3
	Other non-current assets	6.8		5.8
Total		$	715.8	$	205.7



		December 31, 2015
		Fair Value
Instrument	Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	$	356.2	$	18.0
	Other non-current assets	287.8		28.0
Interest rate swap agreements	Other current assets	30.7		—
	Other non-current assets	26.1		4.7
	Other non-current liabilities	0.2		0.9
Derivatives not designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	46.0		5.9
	Accrued expenses and other current liabilities	2.9		7.4
Interest rate swap agreements	Other current assets	2.4		2.3
	Other non-current assets	2.4		1.4
Total		$	754.7	$	68.6

¹ Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets in accordance with ASC 210-20.

The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the three-month periods ended June 30, 2016 and 2015:



	Three-Month Period Ended June 30, 2016
	(Effective Portion)							(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Instrument	Amount of Gain/(Loss) Recognized in OCI on Derivative¹			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income			Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Foreign exchange contracts	$	53.0		Net product sales	$	61.6		Other income (expense), net	$	8.6	2
Treasury rate lock agreements	$	—		Interest (expense)	$	(1.3	)	Other income (expense), net	$	—
Interest rate swap agreements	$	(22.3	)	Interest (expense)	$	(0.4	)	Other income (expense), net	$	—

¹ Net gains of $277.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.

² The amount of net gains recognized in income represents $8.1 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $0.5 million in gains related to the ineffective portion of the hedging relationships.



	Three-Month Period Ended June 30, 2015
	(Effective Portion)							(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Instrument	Amount of Gain/(Loss) Recognized in OCI on Derivative			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income			Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Foreign exchange contracts	$	(144.7	)	Net product sales	$	90.2		Other income (expense), net	$	13.6	1
Treasury rate lock agreements	$	—		Interest (expense)	$	(0.9	)	Other income (expense), net	$	—
Interest rate swap agreements	$	81.9		Interest (expense)	$	(0.3	)	Other income (expense), net	$	—

¹ The amount of net gains recognized in income represents $13.6 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts).

The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the six-month periods ended June 30, 2016 and 2015:



	Six-Month Period Ended June 30, 2016
	(Effective Portion)							(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Instrument	Amount of Gain/(Loss) Recognized in OCI on Derivative¹			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income			Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Foreign exchange contracts	$	(142.0	)	Net product sales	$	150.0		Other income (expense), net	$	22.9	2
Treasury rate lock agreements	$	—		Interest (expense)	$	(2.6	)	Other income (expense), net	$	—
Interest rate swap agreements	$	(48.3	)	Interest (expense)	$	(0.8	)	Other income (expense), net	$	—

¹ Net gains of $277.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.

² The amount of net gains recognized in income represents $21.1 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $1.8 million in gains related to the ineffective portion of the hedging relationships.



	Six-Month Period Ended June 30, 2015
	(Effective Portion)						(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Instrument	Amount of Gain/(Loss) Recognized in OCI on Derivative		Location of Gain/(Loss) Reclassified from Accumulated OCI into Income	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income			Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Foreign exchange contracts	$	287.9	Net product sales	$	160.7		Other income (expense), net	$	17.4	1
Treasury rate lock agreements	$	—	Interest (expense)	$	(1.8	)	Other income (expense), net	$	—
Interest rate swap agreements	$	56.2	Interest (expense)	$	(0.7	)	Other income (expense), net	$	—

¹ The amount of net gains recognized in income represents $20.8 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $3.4 million in losses related to the ineffective portion of the hedging relationships.

The following table summarizes the effect of derivative instruments designated as fair value hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2016 and 2015:



		Amount of Gain Recognized in Income on Derivative
	Location of Gain Recognized in Income on Derivative	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
Instrument	Location of Gain Recognized in Income on Derivative	2016		2015		2016		2015
Interest rate swap agreements	Interest (expense)	$	12.9	$	15.3	$	26.3	$	29.3

The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2016 and 2015:



		Amount of Gain (Loss) Recognized in Income on Derivative
	Location of Gain (Loss) Recognized in Income on Derivative	Three-Month Periods Ended June 30,					Six-Month Periods Ended June 30,
Instrument	Location of Gain (Loss) Recognized in Income on Derivative	2016		2015			2016			2015
Foreign exchange contracts	Other income (expense), net	$	0.3	$	(19.6	)	$	(27.2	)	$	54.9
Put options on our common stock	Other income (expense), net	$	3.2	$	5.0		$	7.6		$	8.9

The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Income in Other income (expense), net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods.