Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

2. FAIR VALUE MEASUREMENTS

Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange forward and option contracts, accounts payable, and short-term and long-term debt. Cash and cash equivalents, marketable securities and foreign currency exchange contracts that hedge accounts receivable and forecasted sales are reported at their respective fair values on our Condensed Consolidated Balance Sheets. The carrying value and fair value of the Convertible Notes were $2.90 billion and $3.53 billion, respectively, as of September 30, 2011. The carrying value and fair value of the Convertible Notes were $3.48 billion and $3.97 billion, respectively, as of December 31, 2010. In March 2011, we issued senior unsecured notes due in 2021 (2021 Notes) in a registered offering for an aggregate principal amount of $1.00 billion. The carrying value and fair value of the 2021 Notes were $991.9 million and $1.07 billion, respectively, as of September 30, 2011. The fair value of the Convertible Notes and 2021 Notes were based on their quoted market values.

The remaining financial instruments are reported on our Condensed Consolidated Balance Sheets at amounts that approximate current fair values.

We determine the fair value of financial and non-financial assets and liabilities using the following fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;

Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and

Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

The following table summarizes, for assets or liabilities recorded at fair value, the respective fair value and classification by level of input within the fair value hierarchy defined above (in thousands):

	September 30, 2011								December 31, 2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Debt securities:
U.S. treasury securities	$	1,155,328	$	—	$	—	$	1,155,328	$	1,355,437	$	—	$	—	$	1,355,437
Money market funds		372,260		—		—		372,260		520,063		—		—		520,063
U.S. government agencies and FDIC guaranteed securities		—		1,090,587		—		1,090,587		—		1,296,110		—		1,296,110
Municipal debt securities		—		24,591		—		24,591		—		17,625		—		17,625
Non-U.S. government securities		—		211,764		25,314		237,078		—		278,610		9,594		288,204
Corporate debt securities		—		1,703,869		—		1,703,869		—		1,119,254		—		1,119,254
Residential mortgage and asset-backed securities		—		316,526		—		316,526		—		277,043		—		277,043
Student loan-backed securities		—		—		56,507		56,507		—		—		70,771		70,771
Total debt securities		1,527,588		3,347,337		81,821		4,956,746		1,875,500		2,988,642		80,365		4,944,507
Equity securities		5,267		—		—		5,267		4,631		—		—		4,631
Derivatives		—		46,229		—		46,229		—		64,461		—		64,461
	$	1,532,855	$	3,393,566	$	81,821	$	5,008,242	$	1,880,131	$	3,053,103	$	80,365	$	5,013,599
Liabilities:
Contingent consideration	$	—	$	—	$	128,305	$	128,305	$	—	$	—	$	11,100	$	11,100
Derivatives		—		39,119		—		39,119		—		38,553		—		38,553
	$	—	$	39,119	$	128,305	$	167,424	$	—	$	38,553	$	11,100	$	49,653

Marketable securities, measured at fair value using Level 2 inputs, are primarily comprised of U.S. government-sponsored entity and corporate debt securities. We review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

The following table is a reconciliation of marketable securities measured at fair value using significant unobservable inputs (Level 3) (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Balance, beginning of period	$	104,145		$	94,062		$	80,365		$	105,662
Total realized and unrealized gains (losses) included in:
Interest and other income, net		1,707			—			4,578			115
Other comprehensive income, net		(22,681	)		2,299			(28,375	)		4,066
Sales of marketable securities		(1,350	)		(8,050	)		(28,630	)		(21,532	)
Transfers into Level 3		—			—			53,883			—
Balance, end of period	$	81,821		$	88,311		$	81,821		$	88,311
Total losses included in interest and other income, net attributable to the change in unrealized losses relating to assets still held at the reporting date	$	—		$	—		$	—		$	—

Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.

Marketable securities, measured at fair value using Level 3 inputs, are comprised of auction rate securities and Greek government-issued bonds within our available-for-sale investment portfolio. The underlying assets of our auction rate securities consist of student loans. Although auction rate securities would typically be measured using Level 2 inputs, the failure of auctions and the lack of market activity and liquidity experienced since the beginning of 2008 required that these securities be measured using Level 3 inputs. The fair value of our auction rate securities was determined using a discounted cash flow model that considered projected cash flows for the issuing trusts, underlying collateral and expected yields. Projected cash flows were estimated based on the underlying loan principal, bonds outstanding and payout formulas. The weighted-average life over which the cash flows were projected considered the collateral composition of the securities and related historical and projected prepayments. The underlying student loans have a weighted-average expected life of three to seven years. The discount rates used in our discounted cash flow model were based on market conditions for comparable or similar term asset-backed and other fixed income securities, adjusted for an illiquidity discount. This resulted in an annual discount rate of 2.38%. Our auction rate securities reset every seven to 14 days with maturity dates ranging from 2025 through 2040 and have annual interest rates ranging from 0.14% to 0.90%. As of September 30, 2011, our auction rate securities continued to earn interest. Although there continued to be failed auctions as well as lack of market activity and liquidity, we believe we had no other-than-temporary impairments on these securities as of September 30, 2011 because we do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost basis.

In 2010, the Greek government agreed to settle the majority of its aged outstanding accounts receivable with zero-coupon bonds, which were expected to trade at a discount to face value. As of September 30, 2011, we had received a total of $63.5 million in bonds, of which $53.9 million were received during the nine months ended September 30, 2011 and were included in transfers into Level 3. We have measured the fair value of the Greek zero-coupon bonds using Level 3 inputs due to the current lack of market activity and liquidity. The discount rates used in our fair value model for these bonds were based on credit default swap rates. We have the ability and intent to hold these bonds until maturity. Therefore, we believe we had no other-than-temporary impairments on these investments as of September 30, 2011.

As of September 30, 2011, our auction rate securities and Greek government-issued bonds were recorded in long-term marketable securities on our Condensed Consolidated Balance Sheet. As of December 31, 2010, our auction rate securities and substantially all of our Greek government-issued bonds were recorded in long-term marketable securities on our Consolidated Balance Sheet.

As of September 30, 2011, we had contingent consideration liabilities totaling $128.3 million. These liabilities were incurred as a result of our acquisitions of CGI Pharmaceuticals, Inc. (CGI) in July 2010, Arresto Biosciences, Inc. (Arresto) in January 2011 and Calistoga Pharmaceuticals, Inc. (Calistoga) in April 2011. The fair value measurements of contingent consideration obligations are based on significant unobservable inputs, and accordingly, such amounts are considered Level 3 measurements. The majority of our contingent consideration liabilities is related to our acquisition of Calistoga. The estimated fair value of the contingent consideration liabilities for the Calistoga acquisition was based on the probability of technical and regulatory success to achieve each of the milestone events at the expected dates and the present value of the total earnout amount. We estimated the fair value using a discount rate of 8.00%. For the three and nine months ended September 30, 2011, changes in the fair values of our contingent consideration liabilities were not significant. See Note 5 for a description of our acquisitions.