Derivative Financial Instruments

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

The Company receives royalties from Astellas on net sales of XTANDI outside of the United States, which are paid to the Company in U.S. dollars and calculated by converting the respective countries’ XTANDI net sales in local currency to U.S. dollars. Because a significant portion of ex-U.S. sales of XTANDI have been generated in the European Union and in Japan, the royalties received from Astellas related to such sales are dependent on the value of the U.S. dollar versus the Euro and Japanese Yen. The Company also conducts certain R&D activities outside of the United States, with expenses incurred in various currencies, including the Euro and Japanese Yen, and these expenses partially offset the currency exposure related to its collaboration revenue from royalties.

In the first quarter of 2016, the Company began using forward foreign currency exchange contracts to hedge a portion of its gross collaboration revenue exposure from royalties related to the Euro and the Japanese Yen. These derivative instruments are designated as cash flow hedges and have maturity dates of 15 months or less. The Company assesses, both at inception and on an ongoing basis, whether its cash flow hedge derivative instruments are highly effective in offsetting the changes in cash flows of the hedged items. At inception and on a quarterly basis, the Company documents and asserts that the critical terms of its derivatives (i.e. notional amounts, currency rate mechanisms, and timing) match the critical terms of the hedged items for the risk being hedged. As such, the Company will assume no ineffectiveness in the hedge relationship because all of the critical terms of the hedge and hedged items are matched. If the Company determines that a forecasted transaction is no longer probable of occurring, hedge accounting will be discontinued for the affected portion of the hedge instrument. If the hedged item becomes probable of not occurring, any related gain or loss on the contract will be recognized immediately in earnings as other income (expense), net.

The effective portion of changes in the fair value of these instruments is initially recorded as a component of accumulated other comprehensive income (loss), or OCI, in stockholders’ equity, and subsequently reclassified into earnings as collaboration revenue when the underlying exposure is reflected in collaboration revenue. All of the gains and losses related to the hedged forecasted transactions reported in accumulated OCI at June 30, 2016 are expected to be reclassified to collaboration revenue within the next 12 months. There were no amounts related to ineffectiveness for the six months ended June 30, 2016. Additionally, the Company did not discontinue any of its cash flow hedges during the six months ended June 30, 2016.

As of June 30, 2016, the Company had an average derivative USD equivalent notional amount on its open contracts of $4.8 million. The Company plans to enter into approximately eight foreign currency forward contracts per quarter covering a rolling four-quarter period.

The obligations of the Company under its foreign exchange contracts are secured obligations under the terms of the Company’s senior secured credit facility. In addition, the Company‘s foreign exchange contracts are subject to standard International Swaps and Derivatives Association (ISDA) master agreements which provide for various events of default, including a cross default to the Company’s senior secured credit facility. If an event of default or termination event where the Company is the defaulting party occurs, the counterparties to these contracts could request immediate payment on the derivatives. The aggregate fair value of all foreign exchange contracts with credit-risk-related contingent features that are in a liability position as of June 30, 2016, is $1.5 million. In addition, the agreements governing such contracts permit the Company, subject to applicable requirements, to net settle transactions of the same currency with a single net amount payable by one party to the other.

While all of the Company’s derivative contracts allow the right to offset assets or liabilities, it is the Company’s policy to present its derivatives on a gross basis in the unaudited condensed consolidated balance sheets. The following table summarizes the classification and fair values of derivative instruments on the Company’s unaudited condensed consolidated balance sheet:

	June 30, 2016
	Asset Derivatives				Liability Derivatives
	Classification		Fair Value		Classification		Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts		Other current assets	$	368		Other current liabilities	$	(1,247	)
Foreign currency exchange contracts		Other non-current assets		35		Other non-current liabilities		—
Total derivatives designated as hedges				403				(1,247	)
Derivatives not designated as hedges:
Foreign currency exchange contracts		Other current assets		—		Other current liabilities		(222	)
Total derivatives not designated as hedges				—				(222	)
Total derivatives			$	403			$	(1,469	)

The following table summarizes the effect of the Company’s foreign currency exchange contracts on its unaudited condensed consolidated financial statements:

	Three Months Ended			Six Months Ended
	June 30, 2016			June 30, 2016
Derivatives designated as hedges:
Gains (losses) recognized in accumulated OCI (effective portion)	$	(574	)	$	(1,066	)
Gains (losses) reclassified from accumulated OCI into collaboration revenue (effective portion)		(222	)		(222	)
Gains (losses) recognized in other income (expense), net		—			—

As of June 30, 2016, the Company held one type of financial instrument – derivative contracts related to foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on the Company’s unaudited condensed consolidated balance sheet:

June 30, 2016
Offsetting of Derivative Assets/Liabilities
									Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Description	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance  Sheet			Derivative Financial Instruments		Cash Collateral Received/Pledged		Net Amount (Legal Offset)
Derivative assets	$	403			—	$	403			—		—	$	403
Derivative liabilities	$	(1,469	)		—	$	(1,469	)		—		—	$	(1,469	)