Financial Instruments and Risk Management

Financial Risks

Mylan 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, interest rate risk and equity risk.

In order to manage foreign currency risk, Mylan 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.

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.

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

In December 2011, the Company executed $500.0 million of notional interest rate swaps in order to fix the interest rate on a portion of its variable rate U.S. Term Loans under its senior credit agreement (the “Senior Credit Agreement”). In January 2012, the Company executed a further $350.0 million of notional interest rate swaps in order to fix the interest rate on an additional portion of its variable rate U.S. Term Loans under the Senior Credit Agreement. In June 2012, the Company executed an additional $750.0 million of forward starting swaps to extend the existing swaps to maturities ranging from March 2016 to November 2016. All of these interest rate swaps are designated as cash flow hedges of the variability of interest expense related to the Company’s variable rate debt. Any changes in fair value are included in earnings or deferred through AOCE, depending on the nature and effectiveness of the offset. The total notional amount of the Company’s effective interest rate swaps on floating-rate debt was $850.0 million and $500.0 million as of June 30, 2012 and December 31, 2011, respectively.

In January 2011, the Company entered into interest rate swaps which convert $500.0 million of the Company’s fixed-rate 6.0% Senior Notes due 2018 (the “2018 Senior Notes”) to a variable rate. These interest rate swaps are designated as fair value hedges, are measured at fair value and reported as current assets or current liabilities on the Condensed Consolidated Balance Sheets. The change 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. As of June 30, 2012, the total notional amount of the Company’s interest rate swaps on fixed-rate debt was $500.0 million.

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 aggregate fair value of all such contracts, which are in a net asset position at June 30, 2012, is $32.5 million. The Company is not subject to any obligations to post collateral under derivative instrument contracts.

The Company maintains significant credit exposure arising from the convertible note hedge on its Cash Convertible Notes. Holders may convert their Cash Convertible Notes subject to certain conversion provisions determined by a) the market price of the Company’s common stock, b) specified distributions to common shareholders, c) a fundamental change, as defined in the purchase agreement, or d) certain time periods specified in the purchase agreement. The conversion feature can only be settled in cash and, therefore, it is bifurcated from the Cash Convertible Notes and treated as a separate derivative instrument. In order to offset the cash flow risk associated with the cash conversion feature, the Company entered into a convertible note hedge with certain counterparties. Both the cash conversion feature and the purchased convertible note hedge are measured at fair value with gains and losses recorded in the Company’s Condensed Consolidated Statements of Operations. Also, in conjunction with the issuance of the Cash Convertible Notes, the Company entered into several warrant transactions with certain counterparties. The warrants meet the definition of derivatives; however, because these instruments have been determined to be indexed to the Company’s own stock, and have been recorded in shareholders’ equity in the Company’s Condensed Consolidated Balance Sheets, the instruments are exempt from the scope of the FASB’s guidance regarding accounting for derivative instruments and hedging activities and are not subject to the fair value provisions set forth therein.

At June 30, 2012, the convertible note hedge had a total fair value of $426.1 million, which reflects the maximum loss that would be incurred should the parties fail to perform according to the terms of the contract. The counterparties are highly rated diversified financial institutions. The counterparties are required to post collateral against this obligation should they be downgraded below thresholds specified in the contract. Eligible collateral is comprised of a wide range of financial securities with a valuation discount percentage reflecting the associated risk.

The Company regularly reviews the creditworthiness of its financial counterparties and does not expect to incur a significant loss from failure of any counterparties to perform under any agreements.

Fair Values of Derivative Instruments

Derivatives Designated as Hedging Instruments



	Asset Derivatives
	June 30, 2012			December 31, 2011
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Prepaid expenses and other current assets	$	36,848	Prepaid expenses and other current assets	$	29,773
Total		$	36,848		$	29,773



	Liability Derivatives
	June 30, 2012			December 31, 2011
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Other current liabilities	$	4,386	Other current liabilities	$	658
Foreign currency forward contracts	Other current liabilities	63,055		Other current liabilities	57,075
Total		$	67,441		$	57,733

Fair Values of Derivative Instruments

Derivatives Not Designated as Hedging Instruments



	Asset Derivatives
	June 30, 2012			December 31, 2011
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Prepaid expenses and other current assets	$	4,132	Prepaid expenses and other current assets	$	3,802
Purchased cash convertible note hedge	Other assets	426,100		Other assets	460,000
Total		$	430,232		$	463,802



	Liability Derivatives
	June 30, 2012			December 31, 2011
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Other current liabilities	$	4,761	Other current liabilities	$	11,760
Cash conversion feature of Cash Convertible Notes	Long-term debt	426,100		Long-term debt	460,000
Total		$	430,861		$	471,760

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

Derivatives in Fair Value Hedging Relationships



	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
(In thousands)		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
Interest Rate Swaps	Interest Expense	$	1,564	$	11,123	$	13,459	$	4,795
Total		$	1,564	$	11,123	$	13,459	$	4,795



	Location of Gain or (Loss) Recognized in Earnings on Hedged Items	Amount of Gain or (Loss) Recognized in Earnings on Hedging Items
(In thousands)		Three Months Ended					Six Months Ended
		June 30,					June 30,
		2012		2011			2012			2011
2018 Senior Notes	Interest Expense	$	1,751	$	(11,123	)	$	(7,074	)	$	(4,795	)
Total		$	1,751	$	(11,123	)	$	(7,074	)	$	(4,795	)

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

Derivatives in Cash Flow Hedging Relationships



	Amount of Gain or (Loss) Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In thousands)	2012			2011		2012			2011
Foreign currency forward contracts	$	(35,453	)	$	301	$	(23,992	)	$	1,689
Interest rate swaps	(1,027		)	568		(2,351		)	2,889
Total	$	(36,480	)	$	869	$	(26,343	)	$	4,578



	Location of Gain or (Loss) Reclassified from AOCE into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCE into Earnings (Effective Portion)
		Three Months Ended						Six Months Ended
		June 30,						June 30,
(In thousands)		2012			2011			2012			2011
Foreign currency forward contracts	Net revenues	$	(13,041	)	$	1,622		$	(18,295	)	$	2,367
Interest rate swaps	Interest expense	(645		)	(407		)	(1,019		)	(2,189		)
Total		$	(13,686	)	$	1,215		$	(19,314	)	$	178



	Location of Gain Excluded from the Assessment of Hedge Effectiveness	Amount of Gain Excluded from the Assessment of Hedge Effectiveness
		Three Months Ended				Six Months Ended
		June 30,				June 30,
(In thousands)		2012		2011		2012		2011
Foreign currency forward contracts	Other income, net	$	15,360	$	5,054	$	21,071	$	5,088
Total		$	15,360	$	5,054	$	21,071	$	5,088

At June 30, 2012, the Company expects that approximately $53.0 million of pre-tax net losses on cash flow hedges will be reclassified from AOCE into earnings during the next 12 months.

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

Derivatives in Net Investment Hedging Relationships



	Amount of Gain or (Loss) Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In thousands)	2012		2011			2012		2011
Foreign currency borrowings	$	—	$	(13,577	)	$	—	$	(47,296	)
Total	$	—	$	(13,577	)	$	—	$	(47,296	)

There was no gain or loss recognized into earnings on derivatives with net investment hedging relationships during the six months ended June 30, 2012 or 2011. The Euro-denominated borrowings that had been designated as a hedge of the net investments in certain Euro functional currency subsidiaries were repaid in November 2011.

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

Derivatives Not Designated as Hedging Instruments



	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Three Months Ended						Six Months Ended
		June 30,						June 30,
(In thousands)		2012			2011			2012			2011
Foreign currency forward contracts	Other income, net	$	(13,912	)	$	2,682		$	(8,657	)	$	14,144
Cash conversion feature of Cash Convertible Notes	Other income, net	85,500			(59,700		)	33,900			(109,000		)
Purchased cash convertible note hedge	Other income, net	(85,500		)	59,700			(33,900		)	109,000
Total		$	(13,912	)	$	2,682		$	(8,657	)	$	14,144

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:



	June 30, 2012
(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Cash equivalents:
Money market funds	$	75,297	$	—	$	—	$	75,297
Total cash equivalents	75,297		—		—		75,297
Trading securities:
Equity securities — exchange traded funds	9,572		—		—		9,572
Total trading securities	9,572		—		—		9,572
Available-for-sale fixed income investments:
U.S. Treasuries	—		11,505		—		11,505
Corporate bonds	—		7,283		—		7,283
Agency mortgage-backed securities	—		1,291		—		1,291
Other	—		2,538		—		2,538
Total available-for-sale fixed income investments	—		22,617		—		22,617
Available-for-sale equity securities:
Biosciences industry	51		—		—		51
Total available-for-sale equity securities	51		—		—		51
Foreign exchange derivative assets	—		4,132		—		4,132
Interest rate swap derivative assets	—		36,848		—		36,848
Purchased cash convertible note hedge	—		426,100		—		426,100
Total assets at fair value ⁽¹⁾	$	84,920	$	489,697	$	—	$	574,617
Financial Liabilities:
Foreign exchange derivative liabilities	$	—	$	67,816	$	—	$	67,816
Interest rate swap derivative liabilities	—		4,386		—		4,386
Cash conversion feature of Cash Convertible Notes	—		426,100		—		426,100
Contingent consideration	—		—		393,339		393,339
Total liabilities at fair value ⁽¹⁾	$	—	$	498,302	$	393,339	$	891,641



	December 31, 2011
(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Cash equivalents:
Money market funds	$	152,331	$	—	$	—	$	152,331
Total cash equivalents	152,331		—		—		152,331
Trading securities:
Equity securities — exchange traded funds	6,760		—		—		6,760
Total trading securities	6,760		—		—		6,760
Available-for-sale fixed income investments:
U.S. Treasuries	—		1,519		—		1,519
Corporate bonds	—		7,192		—		7,192
Agency mortgage-backed securities	—		12,346		—		12,346
Other	—		2,697		—		2,697
Total available-for-sale fixed income investments	—		23,754		—		23,754
Available-for-sale equity securities:
Biosciences industry	172		—		—		172
Total available-for-sale equity securities	172		—		—		172
Foreign exchange derivative assets	—		3,802		—		3,802
Interest rate swap derivative assets	—		29,773		—		29,773
Purchased cash convertible note hedge	—		460,000		—		460,000
Total assets at fair value ⁽¹⁾	$	159,263	$	517,329	$	—	$	676,592
Financial Liabilities:
Foreign exchange derivative liabilities	$	—	$	68,835	$	—	$	68,835
Interest rate swap derivative liabilities	—		658		—		658
Cash conversion feature of Cash Convertible Notes	—		460,000		—		460,000
Contingent consideration	—		—		376,110		376,110
Total liabilities at fair value ⁽¹⁾	$	—	$	529,493	$	376,110	$	905,603

____________


⁽¹⁾	The Company chose not to elect the fair value option for its financial assets and liabilities that had not been previously carried at fair value. Therefore, material financial assets and liabilities not carried at fair value, such as short-term and long-term debt obligations and trade accounts receivable and payable, are still reported at their carrying values.

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 the London Exchange at the reporting date and translated to U.S. Dollars at prevailing spot exchange rates.


•	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, none of which experienced any significant downgrades during the six months ended June 30, 2012 that would reduce the receivable amount owed, if any, to the Company.


•	Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices at the reporting date. Counterparties to these contracts are highly rated financial institutions, none of which experienced any significant downgrades during the six months ended June 30, 2012 that would reduce the receivable amount owed, if any, to the Company.

•

Cash conversion feature of cash convertible notes and purchased convertible note hedge — valued using quoted prices for the Company’s cash convertible notes, its implied volatility and the quoted yield on the Company’s other long-term debt at the reporting date. Counterparties to the purchased convertible note hedge are highly rated financial institutions, none of which experienced any significant downgrades during the six months ended June 30, 2012 that would reduce the receivable amount owed, if any, to the Company.

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 and other acquisitions made during 2011. The measurement is calculated using unobservable inputs based on the Company’s own assumptions. 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 June 30, 2012 and December 31, 2011. Discount rates ranging from 3.3% to 10.4% were utilized in the valuation and represent the present value of the estimated future net cash flows using a market rate of return at June 30, 2012. Significant changes in unobservable inputs could result in material changes to the contingent consideration liability. To reflect a change in fair value measurement of contingent consideration during the six months ended June 30, 2012, a net adjustment of approximately $1.5 million was recorded, to increase the liability. For the three and six months ended June 30, 2012, accretion of $7.5 million and $15.7 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 financial assets and liabilities, any future transacted financial asset or liability will be evaluated for the fair value election.