Financial Instruments and Risk Management

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 and interest rate risk.

Foreign Currency Risk Management

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.

Interest Rate Risk Management

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 in the Condensed Consolidated Balance Sheets.

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. In conjunction with the senior notes offering during the second quarter of 2013 and the related repayment of the Company’s variable-rate U.S. Term Loans (see Note 10), the Company terminated all existing interest rate swaps that had previously fixed the interest rate on a portion of the Company’s variable-rate U.S. Term Loans. As a result, during the nine months ended September 30, 2013, approximately $0.8 million that had previously been classified in AOCE was recognized into other (expense) income, net, as the forecasted transaction was no longer probable of occurring. In addition, $750 million of floating-rate debt interest rate swaps that were extended through forward-starting swaps were terminated during the nine months ended September 30, 2013 in the transaction described above. The total notional amount of the Company’s interest rate swaps on floating-rate debt was $850 million as of December 31, 2012. There were no interest rate swaps on floating-rate debt as of September 30, 2013.

In anticipation of issuing fixed-rate debt, the Company may use treasury rate locks or forward starting interest rate swaps that are designated as cash flow hedges. During the first and third quarters of 2013, the Company entered into a series of forward starting swaps to hedge against changes in interest rates that could impact the Company’s expected future financing of the acquisition of Agila Specialties. These interest rate swaps are designated as cash flow hedges of expected future issuances of long-term bonds. In February 2013, the Company executed interest rate swaps with a notional value of $1.07 billion and an effective date in September 2013. In September, the swaps were extended to an effective date in November 2013. In September 2013, the Company executed an additional $930 million of notional value of interest rate swaps with an effective date in November 2013. The swaps have maturities ranging from three years to 30 years.

In April 2013, the Company entered into a series of forward starting swaps to hedge against changes in interest rates that could impact future debt issuances. These swaps are designated as cash flow hedges of expected future issuances of long-term bonds. The Company executed $1.80 billion of notional value swaps with effective dates ranging from December 2014 to August 2015. These swaps have maturities of ten years.

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. These interest rate swaps designated as fair value hedges are measured at fair value and reported as assets or current liabilities in the Condensed Consolidated Balance Sheets. 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. In June 2013, the Company entered into interest rate swaps with a notional value of $500 million that were designated as hedges of the Company’s 1.80% Senior Notes due 2016. The total notional amount of the Company’s interest rate swaps on fixed-rate debt was $1 billion and $500 million as of September 30, 2013 and December 31, 2012, respectively.

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 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 September 30, 2013, the convertible note hedge had a total fair value of $1.08 billion, 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 with both commercial and investment banking operations. 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.

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 asset and liability balances presented in the tables below reflect the gross amounts of derivatives recorded in the Company’s Condensed Consolidated Financial Statements.

Fair Values of Derivative Instruments

Derivatives Designated as Hedging Instruments



	Asset Derivatives
	September 30, 2013			December 31, 2012
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Prepaid expenses and other current assets	$	90,682	Prepaid expenses and other current assets	$	36,647
Interest rate swaps	Other assets	123,143		Other assets	—
Total		$	213,825		$	36,647



	Liability Derivatives
	September 30, 2013			December 31, 2012
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps	Other current liabilities	$	13,957	Other current liabilities	$	9,823
Foreign currency forward contracts	Other current liabilities	81,427		Other current liabilities	15,863
Total		$	95,384		$	25,686

Fair Values of Derivative Instruments

Derivatives Not Designated as Hedging Instruments



	Asset Derivatives
	September 30, 2013			December 31, 2012
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Prepaid expenses and other current assets	$	5,264	Prepaid expenses and other current assets	$	5,818
Purchased cash convertible note hedge	Other assets	1,078,900		Other assets	636,300
Total		$	1,084,164		$	642,118



	Liability Derivatives
	September 30, 2013			December 31, 2012
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign currency forward contracts	Other current liabilities	$	2,563	Other current liabilities	$	3,365
Cash conversion feature of Cash Convertible Notes	Long-term debt	1,078,900		Long-term debt	636,300
Total		$	1,081,463		$	639,665

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				Nine Months Ended
		September 30,				September 30,
		2013		2012		2013			2012
Interest rate swaps	Interest expense	$	5,354	$	13,050	$	(4,492	)	$	26,509
Total		$	5,354	$	13,050	$	(4,492	)	$	26,509



	Location of (Loss) or Gain Recognized in Earnings on Hedged Items	Amount of (Loss) or Gain Recognized in Earnings on Hedged Items
(In thousands)		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2013			2012			2013		2012
2016 Senior Notes	Interest expense	$	(1,747	)	$	—		$	833	$	—
2018 Senior Notes (6.00% coupon)	Interest expense	211			(9,823		)	14,331		(16,897		)
Total		$	(1,536	)	$	(9,823	)	$	15,164	$	(16,897	)

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

Derivatives in Cash Flow Hedging Relationships



	Amount of (Loss) or Gain Recognized in AOCE (Net of Tax) on Derivative (Effective Portion)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2013			2012			2013			2012
Foreign currency forward contracts	$	(37,371	)	$	23,981		$	(84,826	)	$	(11	)
Interest rate swaps	4,851			(5,485		)	119,837			(7,836		)
Total	$	(32,520	)	$	18,496		$	35,011		$	(7,847	)



	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 thousands)		2013			2012			2013			2012
Foreign currency forward contracts	Net revenues	$	(22,521	)	$	(15,062	)	$	(44,365	)	$	(33,357	)
Interest rate swaps	Interest expense	—			(651		)	(1,408		)	(1,670		)
Interest rate swaps	Other (expense) income, net	—			—			(818		)	—
Total		$	(22,521	)	$	(15,713	)	$	(46,591	)	$	(35,027	)



	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 thousands)		2013		2012		2013		2012
Foreign currency forward contracts	Other (expense) income, net	$	16,239	$	22,210	$	43,455	$	43,281
Total		$	16,239	$	22,210	$	43,455	$	43,281

At September 30, 2013, the Company expects that approximately $63.3 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 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						Nine Months Ended
		September 30,						September 30,
(In thousands)		2013			2012			2013			2012
Foreign currency forward contracts	Other (expense) income, net	$	13,360		$	(7,860	)	$	9,574		$	(16,517	)
Cash conversion feature of Cash Convertible Notes	Other (expense) income, net	(299,200		)	(98,700		)	(442,600		)	(64,800		)
Purchased cash convertible note hedge	Other (expense) income, net	299,200			98,700			442,600			64,800
Total		$	13,360		$	(7,860	)	$	9,574		$	(16,517	)

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, 2013
(In thousands)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements
Financial Assets
Cash equivalents:
Money market funds	$	17,822	$	—	$	—	$	17,822
Total cash equivalents	17,822		—		—		17,822
Trading securities:
Equity securities — exchange traded funds	15,393		—		—		15,393
Total trading securities	15,393		—		—		15,393
Available-for-sale fixed income investments:
U.S. Treasuries	—		11,201		—		11,201
Corporate bonds	—		9,978		—		9,978
Agency mortgage-backed securities	—		747		—		747
Other	—		2,697		—		2,697
Total available-for-sale fixed income investments	—		24,623		—		24,623
Available-for-sale equity securities:
Biosciences industry	173		—		—		173
Total available-for-sale equity securities	173		—		—		173
Foreign exchange derivative assets	—		5,264		—		5,264
Interest rate swap derivative assets	—		213,825		—		213,825
Purchased cash convertible note hedge	—		1,078,900		—		1,078,900
Total assets at recurring fair value measurement	$	33,388	$	1,322,612	$	—	$	1,356,000
Financial Liabilities
Foreign exchange derivative liabilities	$	—	$	83,990	$	—	$	83,990
Interest rate swap derivative liabilities	—		13,957		—		13,957
Cash conversion feature of Cash Convertible Notes	—		1,078,900		—		1,078,900
Contingent consideration	—		—		406,216		406,216
Total liabilities at recurring fair value measurement	$	—	$	1,176,847	$	406,216	$	1,583,063



	December 31, 2012
(In thousands)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements
Financial Assets
Cash equivalents:
Money market funds	$	135,209	$	—	$	—	$	135,209
Total cash equivalents	135,209		—		—		135,209
Trading securities:
Equity securities — exchange traded funds	10,913		—		—		10,913
Total trading securities	10,913		—		—		10,913
Available-for-sale fixed income investments:
U.S. Treasuries	—		11,085		—		11,085
Corporate bonds	—		8,189		—		8,189
Agency mortgage-backed securities	—		1,050		—		1,050
Other	—		2,502		—		2,502
Total available-for-sale fixed income investments	—		22,826		—		22,826
Available-for-sale equity securities:
Biosciences industry	102		—		—		102
Total available-for-sale equity securities	102		—		—		102
Foreign exchange derivative assets	—		5,818		—		5,818
Interest rate swap derivative assets	—		36,647		—		36,647
Purchased cash convertible note hedge	—		636,300		—		636,300
Total assets at recurring fair value measurement	$	146,224	$	701,591	$	—	$	847,815
Financial Liabilities
Foreign exchange derivative liabilities	$	—	$	19,228	$	—	$	19,228
Interest rate swap derivative liabilities	—		9,823		—		9,823
Cash conversion feature of Cash Convertible Notes	—		636,300		—		636,300
Contingent consideration	—		—		379,197		379,197
Total liabilities at recurring fair value measurement	$	—	$	665,351	$	379,197	$	1,044,548

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 nine months ended September 30, 2013 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 nine months ended September 30, 2013 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 nine months ended September 30, 2013 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 certain other acquisitions. 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 September 30, 2013 and December 31, 2012, which was calculated as the present value of the estimated future net cash flows using a market rate of return. Discount rates ranging from 1.9% to 11.0% were utilized in the valuation. Significant changes in unobservable inputs could result in material changes to the contingent consideration liability. During the three and nine months ended September 30, 2013, accretion of $8.2 million and $23.9 million, respectively, was recorded in interest expense. A fair value adjustment to increase the liability by approximately $15.0 million and $3.1 million, during the three and nine months ended September 30, 2013, respectively, was recorded as a component of selling, general and administrative expense.

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.