Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value of Financial Instruments

Fair Value of Financial Instruments

E. Fair Value of Financial Instruments

        The fair value of the Company's financial assets and liabilities reflects the Company's estimate of amounts that it would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the Company's assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:

• Level

  1:  Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
  
  

  Level

  2:  Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
  
  

  Level

  3:  Unobservable inputs based on the Company's assessment of the assumptions that market participants would use in pricing the asset or liability.

        The Company's investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company's investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. As of September 30, 2011, the Company's investments were in money market funds, short-term U.S. Treasury securities and short-term government-sponsored enterprise securities.

        As of September 30, 2011, all of the Company's financial assets that were subject to fair value measurements were valued using observable inputs. The Company's financial assets that were valued based on Level 1 inputs consist of a money market fund, U.S. Treasury securities and government-sponsored enterprise securities. The Company's money market fund also invests in government-sponsored enterprise securities. During the three and nine months ended September 30, 2011 and 2010, the Company did not record an other-than-temporary impairment charge related to its financial assets. During the third quarter of 2011, the Company evaluated VX-759 for impairment using Level 3 inputs. Please refer to Note L, "Acquisition of ViroChem Pharma Inc." for further information. The Company's financial liabilities that were subject to fair value measurement related to the financial transactions that the Company entered into in September 2009 and are valued based on Level 3 inputs. Please refer to Note M, "September 2009 Financial Transactions," for further information. The Company's noncontrolling interest (Alios) includes the fair value of the contingent milestone and royalty payments, which is valued based on Level 3 inputs. Please refer to Note K, "Collaborative Arrangements," for further information.

        The following table sets forth the Company's financial assets and liabilities (excluding Alios' cash equivalents) subject to fair value measurements as of September 30, 2011:

			Fair Value Measurements as of September 30, 2011
					Fair Value Hierarchy
			Total		Level 1		Level 2		Level 3
			(in thousands)
Financial assets carried at fair value:
	Cash equivalents:
		Money market funds	$	193,694	$	193,694	$	—	$	—
		U.S. Treasury securities		7,788		7,788
		Government-sponsored enterprise securities		186,558		186,558		—		—
	Marketable securities:
		Government-sponsored enterprise securities		116,140		116,140		—		—
	Restricted cash			34,119		34,119		—		—
		Total	$	538,299	$	538,299	$	—	$	—
Financial liabilities carried at fair value:
	Embedded derivative related to 2012 Notes		$	6,057	$	—	$	—	$	6,057
	Liability related to sale of future milestone payments			94,162		—		—		94,162
		Total	$	100,219	$	—	$	—	$	100,219

        Alios' cash equivalents of $49.5 million as of September 30, 2011 consist of money market funds, which are valued based on Level 1 inputs.

        The following table is a reconciliation of financial liabilities measured at fair value using significant unobservable inputs (Level 3):

		Nine Months Ended September 30, 2011
		(in thousands)
Balance, December 31, 2010		$	89,888
	Change in fair value of derivative instruments		15,933
	Redemption of a portion of the 2012 Notes		(5,602	)
Balance, September 30, 2011		$	100,219

        As of September 30, 2011, the Company had $400.0 million in aggregate principal amount of 3.35% convertible senior subordinated notes due 2015 (the "2015 Notes") on its condensed consolidated balance sheet. As of September 30, 2011, these 2015 Notes had a fair value of approximately $457 million as obtained from a quoted market source.