UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

Form 10-Q

 

 

 

Commission file number 1-9114

 

MYLAN INC.

(Exact name of registrant as specified in its charter)

 

 

1500 Corporate Drive, Canonsburg, Pennsylvania 15317

(Address of principal executive offices)

 

(724) 514-1800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

MYLAN INC. AND SUBSIDIARIES

 

FORM 10-Q
For the Quarterly Period Ended
September 30, 2009

 

INDEX

 

MYLAN INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations

 

 

See Notes to Condensed Consolidated Financial Statements

MYLAN INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

See Notes to Condensed Consolidated Financial Statements

MYLAN INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

See Notes to Condensed Consolidated Financial Statements

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“interim financial statements”) of Mylan Inc. and subsidiaries (“Mylan” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes and other financial information included in audited financial statements were condensed or omitted. The interim financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented.

 

These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2008.

 

The interim results of operations for the three and nine months ended September 30, 2009 and the interim cash flows for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full fiscal year or any other future period.

 

Management evaluated all activity of Mylan through October 30, 2009 (the issue date of the interim financial statements) and concluded that no subsequent events have occurred that would require recognition in the interim financial statements or disclosure in the notes to the interim financial statements, other than as discussed elsewhere in the Notes to Condensed Consolidated Financial Statements.

 

 

Revenue is recognized for product sales when title and risk of loss pass to the Company’s customers and when provisions for estimates, including discounts, rebates, price adjustments, returns, chargebacks and other promotional programs are reasonably determinable. No revisions were made to the methodology used in determining these provisions during the nine months ended September 30, 2009. Accounts receivable are presented net of allowances relating to these provisions. Such allowances were $546.8 million and $496.5 million as of September 30, 2009 and December 31, 2008. Other current liabilities include $250.9 million and $238.9 million at September 30, 2009 and December 31, 2008, for certain rebates and other adjustments that are payable to indirect customers.

 

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162 (as codified in the FASB Accounting Standards Codification^tm (“ASC” or “Codification”) topic 105, Generally Accepted Accounting Principles (“ASC 105”)). This update to ASC 105 establishes the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This update to ASC 105 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. Following this update to ASC 105, the FASB will not issue new standards in the form of Statements, FASB Staff Positions (“FSP”), or Emerging Issues Task Force (“EITF”) Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the basis for conclusions on the change(s) in the Codification. The Company adopted the requirements of this standard for the quarter ended September 30, 2009. The adoption of this

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

update to ASC 105 did not have a material impact on the Company’s Condensed Consolidated Financial Statements. All accounting references have been updated, and therefore SFAS references have been augmented with ASC references. In future filings all accounting references will refer to the Codification only.

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of SFAS No. 140 (as codified in ASC topic 860, Transfers and Servicing (“ASC 860”)). This update to ASC 860 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (which is codified in ASC 860), and will require more disclosures about transfers of financial assets, including securitization transactions and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. This update to ASC 860 enhances disclosures reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. This update to ASC 860 is effective for fiscal years beginning after November 15, 2009. Early application is not permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this update to ASC 860.

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (as codified in ASC topic 855, Subsequent Events (“ASC 855”)). This update to ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted the requirements of this standard as of June 30, 2009. The adoption of this update to ASC 855 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (as codified in ASC topic 320, Investments — Debt and Equity Securities (“ASC 320”)). This update to ASC 320 amends SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, SFAS 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and EITF Issue 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets (all of which are codified in ASC 320), to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This standard replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. The Company adopted the requirements of this standard as of June 30, 2009. The adoption of this update to ASC 320 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (as codified in ASC topic 825, Financial Instruments (“ASC 825”)). This update to ASC 825 requires companies to disclose in interim financial statements the fair value of financial instruments within the scope of ASC 825. However, companies are not required to provide in interim periods the disclosures about the concentration of credit risk of all financial instruments that are currently required in annual financial statements. The fair-value information disclosed in the footnotes must be presented together with the related carrying amount, making it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the balance sheet. This update to ASC 825 also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period. The

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

Company adopted the requirements of this standard as of June 30, 2009. The adoption of this update to ASC 825 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

On January 1, 2009, the Company adopted FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (as codified in ASC topic 470, Debt (“ASC 470”)). Under the new rules, for convertible debt instruments (including the Company’s Senior Convertible Notes) that may be settled entirely or partially in cash upon conversion, entities now separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The effect of the new rules, as they apply to the Company’s Senior Convertible Notes, is that the equity component is included in the additional paid-in capital section of shareholders’ equity on the Company’s consolidated balance sheet and the value of the equity component is treated as an original issue discount for purposes of accounting for the debt component. Higher interest expense results through the accretion of the discounted carrying value of the Senior Convertible Notes to their face amount over their term. This update to ASC 470 requires retrospective application as disclosed below.

 

On January 1, 2009, the Company adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB 51 (as codified in ASC topic 810, Consolidation (“ASC 810”)). This update to ASC 810 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements (which is codified in ASC 810), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, sometimes called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. This update to ASC 810 requires, among other items, that a noncontrolling interest be included in the consolidated balance sheet within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statement of operations; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value.

 

The Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008, as originally reported and as adjusted for the adoption of the aforementioned updates to ASC 470 and ASC 810, are as follows:

 

 

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

 

The Company’s Condensed Consolidated Balance Sheet as originally reported and as adjusted for the adoption of the aforementioned updates to ASC 470 and ASC 810, is as follows:

 

 

 

Acquisition of the Remaining Interest in Matrix Laboratories Limited

 

On March 26, 2009, the Company announced plans to buy the remaining public interest in Matrix Laboratories Limited (“Matrix”) from its minority shareholders pursuant to a voluntary delisting offer. At the time, the Company owned approximately 71.2% of Matrix through a wholly-owned subsidiary and controlled more than 76% of its voting rights. On June 1, 2009, Mylan announced that it had successfully completed the delisting offer and accepted the discovered price of 211 Rupees per share, which was established by the reverse book building process prescribed by Indian regulations. During the nine months ended September 30, 2009, the Company completed the

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

purchase of an additional portion of the remaining interest from minority shareholders of Matrix, for cash of approximately $172.3 million, bringing both the Company’s total ownership and control to approximately 95%.

 

Matrix’s stock was delisted effective August 21, 2009. Minority shareholders who have not yet tendered their shares may do so during the six-month period following the delisting. The purchase was treated as an equity transaction as required by ASC topic 805, Business Combinations (“ASC 805”). Under ASC 805, subsequent increases or decreases of ownership that do not result in a change in control are accounted for as equity transactions. As such, upon purchase of the additional interest in Matrix, both the noncontrolling interest and additional paid in capital on the Condensed Consolidated Balance Sheet were reduced by $21.6 million and $154.0 million, respectively.

 

Termination of Joint Ventures

 

During the nine months ended September 30, 2009, Matrix and Aspen Pharmacare Holdings Limited (“Aspen”) terminated two joint ventures in which each held a 50% share; Astrix Laboratories Limited (“Astrix”) and Fine Chemicals Corporation (“FCC”). Under the agreed upon terms, Matrix sold its 50% interest in FCC to Aspen for $23.3 million. At the same time, a wholly-owned subsidiary of Mylan purchased from Aspen its 50% interest in Astrix for $38.9 million. These transactions resulted in a net gain of approximately $10.4 million, which is included in other income, net, in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2009. As of the date of purchase, June 1, 2009, the results of Astrix were consolidated with those of Mylan.

 

The Company accounted for the acquisition of the remaining 50% of Astrix using the purchase method of accounting. Under the purchase method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at the preliminary estimate of their respective fair values.

 

Biologics Agreement

 

On June 29, 2009, Mylan announced that it has executed a definitive agreement with Biocon Limited (“Biocon”), a publicly traded company on the Indian stock exchanges, for an exclusive collaboration on the development, manufacturing, supply and commercialization of multiple, high value generic biologic compounds for the global marketplace.

 

As part of this collaboration, Mylan and Biocon will share development, capital and certain other costs to bring products to market. Mylan will have exclusive commercialization rights in the U.S., Canada, Japan, Australia, New Zealand and in the European Union and European Free Trade Association countries through a profit sharing arrangement with Biocon. Mylan will have co-exclusive commercialization rights with Biocon in all other markets around the world. In conjunction with executing this agreement, Mylan recorded a non-recurring research and development charge in the nine months ended September 30, 2009 related to its up-front, non-refundable obligation pursuant to the agreement.

 

 

On February 27, 2008, the Company announced that it was reviewing strategic alternatives for its specialty business, Dey, L.P. (“Dey”), including the potential sale of the business. This decision was based upon several factors, including a strategic review of the business and the expected performance of the Perforomist^® Solution product, where anticipated growth was determined to be slower than expected and the timeframe to reach peak sales was determined to be longer than was originally anticipated.

 

As a result of the Company’s ongoing review of strategic alternatives, the Company determined that it was more likely than not that the business would be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Accordingly, a recoverability test of Dey’s long-lived assets was performed during the three months ended March 31, 2008 in accordance with ASC topic 360, Property, Plant, and Equipment (“ASC

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

360”). The Company evaluated both cash flow projections and estimated proceeds from the eventual disposition of the long-lived assets. The estimated undiscounted future cash flows exceeded the book values of the long-lived assets and, as a result, no impairment charge was recorded.

 

Upon the closing of the former Merck Generics business transaction, Dey was defined as the Specialty Segment under the provisions of ASC topic 280, Segment Reporting. Dey is also considered a reporting unit under the provisions of ASC topic 350, Intangibles — Goodwill and Other (“ASC 350”). Upon closing of the transaction, the Company allocated $711.2 million of goodwill to Dey.

 

The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired. As the Company had determined that it was more likely than not that the business would be sold or otherwise disposed of significantly before the end of its previously estimated useful life, the Company was required, during the three months ended March 31, 2008, to assess whether any portion of its recorded goodwill balance was impaired.

 

The first step of the ASC 350 impairment analysis consisted of a comparison of the fair value of the reporting unit with its carrying amount, including the goodwill. The Company performed extensive valuation analyses, utilizing both income and market-based approaches, in its goodwill assessment process. The following describes the valuation methodologies used to derive the estimated fair value of the reporting unit.

 

Income Approach:  To determine fair value, the Company discounted the expected future cash flows of the reporting unit, using a discount rate, which reflected the overall level of inherent risk and the rate of return an outside investor would have expected to earn. To estimate cash flows beyond the final year of its model, the Company used a terminal value approach. Under this approach, the Company used estimated operating income before interest, taxes, depreciation and amortization in the final year of its model, adjusted to estimate a normalized cash flow, applied a perpetuity growth assumption, and discounted by a perpetuity discount factor to determine the terminal value. The Company incorporated the present value of the resulting terminal value into its estimate of fair value.

 

Market-Based Approach:  To corroborate the results of the income approach described above, Mylan estimated the fair value of its reporting unit using several market-based approaches, including the guideline company method which focused on comparing its risk profile and growth prospects to a select group of publicly traded companies with reasonably similar guidelines.

 

Based on the ASC 350 “step one” analysis that was performed for Dey, the Company determined that the carrying amount of the net assets of the reporting unit was in excess of its estimated fair value. As such, the Company was required to perform the “step two” analysis for Dey, in order to determine the amount of any goodwill impairment. The “step two” analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill based on a hypothetical allocation of the estimated fair value to the net assets. Based on the second step analysis, the Company concluded that $385.0 million of the goodwill recorded at Dey was impaired. As a result, the Company recorded a non-cash goodwill impairment charge of $385.0 million during the three months ended March 31, 2008, which represented the Company’s best estimate as of March 31, 2008. The allocation discussed above was performed only for purposes of assessing goodwill for impairment; accordingly, Mylan did not adjust the net book value of the assets and liabilities on the Company’s Condensed Consolidated Balance Sheet, other than goodwill, as a result of this process.

 

The determination of the fair value of the reporting unit required the Company to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating income before depreciation and amortization, and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. In addition, changes in underlying

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

assumptions could have a significant impact on either the fair value of the reporting unit or the goodwill impairment charge.

 

The hypothetical allocation of the fair value of the reporting unit to individual assets and liabilities within the reporting unit also required the Company to make significant estimates and assumptions. The hypothetical allocation required several analyses to determine the estimate of the fair value of assets and liabilities of the reporting unit.

 

In September 2008, following the completion of the comprehensive review of strategic alternatives for Dey, the Company announced its decision to retain the Dey business. This decision included a plan to realign the business, and as a result, the Company expects to incur severance and other exit costs (see Note 14). In addition, the comprehensive review resulted in the impairment of intangible assets related to certain non-core, insignificant, third-party products in December 2008.

 

 

Mylan’s shareholders approved the 2003 Long-Term Incentive Plan on July 25, 2003, and approved certain amendments on July 28, 2006, April 25, 2008 and May 7, 2009 (as amended, the “2003 Plan”). Under the 2003 Plan, 37,500,000 shares of common stock are reserved for issuance to key employees, consultants, independent contractors and non-employee directors of Mylan through a variety of incentive awards, including: stock options, stock appreciation rights, restricted shares and units, performance awards, other stock-based awards and short-term cash awards. Awards are granted at the fair value of the shares underlying the options at the date of the grant, generally become exercisable over periods ranging from three to four years, and generally expire in ten years. In the 2003 Plan, no more than 8,000,000 shares may be issued as restricted shares, restricted units, performance shares and other stock-based awards.

 

Upon approval of the 2003 Plan, the 1997 Incentive Stock Option Plan (the “1997 Plan”) was frozen, and no further grants of stock options will be made under that plan. However, there are stock options outstanding from the 1997 Plan, expired plans and other plans assumed through acquisitions.

 

The following table summarizes stock option activity:

 

 

As of September 30, 2009, options outstanding, options vested and expected to vest and options exercisable had average remaining contractual terms of 5.97 years, 5.82 years and 4.38 years, respectively. Also at September 30, 2009, options outstanding, options vested and expected to vest and options exercisable had aggregate intrinsic values of $51.2 million, $48.3 million and $27.9 million, respectively.

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

A summary of the status of the Company’s nonvested restricted stock and restricted stock unit awards as of September 30, 2009 and the changes during the nine months ended September 30, 2009, are presented below:

 

 

As of September 30, 2009, the Company had $47.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to all of its stock-based awards, which will be recognized over the remaining weighted average period of 1.82 years. The total intrinsic value of stock-based awards exercised and restricted stock units converted during the nine months ended September 30, 2009 and September 30, 2008 was $11.1 million and $4.6 million.

 

 

Selected balance sheet components consist of the following:

 

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

 

 

Basic (loss) earnings per common share is computed by dividing net (loss) earnings attributable to Mylan Inc. common shareholders by the weighted average number of shares outstanding during the period. Diluted (loss) earnings per common share is computed by dividing net (loss) earnings attributable to Mylan Inc. common shareholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding related to potentially dilutable securities or instruments, if the impact is dilutive.

 

With respect to the Company’s convertible preferred stock, the Company considered the effect on diluted earnings per share of the preferred stock conversion feature using the if-converted method. The preferred stock is convertible into between 125,234,172 shares and 152,785,775 shares of the Company’s common stock, subject to anti-dilution adjustments, depending on the average stock price of the Company’s common stock over the 20 trading-day period ending on the third trading day prior to conversion. For the three and nine months ended September 30, 2009, and for the nine months ended September 30, 2008, the if-converted method is anti-dilutive; therefore, the preferred stock conversion is excluded from the computation of diluted earnings per share. For the three months ended September 30, 2008, the preferred stock conversion is dilutive; therefore, under the provisions of the if-converted method, the conversion of the preferred stock is included in the denominator of the computation of diluted earnings per share, and the preferred share dividend is added back to the numerator.

 

Basic and diluted (loss) earnings per common share attributable to Mylan Inc. are calculated as follows:

 

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

Additional stock options or restricted stock awards representing 19.2 million and 18.6 million shares were outstanding for the nine months ended September 30, 2009 and 2008, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.

 

On October 20, 2009, the Company announced that a quarterly dividend of $16.25 per share was declared (based on the annual dividend rate of 6.5% and a liquidation preference of $1,000 per share) payable on November 16, 2009, to the holders of preferred stock of record as of November 1, 2009.

 

 

A rollforward of goodwill from December 31, 2008 to September 30, 2009 is as follows:

 

 

Intangible assets consist of the following components:

 

 

Amortization expense, which is primarily classified within cost of sales on the Company’s Condensed Consolidated Statements of Operations, for the nine months ended September 30, 2009 and 2008 was $204.3 million and $235.0 million and is expected to be $69.7 million for the remainder of 2009, and $277.8 million, $272.3 million, $271.9 million and $259.8 million for the years ended December 31, 2010 through 2013, respectively.

 

 

Financial Risks

 

The Company is exposed to certain financial risks relating to its ongoing business operations. The primary financial risks that are managed by using derivative instruments are interest rate risk, equity risk and foreign currency risk.

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

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 statement of operations.

 

The Company has €754.5 million ($1.10 billion) of borrowings under the Senior Credit Agreement that are designated as a hedge of its net investment in certain Euro-functional currency subsidiaries. In accordance with ASC topic 830, Foreign Currency Matters, and ASC topic 815, Derivatives and Hedging (“ASC 815”), borrowings designated as hedges of net investments are measured at fair value using the current spot exchange rate at the end of the period, with gains and losses included in the foreign currency translation adjustment component of accumulated other comprehensive income (loss) (“AOCI”) on the balance sheet until the sale or substantial liquidation of the underlying net investments.

 

The Company enters into interest rate swaps in order to manage interest rate risk associated with the Company’s floating-rate debt. These interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The Company’s interest rate swaps fix the interest rate on a portion of the Company’s variable-rate U.S. Tranche B Term Loans and Euro Tranche B Term Loans under the Senior Credit Agreement. In accordance with ASC 815, derivative contracts designated as hedges to manage interest rate risk 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 reported in earnings or deferred, depending on the nature and effectiveness of the offset. Any ineffectiveness in a hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations. As of September 30, 2009, the total notional amount of the Company’s floating-rate debt interest rate swaps was $2.3 billion.

 

As described in Note 11 to Condensed Consolidated Financial Statements, a total of $1.0 billion of the Company’s floating-rate debt interest rate swaps have been extended through additional forward starting swaps. In July 2009, the Company entered into $500.0 million of notional value forward-starting interest-rate swaps to fix the interest rate on a portion of the Company’s variable-rate U.S. Tranche B Term Loans under the Senior Credit Agreement. These swaps are designated as cash flow hedges of expected future borrowings under the Senior Credit Agreement. The swaps extend previously executed swaps maturing in December 2010 and fix a rate of 6.60% from December 2010 to December 2012.

 

Certain derivative contracts entered into by the Company are governed by Master Agreements, which contain credit-risk-related contingent features which 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 derivative instruments with credit-risk-related contingent features that are in a liability position at September 30, 2009 is $70.9 million. The Company is not subject to any obligations to post collateral under derivative contracts.

 

In September 2008, the Company issued $575.0 million in Cash Convertible Notes whereby 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 under ASC 815; 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

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

Consolidated Balance Sheet (in accordance with the guidance of ASC 815), the instruments are exempt from the scope of ASC 815 and are not subject to the fair value provisions set forth therein.

 

The Company’s most significant credit exposure arises from the convertible note hedge on its Cash Convertible Notes. At September 30, 2009, the convertible note hedge had a total fair value of $348.9 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 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.

 

Derivatives Designated as Hedging Instruments under ASC 815
Fair Values of Derivative Instruments

 

 

Derivatives Not Designated as Hedging Instruments under ASC 815
Fair Values of Derivative Instruments

 

 

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Three Months Ended September 30, 2009
Derivatives in ASC 815 Cash Flow Hedging Relationships

 

 

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 2009
Derivatives in ASC 815 Cash Flow Hedging Relationships

 

 

There was no gain or loss recognized into earnings on derivatives with cash flow hedging relationships for ineffectiveness during the three and nine months ended September 30, 2009.

 

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Three Months Ended September 30, 2009
Derivatives in ASC 815 Net Investment Hedging Relationships

 

 

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 2009
Derivatives in ASC 815 Net Investment Hedging Relationships

 

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

There was no gain or loss recognized into earnings on derivatives with net investment hedging relationships during the three and nine months ended September 30, 2009.

 

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Three Months Ended September 30, 2009
Derivatives Not Designated as Hedging Instruments under ASC 815

 

 

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 2009
Derivatives Not Designated as Hedging Instruments under ASC 815

 

 

Fair Value Measurement

 

As defined in ASC topic 820, Fair Value Measurements and Disclosures (“ASC 820”), 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, ASC 820 establishes a fair value hierarchy 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 assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2:  Observable prices that are based on inputs not quoted in active markets, but corroborated by market data.

 

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.

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

Financial assets and liabilities carried at fair value as of September 30, 2009 are classified in the table below in one of the three categories described above:

 

Financial Assets

 

 

Financial Liabilities

 

 

 

 

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:

 

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

 

 

A summary of long-term debt at September 30, 2009 and December 31, 2008, is as follows:

 

 

 

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

 

Details of the interest rates in effect at September 30, 2009 and December 31, 2008, on the outstanding borrowings under the Term Loans are in the table below:

 

 

 

 

 

At September 30, 2009 and December 31, 2008, the fair value of the Senior Convertible Notes was approximately $588.5 million and $444.0 million. At September 30, 2009 and December 31, 2008, the fair value of the Cash Convertible Notes was approximately $802.0 million and $524.4 million.

 

At September 30, 2009 and December 31, 2008, the Company had $84.0 million and $83.6 million in letters of credit outstanding.

 

MYLAN INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

 

Mandatory minimum repayments remaining on the outstanding borrowings under the term loans and convertible notes at September 30, 2009, excluding the discount and conversion feature, are as follows for each of the periods ending December 31: