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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number 001-33528
 
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
75-2402409
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
4400 Biscayne Blvd.
Miami
FL
33137
(Address of Principal Executive Offices) (Zip Code)
 
 
 
(305) 
575-4100
(Registrant’s Telephone Number, Including Area Code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
OPK
NASDAQ Global Select Market

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.    ý  Yes    ¨  NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ý  Yes    ¨  NO

 

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
(in Rule 12b-2 of the Exchange Act) (Check one):
Large accelerated filer
x
Accelerated filer
Non-accelerated filer
¨
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):     YES    ý  NO

As of July 30, 2019, the registrant had 615,601,045 shares of Common Stock outstanding.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 and this Quarterly Report on Form 10-Q, and described from time to time in our other reports filed with the Securities and Exchange Commission (“SEC”). We do not undertake any obligation to update forward-looking statements, except to the extent required by applicable law. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.

Risks and uncertainties, the occurrence of which could adversely affect our business and could cause our actual results to differ materially from any future results expressed or implied in forward-looking statements include the following:
we have a history of losses and may not generate sustained positive cash flow sufficient to fund our operations and research and development programs;
our need for, and ability to obtain, additional financing when needed on favorable terms, or at all;
adverse results in material litigation matters or governmental investigations, including, without limitation, recent lawsuits against the Company and its Chairman and Chief Executive Officer by the SEC, as well as related class action and derivative lawsuits;
the risks inherent in developing, obtaining regulatory approvals for and commercializing new, commercially viable and competitive products and treatments;
our research and development activities may not result in commercially viable products;
that earlier clinical results of effectiveness and safety may not be reproducible or indicative of future results;
the success of our relationship with Pfizer;
that we may fail to obtain regulatory approval for hGH-CTP or successfully commercialize Rayaldee and hGH-CTP;
that we may not generate profits or cash flow from our laboratory operations or substantial revenue from Rayaldee and our pharmaceutical and diagnostic products;
that currently available over-the-counter and prescription products, as well as products under development by others, may prove to be as or more effective than our products for the indications being studied;
our ability to build a successful pharmaceutical sales and marketing infrastructure;
our ability and our distribution and marketing partners’ ability to comply with regulatory requirements regarding the sales, marketing and manufacturing of our products and product candidates and the operation of our laboratories;
the performance of our third-party distribution partners, licensees and manufacturers over which we have limited control;
our success is dependent on the involvement and continued efforts of our Chairman and Chief Executive Officer;
integration challenges for Transition Therapeutics, BioReference, EirGen and other acquired businesses;
availability of insurance coverage with respect to material litigation matters;
changes in regulation and policies in the United States (“U.S.”) and other countries, including increasing downward pressure on healthcare reimbursement;
our ability to manage our growth and our expanded operations;

4

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increased competition, including price competition;
changing relationships with payors, including the various state and multi-state Blues programs, suppliers and strategic partners;
efforts by third-party payors to reduce utilization and reimbursement for clinical testing services;
our ability to maintain reimbursement coverage for our products and services, including the 4Kscore test;
failure to timely or accurately bill and collect for our services;
failure in our information technology systems or those of our third party vendors, including cybersecurity attacks or other data security or privacy incidents;
failure to obtain and retain new clients and business partners, or a reduction in tests ordered or specimens submitted by existing clients;
failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the performance of our testing services;
failure to maintain the security of patient-related information;
our ability to obtain and maintain intellectual property protection for our products;
our ability to defend our intellectual property rights with respect to our products;
our ability to operate our business without infringing the intellectual property rights of others;
our ability to attract and retain key scientific and management personnel;
failure to obtain and maintain regulatory approval outside the U.S.;
legal, economic, political, regulatory, currency exchange, and other risks associated with international operations; and
our ability to finance and successfully complete construction of a research, development and manufacturing center in Waterford, Ireland.

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PART I. FINANCIAL INFORMATION
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our wholly-owned subsidiaries.
Item 1. Financial Statements

The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
111,115

 
$
96,473

Accounts receivable, net
148,287

 
143,907

Inventory, net
48,293

 
42,299

Other current assets and prepaid expenses
36,533

 
35,052

Total current assets
344,228

 
317,731

Property, plant and equipment, net
137,106

 
144,674

Intangible assets, net
581,306

 
614,452

In-process research and development
635,569

 
635,572

Goodwill
699,842

 
700,193

Investments
24,767

 
31,228

Operating lease right-of-use assets
29,640

 

Other assets
3,770

 
7,222

Total assets
$
2,456,228

 
$
2,451,072

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
60,376

 
$
47,395

Accrued expenses
198,382

 
203,513

Current maturities of operating leases
13,376

 

Current portion of convertible notes

 
31,562

Current portion of lines of credit and notes payable
11,240

 
5,851

Total current liabilities
283,374

 
288,321

Operating lease liabilities
16,673

 

Convertible notes
206,165

 
57,299

Deferred tax liabilities, net
113,334

 
115,193

Other long-term liabilities, principally contract liabilities, contingent consideration and line of credit
127,751

 
198,968

Total long-term liabilities
463,923

 
371,460

Total liabilities
747,297

 
659,781

Equity:
 
 
 
Common Stock - $0.01 par value, 1,000,000,000 and 750,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively; 616,150,952 and 586,881,720 shares issued at June 30, 2019 and December 31, 2018, respectively
6,162

 
5,869

Treasury Stock - 549,907 and 549,907 shares at June 30, 2019 and December 31, 2018, respectively
(1,791
)
 
(1,791
)
Additional paid-in capital
3,061,631

 
3,004,422

Accumulated other comprehensive loss
(20,351
)
 
(20,131
)
Accumulated deficit
(1,336,720
)
 
(1,197,078
)
Total shareholders’ equity
1,708,931

 
1,791,291

Total liabilities and equity
$
2,456,228

 
$
2,451,072


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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Revenue from services
$
178,458

 
$
216,055

 
$
357,349

 
$
427,369

Revenue from products
28,680

 
28,523

 
53,981

 
56,374

Revenue from transfer of intellectual property and other
19,230

 
19,107

 
37,490

 
34,855

Total revenues
226,368

 
263,685

 
448,820

 
518,598

Costs and expenses:
 
 
 
 
 
 
 
Cost of service revenue
130,078

 
134,408

 
259,981

 
273,849

Cost of product revenue
14,145

 
15,652

 
28,300

 
30,300

Selling, general and administrative
88,475

 
87,653

 
183,633

 
179,172

Research and development
28,286

 
29,211

 
64,816

 
62,097

Contingent consideration
(3,775
)
 
(15,358
)
 
1,031

 
(13,599
)
Amortization of intangible assets
16,419

 
17,227

 
32,981

 
34,498

Asset impairment charges

 

 
655

 

Total costs and expenses
273,628

 
268,793

 
571,397

 
566,317

Operating loss
(47,260
)
 
(5,108
)
 
(122,577
)
 
(47,719
)
Other income and (expense), net:
 
 
 
 
 
 
 
Interest income
572

 
27

 
1,127

 
67

Interest expense
(5,501
)
 
(2,722
)
 
(10,257
)
 
(4,989
)
Fair value changes of derivative instruments, net
(388
)
 
2,248

 
27

 
3,644

Other income, net
(5,874
)
 
8,584

 
(4,897
)
 
10,477

Other income and (expense), net
(11,191
)
 
8,137

 
(14,000
)
 
9,199

Income (loss) before income taxes and investment losses
(58,451
)
 
3,029

 
(136,577
)
 
(38,520
)
Income tax provision
(1,084
)
 
(2,017
)
 
(1,866
)
 
(1,126
)
Net income (loss) before investment losses
(59,535
)
 
1,012

 
(138,443
)
 
(39,646
)
Loss from investments in investees
(271
)
 
(7,213
)
 
(2,125
)
 
(9,669
)
Net loss
$
(59,806
)
 
$
(6,201
)
 
$
(140,568
)
 
$
(49,315
)
Loss per share, basic and diluted:
 
 
 
 
 
 
 
Loss per share
$
(0.10
)
 
$
(0.01
)
 
$
(0.24
)
 
$
(0.09
)
Weighted average common shares outstanding, basic and diluted
586,351,045

 
559,541,253

 
586,347,645

 
559,507,732



The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(59,806
)
 
$
(6,201
)
 
$
(140,568
)
 
$
(49,315
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation and other comprehensive income (loss)
2,878

 
(12,465
)
 
(220
)
 
(7,600
)
Investments:
 
 
 
 
 
 
 
Reclassification adjustment due to adoption of ASU 2016-01

 

 

 
(4,876
)
Comprehensive loss
$
(56,928
)
 
$
(18,666
)
 
$
(140,788
)
 
$
(61,791
)


The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share and per share data)
For the three and six months ended June 30, 2019

 
Common Stock
 
Treasury
 
Additional
Paid-In
Capital
 
Accumulated Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
Balance at March 31, 2019
616,150,952

 
$
6,162

 
(549,907
)
 
$
(1,791
)
 
$
3,058,509

 
$
(23,229
)
 
$
(1,276,914
)
 
$
1,762,737

Equity-based compensation expense

 

 

 

 
3,122

 

 

 
3,122

Exercise of Common Stock options and warrants

 

 

 

 

 

 

 

Adoption of ASU 2018-07

 

 

 

 

 

 

 

2025 convertible notes including share lending arrangement

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 
(59,806
)
 
(59,806
)
Other comprehensive loss

 

 

 

 

 
2,878

 

 
2,878

Balance at June 30, 2019
616,150,952

 
$
6,162

 
(549,907
)
 
$
(1,791
)
 
$
3,061,631

 
$
(20,351
)
 
$
(1,336,720
)
 
$
1,708,931




 
Common Stock
 
Treasury
 
Additional
Paid-In
Capital
 
Accumulated Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
Balance at December 31, 2018
586,881,720

 
$
5,869

 
(549,907
)
 
$
(1,791
)
 
$
3,004,422

 
$
(20,131
)
 
$
(1,197,078
)
 
$
1,791,291

Equity-based compensation expense

 

 

 

 
7,579

 

 

 
7,579

Exercise of Common Stock options and warrants
19,232

 

 

 

 
(3
)
 

 

 
(3
)
Adoption of ASU 2018-07

 

 

 

 
(926
)
 

 
926

 

2025 convertible notes including share lending arrangement
29,250,000

 
293

 

 

 
50,559

 

 

 
50,852

Net loss

 

 

 

 

 

 
(140,568
)
 
(140,568
)
Other comprehensive loss

 

 

 

 

 
(220
)
 

 
(220
)
Balance at June 30, 2019
616,150,952

 
$
6,162

 
(549,907
)
 
$
(1,791
)
 
$
3,061,631

 
$
(20,351
)
 
$
(1,336,720
)
 
$
1,708,931










The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share and per share data)
For the three and six months ended June 30, 2018

 
Common Stock
 
Treasury
 
Additional
Paid-In
Capital
 
Accumulated Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
Balance at March 31, 2018
560,023,745

 
$
5,600

 
(549,907
)
 
$
(1,791
)
 
$
2,895,192

 
$
(539
)
 
$
(1,087,152
)
 
$
1,811,310

Equity-based compensation expense

 

 

 

 
5,578

 

 

 
5,578

Exercise of Common Stock options and warrants
145,677

 
2

 

 

 
316

 

 

 
318

Adoption of ASU 2016-01

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 
(6,201
)
 
(6,201
)
Other comprehensive loss

 

 

 

 

 
(12,465
)
 

 
(12,465
)
Balance at June 30, 2018
560,169,422

 
$
5,602

 
(549,907
)
 
$
(1,791
)
 
$
2,901,086

 
$
(13,004
)
 
$
(1,093,353
)
 
$
1,798,540




 
Common Stock
 
Treasury
 
Additional
Paid-In
Capital
 
Accumulated Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
Balance at December 31, 2017
560,023,745

 
$
5,600

 
(549,907
)
 
$
(1,791
)
 
$
2,889,256

 
$
(528
)
 
$
(1,048,914
)
 
$
1,843,623

Equity-based compensation expense

 

 

 

 
11,514

 

 

 
11,514

Exercise of Common Stock options and warrants
145,677

 
2

 

 

 
316

 

 

 
318

Adoption of ASU 2016-01

 

 

 

 

 
(4,876
)
 
4,876

 

Net loss

 

 

 

 

 

 
(49,315
)
 
(49,315
)
Other comprehensive loss

 

 

 

 

 
(7,600
)
 

 
(7,600
)
Balance at June 30, 2018
560,169,422

 
$
5,602

 
(549,907
)
 
$
(1,791
)
 
$
2,901,086

 
$
(13,004
)
 
$
(1,093,353
)
 
$
1,798,540



The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 
For the six months ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(140,568
)
 
$
(49,315
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
47,477

 
49,518

Non-cash interest
2,868

 
2,198

Amortization of deferred financing costs
308

 
99

Losses from investments in investees
2,125

 
9,669

Equity-based compensation – employees and non-employees
7,579

 
11,514

Loss (gain) on disposal of fixed assets
220

 
(495
)
Change in fair value of equity securities and derivative instruments
5,431

 
(14,819
)
Change in fair value of contingent consideration
1,031

 
(13,599
)
Impairment of assets
655

 

Deferred income tax (benefit) provision
168

 
(2,026
)
Changes in assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable, net
(4,398
)
 
12,440

Inventory, net
(6,225
)
 
894

Other current assets and prepaid expenses
2,476

 
(3,730
)
Other assets
136

 
(146
)
Accounts payable
12,887

 
(8,092
)
Foreign currency measurement
131

 
(77
)
Contract liabilities
(37,015
)
 
(30,812
)
Accrued expenses and other liabilities
2,095

 
(15,820
)
Net cash used in operating activities
(102,619
)
 
(52,599
)
Cash flows from investing activities:
 
 
 
Investments in investees
(1,200
)
 
(1,000
)
Proceeds from sale of equity securities

 
1,286

Proceeds from the sale of property, plant and equipment
309

 
840

Capital expenditures
(6,432
)
 
(12,792
)
Net cash used in investing activities
(7,323
)
 
(11,666
)
Cash flows from financing activities:
 
 
 
Issuance of convertible notes, including to related parties
200,293

 
55,000

Debt issuance costs
(7,762
)
 

Proceeds from the exercise of Common Stock options and warrants
(3
)
 
318

Borrowings on lines of credit
39,695

 
18,817

Repayments of lines of credit
(78,824
)
 
(20,924
)
Redemption of 2033 Senior Notes
(28,800
)
 

Net cash provided by financing activities
124,599

 
53,211

Effect of exchange rate changes on cash and cash equivalents
(15
)
 
(64
)
Net increase (decrease) in cash and cash equivalents
14,642

 
(11,118
)
Cash and cash equivalents at beginning of period
96,473

 
91,499

Cash and cash equivalents at end of period
$
111,115

 
$
80,381

SUPPLEMENTAL INFORMATION:
 
 
 
Interest paid
$
5,411

 
$
785

Income taxes paid, net of refunds
$
2,132

 
$
5,251

Operating lease right-of-use assets due to adoption of ASU No. 2016-02
$
29,640

 
$

Operating lease liabilities due to adoption of ASU No. 2016-02
$
30,049

 
$

Non-cash financing:
 
 
 
Shares issued upon the conversion of:
 
 
 
Common Stock options and warrants, surrendered in net exercise
$
20

 
$
806



The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes BioReference Laboratories, Inc. (“BioReference”), the nation’s third-largest clinical laboratory with a core genetic testing business and an almost 300-person sales and marketing team focused on driving growth and leveraging new products, including the 4Kscore prostate cancer test. Our pharmaceutical business features Rayaldee, an FDA-approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease (“CKD”) and vitamin D insufficiency (launched in November 2016); OPK88004, a selective androgen receptor modulator which we are exploring for various potential indications; and OPK88003, a once or twice weekly oxyntomodulin for type 2 diabetes and obesity which is a clinically advanced drug candidate among the new class of GLP-1 glucagon receptor dual agonists (phase 2b). Our pharmaceutical business also features hGH-CTP, a once-weekly human growth hormone injection (in phase 3 and partnered with Pfizer). We are incorporated in Delaware and our principal executive offices are located in leased offices in Miami, Florida.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas across New York, New Jersey, Maryland, Pennsylvania, Delaware, Washington, DC, Florida, California, Texas, Illinois and Massachusetts as well as to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for blood, urine, and tissue analysis. This includes hematology, clinical chemistry, immunoassay, infectious diseases, serology, hormones, and toxicology assays, as well as Pap smear, anatomic pathology (biopsies) and other types of tissue analysis. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Ireland, Chile, Spain, and Mexico, which are generating revenue and which we expect to facilitate future market entry for our products currently in development. In addition, we have a development and commercial supply pharmaceutical company and a global supply chain operation and holding company in Ireland. We own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our molecular diagnostic and therapeutic products.
Our research and development activities are primarily performed at facilities in Miramar, FL, Woburn, MA, Waterford, Ireland, Kiryat Gat, Israel, and Barcelona, Spain.


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NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments or otherwise disclosed herein) considered necessary to present fairly the Company’s results of operations, financial position and cash flows have been made. The results of operations and cash flows for the three and six months ended June 30, 2019 are not necessarily indicative of the results of operations and cash flows that may be reported for the remainder of 2019 or any other future periods. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Principles of consolidation. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of OPKO Health, Inc. and of our wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.
Cash and cash equivalents. Cash and cash equivalents include short-term, interest-bearing instruments with original maturities of 90 days or less at the date of purchase. We also consider all highly liquid investments with original maturities at the date of purchase of 90 days or less as cash equivalents. These investments include money markets, bank deposits, certificates of deposit and U.S. treasury securities.
Inventories. Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and current market conditions to determine whether inventories are stated at the lower of cost and net realizable value. Inventories at our diagnostics segment consist primarily of purchased laboratory supplies, which is used in our testing laboratories. Inventory obsolescence expense for the six months ended June 30, 2019 and 2018 was $1.3 million and $1.2 million, respectively.
Pre-launch inventories. We may accumulate commercial quantities of certain product candidates prior to the date we anticipate that such products will receive final U.S. FDA approval. The accumulation of such pre-launch inventories involves the risk that such products may not be approved for marketing by the FDA on a timely basis, or ever. This risk notwithstanding, we may accumulate pre-launch inventories of certain products when such action is appropriate in relation to the commercial value of the product launch opportunity. In accordance with our policy, this pre-launch inventory is expensed.  
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired accounted for by the acquisition method of accounting. Refer to Note 4. Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions at June 30, 2019 and December 31, 2018 was $1.9 billion and $2.0 billion, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. We determined the fair value of intangible assets, including IPR&D, using the “income method.”
Goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value.
Estimating the fair value of a reporting unit for goodwill impairment is highly sensitive to changes in projections and assumptions; therefore, in some instances, changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value.
We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to an

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impairment charge that could be material. For the three and six months periods ending June 30, 2019, the results of operations of our BioReference reporting unit were below management’s forecast of expected cash flows due to a change in reimbursement coverage for our 4Kscore test and other market factors. If we are unable to obtain appropriate reimbursement for our 4Kscore test and experience sustained declines in operating results versus forecast, our estimates of the fair value of the BioReference reporting unit may change. If the fair value of the reporting unit falls below carrying value, we would record impairment of goodwill at BioReference and such impairment could be significant.
Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.
The cost and duration of the development project for hGH-CTP have exceeded our original estimates and will result in additional expenses beyond our estimates and the agreed development cap. If we are unable to reach an agreement with Pfizer regarding cost sharing for overruns, as well as other obligations, including development obligations, it could have a material adverse impact on the expected benefits of the Pfizer transaction. If we are unable to successfully develop hGH-CTP, or if changes in projections and assumptions negatively impact our forecast of net cash flows, then we may be exposed to a material impairment charge related to the IPR&D for hGH-CTP.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from 3 to 20 years. We use the straight-line method of amortization as there is no reliably determinable pattern in which the economic benefits of our intangible assets are consumed or otherwise used up. Amortization expense was $33.0 million and $34.5 million for the six months ended June 30, 2019 and 2018, respectively.
Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their fair value due to the short-term maturities of these instruments. Investments that are considered equity securities as of June 30, 2019 and December 31, 2018 are predominately carried at fair value. Our debt under our credit agreement with JPMorgan Chase Bank, N.A. approximates fair value due to the variable rate of interest.
In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. Refer to Note 8.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with certain prior acquisitions to their fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction in contingent consideration expense. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value which may have a material impact on our results from operations and financial position.
Derivative financial instruments. We record derivative financial instruments on our Condensed Consolidated Balance Sheet at their fair value and recognize the changes in the fair value in our Condensed Consolidated Statement of Operations when they occur, the only exception being derivatives that qualify as hedges. For the derivative instrument to qualify as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At June 30, 2019 and December 31, 2018, our foreign currency forward contracts held to economically hedge inventory purchases did not meet the documentation requirements to be designated as hedges. Accordingly, we recognize all changes in the fair values of our derivatives instruments, net, in our Condensed Consolidated Statement of Operations. Refer to Note 9.
Property, plant and equipment. Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets and includes amortization expense for assets capitalized under finance leases. The estimated useful lives by asset class are as follows: software - 3 years, machinery, medical and other equipment - 5-8 years, furniture and fixtures - 5-12 years, leasehold improvements - the lesser of their useful life or the lease term, buildings and improvements - 10-40 years, and automobiles - 3-5 years. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation expense was $14.5 million and $15.0 million for the six months ended June 30, 2019 and 2018, respectively. Assets held under finance leases are included within Property, plant and equipment, net in our

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Condensed Consolidated Balance Sheet and are amortized over the shorter of their useful lives or the expected term of their related leases.
Impairment of long-lived assets. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. We periodically evaluate the realizability of our
net deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such
adjustment. Valuation allowances on certain U.S. deferred tax assets and non-U.S. deferred tax assets are established, because
realization of these tax benefits through future taxable income does not meet the more-likely-than-not threshold.
We operate in various countries and tax jurisdictions globally.  For interim reporting purposes, we record income taxes based on the expected effective income tax rate, taking into consideration year to date and global forecasted tax results.  For the three and six months ended June 30, 2019, the tax rate differed from the U.S. federal statutory rate of 21% primarily due to the valuation allowance against certain U.S. and non-U.S. deferred tax assets, the relative mix in earnings and losses in the U.S. versus foreign tax jurisdictions, and the impact of certain discrete tax events and operating results in tax jurisdictions which do not result in a tax benefit.
Revenue recognition. We recognize revenue when a customer obtains control of promised goods or services in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
We apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. For a complete discussion of accounting for Revenues from services, Revenues from products and Revenue from transfer of intellectual property and other, refer to Note 12.
Concentration of credit risk and allowance for doubtful accounts. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts receivable are with either companies in the healthcare industry or patients. However, credit risk is limited due to the number of our clients as well as their dispersion across many different geographic regions.
While we have receivables due from federal and state governmental agencies, we do not believe that such receivables represent a credit risk because the related healthcare programs are funded by federal and state governments, and payment is primarily dependent upon submitting appropriate documentation. At June 30, 2019 and December 31, 2018, receivable balances (net of contractual adjustments) from Medicare and Medicaid were 9.6% and 7.4%, respectively, of our consolidated Accounts receivable, net.
The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk. At June 30, 2019 and December 31, 2018, receivables due from patients represented approximately 2.0% and 2.9%, respectively, of our consolidated Accounts receivable, net.
We assess the collectability of accounts receivable balances by considering factors such as historical collection experience, customer credit worthiness, the age of accounts receivable balances, regulatory changes and current economic conditions and trends that may affect a customer’s ability to pay. Actual results could differ from those estimates. Our reported net loss is directly affected by our estimate of the collectability of accounts receivable. The allowance for doubtful accounts

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was $2.1 million and $1.8 million at June 30, 2019 and December 31, 2018, respectively. The provision for bad debts for the six months ended June 30, 2019 and 2018 was $0.2 million and $0.2 million, respectively.
Equity-based compensation. We measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Condensed Consolidated Statement of Operations over the period during which an employee is required to provide service in exchange for the award. We record excess tax benefits realized from the exercise of stock options as cash flows from operations. During the six months ended June 30, 2019 and 2018, we recorded $7.6 million and $11.5 million, respectively, of equity-based compensation expense.
Research and development expenses. Research and development expenses include external and internal expenses. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. Research and development employee-related expenses include salaries, benefits and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period in which the actual services are received. As such, accrued liabilities related to third party research and development activities are recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third party contract.
Research and development expense includes costs for in-process research and development projects acquired in asset acquisitions which have not reached technological feasibility and which have no alternative future use. For in-process research and development projects acquired in business combinations, the in-process research and development project is capitalized and evaluated for impairment until the development process has been completed. Once the development process has been completed the asset will be amortized over its remaining useful life.
Segment reporting. Our chief operating decision-maker (“CODM”) is Phillip Frost, M.D., our Chairman and Chief Executive Officer. Our CODM reviews our operating results and operating plans and makes resource allocation decisions on a Company-wide or aggregate basis. We manage our operations in two reportable segments, pharmaceutical and diagnostics. The pharmaceutical segment consists of our pharmaceutical operations in Chile, Mexico, Ireland, Israel and Spain, Rayaldee product sales and our pharmaceutical research and development. The diagnostics segment primarily consists of clinical laboratory operations through BioReference and point-of-care operations. There are no significant inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes. Refer to Note 14.
Shipping and handling costs. We do not charge customers for shipping and handling costs. Shipping and handling costs are classified as Cost of revenues in the Condensed Consolidated Statement of Operations.
Foreign currency translation. The financial statements of certain of our foreign operations are measured using the local currency as the functional currency. The local currency assets and liabilities are generally translated at the rate of exchange to the U.S. dollar on the balance sheet date and the local currency revenues and expenses are translated at average rates of exchange to the U.S. dollar during the reporting periods. Foreign currency transaction gains (losses) have been reflected as a component of Other income (expense), net within the Condensed Consolidated Statement of Operations and foreign currency translation gains (losses) have been included as a component of the Condensed Consolidated Statement of Comprehensive Loss.
Variable interest entities. The consolidation of a variable interest entity (“VIE”) is required when an enterprise has a controlling financial interest. A controlling financial interest in a VIE will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE. Refer to Note 5.
Investments. We have made strategic investments in development stage and emerging companies. We record these investments as equity method investments or as equity securities based on our percentage of ownership and whether we have significant influence over the operations of the investees. For investments classified under the equity method of accounting, we record our proportionate share of their losses in Losses from investments in investees in our Condensed Consolidated Statement of Operations. Refer to Note 5. For investments classified as equity securities, we record changes in their fair value as Other income (expense) in our Condensed Consolidated Statement of Operations based on their closing price per share at the end of each reporting period, unless the equity security does not have a readily determinable fair value. Refer to Note 5.
Recently adopted accounting pronouncements.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

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2016-02, “Leases (Topic 842),” which requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. ASU 2016-02, as amended and codified under Topic 842, requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. As required, we adopted Topic 842 on January 1, 2019 using the modified retrospective approach for all lease arrangements at the beginning or the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under Topic 842, while prior period amounts were not adjusted and continue to be reported in accordance our historic accounting under ASC 840.
For leases that commenced before the effective date of Topic 842, we elected the permitted practical expedients to not reassess the following: (i) whether any expired or existing contracts contain leases (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also elected the policy of not recording leases on our Condensed Consolidated Balance Sheet when the leases have a term of 12 months or less and we elected not to separate nonlease components from lease components and instead account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
The adoption of Topic 842 resulted in the recognition of operating lease liabilities of approximately $33.7 million and operating lease right-to-use assets of approximately $33.3 million as of March 31, 2019, primarily related to operating leases for our diagnostic facilities, based on the present value of lease payments over the lease term. There was no cumulative-effect adjustment to beginning Accumulated deficit on the Condensed Consolidated Balance Sheet. The accounting for our finance leases remains substantially unchanged, as finance lease liabilities and their corresponding right-to-use assets were already recorded on the Condensed Consolidated Balance Sheet under the previous guidance. The adoption of Topic 842 did not have a significant effect on our results of operations or cash flows. Refer to Note 15 for additional disclosures required by Topic 842.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive loss to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018. We adopted this standard effective January 1, 2019 with the election not to reclassify immaterial amounts of stranded tax effects from accumulated other comprehensive loss to retained earnings.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718),” which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The adoption of ASU 2018-07 on January 1, 2019, did not have a significant impact on our Condensed Consolidated Financial Statements.
Pending accounting pronouncements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.

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NOTE 3 EARNINGS (LOSS) PER SHARE
Basic loss per share is computed by dividing our net loss by the weighted average number of shares of our common stock par value $0.01 per share (“Common Stock”) outstanding during the period. Shares of Common Stock outstanding under the share lending arrangement entered into in conjunction with the 2025 Notes (as defined in Note 6) are excluded from the calculation of basic and diluted earnings per share because the share lending arrangement and the borrower of the shares is required to refund any dividends paid on the shares lent. Refer to Note 6. For diluted earnings per share, the dilutive impact of stock options and warrants is determined by applying the “treasury stock” method. The dilutive impact of the 2033 Senior Notes, the 2023 Convertible Notes and the 2025 Notes (each, as defined herein and as discussed in Note 6) has been considered using the “if converted” method. In the periods in which their effect would be antidilutive, no effect is given to outstanding options, warrants or the potentially dilutive shares issuable pursuant to the 2033 Senior Notes, the 2023 Convertible Notes and the 2025 Notes in the dilutive computation.
A total of 68,933,402 and 61,760,134 potential shares of Common Stock have been excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2019, respectively, because their inclusion would be antidilutive. A full presentation of diluted earnings per share has not been provided because the required adjustments to the numerator and denominator resulted in diluted earnings per share equivalent to basic earnings per share.
During the three months ended June 30, 2019, no Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of no shares of Common Stock.
During the six months ended June 30, 2019, 24,877 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 19,232 shares of Common Stock. Of the 24,877 Common Stock options and Common Stock warrants exercised, 5,645 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the three months ended June 30, 2018, 332,000 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 145,677 shares of Common Stock. Of the 332,000 Common Stock options and Common Stock warrants exercised, 186,323 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the six months ended June 30, 2018, 332,000 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 145,677 shares of Common Stock. Of the 332,000 Common Stock options and Common Stock warrants exercised, 186,323 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.


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NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands)
June 30,
2019
 
December 31,
2018
Accounts receivable, net:
 
 
 
Accounts receivable
$
150,414

 
$
145,665

Less: allowance for doubtful accounts
(2,127
)
 
(1,758
)
 
$
148,287

 
$
143,907

Inventories, net:
 
 
 
Consumable supplies
$
22,008

 
$
23,264

Finished products
21,481

 
15,259

Work in-process
3,096

 
2,473

Raw materials
4,741

 
4,259

Less: inventory reserve
(3,033
)
 
(2,956
)
 
$
48,293

 
$
42,299

Other current assets and prepaid expenses:
 
 
 
Taxes recoverable
18,176

 
15,708

Other receivables
661

 
2,368

Prepaid supplies
10,584

 
9,693

Prepaid insurance
3,878

 
3,436

Other
3,234

 
3,847

 
$
36,533

 
$
35,052

Intangible assets, net:
 
 
 
Customer relationships
$
446,144

 
$
446,296

Technologies
340,702

 
340,729

Trade names
50,420

 
50,404

Licenses
5,766

 
5,766

Covenants not to compete
16,321

 
16,322

Product registrations
8,016

 
7,861

Other
5,586

 
5,613

Less: accumulated amortization
(291,649
)
 
(258,539
)
 
$
581,306

 
$
614,452

Accrued expenses:
 
 
 
Contract liabilities
$
50,388

 
$
63,503

Employee benefits
39,453

 
45,621

Clinical trials
9,936

 
10,401