Annual report pursuant to Section 13 and 15(d)

Acquisitions, Investments, and Licenses

v2.4.0.6
Acquisitions, Investments, and Licenses
12 Months Ended
Dec. 31, 2011
Acquisitions, Investments, and Licenses [Abstract]  
Acquisitions, Investments, and Licenses

Note 3 Acquisitions, Investments, and Licenses

FineTech acquisition

On December 29, 2011, we purchased all of the issued and outstanding shares of FineTech Pharmaceuticals, Ltd., a privately held Israeli company focused on the development and production of specialty Active Pharmaceutical Ingredients (“APIs”). At closing, we delivered to the seller $27.7 million, of which $10.0 million was paid in cash and $17.7 million was paid in shares of our common stock. The shares delivered at closing were valued at $17.7 million based on the closing sales price per share of our common stock as reported by the New York Stock Exchange (“NYSE”) on the actual closing date of the acquisition, or $4.90 per share. The number of shares issued was based on the average closing sales price per share of our common stock as reported on the NYSE for the ten trading days immediately preceding the execution of the purchase agreement, or $4.84 per share. Upon finalization of the closing financial statements of FineTech, we accrued an additional $0.5 million for a working capital surplus, as defined in the purchase agreement, which was paid to the seller in February 2012. In addition, the purchase agreement provides for the payment of additional cash consideration subject to the achievement of certain sales milestones.

The following table summarizes the estimated fair value of the net assets acquired and liabilities assumed in the acquisition of FineTech at the date of acquisition which are subject to change while contingencies that existed on the acquisition date are resolved:

 

         

(in thousands)

     

Current assets (including cash of $2,000)

  $ 3,358  

Intangible assets:

       

Customer relationships

    14,200  

Technology

    2,700  

Non-compete

    1,500  

Tradename

    400  
   

 

 

 

Total intangible assets

    18,800  

Goodwill

    11,623  

Plant and equipment

    1,358  

Other assets

    1,154  

Accounts payable and accrued expenses

    (910

Deferred tax liability

    (2,457

Contingent consideration

    (4,747
   

 

 

 

Total purchase price

  $ 28,179  
   

 

 

 

Claros Diagnostics acquisition

On October 13, 2011, we acquired Claros Diagnostics, Inc. (“Claros”) pursuant to an agreement and plan of merger. We paid $10.0 million in cash, subject to certain set-offs and deductions, and $22.5 million in shares of our common stock, based on the closing sales price per share of our common stock as reported by the NYSE on the closing date of the Merger, or $5.04 per share. The number of shares issued was based on the average closing sales price per share of our common stock as reported by the NYSE for the ten trading days immediately preceding the date of the merger, or $4.45 per share. Pursuant to the merger agreement, $5.0 million of the stock consideration is held in a separate escrow account to secure the indemnification obligations of Claros under the Claros merger agreement. In December 2011, we made a $0.2 million claim against the escrow for certain undisclosed liabilities. In addition, the merger agreement provides for the payment of up to an additional $19.125 million in shares of our common stock upon and subject to the achievement of certain milestones.

 

The following table summarizes the estimated fair value of the net assets acquired and liabilities assumed in the acquisition of Claros at the date of acquisition which are subject to change while contingencies that existed on the acquisition date are resolved:

 

         

(in thousands)

     

Current assets (including cash of $351)

  $ 378  

Technology

    44,400  

Goodwill

    17,977  

Equipment

    333  

Other assets

    18  

Accounts payable and accrued expenses

    (655

Deferred tax liability

    (17,254

Contingent consideration

    (12,745
   

 

 

 

Total purchase price

  $ 32,452  
   

 

 

 

CURNA acquisition

In January 2011, we acquired all of the outstanding stock of CURNA, Inc. (“CURNA”) in exchange for $10.0 million in cash, plus $0.6 million in liabilities, of which, $0.5 million was paid at closing. In addition to the cash consideration, we have agreed to pay to the CURNA sellers a portion of any consideration we receive in connection with certain license, partnership or collaboration agreements we may enter into with third parties in the future relating to the CURNA technology, including, license fees, upfront payments, royalties and milestone payments. As a result, we recorded $0.6 million, as contingent consideration for the future consideration. We will evaluate the contingent consideration on an ongoing basis and the changes in fair value will be recognized in earnings until the contingencies are resolved. Refer to Note 18. CURNA was a privately held company based in Jupiter, Florida, engaged in the discovery of new drugs for the treatment of a wide variety of illnesses, including cancer, heart disease, metabolic disorders and a range of genetic anomalies.

The following table reflects the estimated fair value of the net assets acquired at the date of acquisition which are subject to change while contingencies that existed on the acquisition date are resolved:

 

         

(in thousands)

     

Current assets (including cash of $5)

  $ 38  

Fixed assets

    21  

Intangible assets

       

In-process research and development

    10,000  

Patents

    290  
   

 

 

 

Total intangible assets

    10,290  

Goodwill

    4,827  

Accounts payable and accrued expenses

    (54

Deferred tax liability

    (3,999

Contingent consideration

    (580
   

 

 

 

Total purchase price

  $ 10,543  
   

 

 

 

Rolapitant license

In December 2010, we entered into a license agreement (the “TESARO License”) with TESARO, Inc. (“TESARO”) granting TESARO exclusive rights to the development, manufacture, commercialization and distribution of rolapitant and a related compound. Under the terms of the TESARO License, we are eligible for payments of up to $121.0 million, including an up-front payment of $6.0 million, which has been received, and additional payments based upon achievement of specified regulatory and commercialization milestones. In addition, TESARO will pay us double digit tiered royalties on sales of licensed product. We will share future profits from the commercialization of licensed products in Japan with TESARO and we will have an option to market the products in Latin America. In connection with the TESARO License, we also acquired an equity position in TESARO. We recorded the equity position at $0.7 million, the estimated fair value based on a discounted cash flow model.

In accounting for the license of rolapitant to TESARO, we determined that we did not have any continuing involvement in the development of rolapitant or any other future performance obligations and, as a result, recognized the $6.0 million up-front payment and the $0.7 million equity position as license revenue during the year ended December 31, 2010.

 

We acquired rolapitant on October 12, 2009 from Schering-Plough Corporation (“Schering”). We entered into an asset purchase agreement (the “Schering Agreement”) with Schering to acquire rolapitant and other assets relating to Schering’s neurokinin-1 (“NK-1”) receptor antagonist program. Under the terms of the Schering Agreement, we paid Schering $2.0 million in cash upon closing and agreed to pay up to an additional $27.0 million upon certain development milestones. Rolapitant, the lead product in the NK-1 program, successfully completed Phase II clinical testing for prevention of nausea and vomiting related to cancer chemotherapy and surgery, and other indications. Development of rolapitant and the other assets had been stopped at the time of our acquisition and there were no ongoing clinical trials. None of the assets acquired have alternative future uses, nor have they reached a stage of technological feasibility, as such, we recorded $2.0 million as in-process research and development expense during the year ended December 31, 2009.

Latin America acquisitions

In February 2010, we acquired Exakta-OPKO (previously known as Pharmacos Exakta S.A. de C.V.), a privately-owned Mexican company, engaged in the manufacture, marketing and distribution of ophthalmic and other pharmaceutical products for government and private markets since 1957. Pursuant to a purchase agreement we acquired all of the outstanding stock of Exakta-OPKO and real property owned by an affiliate of Exakta-OPKO for a total aggregate purchase price of $3.5 million, of which an aggregate of $1.5 million was paid in cash and $2.0 million was paid in shares of our common stock, par value $.01. In September 2010, we reduced the consideration paid by $0.1 million in working capital adjustments per the purchase agreement. The number of shares to be issued was determined by the average closing price of our common stock as reported on the NYSE Amex for the ten trading days ending on February 12, 2010. A total of 1,371,428 shares of our common stock were issued in the transaction which were valued at $2.0 million due to trading restrictions. A portion of the proceeds will remain in escrow for a period of time to satisfy indemnification claims.

In October 2009, we entered into a definitive agreement to acquire OPKO Chile (previously known as Pharma Genexx, S.A.), a privately-owned Chilean company engaged in the representation, importation, commercialization and distribution of pharmaceutical products, over-the-counter products and medical devices for government, private and institutional markets in Chile. Pursuant to a stock purchase agreement with OPKO Chile and its shareholders, Farmacias Ahumada S.A., FASA Chile S.A., and Laboratorios Volta S.A., we acquired all of the outstanding stock of OPKO Chile in exchange for $16.0 million in cash. The transaction closed on October 7, 2009.

The following table summarizes the estimated fair value of the net assets acquired and liabilities assumed in the acquisition of OPKO Chile at the date of acquisition:

 

         

(in thousands)

     

Current assets (including cash of $368)

  $ 12,208  

Intangible assets

    7,826  

Goodwill

    4,983  

Other assets

    20  

Accounts payable and accrued expenses

    (9,037
   

 

 

 

Total purchase price

  $ 16,000  
   

 

 

 

Investments

In August 2011, we made an investment in Neovasc Inc. (“Neovasc”), a medical technology company based in Vancouver, Canada, a Canadian publicly traded company. Neovasc is developing devices to treat cardiovascular diseases and is also a leading supplier of tissue components for the manufacturers of replacement heart valves. We invested $2.0 million and received two million Neovasc common shares, and two-year warrants to purchase an additional one million shares for $1.25 a share. We recorded the warrants at their estimated fair value using the Black-Scholes-Merton Model at $0.7 million. We recorded an unrealized gain of $0.2 million at December 31, 2011 related to these warrants to reflect the closing price increase of Neovasc common stock. We also entered into an agreement with Neovasc to provide strategic advisory services to Neovasc as it continues to develop and commercialize its novel cardiac devices. In connection with the consulting agreement, Neovasc granted us 913,750 common stock options. The options were granted at (Canadian) $1.00 per share and vest annually over three years. We valued the options using the Black-Scholes-Merton Model at $0.8 million on the date of grant and will recognize the revenue over four years as other revenue. In addition, we recorded an unrecognized gain of $0.2 million at December 31, 2011 related to these options to reflect the (Canadian) $1.29 closing share price of Neovasc. Refer to Note 18.

 

In November 2010, we made an investment in Fabrus, Inc., a privately held early stage biotechnology company with next generation therapeutic antibody drug discovery and development capabilities. Fabrus is using its proprietary antibody screening and engineering approach to discover promising lead compounds against several important oncology targets. Our investment was part of a $2.1 million financing for Fabrus and included other related parties. Refer to Note 12.

In September 2009, we entered into an agreement pursuant to which we invested $2.5 million in cash in Cocrystal Discovery, Inc., a privately held biopharmaceutical company (“Cocrystal”) in exchange for 1,701,723 shares of Cocrystal’s Convertible Series A Preferred Stock. Cocrystal is focused on the discovery and development of novel antiviral drugs using a combination of protein structure-based approaches. Refer to Note 12.

In June 2009, we entered into a stock purchase agreement with Sorrento Therapeutics, Inc. (“Sorrento”), a publicly held company with a technology for generating fully human monoclonal antibodies, pursuant to which we invested $2.3 million in Sorrento. The closing stock price for Sorrento’s common stock, a thinly traded stock, as quoted on the over-the-counter markets was $0.20 per share on December 31, 2011. Refer to Note 12.

The total assets, liabilities, and net losses of our equity method investees as of and for the year ended December 31, 2011 were $22.9 million, $1.9 million, and $9.1 million, respectively. The following table reflects our maximum exposure, accounting method, ownership interest and underlying equity in net assets of each of our investments:

 

                                     

Investee name

  Year
invested
    Accounting method   Ownership at
December 31,
2011
    (in thousands)     Underlying
equity in net
assets
 

Cocrystal

    2009     Equity method     16   $ 2,500     $ 1,595  

Sorrento

    2009     Equity method     23     2,300       947  

Neovasc

    2011     Equity method, cost (warrants)     4     2,013       233  

Fabrus

    2010     VIE, equity method     13     650       184  

TESARO

    2010     Cost method     2     731       817  

Less accumulated losses in investees

                        (2,656        
                       

 

 

         

Total

                      $ 5,538          

Neovasc options

                        813          

Plus unrealized gain on Neovasc options and warrants

                        366          
                       

 

 

         

TOTAL

                      $ 6,717          
                       

 

 

         

Variable interest entities

We have determined that we hold a variable interest in one entity (“VIE”), Fabrus. We made this determination as a result of our assessment that they do not have sufficient resources to carry out their principal activities without additional subordinated financial support.

In order to determine the primary beneficiary of Fabrus, we evaluated our investment and our related parties investment, as well as our investment combined with the related party group’s investment to identify if we had the power to control Fabrus and who received the largest benefits (absorbed the most losses) from Fabrus. The related party group when considering our investment in Fabrus includes OPKO, the Gamma Trust, Hsu Gamma Investment, L.P., of which Jane Hsiao is the general partner, and the Richard Lerner Family Trust. Dr.’s Frost, Hsiao and Lerner are all members of our Board of Directors. As of December 31, 2011 we own approximately 13% of Fabrus and Dr.’s Frost, Hsiao and Lerner own 24% of Fabrus’ voting stock on an as converted basis, including 16% held by the Gamma Trust. Drs. Frost and Hsiao currently serve on the board of directors of Fabrus and represent 40% of its board. Based on this analysis, we determined that neither OPKO nor its related parties have the power to direct the activities of Fabrus. However, we did determine OPKO and its related parties can significantly influence the success of Fabrus through its board representation and voting power. As OPKO and its related parties have the ability to exercise significant influence over Fabrus’ operations, we account for our investments in Fabrus, under the equity method.

 

In October 2011, Cocrystal received an investment of $7.5 million from Teva Pharmaceutical Industries Ltd. In connection with that investment, we determined Cocrystal no longer meets the definition of a variable interest entity as it has sufficient capital to carry out its principal activities without additional financial support and as such had a reconsideration event occur. As a result of OPKO and its related parties’ ownership interest, OPKO and its related parties have the ability to significantly influence Cocrystal, we account for our investment under the equity method.

In June 2011, TESARO announced a $101 million financing. In connection with that financing, we determined TESARO no longer meets the definition of a variable interest entity as it has sufficient capital to carry out its principal activities without additional financial support. Neither OPKO nor its related parties have the ability to significantly influence TESARO and as such, OPKO accounts for its investment in TESARO under the cost method.

Pro forma disclosures for acquisitions

The following table includes the pro forma results for the years ended December 31, 2011 and 2010 of the combined companies as though the acquisitions of FineTech and Claros had been completed as of the beginning of each period, respectively.

 

                 
    For the years ended December 31,  

(in thousands, except per share amounts)

  2011     2010  

Revenue

  $ 36,238     $ 34,102  

Loss from continuing operations

  $ (20,879   $ (12,606

Net loss attributable to common shareholders

  $ (1,368   $ (23,295

Basic and diluted loss from continuing operations per share

  $ (0.00   $ (0.08

Basic and diluted loss from discontinued operations per share

  $ (0.00   $ (0.04

Basic and diluted loss per share

  $ (0.00   $ (0.12

This unaudited pro forma financial information is presented for informational purposes only. The unaudited pro forma financial information may not necessarily reflect our future results of operations or what the results of operations would have been had we owned and operated each company as of the beginning of the periods presented.

We incurred a pre-tax loss related to the activities of Claros of $1.7 million from the date of our acquisition through December 31, 2011.