Annual report pursuant to Section 13 and 15(d)

Fair Value Measurement

v2.4.0.6
Fair Value Measurement
12 Months Ended
Dec. 31, 2012
Fair Value Measurement [Abstract]  
Fair Value Measurement

Note 18 Fair Value Measurement

We record fair value at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

A summary of our investments as of December 31, 2012 and 2011, classified as available for sale, and carried at fair value is as follows:

 

                                         
    As of December 31, 2012  

(In thousands)

  Amortized
Cost
    Gross
unrealized

gains in
Accumulated
OCI
    Gross
unrealized

losses in
Accumulated
OCI
    Gain/(Loss)
in
Accumulated
Deficit
    Fair
value
 

Common stock investments

  $ 2,051     $ 6,185     $  —       $ —       $ 8,236  

BZNE Note and conversion feature

    1,700       53       —         287       2,040  

Neovasc common stock options

    925       293       —         176       1,394  

Neovasc common stock warrants

    659       194       —         (375     478  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 5,335     $ 6,725     $ —       $ 88     $ 12,148  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                         
    As of December 31, 2011  

(In thousands)

  Amortized
Cost
    Gross
unrealized

gains in
Accumulated
OCI
    Gross
unrealized

losses in
Accumulated
OCI
    Gain/(Loss)
in
Accumulated
Deficit
    Fair
value
 

Neovasc common stock options

  $ 826     $ 205     $  —       $  —       $ 1,031  

Neovasc common stock warrants

    659       194       —         (39     814  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,485     $ 399     $  —       $ (39   $ 1,845  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Any future fluctuation in fair value related to these instruments that is judged to be temporary, including any recoveries of previous write-downs, would be recorded in accumulated other comprehensive income or loss. If we determine that any future valuation adjustment was other-than-temporary, we would record a loss during the period that such determination is made.

As of December 31, 2012, we have money market funds that qualify as cash equivalents, forward contracts for inventory purchases (Refer to Note 19) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics, FineTech, and Farmadiet (Refer to Note 13) that are required to be measured at fair value on a recurring basis. In addition, in connection with our investment in Neovasc as well as entering into our consulting agreement with Neovasc, we record our options and warrants at fair value. Refer to Note 3. During the year ended December 31, 2011, we recorded other income of $0.1 million related to a reduction of the contingent consideration related to CURNA.

 

Our financial assets and liabilities measured at fair value on a recurring basis are as follows:

 

                                 
    Fair value measurements as of December 31, 2012  
(In thousands)   Quoted prices
in active
markets for
identical
assets

(Level 1)
    Significant
other
observable
inputs

(Level 2)
    Significant
unobservable
inputs

(Level 3)
    Total  

Assets:

                               

Money market funds

  $ 18,716     $ —       $ —       $ 18,716  

Certificates of deposits

    —         820       —         820  

Forward contracts

    —         10       —         10  

Common stock investments

    8,236       —         —         8,236  

BZNE Note and conversion feature

    —         —         2,040       2,040  

Neovasc common stock options

    —         1,394       —         1,394  

Neovasc common stock warrants

    —         478       —         478  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 26,952     $ 2,702     $ 2,040     $ 31,694  
   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

                               

Deferred acquisition payments, net of discount

  $ —       $ —       $ 10,103     $ 10,103  

CURNA contingent consideration

    —         —         510       510  

OPKO Diagnostics contingent consideration

    —         —         12,974       12,974  

FineTech contingent consideration

    —         —         5,262       5,262  

Farmadiet contingent consideration

    —         —         1,310       1,310  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

  $ —       $ —       $ 30,159     $ 30,159  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
    Fair value measurements as of December 31, 2011  
(In thousands)   Quoted prices
in active
markets for
identical
assets

(Level 1)
    Significant
other
observable
inputs

(Level 2)
    Significant
unobservable
inputs

(Level 3)
    Total  

Assets:

                               

Money market funds

  $ 68,089     $ —       $ —       $ 68,089  

Forward contracts

    —         143       —         143  

Neovasc common stock options

    —         1,031       —         1,031  

Neovasc common stock warrants

    —         814       —         814  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 68,089     $ 1,988     $ —       $ 70,077  
   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

                               

CURNA contingent consideration

  $ —       $ —       $ 510     $ 510  

OPKO Diagnostics contingent consideration

    —         —         12,745       12,745  

FineTech contingent consideration

    —         —         4,747       4,747  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

  $ —       $ —       $ 18,002     $ 18,002  
   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2012 and 2011, the carrying value of our other financial assets and liabilities approximates their fair value due to their short-term nature.

 

The following table reconciles the beginning and ending balances of our Level 3 assets and liabilities:

 

                         
(In thousands)   BZNE Note
and
conversion
feature
    Contingent
consideration
    Deferred
acquisition
payments, net
of discount
 

Balance at December 31, 2011

  $ —       $ 18,002     $ —    

Additions

    1,700       1,234       9,673  

Change in fair value included in:

                       

Operating expenses

    —         785       —    

Other income and (expenses), net

    1,563       —         204  

Other comprehensive loss

    53       —         —    

Foreign exchange gain (loss)

    —         35       226  

Transfer out to equity method investment

    (1,276     —         —    
   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

  $ 2,040     $ 20,056     $ 10,103  
   

 

 

   

 

 

   

 

 

 

The estimated fair values of the Company’s financial instruments have been determined by using available market information and what we believe to be appropriate valuation methodologies. We use the following methods and assumptions in estimating fair values:

BZNE Note and conversion feature – The stock market activity in BZNE does not represent an active market and as such, we determined the fair market value utilizing a business enterprise valuation approach in the order to determine the fair value of our investment. The most significant assumptions are the projected revenue growth and operating income (loss). The impact of a change in any of our significant underlying assumptions +/- 1% would not result in a materially different fair value.

Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash flow model for the expected payments based on estimated timing and expected revenues (Finetech transaction). We use several discount rates depending on each type of contingent consideration related to Finetech, OPKO Diagnostics, CURNA and Farmadiet transactions. The discount rates used range from 13% to 27% and were based on the weighted average cost of capital for those businesses. If the discount rates were to increase by 1%, on each transaction, the contingent consideration would decrease by $0.2 million. If estimated future sales were to decrease by 10%, the contingent consideration related to Finetech would decrease by an insignificant amount. As of December 31, 2012, of the $20.0 million of contingent consideration, $14.9 million is recorded in Accrued expenses and $5.1 million is recorded in Other-long-term liabilities. As of December 31, 2011, the contingent consideration of $18.0 million was recorded in Other-long term liabilities.

Deferred payments – We estimate the fair value of the deferred payments utilizing a discounted cash flow model for the expected payments.