Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.3.0.814
Fair Value Measurements
9 Months Ended
Sep. 30, 2015
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
We record fair values 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 classified as available for sale and carried at fair value, is as follows:
 
As of September 30, 2015
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Realized
Gain/(Loss)
in
Accumulated
Deficit
 
Fair
value
Common stock investments, available for sale
$
11,479

 
$
715

 
$
(7,596
)
 
$
(1,442
)
 
$
3,156

Common stock options/warrants
3,925

 

 

 
1,618

 
5,543

Total assets
$
15,404

 
$
715

 
$
(7,596
)
 
$
176

 
$
8,699

 
As of December 31, 2014
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Realized
Gain/(Loss)
in
Accumulated
Deficit
 
Fair
value
Common stock investments, available for sale
$
11,479

 
$
293

 
$
(4,573
)
 
$
(1,441
)
 
$
5,758

Common stock options/warrants
1,425

 
216

 

 
4,673

 
6,314

Total assets
$
12,904

 
$
509

 
$
(4,573
)
 
$
3,232

 
$
12,072


Any future fluctuation in fair value related to our available for sale investments that is judged to be temporary, and any recoveries of previous write-downs, will be recorded in Accumulated other comprehensive income or loss. If we determine that any future valuation adjustment was other-than-temporary, we will record a loss during the period such determination is made. Any future changes in the fair value of option and warrant instruments will be recorded in Fair value changes of derivative instruments, net in our Condensed Consolidated Statements of Operations.
As of September 30, 2015, we have money market funds that qualify as cash equivalents, forward contracts for inventory purchases (Refer to Note 9) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics, OPKO Health Europe, and OPKO Renal that are required to be measured at fair value on a recurring basis. In addition, in connection with our investment and our consulting agreement with Neovasc, we record the related Neovasc options at fair value as well as the warrants from COCP, ARNO, Sevion and MabVax.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
 
Fair value measurements as of September 30, 2015
(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
$
99,394

 
$

 
$

 
$
99,394

Common stock investments, available for sale
3,156

 

 

 
3,156

Common stock options/warrants

 
5,543

 

 
5,543

Forward contracts

 
65

 

 
65

Total assets
$
102,550

 
$
5,608

 
$

 
$
108,158

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
18,968

 
$
18,968

Contingent consideration:
 
 
 
 
 
 
 
CURNA

 

 
450

 
450

OPKO Diagnostics

 

 
14,170

 
14,170

OPKO Renal

 

 
40,760

 
40,760

OPKO Health Europe

 

 
477

 
477

Total liabilities
$

 
$

 
$
74,825

 
$
74,825

 
Fair value measurements as of December 31, 2014
(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
$
71,286

 
$

 
$

 
$
71,286

Common stock investments, available for sale
5,758

 

 

 
5,758

Common stock options/warrants

 
6,314

 

 
6,314

Forward contracts

 
36

 

 
36

Total assets
$
77,044

 
$
6,350

 
$

 
$
83,394

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
65,947

 
$
65,947

Contingent consideration:
 
 
 
 
 
 
 
CURNA

 

 
440

 
440

OPKO Diagnostics

 

 
13,578

 
13,578

OPKO Renal

 

 
55,780

 
55,780

OPKO Health Europe

 

 
1,769

 
1,769

Total liabilities
$

 
$

 
$
137,514

 
$
137,514


The carrying amount and estimated fair value of our 2033 Senior Notes, as well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the 2033 Senior Notes is determined using a binomial lattice approach in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. Refer to Note 6.
 
September 30, 2015
(In thousands)
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
2033 Senior Notes
$
25,238

 
$
22,430

 
$

 
$

 
$
22,430


There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy.
As of September 30, 2015 and December 31, 2014, the carrying value of our other assets and liabilities approximates their fair value due to their short-term nature.
The following tables reconcile the beginning and ending balances of our Level 3 assets and liabilities as of September 30, 2015:
 
September 30, 2015
(In thousands)
Contingent
consideration
 
Embedded
conversion
option
Balance at December 31, 2014
$
71,567

 
$
65,947

Total losses (gains) for the period:
 
 
 
Included in results of operations
6,471

 
31,818

Foreign currency impact
(255
)
 

Payments
(21,926
)
 

Conversion

 
(78,797
)
Balance at September 30, 2015
$
55,857

 
$
18,968

The estimated fair values of our 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 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. We use several discount rates depending on each type of contingent consideration related to OPKO Diagnostics, CURNA, OPKO Health Europe and OPKO Renal transactions. The discount rates used range from 6% 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 $0.9 million. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO Renal would decrease by $1.8 million. As of September 30, 2015, of the $55.9 million of contingent consideration, $28.3 million is recorded in Accrued expenses and $27.6 million is recorded in Other long-term liabilities. As of December 31, 2014, of the $71.6 million of contingent consideration, $27.4 million is recorded in Accrued expenses and $44.2 million is 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.
Embedded conversion option – We estimate the fair value of the embedded conversion option related to the 2033 Senior Notes using a binomial lattice model. Refer to Note 6 for detail description of the binomial lattice model and the fair value assumptions used.