Annual report pursuant to Section 13 and 15(d)

Acquisitions, Investments, and Licenses

v3.6.0.2
Acquisitions, Investments, and Licenses
12 Months Ended
Dec. 31, 2016
Business Combinations [Abstract]  
Acquisitions, Investments, and Licenses
Acquisitions, Investments and Licenses
Transition Therapeutics acquisition
In August 2016, we completed the acquisition of Transition Therapeutics, a clinical stage biotechnology company. Holders of Transition Therapeutics common stock received 6,431,899 shares of OPKO Common Stock. The transaction was valued at approximately $58.5 million, based on a closing price per share of our Common Stock of $9.10 as reported by NASDAQ on the closing date.
The following table summarizes the preliminary purchase price allocation and the estimated fair value of the net assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation for Transition Therapeutics is preliminary pending completion of the fair value analysis of acquired assets and liabilities:
(In thousands)
 
Transition Therapeutics
Current assets
 


Cash and cash equivalents
 
$
15,878

IPR&D assets
 
41,000

Goodwill
 
3,453

Other assets
 
634

Accounts payable and other liabilities
 
(1,035
)
Deferred tax liability
 
(1,400
)
Total purchase price
 
$
58,530


Goodwill from the acquisition of Transition Therapeutics principally relates to intangible assets that do not qualify for separate recognition (for instance, Transition Therapeutics' assembled workforce) and the deferred tax liability generated as a result of the transaction. Goodwill is not tax deductible for income tax purposes and was assigned to the pharmaceutical reporting segment.
Revenue and Net income (loss) in the Consolidated Statement of Operations for the year ended December 31, 2016 includes revenue and net loss of Transition Therapeutics from the date of acquisition to December 31, 2016 of $0.0 million and $(2.6) million, respectively.
Our IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval, the IPR&D assets are then accounted for as finite-lived intangible assets and amortized on a straight-line basis over its estimated useful life.
Pro forma disclosure for Transition Therapeutics acquisition (unaudited)
The following table includes the pro forma results for the years ended December 31, 2016 and 2015 and combines the results of operations of OPKO and Transition Therapeutics as though the acquisition of Transition Therapeutics had occurred on January 1, 2015.
 
 
For the year ended December 31,
(In thousands)
 
2016
2015
Revenues
 
$1,221,661
$491,738
Net loss
 
(31,807)
(50,660)
Net loss attributable to common shareholders
 
(31,807)
(49,260)

The unaudited pro forma financial information is presented for information 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 Transition Therapeutics as of the beginning of the period presented.
Bio-Reference acquisition
In August 2015, we completed the acquisition of Bio-Reference, the third largest full service clinical laboratory in the United States, known for its innovative technological solutions and pioneering leadership in the areas of genomics and genetic sequencing. Holders of Bio-Reference common stock received 76,566,147 shares of OPKO Common Stock for the outstanding shares of Bio-Reference common stock. The transaction was valued at approximately $950.1 million, based on a closing price per share of our Common Stock of $12.38 as reported by the New York Stock Exchange, or $34.05 per share of Bio-Reference common stock. Included in the transaction value is $2.3 million related to the value of replacement stock option awards attributable to pre-merger service.
The following table summarizes the purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the acquisition of Bio-Reference at the date of acquisition finalized during the year ended December 31, 2016:
(In thousands)
 
Bio-Reference
Purchase price:
 
 
Value of OPKO Common Stock issued to Bio-Reference shareholders
 
$
947,889

Value of replacement stock options awards to holders of Bio-Reference stock options
 
2,259

Total purchase price
 
$
950,148

 
 
 
Preliminary value of assets acquired and liabilities assumed:
 
 
Current assets
 
 
Cash and cash equivalents
 
$
15,800

Accounts receivable
 
168,164

Inventory
 
19,674

Other current assets, principally deferred tax assets
 
105,765

Total current assets
 
309,403

Property, plant and equipment
 
112,457

Intangible assets:
 
 
Trade name
 
47,100

Customer relationships
 
389,800

Technology
 
100,600

Other intangible assets
 
7,750

Total intangible assets
 
545,250

Goodwill
 
401,821

Investments
 
5,326

Other assets
 
13,265

Total assets
 
1,387,522

Accounts payable and accrued expenses
 
(108,217
)
Income taxes payable
 
(2,921
)
Lines of credit and notes payable
 
(65,701
)
Capital lease obligations
 
(18,293
)
Deferred tax liability (non-current)
 
(235,904
)
Other long-term liabilities
 
(6,338
)
Total purchase price
 
$
950,148


During the year ended December 31, 2016, we finalized our purchase price allocation during the measurement period and obtained new fair value information related to certain assets acquired and liabilities assumed of Bio-Reference. As a result, for the year ended December 31, 2016 we adjusted the purchase price allocation by increasing Other current assets by $44.6 million, decreasing customer relationships by $5.4 million, increasing Other intangible assets by $7.8 million, decreasing Goodwill by $39.3 million, decreasing Accrued expenses by $0.5 million, increasing Income taxes payable by $2.5 million, decreasing Deferred tax liability (non-current) by $0.6 million and increasing Other long-term liabilities by $6.3 million. As a result of these adjustments, Amortization of intangible assets in our Consolidated Statement of Operations for the year ended December 31, 2016 increased $3.1 million.
The purchase price allocation adjustments are largely due to an approval we received from the Internal Revenue Service during 2016 on an application for a change in accounting method.  As a result of the change, we recognized an additional $51.7 million of income tax benefits, of which $39.4 million was recognized as taxes recoverable in Other current assets and $12.3 million was recognized as a reduction of our Deferred tax liability (non-current). In addition, Goodwill was reduced by $51.7 million. OPKO received payment for the $39.4 million taxes recoverable balance during the year ended December 31, 2016.
Goodwill from the acquisition of Bio-Reference principally relates to intangible assets that do not qualify for separate recognition (for instance, Bio-Reference’s assembled workforce), our expectation to develop and market new products, and the deferred tax liability generated as a result of the transaction. Goodwill is not tax deductible for income tax purposes and was assigned to the diagnostics reporting segment.
Revenue and Net income (loss) in the Consolidated Statement of Operations for the year ended December 31, 2015 includes revenue and net income of Bio-Reference from the date of acquisition to December 31, 2015 of $321.9 million and $3.2 million, respectively.
The weighted average amortization periods for intangible assets recognized in the Bio-Reference acquisition are 5 years for trade name, 19.3 years for customer relationships, 10.2 years for technology and 13.0 years in total.
EirGen Pharma Limited acquisition
In May 2015, we acquired all of the issued and outstanding shares of EirGen, a specialty pharmaceutical company incorporated in Ireland focused on the development and commercial supply of high potency, high barrier to entry pharmaceutical products, for $133.8 million. We acquired the outstanding shares of EirGen for approximately $100.2 million in cash and delivered 2,420,487 shares of our Common Stock valued at approximately $33.6 million based on the closing price per share of our Common Stock as reported by the New York Stock Exchange on the closing date of the acquisition, $13.88 per share.
The following table summarizes the final purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the acquisition of EirGen at the date of acquisition:
(In thousands)
 
EirGen
Current assets (1)
 
$
11,795

Intangible assets:
 
 
IPR&D assets
 
560

Customer relationships
 
34,155

Currently marketed products
 
3,919

Total intangible assets
 
38,634

Goodwill
 
83,373

Property, plant and equipment
 
8,117

Other assets
 
1,232

Accounts payable and other liabilities
 
(6,254
)
Deferred tax liability
 
(3,131
)
Total purchase price
 
$
133,766

(1)Current assets include cash, accounts receivable, inventory and other assets of $5.5 million, $2.7 million, $2.2 million and $1.4 million, respectively, related to the EirGen acquisition. The fair value of the accounts receivable equals the gross contractual amount at the date of acquisition.
Goodwill from the acquisition of EirGen principally relates to intangible assets that do not qualify for separate recognition (for instance, EirGen’s assembled workforce), our expectation to develop and market new products, and the deferred tax liability generated as a result of this being a partial stock transaction. Goodwill is not tax deductible for income tax purposes and was assigned to the pharmaceutical reporting segment.
Revenue and Net income (loss) in the Consolidated Statement of Operations for the year ended December 31, 2015 includes revenue and net income of EirGen from the date of acquisition to December 31, 2015 of $13.5 million and $1.4 million, respectively.
Our IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval, the IPR&D assets are then accounted for as finite-lived intangible assets and amortized on a straight-line basis over its estimated useful life. The weighted average amortization periods for amortizing intangible assets recognized in the EirGen acquisition are 15.8 years for customer relationships, 10.0 years for currently marketed product and 15.0 years in total.
Investments
The following table reflects the accounting method, carrying value and underlying equity in net assets of our unconsolidated investments as of December 31, 2016:
(in thousands)
 
 
 
 
Investment type
 
Investment Carrying Value
 
Underlying Equity in Net Assets
Equity method investments
 
$
31,471

 
$
30,195

Variable interest entity, equity method
 
516

 

Available for sale investments
 
4,528

 
 
Cost method investment
 
607

 
 
Warrants and options
 
4,017

 
 
Total carrying value of investments
 
$
41,139

 
 

Equity method investments
Our equity method investments consist of investments in Pharmsynthez (ownership 17%), Cocrystal Pharma, Inc. (“COCP”) (8%), Sevion Therapeutics, Inc. (“Sevion”) (3%), Non-Invasive Monitoring Systems, Inc. ("NIMS") (1%), Neovasc Inc. (4%), VBI (15%), InCellDx, Inc. (27%), and BioCardia, Inc. ("BioCardia") (5%). The total assets, liabilities, and net losses of our equity method investees as of and for the year ended December 31, 2016 were $430.9 million, $205.1 million, and $208.1 million, respectively. We have determined that we and/or our related parties can significantly influence the success of our equity method investments through our board representation and/or voting power. Accordingly, we account for our investment in these entities under the equity method and record our proportionate share of their losses in Loss from investments in investees in our Consolidated Statement of Operations. The aggregate value of our equity method investments based on the quoted market price of their common stock and the number of shares held by us as of December 31, 2016 is $80.1 million.
Available for sale investments
Our available for sale investments consist of investments in RXi Pharmaceuticals Corporation (“RXi”) (ownership 5%), ChromaDex Corporation (2%), MabVax Therapeutics Holdings, Inc. (“MabVax”) (4%), ARNO Therapeutics, Inc. (“ARNO”) (5%) and Xenetic BioSciences, Inc. ("Xenetic") (4%). We have determined that our ownership, along with that of our related parties, does not provide us with significant influence over the operations of our available for sale investments. Accordingly, we account for our investment in these entities as available for sale, and we record changes in these investments as an unrealized gain or loss in Other comprehensive income (loss) each reporting period.
Based on our evaluation of the value of our investments in RXi, including RXi’s decreasing stock price during the year ended December 31, 2016, we determined that the decline in fair value of our RXi common shares was other-than-temporary and recorded an impairment charge of $0.4 million in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2016 to write our investment in RXi common shares down to its fair value of $0.3 million as of December 31, 2016. Based on our evaluation of the value of our investments in Xenetic, including Xenetic’s decreasing stock price during the year ended December 31, 2016, we determined that the decline in fair value of our Xenetic common shares was other-than-temporary and recorded an impairment charge of $3.5 million in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2016 to write our investment in Xenetic common shares down to its fair value of $1.3 million as of December 31, 2016. Based on our evaluation of the value of our investments in ARNO, including ARNO's decreasing stock price during the year ended December 31, 2016, we determined that the decline in fair value of our ARNO common shares was other-than-temporary and recorded an impairment charge of $0.8 million in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2016 to write our investment in ARNO common shares down to zero as of December 31, 2016.
Based on our evaluation of the value of our investments in RXi, including RXi’s decreasing stock price during the year ended December 31, 2015, we determined that the decline in fair value of our RXi common shares was other-than-temporary and recorded an impairment charge of $7.3 million in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2015 to write our investment in RXi common shares down to its fair value of $0.9 million as of December 31, 2015. Based on our evaluation of the value of our investment in ARNO, including ARNO’s decreasing stock price during the year ended December 31, 2014, we determined that the decline in fair value of our ARNO common shares was other-than-temporary and recorded an impairment charge of $1.4 million in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2014 to write our investment in ARNO common shares down to its fair value of $0.6 million as of December 31, 2014. Refer to Note 17 for further discussion of the fair value of our available for sale investments.
Sales of investments
Gains (losses) included in earnings from sales of our investments for the years ended December 31, 2016, 2015 and 2014 were $0.0 million, $0.0 million and $1.3 million, respectively, and were recorded in Other income (expense), net in our Consolidated Statement of Operations. The cost of securities sold is based on the specific identification method. Refer to Investment in SciVac below.
Warrants and options
In addition to our equity method investments and available for sale investments, we hold options to purchase 1.0 million additional shares of Neovasc, which are fully vested as of December 31, 2016, options to purchase 5.0 million additional shares of BioCardia, none of which are vested as of December 31, 2016, and 1.0 million, 2.3 million, 0.3 million, 0.7 million, 0.7 million, 0.5 million and 0.2 million of warrants to purchase additional shares of COCP, ARNO, Sevion, MabVax, InCellDx, Inc., Xenetic and RXi, respectively. We recorded the changes in the fair value of the options and warrants in Fair value changes of derivative instruments, net in our Consolidated Statement of Operations. We also recorded the fair value of the options and warrants in Investments, net in our Consolidated Balance Sheet. See further discussion of the Company’s options and warrants in Note 17 and Note 18.
Investments in variable interest entities
We have determined that we hold variable interests in Zebra Biologics, Inc. (“Zebra”). We made this determination as a result of our assessment that Zebra does not have sufficient resources to carry out its principal activities without additional financial support.
We own 1,260,000 shares of Zebra Series A-2 Preferred Stock and 900,000 shares of Zebra restricted common stock (ownership 28% at December 31, 2016). Zebra is a privately held biotechnology company focused on the discovery and development of biosuperior antibody therapeutics and complex drugs. Dr. Richard Lerner, M.D., a member of our Board of Directors, is a founder of Zebra and, along with Dr. Frost, serves as a member of Zebra’s Board of Directors.
In order to determine the primary beneficiary of Zebra, 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 direct the activities that most significantly impact the economic performance of Zebra. Based on the capital structure, governing documents and overall business operations of Zebra, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact Zebra’s economic performance and no obligation to fund expected losses. We did determine, however, that we can significantly influence the success of Zebra through our board representation and voting power. Therefore, we have the ability to exercise significant influence over Zebra’s operations and account for our investment in Zebra under the equity method.
Investment in SciVac
In June 2012, we acquired a 50% stock ownership in SciVac from FDS Pharma LLP (“FDS”). SciVac was a privately-held Israeli company that produced a third-generation hepatitis B-vaccine. From November 2012 through June 2015, we loaned to SciVac a combined $7.9 million for working capital purposes. We determined that we held variable interests in SciVac based on our assessment that SciVac did not have sufficient resources to carry out its principal activities without financial support. We had also determined we were the primary beneficiary of SciVac through our representation on SciVac’s board of directors. As a result of this conclusion, we consolidated the results of operations and financial position of SciVac through June 2015 and recorded a reduction of equity for the portion of SciVac we do not own.
On July 9, 2015, SciVac Therapeutics Inc., formerly Levon Resources Ltd. (“STI”) completed a reverse takeover transaction (the “Arrangement”) pursuant to which STI acquired all of the issued and outstanding securities of SciVac. As a result of this transaction, OPKO’s ownership in STI decreased to 24.5%.
Upon completion of the Arrangement, we determined that STI was not a VIE. We also determined that we do not have the power to direct the activities that most significantly impact the economic performance of STI that would require us to consolidate STI. We recorded a $15.9 million gain on the deconsolidation of SciVac in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2015. The recognized gain was primarily due to the fair value of the retained interest in STI based on Levon’s cash contribution of approximately $21.2 million under the Arrangement.
Following the deconsolidation, we account for our investment in STI under the equity method as we have determined that we and/or our related parties can significantly influence STI through our voting power and board representation. STI is considered a related party as a result of our board representation in STI and executive management’s ownership interests in STI.
In May 2016, STI completed a merger transaction pursuant to which a wholly-owned subsidiary of STI merged with and into VBI Vaccines Inc. with VBI Vaccines Inc. surviving the merger as a wholly-owned subsidiary of STI, and STI changed its name to VBI Vaccines Inc. (“VBI”) . We recorded a $2.5 million gain in connection with the merger transaction in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2016. In June 2016, we invested an additional $5.7 million in VBI for 1,362,370 shares of its common stock. As a result of these two transactions, OPKO’s ownership in VBI changed to 15%.
We account for our investment in VBI under the equity method as we have determined that we can significantly influence VBI through our board representation.
Other
On January 5, 2016, we completed a stock exchange agreement (the “Exchange Agreement”) with Relative Core Cyprus Limited (“Relative Core”) pursuant to which Relative Core agreed to transfer and sell to us $5.0 million of Xenetic shares in exchange for $5.0 million shares of our common stock. We issued 494,462 shares of our common stock to Relative Core and received 10,204,082 shares of Xenetic common stock from Relative Core. The number of shares exchanged in the transaction was calculated based on the average closing sale price for our common stock on the NYSE for the ten (10) consecutive trading day period ending on the second day prior to the closing and the average closing sale price for Xenetic’s common stock on the OTC “Pink Sheet” for the ten (10) consecutive trading day period ending on the second day prior to the closing. We account for investment in Xenetic as an available for sale investment.
In March 2016, we entered into an agreement with Relative Core pursuant to which we delivered $5.0 million cash to Relative Core in exchange for a $5.0 million promissory note (“Relative Note”) which bears interest at 10% and is due in March 2017. The Relative Note is secured by 4,000,000 shares of common stock of Xenetic and 494,462 shares of OPKO common stock. We recorded the Relative Note within Other current assets and prepaid expenses in our Consolidated Balance Sheet.