Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v2.4.1.9
Fair Value Measurements
12 Months Ended
Dec. 31, 2014
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 December 31, 2014
(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, 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

 
As of December 31, 2013
(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, available for sale
$
3,376

 
$
2,698

 
$

 
$

 
$
6,074

Common stock options/warrants
925

 
1,041

 

 
4,022

 
5,988

Total assets
$
4,301

 
$
3,739

 
$

 
$
4,022

 
$
12,062


Any future fluctuation in fair value related to these instruments that is judged to be temporary, including 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.
As of December 31, 2014, we have money market funds that qualify as cash equivalents, forward contracts for inventory purchases (Refer to Note 18) 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 Cocrystal, ARNO and Sevion.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
 
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

Certificates of deposit

 

 

 

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

 
Fair value measurements as of December 31, 2013
(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
$
168,418

 
$

 
$

 
$
168,418

Certificates of deposit

 
827

 

 
827

Pharmsynthez Notes Receivable & Purchase Option

 
6,151

 

 
6,151

Common stock investments, available for sale
6,074

 

 

 
6,074

Common stock options/warrants

 
5,988

 

 
5,988

Forward contracts

 
49

 

 
49

Total assets
$
174,492

 
$
13,015

 
$

 
$
187,507

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
101,087

 
$
101,087

Deferred acquisition payments, net of discount

 

 
5,465

 
5,465

Contingent consideration:
 
 
 
 
 
 
 
CURNA

 

 
573

 
573

OPKO Diagnostics

 

 
13,776

 
13,776

FineTech

 

 
3,124

 
3,124

OPKO Renal

 

 
53,092

 
53,092

OPKO Health Europe

 

 
1,043

 
1,043

Total liabilities
$

 
$

 
$
178,160

 
$
178,160


The carrying amount and estimated fair value of our long-term debt, 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.
 
December 31, 2014
(In thousands)
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
2033 Senior Notes
$
65,507

 
$
63,062

 
$

 
$

 
$
63,062


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 December 31, 2014 and 2013, 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 December 31, 2014 and 2013:
 
December 31, 2014
(In thousands)
Contingent
consideration
 
Deferred
acquisition
payments, net
of discount
 
Embedded
conversion
option
Balance at December 31, 2013
$
71,620

 
$
5,465

 
$
101,087

Additions

 

 

Total losses (gains) for the period:
 
 
 
 
 
Included in results of operations
24,446

 
(735
)
 
12,213

Foreign currency impact
(130
)
 

 

Payments
(24,369
)
 
(4,730
)
 

Conversion

 

 
(47,353
)
Balance at December 31, 2014
$
71,567

 
$

 
$
65,947

 
December 31, 2013
(In thousands)
BZNE Note
and
conversion
feature
 
Contingent
consideration
 
Deferred
acquisition
payments, net
of discount
 
Embedded
conversion
option
Balance at December 31, 2012
$
2,040

 
$
20,056

 
$
10,103

 
$

Additions

 
47,710

 

 
59,204

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

 
6,947

 
829

 
52,742

Foreign currency remeasurement
 
 
31

 
 
 
 
Conversion
(2,040
)
 

 

 
(10,859
)
Payments

 
(3,124
)
 
(5,467
)
 

Balance at December 31, 2013
$

 
$
71,620

 
$
5,465

 
$
101,087


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, OPKO Renal and rolapitant 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 $1.2 million. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO Renal would decrease by $1.5 million. 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. As of December 31, 2013, of the $71.6 million of contingent consideration, $28.0 million is recorded in Accrued expenses and $43.6 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.
BZNE Notes 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 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. We converted the BZNE Notes into common stock in December 2013.