OPKO Health, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Dec. 31, 2015

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, 2015
(In thousands)	Amortized Cost		Gross unrealized gains in Accumulated OCI		Gross unrealized losses in Accumulated OCI			Fair value
Common stock investments, available for sale	$	2,978	$	904	$	(267	)	$	3,615
Total assets	$	2,978	$	904	$	(267	)	$	3,615



	As of December 31, 2014
(In thousands)	Amortized Cost		Gross unrealized gains in Accumulated OCI		Gross unrealized losses in Accumulated OCI			Fair value
Common stock investments, available for sale	$	10,038	$	293	$	(4,573	)	$	5,758
Total assets	$	10,038	$	293	$	(4,573	)	$	5,758

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 Consolidated Statements of Operations.

As of December 31, 2015, we have money market funds that qualify as cash equivalents, forward foreign currency exchange 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 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 December 31, 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	$	84,421	$	—	$	—	$	84,421
Common stock investments, available for sale	3,615		—		—		3,615
Common stock options/warrants	—		5,338		—		5,338
Forward contracts	—		9		—		9
Total assets	$	88,036	$	5,347	$	—	$	93,383
Liabilities:
Embedded conversion option	$	—	$	—	$	23,737	$	23,737
Contingent consideration:
CURNA	—		—		411		411
OPKO Diagnostics	—		—		12,141		12,141
OPKO Renal	—		—		41,400		41,400
OPKO Health Europe	—		—		470		470
Total liabilities	$	—	$	—	$	78,159	$	78,159



	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 without the embedded conversion option, 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, 2015
(In thousands)	Carrying Value		Total Fair Value		Level 1		Level 2		Level 3
2033 Senior Notes	$	25,675	$	24,647	$	—	$	—	$	24,647

There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy.



	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, 2015 and 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 December 31, 2015 and 2014:



	December 31, 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	5,050			36,587
Foreign currency impact	(269		)	—
Payments	(21,926		)	—
Conversion	—			(78,797		)
Balance at December 31, 2015	$	54,422		$	23,737



	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
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

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 Merck (VARUBI™) transactions. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO Renal would decrease by $1.7 million. As of December 31, 2015, of the $54.4 million of contingent consideration, $22.2 million is recorded in Accrued expenses and $32.3 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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