Table of Contents
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number 001-33528
 
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
75-2402409
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
4400 Biscayne Blvd.
Miami, FL 33137
(Address of Principal Executive Offices) (Zip Code)
 
(305) 575-4100
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  YES    ¨  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  YES    ¨  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
(in Rule 12b-2 of the Exchange Act) (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):   ¨  YES    ý  NO
As of October 30, 2015, the registrant had 545,011,748 shares of Common Stock outstanding.

 

Table of Contents

TABLE OF CONTENTS
Page
 
 
 
EX-31.1
Section 302 Certification of CEO
 
EX-31.2
Section 302 Certification of CFO
 
EX-32.1
Section 906 Certification of CEO
 
EX-32.2
Section 906 Certification of CFO
 
EX-101.INS
XBRL Instance Document
 
EX-101.SCH
XBRL Taxonomy Extension Schema Document
 
EX-101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
EX-101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
EX-101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
EX-101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014, and described from time to time in our other reports filed with the Securities and Exchange Commission. Except as required by law, we do not undertake an obligation to update forward-looking statements. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
We have a history of operating losses and we do not expect to become profitable in the near future.
We may fail to realize the anticipated benefits of the merger with Bio-Reference Laboratories, Inc. (“Bio-Reference”).
The failure to integrate successfully the business and operations of Bio-Reference timely may adversely affect our future results.
Combining our business with Bio-Reference may be more difficult, costly or time-consuming than expected, which may adversely affect our business results and negatively affect the value of our common stock following the merger.
Our future results will suffer if we do not effectively manage our expanded operations following the merger with Bio-Reference.
Third parties may terminate or alter existing contracts or relationships with us or Bio-Reference as a result of the merger.
We may be unable to retain key Bio-Reference personnel following the merger.
The market price of our common stock may decline as a result of the merger with Bio-Reference.
Charges to earnings resulting from the application of the acquisition method of accounting may adversely affect the market value of our common stock following the merger.
Our technologies are in an early stage of development and are unproven.
Our business is substantially dependent on our ability to develop, launch and generate revenue from our pharmaceutical and diagnostic programs.
Our research and development activities, or that of our investees, may not result in commercially viable products.
Our estimates on the timing and expenditures associated with the build-up of pre-launch inventory and capacity expansion could be over or under actual needs and may adversely affect our operations and financial results.
The results of previous clinical trials may not be predictive of future results, and our current and planned clinical trials may not satisfy the requirements of the United States (“U.S.”) Food and Drug Administration (“FDA”) or other non-U.S. regulatory authorities.
We may require substantial additional funding, which may not be available to us on acceptable terms, or at all.
We may finance future cash needs primarily through public or private offerings, debt financings or strategic collaborations, which may dilute your stockholdings in the Company.
If our competitors develop and market products that are more effective, safer or less expensive than our future product candidates, our commercial opportunities will be negatively impacted.

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Material weaknesses in the design and operation of the internal control over financial reporting of companies that we acquire could have a material adverse effect on our financial statements.
The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates.
Failure to recruit and enroll patients for clinical trials may cause the development of our product candidates to be delayed.
Even if we obtain regulatory approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our product candidates, which could materially impair our ability to generate anticipated revenues.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes.
Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our products.
The loss of Phillip Frost, M.D., our Chairman and Chief Executive Officer, could have a material adverse effect on our business and product development.
If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize our product candidates.
As we evolve from a company primarily involved in development to a company also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully.
If we fail to acquire and develop other products or product candidates, at all or on commercially reasonable terms, we may be unable to diversify or grow our business.
We have no experience manufacturing our pharmaceutical product candidates other than at one of our Israel facilities and one of our Irish facilities, and at our Mexican and Spanish facilities, and we have no experience in manufacturing our diagnostic product candidates. We will therefore likely rely on third parties to manufacture and supply our pharmaceutical and diagnostics product candidates, and we would need to meet various standards to satisfy FDA regulations in order to manufacture on our own.    
We currently have no pharmaceutical or diagnostic marketing, sales or distribution capabilities other than in Chile, Mexico, Spain, and Uruguay for sales in those countries and our active pharmaceutical ingredients (“APIs”) business in Israel, and the sales force for our laboratory businesses at OPKO Lab and Bio-Reference. If we are unable to develop our sales and marketing and distribution capability on our own or through collaborations with marketing partners, we will not be successful in commercializing our pharmaceutical and diagnostic product candidates.
Certain elements of our business are dependent on the success of ongoing and planned phase 3 clinical trials for Alpharen (Fermagate Tablets), and hGH-CTP.
Independent clinical investigators and contract research organizations that we engage to conduct our clinical trials may not be diligent, careful or timely.
The success of our business is dependent on the actions of our collaborative partners.
Our exclusive worldwide agreement with Pfizer Inc. (“Pfizer”) is important to our business. If we do not successfully develop hGH-CTP and/or Pfizer does not successfully commercialize hGH-CTP, our business could be adversely affected.
Our license agreement with TESARO, Inc. (“TESARO”) is important to our business. If TESARO does not successfully commercialize Varubi, our business could be adversely affected.
If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
We rely heavily on licenses from third parties.

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We license patent rights to certain of our technology from third-party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects will be harmed.
Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.
Adverse results in material litigation matters or governmental inquiries could have a material adverse effect upon our business and financial condition.
If our products have undesirable effects on patients, we could be subject to litigation or product liability claims that could impair our reputation and have a material adverse effect upon our business and financial condition.
Medicare prescription drug coverage legislation and future legislative or regulatory reform of the health care system may adversely affect our ability to sell our products or provide our services profitably.
Failure to obtain and maintain regulatory approval outside the U.S. will prevent us from marketing our product candidates abroad.
We may not have the funding available to pursue acquisitions.
Acquisitions may disrupt our business, distract our management, may not proceed as planned, and may also increase the risk of potential third party claims and litigation.
We may encounter difficulties in integrating acquired businesses.
Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.
Political and economic instability in Europe and Latin America and political, economic, and military instability in Israel or neighboring countries could adversely impact our operations.
We are subject to fluctuations in currency exchange rates in connection with our international businesses.
We have a large amount of goodwill and other intangible assets as a result of acquisitions and a significant write-down of goodwill and/or other intangible assets would have a material adverse effect on our reported results of operations and net worth.
Our business may become subject to legal, economic, political, regulatory and other risks associated with international operations.
The market price of our Common Stock may fluctuate significantly.
The conversion and redemption features of our January 2013 convertible senior notes due in 2033 are classified as embedded derivatives and may continue to result in volatility in our financial statements, including having a material impact on our result of operations and recorded derivative liability.
Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you may not consider to be in your best interests or in the best interests of our stockholders.
Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as they apply to us, or our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and our Common Stock price may suffer.
We may be unable to maintain our listing on the New York Stock Exchange (“NYSE”), which could cause our stock price to fall and decrease the liquidity of our Common Stock.
Future issuances of Common Stock and hedging activities may depress the trading price of our Common Stock.
Provisions in our charter documents and Delaware law could discourage an acquisition of us by a third party, even if the acquisition would be favorable to you.
We do not intend to pay cash dividends on our Common Stock in the foreseeable future.


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PART I. FINANCIAL INFORMATION
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our wholly-owned subsidiaries.
Item 1. Financial Statements
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
 
September 30, 2015
 
December 31, 2014(1)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
212,144

 
$
96,907

Accounts receivable, net
189,725

 
19,969

Inventory, net
40,693

 
16,604

Prepaid expenses and other current assets
74,854

 
9,389

Total current assets
517,416

 
142,869

Property, plant and equipment, net
126,822

 
16,411

Intangible assets, net
660,287

 
62,649

In-process research and development
812,723

 
793,152

Goodwill
761,234

 
224,292

Investments, net
34,695

 
22,453

Other assets, principally deferred tax assets
102,676

 
5,838

Total assets
$
3,015,853

 
$
1,267,664

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
77,969

 
$
8,744

Accrued expenses
201,113

 
60,912

Current portion of lines of credit and notes payable
78,508

 
13,455

Total current liabilities
357,590

 
83,111

2033 Senior Notes, net of discount and estimated fair value of embedded derivatives
44,206

 
131,454

Deferred tax liabilities
408,213

 
167,153

Other long-term liabilities, principally deferred revenue and contingent consideration
236,476

 
50,205

Total long-term liabilities
688,895

 
348,812

Total liabilities
1,046,485

 
431,923

Equity:
 
 
 
Common Stock - $0.01 par value, 750,000,000 shares authorized; 545,951,707 and 433,421,677
shares issued at September 30, 2015 and December 31, 2014, respectively
5,459

 
4,334

Treasury Stock - 1,120,367 and 1,245,367 shares at September 30, 2015 and December 31, 2014,
       respectively
(3,645
)
 
(4,051
)
Additional paid-in capital
2,696,420

 
1,529,096

Accumulated other comprehensive income (loss)
(20,992
)
 
(12,392
)
Accumulated deficit
(706,474
)
 
(674,843
)
Total shareholders’ equity attributable to OPKO
1,970,768

 
842,144

Noncontrolling interests
(1,400
)
 
(6,403
)
Total shareholders’ equity
1,969,368

 
835,741

Total liabilities and equity
$
3,015,853

 
$
1,267,664

(1)
As of December 31, 2014, total assets include $7.6 million and total liabilities include $12.1 million related to SciVac Ltd (“SciVac”). SciVac was a consolidated variable interest entity which we deconsolidated in July 2015. Refer to Note 5. SciVac’s consolidated assets were owned by SciVac and SciVac’s consolidated liabilities had no recourse against us.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Revenue from services
$
103,919

 
$
2,482

 
$
107,929

 
$
6,606

Revenue from products
20,765

 
17,291

 
59,066

 
58,510

Other revenue, principally transfer of intellectual property
18,350

 

 
48,552

 
476

Total revenues
143,034

 
19,773

 
215,547

 
65,592

Costs and expenses:
 
 
 
 
 
 
 
Cost of service revenue
56,670

 
2,359

 
61,434

 
7,088

Cost of product revenue
10,658

 
8,761

 
30,650

 
28,987

Selling, general and administrative
55,246

 
14,010

 
93,629

 
42,697

Research and development
18,937

 
20,517

 
74,010

 
57,744

In-process research and development

 

 

 
10,055

Contingent consideration
1,636

 
19,592

 
6,471

 
24,078

Amortization of intangible assets
8,110

 
2,735

 
14,011

 
8,304

Grant repayment (Note 12)

 

 
25,889

 

Total costs and expenses
151,257

 
67,974

 
306,094

 
178,953

Operating income (loss)
(8,223
)
 
(48,201
)
 
(90,547
)
 
(113,361
)
Other income and (expense), net:
 
 
 
 
 
 
 
Interest income
13

 
402

 
27

 
450

Interest expense
(2,745
)
 
(2,402
)
 
(6,296
)
 
(10,572
)
Fair value changes of derivative instruments, net
32,244

 
3,305

 
(34,100
)
 
3,758

Other income (expense), net
17,482

 
(2,764
)
 
16,734

 
2,044

Other income and (expense), net
46,994

 
(1,459
)
 
(23,635
)
 
(4,320
)
Income (loss) before income taxes and investment losses
38,771

 
(49,660
)
 
(114,182
)
 
(117,681
)
Income tax benefit (provision)
92,978

 
(294
)
 
87,218

 
(1,009
)
Income (loss) before investment losses
131,749

 
(49,954
)
 
(26,964
)
 
(118,690
)
Loss from investments in investees
(3,502
)
 
(60
)
 
(6,067
)
 
(2,486
)
Net income (loss)
128,247

 
(50,014
)
 
(33,031
)
 
(121,176
)
Less: Net loss attributable to noncontrolling interests

 
(1,345
)
 
(1,400
)
 
(2,481
)
Net income (loss) attributable to common shareholders
$
128,247

 
$
(48,669
)
 
$
(31,631
)
 
$
(118,695
)
Earnings (loss) per share:
 
 
 
 
 
 
 
Earnings (loss) per share, basic
$
0.26

 
$
(0.11
)
 
$
(0.07
)
 
$
(0.28
)
Earnings (loss) per share, diluted
$
0.25

 
$
(0.11
)
 
$
(0.07
)
 
$
(0.28
)
Weighted average common shares outstanding, basic
500,562,254

 
427,577,102

 
469,931,486

 
418,649,421

Weighted average common shares outstanding, diluted
514,320,570

 
427,577,102

 
469,931,486

 
418,649,421



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
128,247

 
$
(50,014
)
 
$
(33,031
)
 
$
(121,176
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation and other comprehensive income (loss) from equity investments
(1,452
)
 
(3,169
)
 
(5,998
)
 
(4,781
)
Available for sale investments:
 
 
 
 
 
 
 
Change in unrealized gain (loss), net of tax
(661
)
 
(5,834
)
 
(2,602
)
 
(6,781
)
Less: reclassification adjustments for (gains) losses included in net income (loss), net of tax

 

 

 
(553
)
Comprehensive loss
126,134

 
(59,017
)
 
(41,631
)
 
(133,291
)
Less: Comprehensive loss attributable to noncontrolling interest

 
(1,345
)
 
(1,400
)
 
(2,481
)
Comprehensive income (loss) attributable to common shareholders
$
126,134

 
$
(57,672
)
 
$
(40,231
)
 
$
(130,810
)


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 
For the nine months ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(33,031
)
 
$
(121,176
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
20,073

 
11,269

Non-cash interest on 2033 Senior Notes
2,176

 
4,596

Amortization of deferred financing costs
1,175

 
1,907

Losses from investments in investees
6,067

 
2,486

Equity-based compensation – employees and non-employees
17,765

 
10,088

(Recovery of) provision for bad debts
8,308

 
(20
)
Provision for inventory obsolescence
683

 
773

Revenue from receipt of equity
(140
)
 
(180
)
Realized gain on sale of equity securities
(216
)
 
(1,273
)
(Gain) loss on conversion of 3.00% convertible senior notes
(943
)
 
(2,668
)
Change in fair value of derivative instruments
34,100

 
(3,758
)
In-process research and development

 
10,055

Change in fair value of contingent consideration
6,471

 
24,078

Gain on deconsolidation of SciVac
(17,340
)
 

Deferred income tax (benefit) expense
(96,713
)
 

Changes in assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
(14,012
)
 
(4,140
)
Inventory
(6,407
)
 
(1,099
)
Prepaid expenses and other current assets
(4,225
)
 
3,487

Other assets
1,262

 
4,465

Accounts payable
(35,504
)
 
(3,850
)
Foreign currency measurement
776

 
1,008

Deferred revenue
246,262

 

Accrued expenses and other liabilities
36,788

 
(1,666
)
Net cash provided by (used in) operating activities
173,375

 
(65,618
)
Cash flows from investing activities:
 
 
 
Investments in investees
(3,000
)
 
(589
)
Proceeds from sale of equity securities

 
1,331

Acquisition of businesses, net of cash
(78,862
)
 
(1,683
)
Acquisition of intangible assets
(5,000
)
 

Capital expenditures
(4,422
)
 
(3,935
)
Net cash used in investing activities
(91,284
)
 
(4,876
)
Cash flows from financing activities:
 
 
 
Issuance of 2033 Senior Notes, net, including related parties
81

 

Proceeds from the exercise of Common Stock options and warrants
25,180

 
12,066

Cash from non-controlling interest
100

 

Contingent consideration payments

 
(6,435
)
Borrowings on lines of credit
111,359

 
19,326

Repayments of lines of credit
(103,544
)
 
(21,823
)
Net cash provided by financing activities
33,176

 
3,134

Effect of exchange rate on cash and cash equivalents
(30
)
 
(180
)
Net increase (decrease) in cash and cash equivalents
115,237

 
(67,540
)
Cash and cash equivalents at beginning of period
96,907

 
185,798

Cash and cash equivalents at end of period
$
212,144

 
$
118,258

SUPPLEMENTAL INFORMATION:
 
 
 
Interest paid
$
2,917

 
$
5,222

Income taxes paid, net
$
1,383

 
$
566

Pharmsynthez common stock received
$

 
$
6,264

Non-cash financing:
 
 
 
Shares issued upon the conversion of:
 
 
 
2033 Senior Notes
$
120,299

 
$
95,665

Common Stock options and warrants, surrendered in net exercise
$
14,241

 
$
3,494

Issuance of capital stock to acquire:
 
 
 
Bio-Reference Laboratories, Inc.
$
950,010

 
$

EirGen Pharma Limited
$
33,569

 
$

Inspiro
$

 
$
8,566

OPKO Health Europe
$
1,813

 
$

OPKO Renal
$
20,113

 
$
21,155

OPKO Uruguay Ltda.
$

 
$
159



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes Bio-Reference Laboratories, the nation’s third-largest clinical laboratory with a core genetic testing business and a 420-person sales force to drive growth and leverage new products, including the 4Kscore® prostate cancer test and the Claros® 1 in-office immunoassay platform. Our pharmaceutical business features Rayaldee™, a treatment for secondary hyperparathyroidism in stage 3-4 chronic kidney disease patients with vitamin D deficiency (March 29, 2016 PDUFA date) and VARUBI™ for chemotherapy-induced nausea and vomiting (oral formulation approved by FDA and pending launch by partner TESARO). Our biologics business includes hGH-CTP, a once-weekly human growth hormone injection (in Phase 3 and partnered with Pfizer), and a once-daily Factor VIIa drug for hemophilia (entering Phase 2). We are incorporated in Delaware and our principal executive offices are located in leased offices in Miami, Florida.
In August 2015, we completed the acquisition of Bio-Reference Laboratories, Inc. (“Bio-Reference”) following a vote of Bio-Reference’s shareholders to adopt the agreement and plan of merger (“Merger Agreement”) and approve the merger. Bio-Reference is the third largest full service clinical laboratory in the United States and is known for its innovative technological solutions and pioneering leadership in the areas of genomics and genetic sequencing. Under the terms of the Merger Agreement, 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 $950.0 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.
Through our acquisition of Bio-Reference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas across New York, New Jersey, Maryland, Pennsylvania, Delaware, Washington DC, Florida, California, Texas, Illinois and Massachusetts as well as to customers in a number of other states. We offer a comprehensive list of clinical diagnostic tests including blood and urine analysis, blood chemistry, hematology services, serology, radio-immuno analysis, toxicology (including drug screening), pap smears, tissue pathology (biopsies) and other tissue analysis. We perform cancer cytogenetic testing at our leased facilities in Elmwood Park, NJ, Smithtown, NY, Clarksburg, MD, Milford, MA, Miami Florida, and Campbell California and genetic testing at our leased facility in Gaithersburg, MD, as well as at our Elmwood Park facility. We perform cytology testing at our leased facilities Frederick, MD, Milford, MA, Columbus, OH, Houston, TX and at our Elmwood Park facility. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
In May 2015, we acquired all of the issued and outstanding shares of EirGen Pharma Limited (“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 in the aggregate. 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.
We own established pharmaceutical platforms in Chile, Spain, Mexico, and Uruguay, which are generating revenue and which we expect to facilitate future market entry for our products currently in development. In addition, we have a development and commercial supply pharmaceutical company and a global supply chain operation and holding company in Ireland. We own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and therapeutic products.
Our research and development activities are primarily performed at leased facilities in Jupiter and Miramar, Florida, Woburn, Massachusetts, Nes Ziona, Israel, and Barcelona, Spain.

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NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments or otherwise disclosed herein) considered necessary to present fairly the Company’s results of operations, financial position and cash flows have been made. The results of operations and cash flows for the three and nine months ended September 30, 2015, are not necessarily indicative of the results of operations and cash flows that may be reported for the remainder of 2015 or any future periods. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Principles of consolidation. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of OPKO Health, Inc. and of our wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.
Cash and cash equivalents. Cash and cash equivalents include short-term, interest-bearing instruments with original maturities of 90 days or less at the date of purchase. We also consider all highly liquid investments with original maturities at the date of purchase of 90 days or less as cash equivalents. These investments include money markets, bank deposits, certificates of deposit and U.S. treasury securities.
Inventories. Inventories are valued at the lower of cost or market (net realizable value). Cost is determined by the first-in, first-out method. We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and current market conditions to determine whether inventories are stated at the lower of cost or market. Inventories at our diagnostics segment consist primarily of purchased laboratory supplies, which is used in our testing laboratories.
Pre-launch inventories. We may accumulate commercial quantities of certain product candidates prior to the date we anticipate that such products will receive final U.S. FDA approval.  The accumulation of such pre-launch inventories involves the risk that such products may not be approved for marketing by the FDA on a timely basis, or ever.  This risk notwithstanding, we may accumulate pre-launch inventories of certain products when such action is appropriate in relation to the commercial value of the product launch opportunity.  In accordance with our policy, this pre-launch inventory is expensed.  At September 30, 2015 and December 31, 2014, there were no pre-launch inventories.
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired when accounted for by the purchase method of accounting and arose from our acquisitions of Pharma Genexx, S.A. (“OPKO Chile”), Pharmacos Exakta S.A. de C.V. (“OPKO Mexico”), CURNA, Inc. (“CURNA”), Claros Diagnostics, Inc. (“OPKO Diagnostics”), FineTech Pharmaceuticals, Ltd. (“FineTech”), ALS Distribuidora Limitada (“ALS”), Farmadiet Group Holding, S.L. (“OPKO Health Europe”), previously known as OPKO Spain, Prost-Data, Inc. (“OPKO Lab”), Cytochroma Inc. (“OPKO Renal”), Silcon Comércio, Importacao E Exportacao de Produtos Farmaceuticos e Cosmeticos Ltda. (“OPKO Brazil”), PROLOR Biotech, Inc. (“OPKO Biologics”), EirGen and Bio-Reference. Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions at September 30, 2015 and December 31, 2014 were $2.2 billion and $1.1 billion, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. We determined the fair value of intangible assets, including IPR&D, using the “income method.”
Goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value.
Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then accounted for as a finite-lived

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intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, currently ranging from 3 to 20 years. We use the straight-line method of amortization as there is no reliably determinable pattern in which the economic benefits of our intangible assets are consumed or otherwise used up. Amortization expense was $14.0 million and $8.3 million for the nine months ended September 30, 2015 and 2014, respectively.
Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their fair value due to the short-term maturities of these instruments. Investments that are considered available for sale as of September 30, 2015 and December 31, 2014, are carried at fair value.
Short-term investments, which we invest in from time to time, include bank deposits, corporate notes, U.S. treasury securities and U.S. government agency securities with original maturities of greater than 90 days and remaining maturities of less than one year. Long-term investments include corporate notes, U.S. treasury securities and U.S. government agency securities with maturities greater than one year.
In evaluating fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. Refer to Note 8.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with certain prior acquisitions to their fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as contingent consideration income. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value which may have a material impact on our results from operations and financial position.
Derivative financial instruments. We record derivative financial instruments on our Condensed Consolidated Balance Sheet at their fair value and recognize the changes in the fair value in our Condensed Consolidated Statement of Operations, when they occur, the only exception being derivatives that qualify as hedges. For the derivative instrument to qualify as a hedge, we are required to meet specific hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At September 30, 2015 and December 31, 2014, our forward contracts for inventory purchases did not meet the hedge effectiveness requirements to be designated as hedges. Accordingly, we recognize all changes in the fair values of our derivatives instruments, net, in our Condensed Consolidated Statement of Operations. Refer to Note 9.
Revenue recognition. Revenue for laboratory services is recognized on the accrual basis at the time test results are reported, which approximates when services are provided. Services are provided to patients covered by various third-party payer programs including various managed care organizations, as well as the Medicare and Medicaid programs. Billings for services under third-party payer programs are included in revenue net of allowances for contractual discounts and allowances for differences between the amounts billed and estimated program payment amounts. Adjustments to the estimated payment amounts based on final settlement with the programs are recorded upon settlement as an adjustment to revenue. For the three months ended September 30, 2015 and 2014, approximately 9% and 5%, respectively, of our revenues were derived directly from the Medicare and Medicaid programs. The increase in revenues from laboratory services, including revenue from Medicare and Medicaid programs, is due to the acquisition of Bio-Reference in August 2015.
Generally, we recognize revenue from product sales when goods are shipped and title and risk of loss transfer to our customers. Our estimates for sales returns and allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales from which they originated, and management’s evaluation of specific factors that may increase or decrease the risk of product returns.
Revenue from transfer of intellectual property includes revenue related to the sale, license or transfer of intellectual property such as upfront license payments, license fees and milestone payments received through our license, collaboration and commercialization agreements. We analyze our multiple-element arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting.

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Non-refundable license fees for the out-license of our technology are recognized depending on the provisions of each agreement. We recognize non-refundable upfront license payments as revenue upon receipt if the license has standalone value and qualifies for treatment as a separate unit of accounting under multiple-element arrangement guidance. License fees with ongoing involvement or performance obligations that do not have standalone value are recorded as deferred revenue, included in Accrued expenses or Other long-term liabilities, when received and generally are recognized ratably over the period of such performance obligations only after both the license period has commenced and we have delivered the technology.
The assessment of our obligations and related performance periods requires significant management judgment. If an agreement contains research and development obligations, the relevant time period for the research and development phase is based on management estimates and could vary depending on the outcome of clinical trials and the regulatory approval process. Such changes could materially impact the revenue recognized, and as a result, management reviews the estimates related to the relevant time period of research and development on a quarterly basis. For the three and nine months ended September 30, 2015, revenue from transfer of intellectual property includes $17.7 million and $47.8 million, respectively, of revenue related to the Pfizer Transaction. Refer to Note 12.
Revenue from milestone payments related to arrangements under which we have continuing performance obligations are recognized as Revenue from transfer of intellectual property upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; there was substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; the milestone is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; the milestone relates solely to past performance; and the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are not considered to be substantive and are, therefore, deferred and recognized as Revenue from transfer of intellectual property over the term of the arrangement as we complete our performance obligations.
Total deferred revenue included in Accrued expenses and Other long-term liabilities was $254.1 million and $6.7 million at September 30, 2015 and December 31, 2014, respectively. The deferred revenue balance at September 30, 2015 relates primarily to the Pfizer Transaction. Refer to Note 12.
Concentration of Credit Risk and Allowance for doubtful accounts. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts receivable are with companies in the health care industry and individuals. However, concentrations of credit risk are limited due to the number of our clients as well as their dispersion across many different geographic regions.
While we have receivables due from federal and state governmental agencies, we do not believe that such receivables represent a credit risk since the related health care programs are funded by federal and state governments, and payment is primarily dependent upon submitting appropriate documentation. Accounts receivable balances (prior to allowance for doubtful accounts and net of contractual adjustments) from Medicare and Medicaid were $22.8 million and $0.6 million at September 30, 2015 and December 31, 2014, respectively.
The portion of our accounts receivable due from patients comprises the largest portion of credit risk. At September 30, 2015 and December 31, 2014, receivables due from patients represent approximately 9% and 0.5% of our consolidated accounts receivable (prior to allowance for doubtful accounts and net of contractual adjustments).
We assess the collectability of accounts receivable balances by considering factors such as historical collection experience, customer credit worthiness, the age of accounts receivable balances, regulatory changes and current economic conditions and trends that may affect a customer’s ability to pay. Actual results could differ from those estimates. Our reported net income (loss) is directly affected by our estimate of the collectability of accounts receivable. The allowance for doubtful accounts recognized in our Condensed Consolidated Balance Sheets was $9.1 million and $1.9 million at September 30, 2015 and December 31, 2014, respectively.
Equity-based compensation. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Condensed Consolidated Statement of Operations over the period during which an employee is required to provide service in exchange for the award. We record excess tax benefits, realized from the exercise of stock options as a financing cash inflow and as a reduction of taxes paid in cash flow from operations. Equity-based compensation arrangements to non-employees are recorded at their fair value on the measurement date. The measurement of equity-based compensation to non-employees is subject to periodic adjustment as the underlying equity instruments vest. During the nine months ended September 30, 2015 and 2014, we recorded $17.8 million and $10.1 million, respectively, of equity-based compensation expense.
Property, Plant and Equipment. Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally five to ten years and includes amortization expense

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for assets capitalized under capital leases. The estimated useful lives by asset class are as follows: software - 3 years, machinery and equipment - 5-8 years, furniture and fixtures - 5-10 years, leasehold improvements - the lesser of their useful life or the lease term, buildings and improvements - 10-40 years. Expenditures for repairs and maintenance are charged to expense as incurred.
Impairment of Long-Lived Assets. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value, or carrying amount for cost basis assets, of the asset.
Research and development expenses. Research and development expenses include external and internal expenses, partially offset by third-party grants and fundings arising from collaboration agreements. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. Research and development employee-related expenses include salaries, benefits and stock-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period in which the actual services are received. As such, accrued liabilities related to third party research and development activities are recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third party contract.
We record expense for in-process research and development projects acquired as asset acquisitions which have not reached technological feasibility and which have no alternative future use. For in-process research and development projects acquired in business combinations, the in-process research and development project is capitalized and evaluated for impairment until the development process has been completed. Once the development process has been completed the asset will be amortized over its remaining useful life.
Segment reporting. Our chief operating decision-maker (“CODM”) is Phillip Frost, M.D., our Chairman and Chief Executive Officer. Our CODM reviews our operating results and operating plans and makes resource allocation decisions on a Company-wide or aggregate basis. We currently manage our operations in two reportable segments, pharmaceuticals and diagnostics. The pharmaceutical segment consists of two operating segments, our (i) pharmaceutical research and development segment which is focused on the research and development of pharmaceutical products, and vaccines, and (ii) the pharmaceutical operations we acquired in Chile, Mexico, Ireland, Israel, Spain, Uruguay and Brazil. The diagnostics segment consists of two operating segments, our (i) clinical laboratory operations we acquired through the acquisitions of Bio-Reference and OPKO Lab and (ii) point-of-care and molecular diagnostics operations. There are no significant inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes.
Variable interest entities. The consolidation of variable interest entities (“VIE”) is required when an enterprise has a controlling financial interest. A controlling financial interest in a VIE will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE. Refer to Note 5.
Investments. We have made strategic investments in development stage and emerging companies. We record these investments as equity method investments or investments available for sale based on our percentage of ownership and whether we have significant influence over the operations of the investees. Investments for which it is not practical to estimate fair value and which we do not have significant influence are accounted for as cost method investments. For investments classified under the equity method of accounting, we record our proportionate share of their losses in Losses from investments in investees in our Condensed Consolidated Statement of Operations. Refer to Note 5. For investments classified as available for sale, we record changes in their fair value as unrealized gain or loss in Other comprehensive income (loss) based on their closing price per share at the end of each reporting period. Refer to Note 5.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. We periodically evaluate the realizability of our net

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deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment.
Income tax benefit for the nine months ended September 30, 2015 was primarily due to a $93.4 million release of a valuation allowance on our U.S. deferred tax assets as a result of the merger with Bio-Reference in August 2015. This was partially offset by expense recognized on taxable income from the Pfizer Transaction during the nine months ended September 30, 2015. Refer to Note 12 for a discussion of the Pfizer Transaction.
Included in income tax benefit is an accrual of $2.3 million related to uncertain tax positions involving income recognition. We recognize that local tax law is inherently complex and the local taxing authorities may not agree with certain tax positions taken. Consequently, it is reasonably possible that the ultimate resolution of these matters in any jurisdiction may be significantly more or less than estimated. We evaluated the estimated tax exposure for a range of current likely outcomes to be from $0 to approximately $50.0 million and recorded our accrual to reflect our best expectation of ultimate resolution.
Recent accounting pronouncements. In May 2014, the FASB issued Accounting Standards Update (“ASU”), ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach. We are currently evaluating both methods of adoption and the impact that the adoption of this ASU will have on our Condensed Consolidated Financial Statements.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Earlier adoption is permitted. The amendments can be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards. We expect to apply the ASU prospectively and do not expect the adoption to have an impact on our Condensed Consolidated Financial Statements.
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 with early adoption permitted. We do not believe the impact of our pending adoption of ASU 2014-15 on our Condensed Consolidated Financial Statements will be material.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which amends current consolidation guidance including changes to both the variable and voting interest models used by companies to evaluate whether an entity should be consolidated. The requirements from ASU 2015-02 are effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for entities that do not measure inventory using the last-in, first-out (LIFO) or retail inventory method from the lower of cost or market to lower of cost and net realizable value. For public business entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015- 16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts,

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calculated as if the accounting had been completed at the acquisition date. For public business entities, ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance, with earlier application permitted for financial statements that have not been issued. Our early adoption of ASU 2015-16 in the third quarter of 2015 did not have a material impact on our Condensed Consolidated Financial Statements.
NOTE 3 EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing our net income (loss) by the weighted average number of shares outstanding during the period. The dilutive impact of stock options and warrants is determined by applying the “treasury stock” method. In the periods in which their effect would be antidilutive, no effect has been given to outstanding options, warrants or the potentially dilutive shares issuable pursuant to 2033 Senior Notes (defined in Note 6) in the diluted computation. The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
For the three months ended September 30,
 
For the nine months ended September 30,
(Shares in thousands)
2015
 
2014
 
2015
 
2014
Numerator
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders, basic
$
128,247

 
$
(48,669
)
 
$
(31,631
)
 
$
(118,695
)
  Add: Interest on 2033 Senior Notes
779

 

 

 

Net income (loss) attributable to common shareholders, diluted
$
129,026

 
$
(48,669
)
 
$
(31,631
)
 
$
(118,695
)
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
(Shares in thousands)
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
500,562

 
427,577

 
469,931

 
418,649

Effect of dilutive securities:
 
 


 
 
 


  Stock options
6,349

 

 

 

  Warrants
2,065

 

 

 

  2033 Senior Notes
5,344

 

 

 

     Dilutive potential shares
13,758

 

 

 

Weighted average common shares outstanding, diluted
514,320

 
427,577

 
469,931

 
418,649

 
 
 
 
 
 
 
 
Earnings (loss) per share, basic
$
0.26

 
$
(0.11
)
 
$
(0.07
)
 
$
(0.28
)
Earnings (loss) per share, diluted
$
0.25

 
$
(0.11
)
 
$
(0.07
)
 
$
(0.28
)
A total of 29,874,112 potential shares of Common Stock have been excluded from the calculation of diluted earnings (loss) per share for the three months ended September 30, 2014, because their inclusion would be antidilutive. A total of 12,348,652 and 29,231,538 potential shares of Common Stock have been excluded from the calculation of diluted earnings (loss) per share for the nine months ended September 30, 2015 and 2014, respectively, because their inclusion would be anti-dilutive.
During the three months ended September 30, 2015, 1,595,614 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 1,595,461 shares of Common Stock. Of the 1,595,614 Common Stock options and Common Stock warrants exercised, 153 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the nine months ended September 30, 2015, 25,437,929 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 24,231,123 shares of Common Stock. Of the 25,437,929 Common Stock options and Common Stock warrants exercised, 1,206,807 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the three months ended September 30, 2014, 3,556,688 Common Stock options and Common Stock warrants to

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purchase shares of our Common Stock were exercised, resulting in the issuance of 3,556,602 shares of Common Stock. Of the 3,556,688 Common Stock options exercised, 86 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the nine months ended September 30, 2014, 5,262,094 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 4,866,852 shares of Common Stock. Of the 5,262,094 Common Stock options and Common Stock warrants exercised, 395,242 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the warrant agreements.


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NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands)
September 30,
2015
 
December 31,
2014
Accounts receivable, net
 
 
 
Accounts receivable
$
198,840

 
$
21,875

Less: allowance for doubtful accounts
(9,115
)
 
(1,906
)
 
$
189,725

 
$
19,969

Inventories, net
 
 
 
Consumable supplies
$
21,119

 
$
279

Finished products
13,851

 
11,837

Work in-process
1,045

 
1,011

Raw materials
5,472

 
4,116

Less: inventory reserve
(794
)
 
(639
)
 
$
40,693

 
$
16,604

Prepaid expenses and other current assets
 
 
 
Deferred tax assets
$
55,527

 
$
1,892

Prepaid supplies
9,298

 
1,123

Other receivables
3,995

 
669

Taxes recoverable
3,083

 
2,417

Other
2,357

 
2,320

Prepaid insurance
594

 
968

 
$
74,854

 
$
9,389

Intangible assets, net:
 
 
 
Customer relationships
$
451,030

 
$
22,108

Technologies
151,791

 
52,508

Trade names
50,431

 
3,483

Licenses
25,399

 
572

Covenants not to compete
8,618

 
8,639

Product registrations
7,642

 
8,763

Other
11,342

 
507

Less:  accumulated amortization
(45,966
)
 
(33,931
)
 
$
660,287

 
$
62,649

Accrued expenses:
 
 
 
Deferred revenue
$
75,763

 
$
4,185

Employee benefits
31,668

 
4,127

Contingent consideration
28,283

 
27,352

Taxes payable
24,024

 
77

Capital leases short-term
10,785

 

Clinical trials
4,351

 
8,643

Professional fees
1,375

 
1,860

Milestone payment
5,000

 

Other
19,864

 
14,668

 
$
201,113

 
$
60,912

 
 
 
 

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(In thousands)
September 30,
2015
 
December 31,
2014
Other long-term liabilities:
 
 
 
Deferred revenue
$
178,308

 
$
2,526

Contingent consideration – OPKO Renal
19,210

 
36,529

Contingent consideration – OPKO Health Europe
232

 
254

Contingent consideration – OPKO Diagnostics
7,683

 
6,992

Contingent consideration – CURNA
450

 
440

Mortgages and other debts payable
4,735

 
2,434

Capital leases long-term
7,120

 

Other
18,738

 
1,030

 
$
236,476

 
$
50,205

All of the intangible assets and goodwill acquired relate to our acquisitions of principally OPKO Renal, OPKO Biologics, EirGen and Bio-Reference. We do not anticipate capitalizing the cost of product registration renewals, rather we expect to expense these costs, as incurred. Our goodwill is not tax deductible for income tax purposes in any jurisdiction we operate in.
At September 30, 2015, the changes in value of the intangible assets and goodwill are primarily due to the acquisitions of Bio-Reference and EirGen and foreign currency fluctuations between the Chilean and Mexican pesos, the Euro and the Shekel against the U.S. dollar.
The following table reflects the changes in Goodwill during the nine months ended September 30, 2015.
 
2015
(In thousands)
Balance at January 1st
 
Acquisitions and deconsolidation
 
Foreign exchange
 
Balance at September 30th
Pharmaceuticals
 
 
 
 
 
 
 
CURNA
$
4,827

 
$

 
$

 
$
4,827

EirGen

 
66,823

 
273

 
67,096

FineTech
11,698

 

 

 
11,698

OPKO Chile
5,283

 

 
(739
)
 
4,544

OPKO Biologics
139,784

 

 

 
139,784

OPKO Health Europe
8,013

 

 
(600
)
 
7,413

OPKO Mexico
100

 

 
(13
)
 
87

OPKO Renal
2,069

 

 

 
2,069

SciVac
1,553

 
(1,553
)
 

 

 
 
 
 
 
 
 
 
Diagnostics
 
 
 
 
 
 
 
Bio Reference

 
472,751

 

 
472,751

OPKO Diagnostics
17,977

 

 

 
17,977

OPKO Lab
32,988

 

 

 
32,988

 
$
224,292

 
$
538,021

 
$
(1,079
)
 
$
761,234



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NOTE 5 ACQUISITIONS, INVESTMENTS AND LICENSES
Bio-Reference acquisition
In August 2015, we completed the acquisition of Bio-Reference following a vote of Bio-Reference’s shareholders to adopt the Merger Agreement and approve the merger. Bio-Reference is the third largest full service clinical laboratory in the United States and is known for its innovative technological solutions and pioneering leadership in the areas of genomics and genetic sequencing. Under the terms of the Merger Agreement, 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 $950.0 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 preliminary purchase price allocation and the estimated fair value of the net assets acquired and liabilities assumed in the acquisition of Bio-Reference at the date of acquisition. The purchase price allocation for Bio-Reference is preliminary:
(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

Less: Equity issuance costs
 
(138
)
Total purchase price
 
$
950,010

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

Accounts receivable
 
162,940

Inventory
 
19,825

Other current assets, principally deferred tax assets
 
54,141

Total current assets
 
252,706

Property, plant and equipment
 
106,306

Intangible assets:
 
 
Trade name
 
47,100

Customer relationships
 
395,200

Technology
 
100,600

Internally developed software
 
6,900

Total intangible assets
 
549,800

Goodwill
 
472,751

Investments
 
5,326

Other assets
 
12,164

Total assets
 
1,399,053

Accounts payable
 
(79,360
)
Accrued expenses
 
(29,249
)
Income taxes payable
 
(20,411
)
Lines of credit and notes payable
 
(65,701
)
Capital lease obligations
 
(18,293
)
Deferred tax liability (non-current)
 
(236,029
)
Total purchase price
 
$
950,010


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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 segment.
Revenue and Net income (loss) in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2015 includes revenue and net income (loss) of Bio-Reference from the date of acquisition to September 30, 2015 of $102.1 million and $6.8 million, respectively.
The preliminary amortization periods for intangible assets acquired are 5 years for trade name, 10-20 years for customer relationships, 8-12 years for technology and 3 years for internally developed software.
We recognized $6.2 million of acquisition related costs for the acquisition of Bio-Reference that were expensed in the current period as a component of Selling, general and administrative expense.
Pro forma disclosure for Bio-Reference acquisition
The pro forma information has been prepared utilizing period ends that differ by less than 93 days, as permitted by Regulation S-X. We are a registrant with a fiscal year that ends on December 31 and Bio-Reference was a registrant with a fiscal year that ended on October 31. The pro forma results for the three and nine months ended September 30, 2015 and 2014 combines the results of operations of OPKO and Bio-Reference, giving effect to the merger as if it occurred on January 1, 2014, and are based on the individual condensed consolidated statement of operations of OPKO as of September 30, 2015 and 2014 and Bio-Reference as of July 31, 2015 and 2014.
 
For the three months ended September 30,
 
For the nine months ended September 30,
(In thousands)
2015
2014
 
2015
2014
Revenues
$282,461
$241,826
 
$813,018
$670,280
Net income (loss)
121,086
(25,282)
 
(7,507)
(90,990)
Net income (loss) attributable to common shareholders
121,086
(23,937)
 
(6,107)
(67,841)
The unaudited pro forma financial information is presented for information purposes only. The 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 Bio-Reference as of the beginning of the period presented.
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 in the aggregate. 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.

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The following table summarizes the preliminary purchase price allocation and the estimated fair value of the net assets acquired and liabilities assumed in the acquisition of EirGen at the date of acquisition. The purchase price allocation for EirGen is preliminary:
(In thousands)
 
EirGen
Current assets (1)
 
$
11,795

Intangible assets:
 

IPR&D assets
 
19,597

Customer relationships
 
34,155

Currently marketed products
 
3,919

Total intangible assets
 
57,671

Goodwill
 
66,823

Property, plant and equipment
 
8,117

Other assets
 
1,232

Accounts payable and other liabilities
 
(6,254
)
Deferred tax liability
 
(5,618
)
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 pharmaceuticals segment.
Revenue and Net income (loss) in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2015 includes revenue and earnings (loss) of EirGen from the date of acquisition to September 30, 2015 of $7.6 million and $0.1 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. We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, currently ranging from 3 to 20 years.
We recognized $0.5 million of acquisition related costs for the acquisition of EirGen that were expensed in the current period as a component of Selling, general and administrative expense.
Pro forma disclosure for EirGen acquisition
The following table includes the pro forma results for the three and nine months ended September 30, 2015 and 2014 of the combined companies as though the acquisition of EirGen had been completed as of the beginning of the period presented.
 
For the three months ended September 30,
 
For the nine months ended September 30,
(In thousands)
2015
2014
 
2015
2014
Revenues
$143,034
$22,730
 
$219,803
$75,470
Net income (loss)
128,247
(49,834)
 
(34,084)
(125,657)
Net income (loss) attributable to common shareholders
128,247
(48,489)
 
(32,684)
(123,176)
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 EirGen as of the beginning of the period presented.

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Inspiro Medical Ltd. acquisition
In May 2014, we acquired 100% of the issued and outstanding share capital of Inspiro Medical Ltd. (“Inspiro”), an Israeli medical device company developing a new platform to deliver small molecule drugs such as corticosteroids and beta agonists and larger molecules to treat respiratory diseases.     
In connection with the transaction, we paid $1.5 million in cash and delivered 999,556 shares of our Common Stock valued at $8.6 million.
Inspiro’s Inspiromatic™ is a “smart” easy-to-use dry powder inhaler with several advantages over existing devices. We anticipate that this innovative device will play a valuable role in the improvement of therapy for asthma, chronic obstructive pulmonary disease, cystic fibrosis and other respiratory diseases. We recorded the transaction as an asset acquisition and recorded the assets and liabilities at fair value. As the asset had no alternative future use, we recorded $10.1 million of acquired in-process research and development expenses. We record expense for in-process research and development projects accounted for as asset acquisitions which have not reached technological feasibility and which have no alternative future use.
Investments
The following table reflects the accounting method, carrying value and underlying equity in net assets of our unconsolidated investments as of September 30, 2015:
(in thousands)
 
 
 
 
Investment type
 
Investment Carrying Value
 
Underlying Equity in Net Assets
Equity method investments
 
$
25,693

 
$
30,722

Variable interest entity, equity method
 
303

 

Available for sale investments
 
3,156

 
 
Warrants and options
 
5,543

 
 
Total carrying value of investments
 
$
34,695

 
 
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. (1%), Neovasc (5%), STI (25%) and InCellDx, Inc. (27%) The total assets, liabilities, and net losses of our equity method investees as of and for the nine months ended September 30, 2015 were $430.5 million, $(100.3) million, and $(64.3) 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 voting power. Accordingly, we account for our investment in these entities under the equity method. For investments classified under the equity method of accounting, we record our proportionate share of their losses in Loss from investments in investees in our Condensed 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 September 30, 2015 is $85.9 million. See further discussion of our investment in Pharmsynthez below.
Available for Sale Investments
Our available for sale investments consist of investments in RXi Pharmaceuticals Corporation (“RXi”) (ownership 3%), ChromaDex Corporation (2%) and ARNO Therapeutics, Inc. (“ARNO”) (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.
Sales of Investments
Gains (losses) included in earnings from sales of our investments for the nine months ended September 30, 2014 were $1.3 million and were recorded in Other income (expense), net in our Condensed Consolidated Statement of Operations. We did not have any such activity in the nine months ended September 30, 2015. The cost of securities sold is based on the specific identification method.

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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, 2014, and 1.0 million, 0.8 million, 0.5 million and 1.7 million of warrants to purchase additional shares of COCP, ARNO, Sevion and MabVax Therapeutics Holdings, Inc., 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 Statements of Operations. We record the fair value of the options and warrants in Investments, net in our Consolidated Balance Sheets. See further discussion of the Company’s options and warrants in Note 8 and Note 9.
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 840,000 shares of Zebra Series A-2 Preferred Stock and 900,000 shares of Zebra restricted common stock (ownership 28% at September 30, 2015). 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. We determined that we do not have the power to direct the activities that most significantly impact Zebra’s economic performance. 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. 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 produces a third-generation hepatitis B-vaccine. From November 2012 through June 30, 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 does 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. SciVac’s board of directors consisted of 5 members, of which 3 members had been appointed by us, representing 60% of SciVac’s board. As a result of this conclusion, we consolidated the results of operations and financial position of SciVac through the second quarter of 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 in exchange for 517,514,016 common shares of STI, resulting in the former SciVac shareholders holding 68.4% of the issued and outstanding common shares of STI and Levon’s shareholders immediately prior to consummation of the transaction controlling the remaining 31.6%. 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. STI’s board of directors consists of 7 members, of which 3 independent members are initially members of our management. We do not have any rights to appoint members to STI’s board. STI’s board members are approved by a vote of the shareholders. We recorded a $17.3 million gain on the deconsolidation of SciVac in Other income (expense), net in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2015. The recognized gain was primarily due to the fair value of the retained interest in STI of $16.4 million as of July 9, 2015. We determined the fair value of our retained interest in STI based on Levon’s cash contribution of CAD $27.0 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 board representation and voting power. STI is considered a related party as a result of our board representation in STI and executive management’s ownership interests in STI.

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In October 2015, STI announced it entered into an agreement and plan of merger pursuant to which a newly-formed wholly owned subsidiary of STI will merge with and into VBI Vaccines Inc. (“VBI”) with VBI surviving the merger as a wholly owned subsidiary of STI, and STI will change its name to VBI Vaccines Inc. At the effective time of the merger, each share of VBI common stock will be converted into the right to receive 20.808356 common shares of STI (the “Exchange Ratio”). In aggregate, VBI stockholders will receive approximately 541,573,712 common shares of STI, representing approximately 42% of the issued and outstanding shares and voting power of the combined company after giving effect to the merger. In total, upon consummation of the merger, holders of VBI’s securities will receive shares, options and warrants of STI representing approximately 46% of the fully diluted outstanding shares of the combined company.
The following table represents the consolidated assets and non-recourse liabilities related to SciVac as of December 31, 2014. These assets were owned by, and these liabilities were obligations of, SciVac, not us.
(In thousands)
December 31,
2014
Assets
 
Current assets:
 
Cash and cash equivalents
$
393

Accounts receivable, net
316

Inventories, net
1,649

Prepaid expenses and other current assets
718

Total current assets
3,076

Property, plant and equipment, net
1,725

Intangible assets, net
875

Goodwill
1,553

Other assets
384

Total assets
$
7,613

Liabilities
 
Current liabilities:
 
Accounts payable
$
445

Accrued expenses
4,446

Notes payable
5,189

Total current liabilities
10,080

Other long-term liabilities
2,042

Total liabilities
$
12,122



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NOTE 6 DEBT    
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional buyers and accredited investors (collectively the “Purchaser”) in a private placement in reliance on exemptions from registration under the Securities Act of 1933, (the “Securities Act”). The Purchasers of the 2033 Senior Notes include Frost Gamma Investments Trust, a trust affiliated with Dr. Frost, and Hsu Gamma Investment, L.P., an entity affiliated with Dr. Jane H. Hsiao, our Vice Chairman and Chief Technology Officer. The 2033 Senior Notes were issued on January 30, 2013. The 2033 Senior Notes, which total $175.0 million, bear interest at the rate of 3.00% per year, payable semiannually on February 1 and August 1 of each year, beginning August 1, 2013. The 2033 Senior Notes will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the instruments governing the 2033 Senior Notes, subject to certain exceptions, the holders may require us to repurchase all or any portion of their 2033 Senior Notes for cash at a repurchase price equal to 100% of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued and unpaid interest to but not including the fundamental change repurchase date.
The following table sets forth information related to the 2033 Senior Notes which is included our Condensed Consolidated Balance Sheets as of September 30, 2015:
(In thousands)
Embedded conversion option
 
2033 Senior Notes
 
Discount
 
Total
Balance at December 31, 2014
$
65,947

 
$
87,642

 
$
(22,135
)
 
$
131,454

Amortization of debt discount

 

 
2,176

 
2,176

Change in fair value of embedded derivative
31,818

 

 

 
31,818

Conversion
(78,797
)
 
(55,442
)
 
12,997

 
(121,242
)
Balance at September 30, 2015
$
18,968

 
$
32,200

 
$
(6,962
)
 
$
44,206

The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second scheduled trading day immediately preceding the maturity date, at the option of the holders. Additionally, holders may convert their 2033 Senior Notes prior to the close of business on the scheduled trading day immediately preceding November 1, 2032, under the following circumstances: (1) conversion based upon satisfaction of the trading price condition relating to the 2033 Senior Notes; (2) conversion based on the Common Stock price; (3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior Notes for redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of cash and shares of Common Stock, at our election unless we have made an irrevocable election of net share settlement. The initial conversion rate for the 2033 Senior Notes will be 141.48 shares of Common Stock per $1,000 principal amount of 2033 Senior Notes (equivalent to an initial conversion price of approximately $7.07 per share of Common Stock), and will be subject to adjustment upon the occurrence of certain events. In addition, we will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes in connection with a make-whole fundamental change (as defined in the Indenture) and holders who convert upon the occurrence of certain specific events prior to February 1, 2017 (other than in connection with a make-whole fundamental change). Holders of the 2033 Senior Notes may require us to repurchase the 2033 Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, on February 1, 2019, February 1, 2023 and February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the 2033 Senior Notes. See further discussion in Note 14.
We may not redeem the 2033 Senior Notes prior to February 1, 2017. On or after February 1, 2017 and before February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes but only if the last reported sale price of our Common Stock exceeds 130% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date on which we deliver the redemption notice. The redemption price will equal 100% of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest to but not including the redemption date. On or after February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes at a redemption price of 100% of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest up to but not including the redemption date.
The terms of the 2033 Senior Notes, include, among others: (i) rights to convert into shares of our Common Stock, including upon a fundamental change; and (ii) a coupon make-whole payment in the event of a conversion by the holders of the 2033 Senior Notes on or after February 1, 2017 but prior to February 1, 2019. We have determined that these specific terms are considered to be embedded derivatives. Embedded derivatives are required to be separated from the host contract, the 2033 Senior Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. We have concluded that the embedded derivatives within the 2033

26

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Senior Notes meet these criteria and, as such, must be valued separate and apart from the 2033 Senior Notes and recorded at fair value each reporting period.
For accounting and financial reporting purposes, we combine these embedded derivatives and value them together as one unit of accounting. At each reporting period, we record these embedded derivatives at fair value which is included as a component of the 2033 Senior Notes on our Condensed Consolidated Balance Sheets.
On August 30, 2013, one of the conversion rights in the 2033 Senior Notes was triggered. Holders of the 2033 Senior Notes converted $16.9 million principal amount into 2,396,145 shares of our Common Stock at a rate of 141.4827 shares of Common Stock per $1,000 principal amount of 2033 Senior Notes. In June 2014, we entered into an exchange agreement with a holder of the Company’s 2033 Senior Notes pursuant to which such holder exchanged $70.4 million in aggregate principal amount of 2033 Senior Notes for 10,974,431 shares of the Company’s Common Stock and approximately $0.8 million in cash representing accrued interest through the date of completion of the exchange.
In March 2015, we entered into exchange agreements with certain holders of our 2033 Senior Notes pursuant to which such holders exchanged $36.4 million in aggregate principal amount of 2033 Senior Notes for 5,363,896 shares of the Company’s Common Stock and approximately $0.2 million in cash representing accrued interest through the date of completion of the exchange. We recorded a $0.3 million non-cash loss related to the exchange. The loss on exchange is included within Other income (expense) in our Condensed Consolidated Statement of Operations.
On April 1, 2015, we announced that our 2033 Senior Notes are convertible by holders of such notes. We have elected to satisfy our conversion obligation under the 2033 Senior Notes in shares of our Common Stock. This conversion right was triggered because the closing price per share of our Common Stock has exceeded $9.19, or 130% of the initial conversion price of $7.07, for at least 20 of 30 consecutive trading days during the period ending on March 31, 2015. The 2033 Senior Notes were convertible until June 30, 2015, and may be convertible thereafter, if one or more of the conversion conditions specified in the Indenture, dated as of January 30, 2013, by and between the Company and Wells Fargo Bank N.A., is satisfied during future measurement periods. Refer to Note 14. Pursuant to the Indenture, a holder who elects to convert the 2033 Senior Notes will receive 141.4827 shares of our Common Stock plus such number of additional shares as is applicable on the conversion date per $1,000 principal amount of 2033 Senior Notes based on the early conversion provisions in the Indenture. On July 1, 2015 and October 1, 2015, we announced that our 2033 Senior Notes continue to be convertible by holders of such notes during the third and fourth quarters of 2015, respectively.
In May 2015, pursuant to the conversion right, a holder of our 2033 Senior Notes converted $5.0 million in aggregate principal amount of 2033 Senior Notes for 726,036 shares of the Company’s Common Stock. We recorded a $30,000 non-cash gain related to the exchange. The gain on exchange is included within Other income (expense) in our Condensed Consolidated Statement of Operations.
In August and September 2015, pursuant to the conversion right, holders of our 2033 Senior Notes converted $14.0 million in aggregate principal amount of 2033 Senior Notes for 2,028,130 shares of the Company’s Common Stock. We recorded a $1.2 million non-cash gain related to the exchange. The gain on exchange is included within Other income (expense) in our Condensed Consolidated Statement of Operations.
We used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. A binomial lattice model generates two probable outcomes — one up and another down —arising at each point in time, starting from the date of valuation until the maturity date. A lattice model was initially used to determine if the 2033 Senior Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the 2033 Senior Notes will be converted early if the conversion value is greater than the holding value; or (ii) the 2033 Senior Notes will be called if the holding value is greater than both (a) the redemption price (as defined in the Indenture) and (b) the conversion value plus the coupon make-whole payment at the time. If the 2033 Senior Notes are called, then the holder will maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2) converting the 2033 Senior Notes.
Using this lattice model, we valued the embedded derivatives using the “with-and-without method,” where the value of the 2033 Senior Notes including the embedded derivatives is defined as the “with,” and the value of the 2033 Senior Notes excluding the embedded derivatives is defined as the “without.” This method estimates the value of the embedded derivatives by looking at the difference in the values between the 2033 Senior Notes with the embedded derivatives and the value of the 2033 Senior Notes without the embedded derivatives.
The lattice model requires the following inputs: (i) price of our Common Stock; (ii) Conversion Rate (as defined in the Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.

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The following table sets forth the inputs to the lattice model used to value the embedded derivative:
 
September 30, 2015
Stock price
$8.41
Conversion Rate
141.4827
Conversion Price
$7.07
Maturity date
February 1, 2033
Risk-free interest rate
1.00%
Estimated stock volatility
49%
Estimated credit spread
1,411 basis points
The following table sets forth the fair value of the 2033 Senior Notes with and without the embedded derivatives, and the fair value of the embedded derivatives at September 30, 2015. At September 30, 2015 the principal amount of the 2033 Senior Notes was $32.2 million:
(In thousands)
September 30, 2015
Fair value of 2033 Senior Notes:
 
With the embedded derivatives
$
41,398

Without the embedded derivatives
$
22,430

Estimated fair value of the embedded derivatives
$
18,968


Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded derivatives. For example, a decrease in our estimated credit spread results in an increase in the estimated value of the embedded derivatives. Conversely, a decrease in the price of our Common Stock results in a decrease in the estimated fair value of the embedded derivatives. For the nine months ended September 30, 2015, we observed an increase in the average market price of our Common Stock which resulted in a $31.8 million increase in the estimated fair value of our embedded derivatives recorded in Fair value changes of derivative instruments, net in our Condensed Consolidated Statements of Operations.
In connection with the Bio-Reference merger, Bio-Reference entered into a Fifteenth Amendment to Loan Documents, dated as of August 18, 2015 (the “Loan Amendment”), with PNC Bank, National Association (“PNC”), as lender and as agent, amending the Amended and Restated Loan and Security Agreement, dated as of September 30, 2004, by and among Bio-Reference and GeneDx, Inc., as borrowers, and PNC, as lender and agent, as amended (the “Credit Facility”). The Loan Amendment includes PNC’s consent to the Merger and amendments to certain provisions in the Credit Facility to, among other things, (i) permit Bio-Reference to amend its organizational documents and change its fiscal year as a result of the Merger, (ii) modify the event of default triggered upon a change in the existing management of Bio-Reference and (iii) allow termination of the Credit Facility upon 20 days’ (or such shorter period as is acceptable to PNC) prior written notice and payment in full of the outstanding obligations under the Credit Facility.
The Credit Facility provides Bio-Reference with a line of credit of up to the lesser of $120 million and 50% of certain eligible receivables of Bio-Reference, subject to the terms and conditions set forth therein. Borrowings under the Credit Facility may be used for working capital needs and to reimburse drawings under letters of credit. Interest on advances under the Credit Facility is payable based on PNC’s prime rate, and may also be based in part on a “Euro-Rate” linked to the London interbank offer rate for US dollars, in each case, plus an additional interest percentage. The Credit Facility is secured by substantially all assets of Bio-Reference and is guaranteed by certain subsidiaries of Bio-Reference. The Credit Facility contains certain affirmative and negative covenants (subject to certain exceptions and baskets), which limit the ability of Bio-Reference, the guarantors thereunder and certain of their subsidiaries to, among other things, pay dividends, incur indebtedness, create liens, enter into certain acquisition transactions and make capital expenditures. Additionally, the Credit Facility contains financial covenants which require Bio-Reference to maintain a minimum fixed charge coverage ratio. The Credit Facility also contains customary events of default, including events of default arising from non-payment, material misrepresentations, breaches of covenants, cross default to certain indebtedness, bankruptcy and changes in management.
In September 2015, we notified PNC of our intent to terminate the Credit Facility and pay in full all amounts due to PNC. We will incur an fee of approximately $0.5 million for the early termination of the Credit Facility. As of September 30, 2015, approximately $67.9 million was outstanding under the Credit Facility. At September 30, 2015, the interest rates on borrowings under the Credit Facility ranged from 3.5% to 7.58%.

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On November 5, 2015, Bio-Reference and certain of its subsidiaries entered into a new credit agreement with JPMorgan Chase Bank, N.A. (“CB”), as lender and administrative agent (the “New Credit Agreement”), which replaces Bio-Reference’s existing Credit Facility with PNC. The New Credit Agreement provides for a $175.0 million secured revolving credit facility and includes a $20.0 million sub-facility for swingline loans and a $20.0 million sub-facility for the issuance of letters of credit. Bio-Reference may increase the credit facility to up to $275.0 million on a secured basis, subject to the satisfaction of specified conditions. The new credit facility matures on November 5, 2020 and is guaranteed by all of Bio-Reference’s domestic subsidiaries. The new credit facility is also secured by substantially all assets of Bio-Reference and its domestic subsidiaries, as well as a non-recourse pledge by us of our equity interest in Bio-Reference. Availability under the New Credit Agreement is based on a borrowing base comprised of eligible accounts receivables of Bio-Reference and certain of its subsidiaries, as specified therein. The proceeds of the new credit facility will be used to refinance existing indebtedness, including amounts outstanding under the Credit Facility which has been terminated in accordance with its terms, to finance working capital needs and for general corporate purposes of Bio-Reference and its subsidiaries.

At Bio-Reference’s option, borrowings under the New Credit Agreement (other than swingline loans) will bear interest at (i) the CB floating rate (defined as the higher of (a) the prime rate and (b) the LIBOR rate (adjusted for statutory reserve requirements for eurocurrency liabilities) for an interest period of one month plus 2.50%) plus an applicable margin of 0.35% for the first 12 months and 0.50% thereafter or (ii) the LIBOR rate (adjusted for statutory reserve requirements for eurocurrency liabilities) plus an applicable margin of 1.35% for the first 12 months and 1.50% thereafter. Swingline loans will bear interest at the CB floating rate plus the applicable margin. The New Credit Agreement also calls for other customary fees and charges, including an unused commitment fee of 0.25% of the lending commitments.

The New Credit Agreement contains customary covenants and restrictions, including, without limitation, covenants that require Bio-Reference and its subsidiaries to maintain a minimum fixed charge coverage ratio if availability under the new credit facility falls below a specified amount and to comply with laws, and restrictions on the ability of Bio-Reference and its subsidiaries to incur additional indebtedness or to pay dividends and make certain other distributions to the Company, subject to certain exceptions as specified therein. Failure to comply with these covenants would constitute an event of default under the New Credit Agreement, notwithstanding the ability of Bio-Reference to meet its debt service obligations. The New Credit Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the New Credit Agreement and execution upon the collateral securing obligations under the New Credit Agreement.

The foregoing description of the New Credit Agreement is only a summary and is qualified in its entirety by reference to the full text of the New Credit Agreement, which will be filed with the Company’s Annual Report on Form 10-K for the year ending December 31, 2015.
We have line of credit agreements with ten financial institutions as of September 30, 2015 and twelve financial institutions as of December 31, 2014 in United States, Chile and Spain. These lines of credit are used primarily as a source of working capital for inventory purchases.
The following table summarizes the amounts outstanding under the Bio Reference, Chilean and Spanish lines of credit:
(Dollars in thousands)
 
 
 
 
 
 Balance Outstanding
Lender
 
Interest rate on
borrowings at September 30, 2015
 
Credit line
capacity
 
September 30,
2015
 
December 31,
2014
PNC Bank
 
3.50%
 
$120,000
 
$67,892
 
$—
Itau Bank
 
6.00%
 
1,800
 
980
 
965
Bank of Chile
 
5.50%
 
2,250
 
2,101
 
1,410
BICE Bank
 
6.16%
 
2,300
 
1,591
 
1,249
BBVA Bank
 
5.00%
 
2,300
 
1,418
 
795
Penta Bank
 
7.58%
 
290
 
289
 
1,008
Security Bank
 
6.16%
 
940
 
346
 
361
Estado Bank
 
5.30%
 
2,800
 
2,112
 
1,870
BBVA Bank
 
3.90%
 
281
 
 
Santander Bank
 
5.30%
 
2,000
 
750
 
Total
 
 
 
$134,961
 
$77,479
 
$7,658

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At September 30, 2015 and December 31, 2014, the weighted average interest rate on our lines of credit was approximately 4.6% and 6.1%, respectively.
At September 30, 2015 and December 31, 2014, we had mortgage notes and other debt (excluding the 2033 Senior Notes, the Credit Facility and amounts outstanding under lines of credit) as follows:
(In thousands)
September 30,
2015
 
December 31,
2014
Current portion of notes payable
$
1,029

 
$
608

Other long-term liabilities
2,347

 
2,435

Total mortgage notes and other debt
$
3,376

 
$
3,043

The mortgages and other debts mature at various dates ranging from 2015 through 2024 bearing variable interest rates from 2.7% up to 6.3%. The weighted average interest rate on the mortgage notes and other debt at September 30, 2015 and December 31, 2014, was 3.3% and 3.4%, respectively. The mortgages are secured by our office space in Barcelona.

NOTE 7 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 30, 2015, changes in Accumulated other comprehensive income (loss), net of tax, were as follows:
(In thousands)
Foreign
currency
 
Unrealized
gain (loss) in
Accumulated
OCI
 
Total
Balance at December 31, 2014
$
(6,717
)
 
$
(5,675
)
 
$
(12,392
)
Other comprehensive income before reclassifications, net of tax
(5,998
)
 
(2,602
)
 
(8,600
)
Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

Net other comprehensive loss
(5,998
)
 
(2,602
)
 
(8,600
)
Balance at September 30, 2015
$
(12,715
)
 
$
(8,277
)
 
$
(20,992
)

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Table of Contents

NOTE 8 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.

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Table of Contents

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


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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.


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Table of Contents

NOTE 9 DERIVATIVE CONTRACTS
The following table summarizes the fair values and the presentation of our derivative financial instruments in the Condensed Consolidated Balance Sheets:
(In thousands)
Balance Sheet Component
 
September 30,
2015
 
December 31,
2014
Derivative financial instruments:
 
 
 
 
 
Common Stock options/warrants
Investments, net
 
$
5,543

 
$
6,314

Embedded conversion option
2033 Senior Notes, net of discount and estimated fair value of embedded derivatives
 
$
18,968

 
$
65,947

Forward contracts
Unrealized gains on forward contracts are recorded in Prepaid expenses and other current assets. Unrealized losses on forward contracts are recorded in Accrued expenses.
 
$
65

 
$
36

We enter into foreign currency forward exchange contracts to cover the risk of exposure to exchange rate differences arising from inventory purchases on letters of credit. Under these forward contracts, for any rate above or below the fixed rate, we receive or pay the difference between the spot rate and the fixed rate for the given amount at the settlement date.
To qualify the derivative instrument as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At September 30, 2015 and December 31, 2014, our derivative financial instruments do not meet the documentation requirements to be designated as hedges. Accordingly, we recognize the changes in Fair value of derivative instruments, net in our Condensed Consolidated Statements of Operations. The following table summarizes the losses and gains recorded for the three and nine months ended September 30, 2015 and 2014:
 
Three months ended September 30,
 
Nine months ended September 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Derivative gain (loss):
 
 
 
 
 
 
 
Common Stock options/warrants
$
(4,070
)
 
$
651

 
$
(2,645
)
 
$
388

2033 Senior Notes
36,132

 
2,521

 
(31,818
)
 
3,291

Forward contracts
182

 
133

 
363

 
79

Total
$
32,244

 
$
3,305

 
$
(34,100
)
 
$
3,758

The outstanding forward contracts at September 30, 2015 and December 31, 2014, have been recorded at fair value, and their maturity details are as follows:
(In thousands)
Days until maturity
 
Contract value
 
Fair value at
 September 30, 2015
 
Effect on income (loss)
0 to 30
 
$
2,790

 
$
2,840

 
$
50

31 to 60
 
1,966

 
1,979

 
13

61 to 90
 
195

 
197

 
2

91 to 120
 

 

 

More than 120
 

 

 

Total
 
$
4,951

 
$
5,016

 
$
65

(In thousands)
Days until maturity
 
Contract value
 
Fair value at
 December 31, 2014
 
Effect on income (loss)
0 to 30
 
$
750

 
$<