Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
 6 Months Ended
Jun. 30, 2013
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
We record fair value 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 as of June 30, 2013, classified as available for sale, and carried at fair value is as follows:
 
As of June 30, 2013
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Gain/(Loss)
in
Accumulated
Deficit
 
Fair
value
Common stock investments, available for sale
$
1,376

 
$
1,160

 
$
—

 
$
—

 
$
2,536

BZNE Note and conversion feature
1,700

 
53

 
—

 
287

 
2,040

Neovasc common stock options
925

 
715

 
—

 
679

 
2,319

U.S. Treasury securities
75,040

 
—

 
(7
)
 
(7
)
 
75,026

Total assets
$
79,041

 
$
1,928

 
$
(7
)
 
$
959

 
$
81,921

A summary of our investments as of December 31, 2012, classified as available for sale, and carried at fair value is as follows:
 
As of December 31, 2012
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Gain/(Loss)
in
Accumulated
Deficit
 
Fair
value
Common stock investments, available for sale
$
2,051

 
$
6,185

 
$
—

 
$
—

 
$
8,236

BZNE Note and conversion feature
1,700

 
53

 
—

 
287

 
2,040

Neovasc common stock options
925

 
293

 
—

 
176

 
1,394

Neovasc common stock warrants
659

 
194

 
—

 
(375
)
 
478

Total assets
$
5,335

 
$
6,725

 
$
—

 
$
88

 
$
12,148


Any future fluctuation in fair value related to these instruments that is judged to be temporary, including any recoveries of previous write-downs, will be recorded in Accumulated other comprehensive income or loss. If we determine that any future valuation adjustment was other-than-temporary, we will record a loss during the period such determination is made.
As of June 30, 2013, 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, Inc. (“CURNA”), Claros Diagnostics, Inc. (“OPKO Diagnostics”), FineTech Pharmaceuticals, Ltd. (“FineTech”), Farmadiet, and Cytochroma 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 and warrants at fair value as well as the derivative instruments related to our transactions with Pharmsynthez.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
 
Fair value measurements as of June 30, 2013
(In thousands)
Quoted
prices in
active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
80,183

 
$
—

 
$
—

 
$
80,183

U.S. Treasury securities
24,999

 
50,027

 
—

 
75,026

Certificates of deposit
—

 
827

 
—

 
827

Pharmsynthez Note Receivable and Purchase Option
—

 
6,795

 
—

 
6,795

Forward contracts
—

 
133

 
—

 
133

Common stock investments, available for sale
2,536

 
—

 
—

 
2,536

BZNE Note and conversation feature
—

 
—

 
2,040

 
2,040

Neovasc common stock options
—

 
2,319

 
—

 
2,319

Total assets
$
107,718

 
$
60,101

 
$
2,040

 
$
169,859

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$
—

 
$
—

 
$
74,079

 
$
74,079

Deferred acquisition payments, net of discount
—

 
—

 
9,415

 
9,415

Contingent consideration:
 
 
 
 
 
 
 
CURNA
—

 
—

 
549

 
549

OPKO Diagnostics
—

 
—

 
14,512

 
14,512

FineTech
—

 
—

 
2,763

 
2,763

Cytochroma
—

 
—

 
49,784

 
49,784

Farmadiet
—

 
—

 
1,298

 
1,298

Total liabilities
$
—

 
$
—

 
$
152,400

 
$
152,400

 
Fair value measurements as of December 31, 2012
(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
$
18,716

 
$
—

 
$
—

 
$
18,716

Certificates of deposit
—

 
820

 
—

 
820

Common stock investments, available for sale
8,236

 
—

 
—

 
8,236

BZNE Note and conversation feature
—

 
—

 
2,040

 
2,040

Neovasc common stock options
—

 
1,394

 
—

 
1,394

Neovasc common stock warrants
—

 
478

 
—

 
478

Total assets
$
26,952

 
$
2,692

 
$
2,040

 
$
31,684

Liabilities:
 
 
 
 
 
 
 
Forward contracts
$
—

 
$
10

 
$
—

 
$
10

Deferred acquisition payments, net of discount
—

 
—

 
10,103

 
10,103

Contingent consideration:
 
 
 
 
 
 
 
CURNA
—

 
—

 
510

 
510

OPKO Diagnostics
—

 
—

 
12,974

 
12,974

FineTech
—

 
—

 
5,262

 
5,262

Farmadiet
—

 
—

 
1,310

 
1,310

Total liabilities
$
—

 
$
10

 
$
30,159

 
$
30,169


Our U.S. Treasury securities mature on September 5, 2013 ($25.0 million), September 30, 2013 ($25.0 million) and October 15, 2013 ($25.0 million).
The carrying amount and estimated fair value of our long-term debt, as well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the Notes is determined using a binomial lattice approach in order to estimate the fair value of the embedded derivative in the Notes. Refer to Note 6.
 
June 30, 2013
(In thousands)
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
Notes
$
114,445

 
$
115,402

 
$
—

 
$
—

 
$
115,402


As of June 30, 2013 and December 31, 2012, 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 June 30, 2013 and December 31, 2012:
 
June 30, 2013
(In thousands)
BZNE Note
and
conversion
feature
 
Contingent
consideration
 
Deferred
acquisition
payments, net
of discount
 
Embedded
conversion
option
Balance at December 31, 2012
$
2,040

 
$
20,056

 
$
10,103

 
$
—

Additions
—

 
47,710

 
—

 
59,204

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

 
3,901

 
112

 
14,875

Payments
—

 
(2,761
)
 
(800
)
 
—

Balance at June 30, 2013
$
2,040

 
$
68,906

 
$
9,415

 
$
74,079

 
December 31, 2012
(In thousands)
BZNE Note
and
conversion
feature
 
Contingent
consideration
 
Deferred
acquisition
payments, net
of discount
Balance at December 31, 2011
$
—

 
$
18,002

 
$
—

Additions
1,700

 
1,234

 
9,673

Total losses (gains) for the period:
 
 
 
 
 
Included in results of operations
1,563

 
820

 
430

Included in Other comprehensive loss
53

 
—

 
—

Transfer out to equity method investment
(1,276
)
 
—

 
—

Balance at December 31, 2012
$
2,040

 
$
20,056

 
$
10,103


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:
BZNE Notes and conversion feature - The stock market activity in BZNE does not represent an active market and as such, we determined the fair market value utilizing a business enterprise valuation approach in order to determine the fair value of our investment. The most significant assumptions are the projected revenue growth and operating income (loss). The impact of a change in any of our significant underlying assumptions +/-1% would not result in a materially different fair value.
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 FineTech, OPKO Diagnostics, CURNA, Farmadiet and Cytochroma transactions. The discount rates used range from 6% to 27% and were based on the weighted average cost of capital for those businesses. If the discount rates were to increase by 1%, on each transaction, the contingent consideration would decrease by $1.3 million. If estimated future sales were to decrease by 10%, the contingent consideration related to CURNA, FineTech and Cytochroma would decrease by $0.5 million. As of June 30, 2013, of the $68.9 million of contingent consideration, $5.3 million is recorded in Accrued expenses and $63.6 million is recorded in Other long-term liabilities. As of December 31, 2012, of the $20.0 million of contingent consideration, $5.1 million is recorded in Accrued expenses and $14.9 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 Notes using a binomial lattice model. Refer to Note 6 for detail description of the binomial lattice model and the fair value assumptions used.
Pharmsynthez Note Receivable and Purchase Option - We determined the fair value of the Pharmsynthez Note Receivable and Purchase Option using a number of Black-Scholes scenarios simulating changes in Pharmsynthez's common stock price. Refer to Note 8.