Quarterly report pursuant to Section 13 or 15(d)

Acquisitions, Investments, and Licenses

v2.4.0.8
Acquisitions, Investments, and Licenses
6 Months Ended
Jun. 30, 2014
Business Combinations [Abstract]  
ACQUISITIONS, INVESTMENTS, AND LICENSES
ACQUISITIONS, INVESTMENTS AND LICENSES
Inspiro Medical Ltd. acquisition
On April 17, 2014, we entered into a stock purchase agreement to acquire 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 based on the closing price per share of our Common Stock as reported by the NYSE on the actual closing date of the acquisition, or $8.57 per share. The transaction closed on May 22, 2014. The number of shares issued was based upon our trading price as reported by the NYSE for the ten trading days immediately preceding the execution date of the purchase agreement, or $9.00 per share.
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, and as a result, we recorded $10.1 million of acquired in-process research and development expenses.
OPKO Biologics acquisition
In August 2013, we acquired OPKO Biologics (formerly PROLOR) pursuant to an agreement and plan of merger dated April 23, 2013 (the “Merger Agreement”) in an all-stock transaction. OPKO Biologics is an Israeli-based biopharmaceutical company focused on developing and commercializing longer-acting proprietary versions of already approved therapeutic proteins.
Under the terms of the Merger Agreement, holders of PROLOR common stock received 0.9951 shares of our Common Stock for each share of PROLOR common stock. At closing, we delivered 63,670,805 shares of our Common Stock valued at $540.6 million based on the closing price per share of our Common Stock as reported by the NYSE on the closing date of the acquisition, or $8.49 per share. In addition, each outstanding option and warrant to purchase shares of PROLOR common stock that was outstanding and unexercised immediately prior to the closing date, whether vested or not vested, was converted into 7,889,265 options and warrants to purchase OPKO Common Stock at a fair value of $46.1 million.
Until completion of the acquisition, Dr. Phillip Frost, our Chairman and Chief Executive Officer, was PROLOR’s Chairman of the Board and owned greater than 5% of its stock. Dr. Jane H. Hsiao, our Vice Chairman and Chief Technology Officer, and Mr. Steven Rubin, our Executive Vice President, Administration, were both directors of PROLOR and owned less than 5% of its stock.
OPKO Renal acquisition
In March 2013, we acquired OPKO Renal (formerly Cytochroma, Inc.), whose lead products, both in Phase 3 development, are RayaldeeTM (CTAP101), a vitamin D prohormone to treat secondary hyperparathyroidism in patients with stage 3 or 4 CKD and vitamin D insufficiency, and AlpharenTM (Fermagate Tablets), a non-absorbed phosphate binder to treat hyperphosphatemia in dialysis patients (the “OPKO Renal Acquisition”).
In connection with the OPKO Renal Acquisition, we delivered 20,517,030 of shares of our Common Stock valued at $146.9 million based on the closing price per share of our Common Stock as reported by the NYSE on the actual closing date of the acquisition, or $7.16 per share. The number of shares issued was based on the volume-weighted average price per share of our Common Stock as reported on the NYSE for the 10 trading days immediately preceding the date of the purchase agreement for the OPKO Renal Acquisition, or $4.87 per share.
In addition, the OPKO Renal Acquisition requires payments of up to an additional $190.0 million in cash or additional shares of our Common Stock, at our election, upon the achievement of certain milestones relating to development and annual revenue. As a result, we recorded $47.7 million as contingent consideration at acquisition. We evaluate the contingent consideration on an ongoing basis and the changes in the fair value are recognized in earnings until the milestones are achieved. Refer to Note 8.
The following table summarizes the purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the acquisitions of OPKO Renal and OPKO Biologics at the dates of acquisition. The purchase price allocation for OPKO Biologics is subject to change while contingencies that existed on the acquisition date are resolved:
(In thousands)
OPKO Renal
 
OPKO Biologics
Current assets (1)
$
1,224

 
$
21,500

Intangible assets:
 
 
 
In-process research and development
191,530

 
590,200

Patents
210

 

Total intangible assets
191,740

 
590,200

Goodwill
2,411

 
139,784

Property, plant and equipment
306

 
1,057

Other assets

 
371

Accounts payable and accrued expenses
(1,069
)
 
(9,866
)
Deferred tax liability

 
(156,403
)
Total purchase price
$
194,612

 
$
586,643

(1)Current assets include cash of $0.4 million and $20.5 million related to the OPKO Renal and OPKO Biologics acquisitions, respectively.
Goodwill from the acquisition of OPKO Biologics principally relates to the deferred tax liability generated as a result of this being a stock transaction and the assembled workforce. Goodwill from the acquisition of OPKO Renal principally relates to the assembled workforce. Goodwill is not tax deductible for income tax purposes.
Pro forma disclosure for acquisitions
The following table includes the pro forma results for the three and six months ended June 30, 2014 of the combined companies as though the acquisition of OPKO Biologics and OPKO Renal had been completed as of the beginning of the period presented.
 
For the three months ended June 30,
 
For the six months ended June 30,
(In thousands)
2014
2013
 
2014
2013
Revenues
23,545
23,821
 
45,818
55,197
Net loss
(26,077)
(14,238)
 
(71,163)
(51,809)
Net loss attributable to common shareholders
(25,480)
(13,279)
 
(70,026)
(50,303)
Basic and diluted loss per share
$(0.06)
$(0.03)
 
$(0.17)
$(0.13)

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 each company as of the beginning of the period presented.
Investments
The total assets, liabilities, and net losses of our equity method investees for six months ended June 30, 2014 were $131.4 million, $17.7 million, and $25.2 million, respectively. The following table reflects our maximum exposure, accounting method, ownership interest and underlying equity in net assets of each of our unconsolidated investments as of June 30, 2014:
(Dollars in thousands, except per share prices)
Investee name
 
Year
invested
 
Accounting method
 
Ownership at
June 30, 2014
 
Investment
 
Underlying equity in net assets
 
Closing share price
at June 30, 2014
for investments
available for sale
Neovasc
 
2011
 
Equity method
 
6
%
 
3,798

 
1,454

 
 
 
Senesco
 
2014
 
Equity method
 
4
%
 
750

 
366

 
 
 
RXi
 
2013
 
Equity method
 
15
%
 
15,000

 
1,918

 
 
 
Pharmsynthez
 
2013
 
Equity method
 
17
%
 
11,300

 
6,405

 
 
 
Zebra
 
2013
 
VIE, equity method
 
19
%
 
2,000

 
840

 
 
 
Cocrystal
 
2009
 
Equity method
 
16
%
 
5,476

 
993

 
 
 
Neovasc options
 
2011
 
Investment available for sale
 
N/A

 
925

 
 
 

$
6.25

ChromaDex
 
2012
 
Investment available for sale
 
1
%
 
1,320

 
 
 
 
$
1.30

ARNO
 
2013
 
Investment available for sale
 
5
%
 
2,000

 
 
 
 
$
1.78

Cocrystal 10 yr warrants
 
2014
 
Investment available for sale
 
N/A

 
500

 
 
 
 
 
Senesco warrants
 
2014
 
Investment available for sale
 
N/A

 
228

 
 
 
 
 
Plus unrealized gains on investments, options and warrants, net
 
8,827

 
 
 
 
 
Less accumulated losses in investees
 
(18,696
)
 
 
 
 
 
Total carrying value of equity method investees and investments, available for sale
 
$
33,428

 
 
 
 
 

Cocrystal Pharma, Inc.
We previously made investments in Biozone Pharmaceuticals, Inc. (“Biozone”) and Cocrystal Discovery, Inc. (“Cocrystal”). Effective January 2, 2014, Biozone and Cocrystal completed a merger transaction pursuant to which Cocrystal was the surviving entity, and the name of the issuer was changed to Cocrystal Pharma, Inc. (“CPI”). In connection with the transaction, CPI issued to Cocrystal’s former security holders 1,000,000 shares of the CPI’s Series B Convertible Preferred Stock (“Series B”). The Series B shares: (i) automatically convert into shares of the CPI’s common stock at a rate of 205.08308640 shares for each share of Series B at such time that CPI has sufficient authorized capital, (ii) are entitled to vote on all matters submitted to shareholders of CPI and vote on an as converted basis and (iii) have a nominal liquidation preference. The merger was being treated as a reverse merger and recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of the former Biozone’s operations were disposed of immediately prior to the consummation of the merger as reported on a Form 8-K filed on January 8, 2014. Cocrystal is treated as the accounting acquirer as its shareholders control CPI after the Merger.
We have determined that we and our related parties can significantly influence the success of CPI through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over CPI’s operations, we account for our investment in CPI under the equity method.
ARNO
In October 2013, we made an investment in ARNO Therapeutics, Inc. (“ARNO”), a clinical stage company focused on the development of oncology drugs. We invested $2.0 million and received 833,333 ARNO common shares, one year warrants to purchase 833,333 ARNO common shares for $2.40 a share and five year warrants to purchase an additional 833,333 ARNO common shares for $4.00 a share. Our investment was part of a private placement by ARNO. Other investors participating in the private financing included certain related parties. Refer to Note 10. We have determined that our ownership, along with that of our related parties, does not provide us with significant influence over the operations of ARNO and as a result, we account for ARNO as an investment, available for sale, and we record changes in the fair value of ARNO as an unrealized gain or loss in Other comprehensive loss each reporting period. We recorded the warrants on the date of the grant at their estimated fair value of $3.6 million using the Black-Scholes-Merton Model. We record changes in fair value of ARNO warrants in Other income (expense), net in our Condensed Consolidated Statement of Operations.
Neovasc
In 2011, we made an investment in Neovasc, a medical technology company based in Vancouver, Canada. We invested $2.0 million and received two million Neovasc common shares, and two-year warrants to purchase an additional one million shares for $1.25 a share. During the year ended December 31, 2013 we exercised the warrants and paid $1.2 million. We accounted for the warrants as an investment, available for sale and recorded the warrants at fair value on the date of acquisition. We recorded the changes in the fair value of the warrants in Fair value changes of derivatives instruments, net in our Condensed Consolidated Statements of Operations. We have determined that our related parties can significantly influence the success of Neovasc through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over Neovasc’s operations, we account for our investment in Neovasc under the equity method.
2013 licensing agreements
An element of our growth strategy is to leverage our proprietary technology through a combination of internal development, acquisition, and external partnerships to maximize the commercial opportunities for our portfolio of proprietary pharmaceutical and diagnostic products and as such during 2013, we have entered into licensing agreements with Pharmsynthez and RXi.
Pharmsynthez transactions
In April 2013, we entered into a series of concurrent transactions with Pharmsynthez, a Russian pharmaceutical company traded on the Moscow Stock Exchange. The transactions consisted of:
We delivered approximately $9.6 million to Pharmsynthez.
Pharmsynthez issued to us approximately 13.6 million of its common shares.
Pharmsynthez agreed, at its option, to issue approximately 12.0 million common shares to us or to pay us cash in Russian Rubles (“RUR”) 265.0 million ($8.1 million) on or before December 31, 2013 (the “Pharmsynthez Note Receivable”). In January 2014, Pharmsynthez delivered to us approximately 12.0 million shares of its common stock in satisfaction of the Pharmsynthez Notes Receivable.
We had a right to purchase additional shares in Pharmsynthez at a fixed price if Pharmsynthez pays us in cash rather than delivering to us the 12.0 million Pharmsynthez common shares (the “Purchase Option”), however in connection with the settlement of the Pharmsynthez Note Receivable in January 2014, this right terminated. 
We granted rights to certain technologies in the Russian Federation, Ukraine, Belarus, Azerbaijan and Kazakhstan (the “Territories”) to Pharmsynthez. 
We will receive from Pharmsynthez royalty on net sales of products incorporating the technologies in the Territories, as well as a percentage of any sublicense income from third parties for the technologies in the Territories.
Pharmsynthez paid us $9.5 million under the various collaboration and funding agreements for the development of the technologies (the “Collaboration Payments”).
We recorded the shares received in Pharmsynthez as an equity method investment.  We initially recorded the Pharmsynthez Note Receivable, and the Purchase Option, as financial instruments and elected the fair value option for subsequent measurement. Changes in the fair value of the receivable from Pharmsynthez for its common stock or RUR, with the embedded derivative, and the Purchase Option are recorded in Fair value changes of derivative instruments, net in our Condensed Consolidated Statements of Operations. Upon settlement in January 2014, we recorded the additional shares at fair value as an equity method investment.
We have accounted for the license and development activities as a multi-element arrangement, and allocated the total arrangement consideration based on the relative selling prices of the elements. We will record the allocated consideration for development activities as an offset to Research and development expenses over the three-year term of the Collaboration Payments.  We will record revenue in connection with the grant of rights to the technologies proportionately as the payments are received. 
During the six months ended June 30, 2014, we received $1.4 million related to the Collaboration Payments of which we recorded $0.5 million in Revenue from transfer of intellectual property and $0.8 million as an offset to Research and development expenses.
RXi transactions
In March 2013, we completed the sale to RXi Pharmaceuticals, Inc. (“RXi”) of substantially all of our assets in the field of RNA interference (the “RNAi Assets”) (collectively, the “Asset Purchase Agreement”). As consideration for the RNAi Assets, at the closing of the Asset Purchase Agreement, RXi issued to us 50 million shares of its common stock (the “APA Shares”).
Pursuant to the Asset Purchase Agreement, RXi will be required to pay us up to $50.0 million in milestone payments upon the successful development and commercialization of each drug developed by RXi, certain of its affiliates or any of its or their licensees or sublicensees utilizing patents included within the RNAi Assets (each, a “Qualified Drug”). In addition, RXi will also be required to pay us royalties equal to: (a) a mid single-digit percentage of “Net Sales” (as defined in the Asset Purchase Agreement) with respect to each Qualified Drug sold for an ophthalmologic use during the applicable “Royalty Period” (as defined in the Asset Purchase Agreement); and (b) a low single-digit percentage of net sales with respect to each Qualified Drug sold for a non-ophthalmologic use during the applicable royalty period.
In addition to the Asset Purchase Agreement, we purchased 17,241,380 shares of RXi, for $2.5 million, as part of a $16.4 million financing for RXi, which included other related parties. We have determined that our ownership, along with that of our related parties, provides us the ability to exercise significant influence over RXi operations and as such we have accounted for our investment in RXi under the equity method.
Senesco Technologies, Inc
We previously held a variable interest in Fabrus, Inc (“Fabrus”). Effective May 16, 2014 Senesco Technologies, Inc (“Senesco”) acquired Fabrus through a merger, with Fabrus surviving the merger as a wholly-owned subsidiary of Senesco.
Immediately prior to the effective time of the Merger, any unpaid indebtedness pursuant to all outstanding Fabrus convertible promissory notes was canceled and converted into Fabrus common stock. At the effective time of the merger, all outstanding Fabrus stock options were accelerated and terminated by Fabrus and replaced with stock options to acquire shares of Senesco common stock with identical rights and privileges except that the number of shares subject to each Senesco option equal the number of shares subject to the Fabrus option it replaced multiplied by 0.376939. As a part of the Merger consideration, Senesco issued to the Fabrus investors Common Stock Purchase Warrants to purchase shares of the Company’s common stock.
OPKO’s convertible promissory notes in Fabrus were canceled and converted into 80,000 shares of Senesco common stock, and OPKO’s 1,159,380 shares of Fabrus common stock were replaced with 437,016 shares of Senesco common stock. OPKO received a total of 517,016 shares of Senesco common stock and warrants to purchase an additional 267,927 shares of Senesco common stock.
We have determined that we and our related parties can significantly influence the success of Senesco through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over Senesco’s operations, we account for our investment in Senesco under the equity method. Based on our review of the applicable accounting literature, we believe the transaction qualifies for carryover basis.
Investments in variable interest entities

We have determined that we hold variable interests in SciVac Ltd (“SciVac”), previously known as SciGen (I.L.) Ltd, and Zebra Biologics, Inc. (“Zebra”). We made this determination as a result of our assessment that they do not have sufficient resources to carry out their principal activities without additional financial support.
In October 2013, we acquired 840,000 shares of Zebra Series A-2 Preferred Stock for $2.0 million. In connection with the transactions, Dr. Frost also gifted to OPKO 900,000 shares of Zebra restricted common stock which he had received as a founding member of Zebra. Zebra is a privately held biotechnology company focused on the discovery and development of biosuperior antibody therapeutics and complex drugs. After the closing on October 29, 2013, OPKO owns 23.5% of the Series A-2 Preferred stock issued and outstanding of Zebra. 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. Accordingly, as we have the ability to exercise significant influence over Zebra’s operations, we account for our investment in Zebra under the equity method.
Consolidated variable interest entities
In June 2012, we entered into a share and debt purchase agreement whereby in exchange for $0.7 million we acquired shares representing a 50% stock ownership in SciVac from FDS Pharma LLP (“FDS”). SciVac is a privately-held Israeli company that produces a third-generation hepatitis B-vaccine. From November 2012 until June 30, 2014, we loaned to SciVac a combined $2.6 million for working capital purposes. We have determined that we hold variable interests in SciVac based on our assessment that SciVac does not have sufficient resources to carry out its principal activities without financial support. In order to determine the fair market value of our investment in SciVac, we have utilized a business enterprise valuation approach.
In order to determine the primary beneficiary of SciVac, we evaluated our investment to identify if we had the power to direct the activities that most significantly impact the economic performance of SciVac. We have determined that the power to direct the activities that most significantly impact the economic performance of SciVac is conveyed through SciVac’s board of directors. SciVac’s board of directors appoint and oversee SciVac’s management team who carry out the activities that most significantly impact the economic performance of SciVac. As part of the share and debt purchase agreement, SciVac’s board of directors is constituted by 5 members, of which 3 members will be appointed by us, representing 60% of SciVac’s board. Based on this analysis, we determined that we have the power to direct the activities of SciVac and as such we are the primary beneficiary. As a result of this conclusion, we have consolidated the results of operations and financial position of SciVac and recorded a reduction of equity for the portion of SciVac we do not own.
The following table represents the consolidated assets and non-recourse liabilities related to SciVac as of June 30, 2014 and December 31, 2013. These assets are owned by, and these liabilities are obligations of, SciVac, not us.
(In thousands)
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
433

 
$
2

Accounts receivable, net
516

 
283

Inventories, net
1,700

 
1,696

Prepaid expenses and other current assets
529

 
218

Total current assets
3,178

 
2,199

Property, plant and equipment, net
1,412

 
1,374

Intangible assets, net
1,055

 
1,111

Goodwill
1,757

 
1,821

Other assets
263

 
261

Total assets
$
7,665

 
6,766

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,007

 
$
1,136

Accrued expenses
8,298

 
6,498

Notes payable
3,903

 
1,537

Total current liabilities
13,208

 
9,171

Other long-term liabilities
261

 
1,240

Total liabilities
$
13,469

 
$
10,411