Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
6 Months Ended
Jun. 30, 2014
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
A summary of our investments as of June 30, 2014, classified as available for sale and carried at fair value, is as follows:
 
As of June 30, 2014
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Gain/(Loss)
in
Accumulated
Deficit
 
Fair
value
Common stock investments, available for sale
$
3,320

 
$
1,100

 
$
(517
)
 
$

 
$
3,903

Common stock options/warrants
1,425

 
1,575

 

 
2,980

 
5,980

Total assets
$
4,745

 
$
2,675

 
$
(517
)
 
$
2,980

 
$
9,883

A summary of our investments as of December 31, 2013, classified as available for sale and carried at fair value is as follows:
 
As of December 31, 2013
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Gain/(Loss)
in
Accumulated
Deficit
 
Fair
value
Common stock investments, available for sale
$
3,376

 
$
2,698

 
$

 
$

 
$
6,074

Common stock options/warrants
925

 
1,041

 

 
4,022

 
5,988

Total assets
$
4,301

 
$
3,739

 
$

 
$
4,022

 
$
12,062


Any future fluctuation in fair value related to these instruments that is judged to be temporary, including any recoveries of previous write-downs, will be recorded in Accumulated other comprehensive income or loss. If we determine that any future valuation adjustment was other-than-temporary, we will record a loss during the period such determination is made.
As of June 30, 2014, 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, FineTech, OPKO Spain, 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 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, 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
$
112,546

 
$

 
$

 
$
112,546

Certificates of deposit

 
827

 

 
827

Common stock investments, available for sale
3,903

 

 

 
3,903

Common stock options/warrants

 
5,980

 

 
5,980

Total assets
$
116,449

 
$
6,807

 
$

 
$
123,256

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
52,964

 
$
52,964

Forward Contracts

 
55

 

 
55

Deferred acquisition payments, net of discount

 

 

 

Contingent consideration:
 
 
 
 
 
 
 
CURNA

 

 
598

 
598

OPKO Diagnostics

 

 
14,174

 
14,174

OPKO Renal

 

 
56,470

 
56,470

OPKO Spain

 

 
1,672

 
1,672

Total liabilities
$

 
$
55

 
$
125,878

 
$
125,933

 
Fair value measurements as of December 31, 2013
(In thousands)
Quoted
prices in
active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
168,418

 
$

 
$

 
$
168,418

Certificates of deposit

 
827

 

 
827

Pharmsynthez Notes Receivable & Purchase Option

 
6,151

 

 
6,151

Common stock investments, available for sale
6,074

 

 

 
6,074

Common stock options/warrants

 
5,988

 

 
5,988

Forward contracts

 
49

 

 
49

Total assets
$
174,492

 
$
13,015

 
$

 
$
187,507

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option

 

 
101,087

 
101,087

Deferred acquisition payments, net of discount

 

 
5,465

 
5,465

Contingent consideration:
 
 
 
 
 
 
 
CURNA

 

 
573

 
573

OPKO Diagnostics

 

 
13,776

 
13,776

FineTech

 

 
3,124

 
3,124

OPKO Renal

 

 
53,092

 
53,092

OPKO Spain

 

 
1,043

 
1,043

Total liabilities
$

 
$

 
$
178,160

 
$
178,160


The carrying amount and estimated fair value of our long-term debt, as well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the 2033 Senior Notes is determined using a binomial lattice approach in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. Refer to Note 6.
 
June 30, 2014
(In thousands)
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
2033 Senior Notes
$
63,401

 
$
69,759

 
$

 
$

 
$
69,759


As of June 30, 2014 and December 31, 2013, the carrying value of our other assets and liabilities approximates their fair value due to their short-term nature.
The following tables reconcile the beginning and ending balances of our Level 3 assets and liabilities as of June 30, 2014:
 
June 30, 2014
(In thousands)
Contingent
consideration
 
Deferred
acquisition
payments, net
of discount
 
Embedded
conversion
option
Balance at December 31, 2013
$
71,620

 
$
5,484

 
$
101,087

Additions

 

 

Total losses (gains) for the period:
 
 
 
 
 
Included in results of operations
4,486

 
(754
)
 
(770
)
Payments
(3,192
)
 
(4,730
)
 

Conversion

 

 
(47,353
)
Balance at June 30, 2014
$
72,914

 
$

 
$
52,964

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 FineTech, OPKO Diagnostics, CURNA, OPKO Spain 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 $2.1 million. If estimated future sales were to decrease by 10%, the contingent consideration related to CURNA, FineTech and OPKO Renal would decrease by $0.7 million. As of June 30, 2014, of the $72.9 million of contingent consideration, $24.6 million is recorded in Accrued expenses and $48.3 million is recorded in Other long-term liabilities. As of December 31, 2013, of the $71.6 million of contingent consideration, $28.0 million is recorded in Accrued expenses and $43.6 million is recorded in Other long-term liabilities.
Deferred payments – We estimate the fair value of the deferred payments utilizing a discounted cash flow model for the expected payments.
Embedded conversion option – We estimate the fair value of the embedded conversion option related to the 2033 Senior Notes using a binomial lattice model. Refer to Note 6 for detail description of the binomial lattice model and the fair value assumptions used.