Quarterly report pursuant to Section 13 or 15(d)

Acquisitions, Investments, and Licenses

v3.3.0.814
Acquisitions, Investments, and Licenses
9 Months Ended
Sep. 30, 2015
Business Combinations [Abstract]  
ACQUISITIONS, INVESTMENTS, AND LICENSES
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


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.
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.
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.
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.
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