Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.4.0.3
Fair Value Measurements
3 Months Ended
Mar. 31, 2016
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 classified as available for sale and carried at fair value, is as follows:
 
As of March 31, 2016
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Fair
value
Common stock investments, available for sale
$
8,084

 
$
1,283

 
$
(2,162
)
 
$
7,205

Total assets
$
8,084

 
$
1,283

 
$
(2,162
)
 
$
7,205

 
As of December 31, 2015
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Fair
value
Common stock investments, available for sale
$
2,978

 
$
904

 
$
(267
)
 
$
3,615

Total assets
$
2,978

 
$
904

 
$
(267
)
 
$
3,615


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.
As of March 31, 2016, we have money market funds that qualify as cash equivalents, forward foreign currency exchange 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.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
 
Fair value measurements as of March 31, 2016
(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
$
62,412

 
$

 
$

 
$
62,412

Common stock investments, available for sale
7,205

 

 

 
7,205

Common stock options/warrants

 
4,615

 

 
4,615

Total assets
$
69,617

 
$
4,615

 
$

 
$
74,232

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
23,875

 
$
23,875

Forward Contracts

 
296

 

 
296

Contingent Consideration

 

 
55,882

 
55,882

Total liabilities
$

 
$
296

 
$
79,757

 
$
80,053

 
Fair value measurements as of December 31, 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
$
84,421

 
$

 
$

 
$
84,421

Common stock investments, available for sale
3,615

 

 

 
3,615

Common stock options/warrants

 
5,338

 

 
5,338

Forward contracts

 
9

 

 
9

Total assets
$
88,036

 
$
5,347

 
$

 
$
93,383

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
23,737

 
$
23,737

Contingent consideration

 

 
54,422

 
54,422

Total liabilities
$

 
$

 
$
78,159

 
$
78,159


The carrying amount and estimated fair value of our 2033 Senior Notes without the embedded conversion option, 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.
 
March 31, 2016
(In thousands)
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
2033 Senior Notes
$
26,122

 
$
25,737

 
$

 
$

 
$
25,737


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 March 31, 2016 and December 31, 2015, the carrying value of our other assets and liabilities approximates their fair value due to their short-term nature or variable rate of interest.
The following table reconciles the beginning and ending balances of our Level 3 assets and liabilities as of March 31, 2016:
 
March 31, 2016
(In thousands)
Contingent
consideration
 
Embedded
conversion
option
Balance at December 31, 2015
$
54,422

 
$
23,737

Total losses for the period:
 
 
 
Included in results of operations
1,753

 
138

Foreign currency impact
20

 

Payments
(313
)
 

Conversion

 

Balance at March 31, 2016
$
55,882

 
$
23,875

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. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO Renal, which represents the majority of our contingent consideration liability, would decrease by $1.9 million. As of March 31, 2016, of the $55.9 million of contingent consideration, $21.2 million is recorded in Accrued expenses and $34.7 million is recorded in Other long-term liabilities. As of December 31, 2015, of the $54.4 million of contingent consideration, $22.2 million is recorded in Accrued expenses and $32.3 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.