NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Business and Organization
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes Bio-Reference Laboratories, Inc. (“Bio-Reference”), the nation’s third-largest clinical laboratory with a core genetic testing business and a
400
-person sales and marketing team to drive growth and leverage new products, including the
4Kscore
prostate cancer test and the
Claros
1 in-office immunoassay platform (in development). Our pharmaceutical business features
Rayaldee
, an FDA-approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease (“CKD”) and vitamin D insufficiency and VARUBI™ for chemotherapy-induced nausea and vomiting (oral formulation launched by partner TESARO in November 2015 and pending approval for IV formulation), TT401, a once or twice weekly oxyntomodulin for type 2 diabetes and obesity which is a clinically advanced drug candidate among the new class of GLP-1 glucagon receptor dual agonists (Phase 2b), and TT701, an androgen receptor modulator for androgen deficiency indications. Our pharmaceutical business also includes OPKO Biologics, which features hGH-CTP, a once-weekly human growth hormone injection (in Phase 3 and partnered with Pfizer), a once-daily Factor VIIa drug for hemophilia (Phase 2a), and long-acting oxyntomodulin (“OXM”) for diabetes and obesity (Phase 1). We are incorporated in Delaware and our principal executive offices are located in leased offices in Miami, Florida.
In August 2016, we completed the acquisition of Transition Therapeutics, Inc. (“Transition Therapeutics”), a clinical stage biotechnology company developing TT401, a once or twice weekly oxyntomodulin for type 2 diabetes and obesity, and TT701, an androgen receptor modulator for androgen deficiency indications. Holders of Transition Therapeutics common stock received
6,431,899
shares of OPKO Common Stock. The transaction was valued at approximately
$58.5 million
, based on a closing price per share of our Common Stock of
$9.10
as reported by NASDAQ on the closing date.
In August 2015, we completed the acquisition of Bio-Reference, the third largest full service clinical laboratory in the United States, known for its innovative technological solutions and pioneering leadership in the areas of genomics and genetic sequencing. 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
$950.1 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.
Through our acquisition of Bio-Reference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas across New York, New Jersey, Maryland, Pennsylvania, Delaware, Washington DC, Florida, California, Texas, Illinois and Massachusetts as well as to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for blood, urine, and tissue analysis. This includes hematology, clinical chemistry, immunoassay, infectious diseases, serology, hormones, and toxicology assays, as well as Pap smear, anatomic pathology (biopsies) and other types of tissue analysis. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
In May 2015, we acquired all of the issued and outstanding shares of EirGen Pharma Limited (“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
. 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.
We operate established pharmaceutical platforms in Ireland, Chile, Spain, and Mexico, which are generating revenue and which we expect to facilitate future market entry for our products currently in development. In addition, we have a development and commercial supply pharmaceutical company and a global supply chain operation and holding company in Ireland. We own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our molecular diagnostic and therapeutic products.
Our research and development activities are primarily performed at leased facilities in Miramar, FL, Woburn, MA, Waterford, Ireland, Kiryat Gat, Israel, and Barcelona, Spain.
Note 2 Summary of Significant Accounting Policies
Basis of presentation.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. and with the instructions to Form 10-K and of Regulation S-X.
Principles of consolidation.
The accompanying Consolidated Financial Statements include the accounts of OPKO Health, Inc. and of our wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Use of estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.
Cash and cash equivalents.
Cash and cash equivalents include short-term, interest-bearing instruments with original maturities of
90 days
or less at the date of purchase. We also consider all highly liquid investments with original maturities at the date of purchase of
90 days
or less as cash equivalents. These investments include money markets, bank deposits, certificates of deposit and U.S. treasury securities.
Inventories.
Inventories are valued at the lower of cost or market (net realizable value). Cost is determined by the first-in, first-out method. We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and current market conditions to determine whether inventories are stated at the lower of cost or market. Inventories at our diagnostics segment consist primarily of purchased laboratory supplies, which is used in our testing laboratories. The provision for inventory obsolescence for the
years ended December 31, 2016
and
2015
was
$0.0 million
and
$0.9 million
, respectively.
Pre-launch inventories.
We may accumulate commercial quantities of certain product candidates prior to the date we anticipate that such products will receive final U.S. FDA approval. The accumulation of such pre-launch inventories involves the risk that such products may not be approved for marketing by the FDA on a timely basis, or ever. This risk notwithstanding, we may accumulate pre-launch inventories of certain products when such action is appropriate in relation to the commercial value of the product launch opportunity. In accordance with our policy, this pre-launch inventory is expensed.
Goodwill and intangible assets.
Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired accounted for by the acquisition method of accounting and arose from our acquisitions. Refer to Note 5. Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions at
December 31, 2016
and
2015
, were
$2.1 billion
and
$2.2 billion
, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. We determined the fair value of intangible assets, including IPR&D, using the “income method.”
Goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value.
Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.
We reclassified
$187.6 million
of IPR&D related to
Rayaldee
from In-process research and development to Intangible assets, net in our Consolidated Balance Sheet upon the FDA’s approval of
Rayaldee
in June 2016. The assets will be amortized on a straight-line basis over their estimated useful life of approximately
12
years.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from
3
to
20
years. We use the straight-line method of amortization as there is no reliably determinable pattern in which the economic benefits of our intangible assets are consumed or otherwise used up. Amortization expense was
$64.4 million
,
$28.0 million
and
$10.9 million
for the
years ended December 31, 2016
,
2015
and 2014, respectively. Amortization expense from operations for our intangible assets is expected to be
$69.2
million,
$66.5
million,
$64.2
million,
$57.8
million and
$51.8
million for the years ended December
2017
,
2018
,
2019
,
2020
and
2021
, respectively.
Fair value measurements
. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their fair value due to the short-term maturities of these instruments. Investments that are considered available for sale as of
December 31, 2016
and
2015
are carried at fair value. Our debt under the credit agreement with JPMorgan Chase Bank, N.A. approximates fair value due to the variable rate of interest.
In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. Refer to Note 17.
Contingent consideration
. Each period we revalue the contingent consideration obligations associated with certain prior acquisitions to their fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction in contingent consideration expense. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value which may have a material impact on our results from operations and financial position.
Derivative financial instruments.
We record derivative financial instruments on our Consolidated Balance Sheet at their fair value and recognize the changes in the fair value in our Consolidated Statement of Operations when they occur, the only exception being derivatives that qualify as hedges. For the derivative instrument to qualify as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At
December 31, 2016
and
2015
, our foreign currency forward contracts held to economically hedge inventory purchases did not meet the documentation requirements to be designated as hedges. Accordingly, we recognize all changes in the fair values of our derivatives instruments, net, in our Consolidated Statement of Operations. Refer to Note 18.
Property, plant and equipment.
Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets and includes amortization expense for assets capitalized under capital leases. The estimated useful lives by asset class are as follows: software -
3 years
, machinery, medical and other equipment -
5
-
8 years
, furniture and fixtures -
5
-
10 years
, leasehold improvements - the lesser of their useful life or the lease term, buildings and improvements -
10
-
40 years
, automobiles and aircraft -
3
-
15 years
. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation expense was
$33.3 million
,
$14.2 million
and
$4.0 million
for the
years ended December 31, 2016
,
2015
and 2014, respectively. Assets held under capital leases are included within Property, plant and equipment, net in our Consolidated Balance Sheet and are amortized over the shorter of their useful lives or the expected term of their related leases.
Impairment of long-lived assets.
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Income taxes.
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
We operate in various countries and tax jurisdictions globally. For the year ended
December 31, 2016
, the tax rate differed from the U.S. federal statutory rate of
35%
primarily due to the relative mix in earnings and losses in the U.S. versus foreign tax jurisdictions, the impact of certain discrete tax events and operating results in tax jurisdictions which do not result in a tax benefit.
Income tax benefit for the year ended December 31, 2015 was primarily due to a
$93.4 million
release of a valuation allowance on our U.S. deferred tax assets due to a change in the assessment of recoverability following the merger with Bio-Reference in August 2015.
We periodically evaluate the realizability of our net deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment. On January 5, 2016, the Israeli Parliament officially published the
Law for the Amendment of the Israeli Tax Ordinance
(Amendment 216), that reduces the standard corporate income tax rate from
26.5%
to
25%
. The amendment was entered into force on January 1, 2016 and the
25%
corporate tax rate will apply to income that was generated from that day onwards. On December 29, 2016, the Israeli parliament further reduced the standard corporate income tax rate to
24%
, effective January 1, 2017 and
23%
effective January 1, 2018. The new rates have been used in determining Income tax benefit in 2016.
Included in Other long-term liabilities is an accrual of
$2.5 million
related to uncertain tax positions involving income recognition. We recognize that local tax law is inherently complex and the local taxing authorities may not agree with certain tax positions taken. Consequently, it is reasonably possible that the ultimate resolution of tax matters in any jurisdiction may be significantly more or less than estimated. We evaluated the estimated tax exposure for a range of current likely outcomes to be from
$0
to approximately
$50.0 million
and recorded our accrual to reflect our best expectation of ultimate resolution.
Revenue recognition
. Revenue for laboratory services is recognized at the time test results are reported, which approximates when services are provided. Services are provided to patients covered by various third-party payer programs including various managed care organizations, as well as the Medicare and Medicaid programs. Billings for services under third-party payer programs are included in revenue net of allowances for contractual discounts and allowances for differences between the amounts billed and estimated program payment amounts. Adjustments to the estimated payment amounts based on final settlement with the programs are recorded upon settlement as an adjustment to revenue. For the
years ended December 31, 2016
and
2015
, approximately
16%
and
9%
, respectively, of our revenues from services were derived directly from the Medicare and Medicaid programs. The increase in revenues from laboratory services, including revenue from Medicare and Medicaid programs, is due to the acquisition of Bio-Reference in August 2015.
We recognize revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, collectability is reasonably assured, and the price to the buyer is fixed or determinable, which is generally when goods are shipped and title and risk of loss transfer to our customers. Our estimates for sales returns and allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales from which they originated, and our evaluation of specific factors that may increase or decrease the risk of product returns. Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions (collectively, "Sales Deductions") as well as estimated product returns. Allowances are recorded as a reduction of revenue at the time product revenues are recognized.
We launched
Rayaldee
in the U.S. through our dedicated renal sales force in November 2016.
Rayaldee
is distributed in the U.S. principally through the retail pharmacy channel, which initiates with the largest wholesalers in the U.S. (collectively, "
Rayaldee
Customers"). In addition to distribution agreements with
Rayaldee
Customers, we have entered into arrangements with many health care providers and payers that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of
Rayaldee
.
We lack the experiential data which would allow us to estimate Sales Deductions and returns. Therefore, as of
December 31, 2016
, we have determined that we do not yet meet the criteria for the recognition of revenue for shipments of
Rayaldee
at the time of shipment to
Rayaldee
Customers as allowances for Sales Deductions and returns are not known or cannot be reasonably estimated. We will not recognize revenue upon shipment until such time as we can reasonably estimate and record provisions for Sales Deductions and returns utilizing historical information and market research projections.
During the year ended
December 31, 2016
, we did not recognize any product revenues related to
Rayaldee
sales. Payments received from
Rayaldee
Customers in advance of recognition of revenue are recorded as deferred revenue included in Accrued expenses in our Consolidated Balance Sheet. The related deferred revenue balance as of
December 31, 2016
was
$1.6 million
. The corresponding costs of product revenues for which we have not recognized product revenue have similarly not yet been reflected in our Consolidated Statement of Operations.
Revenue from transfer of intellectual property includes revenue related to the sale, license or transfer of intellectual property such as upfront license payments, license fees, milestone and royalty payments received through our license, and collaboration and commercialization agreements. We analyze our multiple-element arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting.
Non-refundable license fees for the out-license of our technology are recognized depending on the provisions of each agreement. We recognize non-refundable upfront license payments as revenue upon receipt if the license has standalone value and qualifies for treatment as a separate unit of accounting under multiple-element arrangement guidance. License fees with ongoing involvement or performance obligations that do not have standalone value are recorded as deferred revenue, included in Accrued expenses or Other long-term liabilities, when received and generally are recognized ratably over the period of such performance obligations only after both the license period has commenced and we have delivered the technology.
The assessment of our obligations and related performance periods requires significant management judgment. If an agreement contains research and development obligations, the relevant time period for the research and development phase is based on management estimates and could vary depending on the outcome of clinical trials and the regulatory approval process. Such changes could materially impact the revenue recognized, and as a result, management reviews the estimates related to the relevant time period of research and development on a periodic basis. For the
years ended December 31, 2016
,
2015
and 2014 we recorded
$126.1 million
,
$81.9 million
and
$5.5 million
of revenue from the transfer of intellectual property, respectively. For the
year ended December 31, 2016
, revenue from the transfer of intellectual property included
$50.0
million related to the VFMCRP Agreement and
$70.6 million
related to the Pfizer Transaction. Refer to Note 14. For the year ended December 31,
2015
, revenue from the transfer of intellectual property included
$15.0 million
related to a milestone payment that TESARO, Inc. (“TESARO”) paid us under our license agreement with them and
$65.5 million
related to the Pfizer Transaction. For the year ended December 31, 2014,
$5.0 million
related to a milestone payment that TESARO paid us under our license agreement with them.
Revenue from milestone payments related to arrangements under which we have continuing performance obligations are recognized as Revenue from transfer of intellectual property upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; there was substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; the milestone payment is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item by us; the milestone relates solely to past performance; and the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are not considered to be substantive and are, therefore, deferred and recognized as Revenue from transfer of intellectual property over the term of the arrangement as we complete our performance obligations.
Total deferred revenue included in Accrued expenses and Other long-term liabilities was
$162.4 million
and
$232.9 million
at
December 31, 2016
and
2015
, respectively. The deferred revenue balance at
December 31, 2016
and
2015
relates primarily to the Pfizer Transaction. Refer to Note 14.
Concentration of credit risk and allowance for doubtful accounts
. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts receivable are with either companies in the health care industry or patients. However, credit risk is limited due to the number of our clients as well as their dispersion across many different geographic regions.
While we have receivables due from federal and state governmental agencies, we do not believe that such receivables represent a credit risk since the related health care programs are funded by federal and state governments, and payment is primarily dependent upon submitting appropriate documentation. Accounts receivable balances (net of contractual adjustments) from Medicare and Medicaid were
$50.5 million
and
$26.1 million
at
December 31, 2016
and
2015
, respectively.
The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk. At
December 31, 2016
and
2015
, receivables due from patients represent approximately
7.3%
and
7.5%
, respectively, of our consolidated accounts receivable (prior to allowance for doubtful accounts).
We assess the collectability of accounts receivable balances by considering factors such as historical collection experience, customer credit worthiness, the age of accounts receivable balances, regulatory changes and current economic conditions and trends that may affect a customer’s ability to pay. Actual results could differ from those estimates. Our reported net income (loss) is directly affected by our estimate of the collectability of accounts receivable. The allowance for doubtful accounts was
$36.3 million
and
$25.2 million
at
December 31, 2016
and
2015
, respectively. The provision for bad debts for the years ended
December 31, 2016
and
2015
was
$83.5 million
and
$24.5 million
, respectively.
Equity-based compensation.
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Consolidated Statement of Operations over the period during which an employee is required to provide service in exchange for the award. We record excess tax benefits, realized from the exercise of stock options as a financing cash inflow and as a reduction of taxes paid in cash flow from operations. Equity-based compensation arrangements to non-employees are recorded at their fair value on the measurement date. The measurement of equity-based compensation to non-employees is subject to periodic adjustment as the underlying equity instruments vest. During the
years ended December 31, 2016
,
2015
and 2014, we recorded
$42.7 million
,
$26.1 million
and
$14.8 million
, respectively, of equity-based compensation expense.
Research and development expenses
. Research and development expenses include external and internal expenses, partially offset by third-party grants and fundings arising from collaboration agreements. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. Research and development employee-related expenses include salaries,
benefits and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period in which the actual services are received. As such, accrued liabilities related to third party research and development activities are recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third party contract.
We record expense for in-process research and development projects acquired as asset acquisitions which have not reached technological feasibility and which have no alternative future use. For in-process research and development projects acquired in business combinations, the in-process research and development project is capitalized and evaluated for impairment until the development process has been completed. Once the development process has been completed the asset will be amortized over its remaining useful life.
Segment reporting.
Our chief operating decision-maker (“CODM”) is Phillip Frost, M.D., our Chairman and Chief Executive Officer. Our CODM reviews our operating results and operating plans and makes resource allocation decisions on a Company-wide or aggregate basis. We manage our operations in
two
reportable segments, pharmaceutical and diagnostics. The pharmaceutical segment consists of our pharmaceutical operations we acquired in Chile, Mexico, Ireland, Israel and Spain and our pharmaceutical research and development. The diagnostics segment primarily consists of clinical laboratory operations we acquired through the acquisition of Bio-Reference and point-of-care operations. There are no significant inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes. Refer to Note 16.
Shipping and handling costs.
We do not charge customers for shipping and handling costs. Shipping and handling costs are classified as Cost of revenues in the Consolidated Statement of Operations.
Foreign currency translation
. The financial statements of certain of our foreign operations are measured using the local currency as the functional currency. The local currency assets and liabilities are generally translated at the rate of exchange to the United States (“U.S.”) dollar on the balance sheet date and the local currency revenues and expenses are translated at average rates of exchange to the U.S. dollar during the reporting periods. Foreign currency transaction gains (losses) have been reflected as a component of Other income (expense), net within the Consolidated Statement of Operations and foreign currency translation gains (losses) have been included as a component of the Consolidated Statement of Comprehensive Loss. During the
years ended December 31, 2016
,
2015
and 2014, we recorded
$0.8 million
,
$(2.4) million
and
$(4.8) million
, respectively of transaction gains (losses).
Variable interest entities.
The consolidation of variable interest entities (“VIE”) is required when an enterprise has a controlling financial interest. A controlling financial interest in a VIE will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE. In July 2015, we deconsolidated SciVac Therapeutics Inc. (“STI”), and account for our retained interest in STI as an equity method investment. Refer to Note 4.
Investments.
We have made strategic investments in development stage and emerging companies. We record these investments as equity method investments or investments available for sale based on our percentage of ownership and whether we have significant influence over the operations of the investees. Investments for which it is not practical to estimate fair value and which we do not have significant influence are accounted for as cost method investments. For investments classified under the equity method of accounting, we record our proportionate share of their losses in Losses from investments in investees in our Consolidated Statement of Operations. Refer to Note 4. For investments classified as available for sale, we record changes in their fair value as unrealized gain or loss in Other comprehensive income (loss) based on their closing price per share at the end of each reporting period. Refer to Note 4.
Recent accounting pronouncements
. In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09, as amended, clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach. We continue to evaluate both methods of adoption and the impact that the adoption of this ASU will have on our Consolidated Financial Statements.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force).” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 was effective for the Company beginning after January 1, 2016. Our adoption of ASU 2014-12 in the first quarter of 2016 using the prospective application did not have a material impact on our Consolidated Financial Statements.
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 with early adoption permitted. Our adoption of ASU 2014-15 in 2016 did not have an impact on our Consolidated Financial Statements.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which amends current consolidation guidance including changes to both the variable and voting interest models used by companies to evaluate whether an entity should be consolidated. The requirements from ASU 2015-02 were effective for the Company beginning January 1, 2016. Our adoption of ASU 2015-02 in the first quarter of 2016 did not have a material impact on our Consolidated Financial Statements.
In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03, as amended, was effective for the Company beginning January 1, 2016. Our adoption of ASU 2015-03 in the first quarter of 2016 did not have a material impact on our Consolidated Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for entities that do not measure inventory using the last-in, first-out (“LIFO”) or retail inventory method from the lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of this new guidance to have a material impact on our Consolidated Financial Statements.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Our early adoption of ASU 2015-16 in 2015 did not have a significant impact on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. We early adopted the provisions of this ASU prospectively in the fourth quarter of 2015, and did not retrospectively adjust the prior periods. The adoption of this ASU simplifies the presentation of deferred income taxes and reduces complexity without decreasing the usefulness of information provided to users of financial statements. The adoption of ASU 2015-17 did not have a significant impact on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10),” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718),” which simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and accounting for forfeitures. ASU 2016-09 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which addresses the classification of eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350),” which simplifies how an entity is required to test for goodwill impairment. ASU 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted after January 1, 2017. We are currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
Note 3 Loss Per Share
Basic loss per share is computed by dividing our net loss by the weighted average number of shares outstanding during the period. For diluted earnings per share, the dilutive impact of stock options, warrants and conversion options of the 2033 Senior Notes is determined by applying the “treasury stock” method. In the periods in which their effect would be antidilutive, no effect has been given to outstanding options, warrants or the potentially dilutive shares issuable pursuant to the 2033 Senior Notes (defined in Note 6) in the dilutive computation.
A total of
9,494,999
,
14,269,717
and
28,456,149
potential shares of Common Stock have been excluded from the calculation of diluted net loss per share for the
years ended December 31, 2016
,
2015
and 2014, respectively, because their inclusion would be antidilutive.
During the
year ended December 31, 2016
,
3,420,697
Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of
3,292,753
shares of Common Stock. Of the
3,420,697
Common Stock options and Common Stock warrants exercised,
127,944
shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the year ended December 31,
2015
,
25,686,153
Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of
24,466,106
shares of Common Stock. Of the
25,686,153
Common Stock options and Common Stock warrants exercised,
1,220,047
shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the year ended December 31, 2014,
5,787,983
Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of
5,392,741
shares of Common Stock. Of the
5,787,983
Common Stock options and Common Stock warrants exercised,
426
shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
Note 4 Acquisitions, Investments and Licenses
Transition Therapeutics acquisition
In August 2016, we completed the acquisition of Transition Therapeutics, a clinical stage biotechnology company. Holders of Transition Therapeutics common stock received
6,431,899
shares of OPKO Common Stock. The transaction was valued at approximately
$58.5 million
, based on a closing price per share of our Common Stock of
$9.10
as reported by NASDAQ on the closing date.
The following table summarizes the preliminary purchase price allocation and the estimated fair value of the net assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation for Transition Therapeutics is preliminary pending completion of the fair value analysis of acquired assets and liabilities:
|
|
|
|
|
|
(In thousands)
|
|
Transition Therapeutics
|
Current assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,878
|
|
IPR&D assets
|
|
41,000
|
|
Goodwill
|
|
3,453
|
|
Other assets
|
|
634
|
|
Accounts payable and other liabilities
|
|
(1,035
|
)
|
Deferred tax liability
|
|
(1,400
|
)
|
Total purchase price
|
|
$
|
58,530
|
|
Goodwill from the acquisition of Transition Therapeutics principally relates to intangible assets that do not qualify for separate recognition (for instance, Transition Therapeutics' assembled workforce) 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 pharmaceutical reporting segment.
Revenue and Net income (loss) in the Consolidated Statement of Operations for the
year ended December 31, 2016
includes revenue and net loss of Transition Therapeutics from the date of acquisition to
December 31, 2016
of
$0.0 million
and
$(2.6) 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.
Pro forma disclosure for Transition Therapeutics acquisition
(unaudited)
The following table includes the pro forma results for the
years ended December 31, 2016
and 2015 and combines the results of operations of OPKO and Transition Therapeutics as though the acquisition of Transition Therapeutics had occurred on January 1, 2015.
|
|
|
|
|
|
|
For the year ended December 31,
|
(In thousands)
|
|
2016
|
2015
|
Revenues
|
|
$1,221,661
|
$491,738
|
Net loss
|
|
(31,807)
|
(50,660)
|
Net loss attributable to common shareholders
|
|
(31,807)
|
(49,260)
|
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 Transition Therapeutics as of the beginning of the period presented.
Bio-Reference acquisition
In August 2015, we completed the acquisition of Bio-Reference, the third largest full service clinical laboratory in the United States, known for its innovative technological solutions and pioneering leadership in the areas of genomics and genetic sequencing. 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
$950.1 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 purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the acquisition of Bio-Reference at the date of acquisition finalized during the year ended December 31, 2016:
|
|
|
|
|
|
(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
|
|
Total purchase price
|
|
$
|
950,148
|
|
|
|
|
Preliminary value of assets acquired and liabilities assumed:
|
|
|
Current assets
|
|
|
Cash and cash equivalents
|
|
$
|
15,800
|
|
Accounts receivable
|
|
168,164
|
|
Inventory
|
|
19,674
|
|
Other current assets, principally deferred tax assets
|
|
105,765
|
|
Total current assets
|
|
309,403
|
|
Property, plant and equipment
|
|
112,457
|
|
Intangible assets:
|
|
|
Trade name
|
|
47,100
|
|
Customer relationships
|
|
389,800
|
|
Technology
|
|
100,600
|
|
Other intangible assets
|
|
7,750
|
|
Total intangible assets
|
|
545,250
|
|
Goodwill
|
|
401,821
|
|
Investments
|
|
5,326
|
|
Other assets
|
|
13,265
|
|
Total assets
|
|
1,387,522
|
|
Accounts payable and accrued expenses
|
|
(108,217
|
)
|
Income taxes payable
|
|
(2,921
|
)
|
Lines of credit and notes payable
|
|
(65,701
|
)
|
Capital lease obligations
|
|
(18,293
|
)
|
Deferred tax liability (non-current)
|
|
(235,904
|
)
|
Other long-term liabilities
|
|
(6,338
|
)
|
Total purchase price
|
|
$
|
950,148
|
|
During the
year ended December 31, 2016
, we finalized our purchase price allocation during the measurement period and obtained new fair value information related to certain assets acquired and liabilities assumed of Bio-Reference. As a result, for the
year ended December 31, 2016
we adjusted the purchase price allocation by increasing Other current assets by
$44.6 million
, decreasing customer relationships by
$5.4 million
, increasing Other intangible assets by
$7.8 million
, decreasing Goodwill by
$39.3 million
, decreasing Accrued expenses by
$0.5 million
, increasing Income taxes payable by
$2.5 million
, decreasing Deferred tax liability (non-current) by
$0.6 million
and increasing Other long-term liabilities by
$6.3 million
. As a result of these adjustments, Amortization of intangible assets in our Consolidated Statement of Operations for the
year ended December 31, 2016
increased
$3.1 million
.
The purchase price allocation adjustments are largely due to an approval we received from the Internal Revenue Service during 2016 on an application for a change in accounting method. As a result of the change, we recognized an additional
$51.7 million
of income tax benefits, of which
$39.4 million
was recognized as taxes recoverable in Other current assets and
$12.3 million
was recognized as a reduction of our Deferred tax liability (non-current). In addition, Goodwill was reduced by
$51.7 million
. OPKO received payment for the
$39.4 million
taxes recoverable balance during the
year ended December 31, 2016
.
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 reporting segment.
Revenue and Net income (loss) in the Consolidated Statement of Operations for the year ended December 31, 2015 includes revenue and net income of Bio-Reference from the date of acquisition to December 31, 2015 of
$321.9 million
and
$3.2 million
, respectively.
The weighted average amortization periods for intangible assets recognized in the Bio-Reference acquisition are
5
years for trade name,
19.3
years for customer relationships,
10.2
years for technology and
13.0
years in total.
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
. 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 final purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the acquisition of EirGen at the date of acquisition:
|
|
|
|
|
|
(In thousands)
|
|
EirGen
|
Current assets
(1)
|
|
$
|
11,795
|
|
Intangible assets:
|
|
|
IPR&D assets
|
|
560
|
|
Customer relationships
|
|
34,155
|
|
Currently marketed products
|
|
3,919
|
|
Total intangible assets
|
|
38,634
|
|
Goodwill
|
|
83,373
|
|
Property, plant and equipment
|
|
8,117
|
|
Other assets
|
|
1,232
|
|
Accounts payable and other liabilities
|
|
(6,254
|
)
|
Deferred tax liability
|
|
(3,131
|
)
|
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 pharmaceutical reporting segment.
Revenue and Net income (loss) in the Consolidated Statement of Operations for the year ended December 31, 2015 includes revenue and net income of EirGen from the date of acquisition to December 31, 2015 of
$13.5 million
and
$1.4 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. The weighted average amortization periods for amortizing intangible assets recognized in the EirGen acquisition are
15.8
years for customer relationships,
10.0
years for currently marketed product and
15.0
years in total.
Investments
The following table reflects the accounting method, carrying value and underlying equity in net assets of our unconsolidated investments as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Investment type
|
|
Investment Carrying Value
|
|
Underlying Equity in Net Assets
|
Equity method investments
|
|
$
|
31,471
|
|
|
$
|
30,195
|
|
Variable interest entity, equity method
|
|
516
|
|
|
—
|
|
Available for sale investments
|
|
4,528
|
|
|
|
Cost method investment
|
|
607
|
|
|
|
Warrants and options
|
|
4,017
|
|
|
|
Total carrying value of investments
|
|
$
|
41,139
|
|
|
|
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. ("NIMS") (
1%
), Neovasc Inc. (
4%
), VBI (
15%
), InCellDx, Inc. (
27%
), and BioCardia, Inc. ("BioCardia") (
5%
). The total assets, liabilities, and net losses of our equity method investees as of and for the year ended
December 31, 2016
were
$430.9 million
,
$205.1 million
, and
$208.1 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/or voting power. Accordingly, we account for our investment in these entities under the equity method and record our proportionate share of their losses in Loss from investments in investees in our 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
December 31, 2016
is
$80.1 million
.
Available for sale investments
Our available for sale investments consist of investments in RXi Pharmaceuticals Corporation (“RXi”) (ownership
5%
), ChromaDex Corporation (
2%
), MabVax Therapeutics Holdings, Inc. (“MabVax”) (
4%
), ARNO Therapeutics, Inc. (“ARNO”) (
5%
) and Xenetic BioSciences, Inc. ("Xenetic") (
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.
Based on our evaluation of the value of our investments in RXi, including RXi’s decreasing stock price during the year ended
December 31, 2016
, we determined that the decline in fair value of our RXi common shares was other-than-temporary and recorded an impairment charge of
$0.4 million
in Other income (expense), net in our Consolidated Statement of Operations for the
year ended December 31, 2016
to write our investment in RXi common shares down to its fair value of
$0.3 million
as of
December 31, 2016
. Based on our evaluation of the value of our investments in Xenetic, including Xenetic’s decreasing stock price during the year ended
December 31, 2016
, we determined that the decline in fair value of our Xenetic common shares was other-than-temporary and recorded an impairment charge of
$3.5 million
in Other income (expense), net in our Consolidated Statement of Operations for the year ended
December 31, 2016
to write our investment in Xenetic common shares down to its fair value of
$1.3 million
as of
December 31, 2016
. Based on our evaluation of the value of our investments in ARNO, including ARNO's decreasing stock price during the year ended
December 31, 2016
, we determined that the decline in fair value of our ARNO common shares was other-than-temporary and recorded an impairment charge of
$0.8 million
in Other income (expense), net in our Consolidated Statement of Operations for the
year ended December 31, 2016
to write our investment in ARNO common shares down to
zero
as of December 31, 2016.
Based on our evaluation of the value of our investments in RXi, including RXi’s decreasing stock price during the year ended
December 31, 2015
, we determined that the decline in fair value of our RXi common shares was other-than-temporary and recorded an impairment charge of
$7.3 million
in Other income (expense), net in our Consolidated Statement of Operations for the year ended
December 31, 2015
to write our investment in RXi common shares down to its fair value of
$0.9 million
as of
December 31, 2015
. Based on our evaluation of the value of our investment in ARNO, including ARNO’s decreasing stock price during the year ended December 31, 2014, we determined that the decline in fair value of our ARNO common shares was other-than-temporary and recorded an impairment charge of
$1.4 million
in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2014 to write our investment in ARNO common shares down to its fair value of
$0.6 million
as of December 31, 2014. Refer to Note 17 for further discussion of the fair value of our available for sale investments.
Sales of investments
Gains (losses) included in earnings from sales of our investments for the years ended
December 31, 2016
,
2015
and
2014
were
$0.0 million
,
$0.0 million
and
$1.3 million
, respectively, and were recorded in Other income (expense), net in our Consolidated Statement of Operations. The cost of securities sold is based on the specific identification method. Refer to
Investment in SciVac
below.
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, 2016
, options to purchase
5.0 million
additional shares of BioCardia, none of which are vested as of
December 31, 2016
, and
1.0 million
,
2.3 million
,
0.3 million
,
0.7 million
,
0.7 million
,
0.5 million
and
0.2 million
of warrants to purchase additional shares of COCP, ARNO, Sevion, MabVax, InCellDx, Inc., Xenetic and RXi, 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 Statement of Operations. We also recorded the fair value of the options and warrants in Investments, net in our Consolidated Balance Sheet. See further discussion of the Company’s options and warrants in Note 17 and Note 18.
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
1,260,000
shares of Zebra Series A-2 Preferred Stock and
900,000
shares of Zebra restricted common stock (ownership
28%
at
December 31, 2016
). 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. 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 and no obligation to fund expected losses. 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 produced a third-generation hepatitis B-vaccine. From November 2012 through June 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 did 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. As a result of this conclusion, we consolidated the results of operations and financial position of SciVac through June 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. 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. We recorded a
$15.9 million
gain on the deconsolidation of SciVac in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2015. The recognized gain was primarily due to the fair value of the retained interest in STI based on Levon’s cash contribution of approximately
$21.2 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 voting power and board representation. STI is
considered a related party as a result of our board representation in STI and executive management’s ownership interests in STI.
In May 2016, STI completed a merger transaction pursuant to which a wholly-owned subsidiary of STI merged with and into VBI Vaccines Inc. with VBI Vaccines Inc. surviving the merger as a wholly-owned subsidiary of STI, and STI changed its name to VBI Vaccines Inc. (“VBI”) . We recorded a
$2.5 million
gain in connection with the merger transaction in Other income (expense), net in our Consolidated Statement of Operations for the year ended December 31, 2016. In June 2016, we invested an additional
$5.7 million
in VBI for
1,362,370
shares of its common stock. As a result of these two transactions, OPKO’s ownership in VBI changed to
15%
.
We account for our investment in VBI under the equity method as we have determined that we can significantly influence VBI through our board representation.
Other
On January 5, 2016, we completed a stock exchange agreement (the “Exchange Agreement”) with Relative Core Cyprus Limited (“Relative Core”) pursuant to which Relative Core agreed to transfer and sell to us
$5.0 million
of Xenetic shares in exchange for
$5.0 million
shares of our common stock. We issued
494,462
shares of our common stock to Relative Core and received
10,204,082
shares of Xenetic common stock from Relative Core. The number of shares exchanged in the transaction was calculated based on the average closing sale price for our common stock on the NYSE for the ten (
10
) consecutive trading day period ending on the second day prior to the closing and the average closing sale price for Xenetic’s common stock on the OTC “Pink Sheet” for the ten (
10
) consecutive trading day period ending on the second day prior to the closing. We account for investment in Xenetic as an available for sale investment.
In March 2016, we entered into an agreement with Relative Core pursuant to which we delivered
$5.0 million
cash to Relative Core in exchange for a
$5.0 million
promissory note (“Relative Note”) which bears interest at
10%
and is due in March 2017. The Relative Note is secured by
4,000,000
shares of common stock of Xenetic and
494,462
shares of OPKO common stock. We recorded the Relative Note within Other current assets and prepaid expenses in our Consolidated Balance Sheet.
Note 5 Composition of Certain Financial Statement Captions
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In thousands)
|
2016
|
|
2015
|
Accounts receivable, net
|
|
|
|
Accounts receivable
|
$
|
256,552
|
|
|
$
|
219,043
|
|
Less: allowance for doubtful accounts
|
(36,268
|
)
|
|
(25,168
|
)
|
|
$
|
220,284
|
|
|
$
|
193,875
|
|
Inventories, net
|
|
|
|
Consumable supplies
|
$
|
23,448
|
|
|
$
|
22,265
|
|
Finished products
|
16,143
|
|
|
13,404
|
|
Work in-process
|
3,896
|
|
|
1,215
|
|
Raw materials
|
4,686
|
|
|
3,848
|
|
Less: inventory reserve
|
(945
|
)
|
|
(1,051
|
)
|
|
$
|
47,228
|
|
|
$
|
39,681
|
|
Other current assets and prepaid expenses
|
|
|
|
Other receivables
|
$
|
13,021
|
|
|
$
|
11,946
|
|
Taxes recoverable
|
16,187
|
|
|
3,076
|
|
Prepaid supplies
|
6,952
|
|
|
8,773
|
|
Prepaid insurance
|
3,688
|
|
|
2,206
|
|
Other
|
7,508
|
|
|
903
|
|
|
$
|
47,356
|
|
|
$
|
26,904
|
|
Property, plant and equipment, net:
|
|
|
|
Machinery, medical and other equipment
|
$
|
100,100
|
|
|
$
|
89,936
|
|
Leasehold improvements
|
30,122
|
|
|
27,949
|
|
Furniture and fixtures
|
11,247
|
|
|
11,403
|
|
Automobiles and aircraft
|
13,342
|
|
|
10,271
|
|
Software
|
10,990
|
|
|
10,497
|
|
Building
|
5,696
|
|
|
5,965
|
|
Land
|
2,264
|
|
|
2,394
|
|
Construction in process
|
5,848
|
|
|
425
|
|
Less: accumulated depreciation
|
(56,778
|
)
|
|
(27,042
|
)
|
|
$
|
122,831
|
|
|
$
|
131,798
|
|
Intangible assets, net:
|
|
|
|
Customer relationships
|
$
|
443,560
|
|
|
$
|
449,972
|
|
Technologies
|
340,397
|
|
|
151,709
|
|
Trade names
|
50,442
|
|
|
50,416
|
|
Covenants not to compete
|
16,348
|
|
|
8,612
|
|
Licenses
|
23,506
|
|
|
23,432
|
|
Product registrations
|
7,641
|
|
|
7,512
|
|
Other
|
5,289
|
|
|
5,600
|
|
Less: accumulated amortization
|
(123,207
|
)
|
|
(59,101
|
)
|
|
$
|
763,976
|
|
|
$
|
638,152
|
|
Accrued expenses:
|
|
|
|
Deferred revenue
|
$
|
73,434
|
|
|
$
|
70,246
|
|
Employee benefits
|
43,792
|
|
|
29,751
|
|
Taxes payable
|
4,430
|
|
|
7,605
|
|
Contingent consideration
|
259
|
|
|
22,164
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In thousands)
|
2016
|
|
2015
|
Clinical trials
|
5,935
|
|
|
2,505
|
|
Capital leases short-term
|
3,025
|
|
|
5,373
|
|
Milestone payment
|
4,865
|
|
|
5,000
|
|
Professional fees
|
4,035
|
|
|
1,506
|
|
Other
|
58,180
|
|
|
23,749
|
|
|
$
|
197,955
|
|
|
$
|
167,899
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
Deferred revenue
|
$
|
89,016
|
|
|
$
|
162,634
|
|
Line of credit
|
38,809
|
|
|
72,107
|
|
Contingent consideration
|
44,817
|
|
|
32,258
|
|
Capital leases long-term
|
7,216
|
|
|
9,285
|
|
Mortgages and other debts payable
|
717
|
|
|
2,523
|
|
Other
|
21,908
|
|
|
13,663
|
|
|
$
|
202,483
|
|
|
$
|
292,470
|
|
The following table summarizes the fair values assigned to our major intangible asset classes upon each acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Technologies
|
|
In-process research and development
|
|
Customer relationships
|
|
Product registrations
|
|
Covenants not to compete
|
|
Trade names
|
|
Other
|
|
Total identified intangible assets
|
|
Goodwill
|
Bio-Reference
|
$
|
100,600
|
|
|
$
|
—
|
|
|
$
|
389,800
|
|
|
$
|
—
|
|
|
$
|
7,750
|
|
|
$
|
47,100
|
|
|
$
|
—
|
|
|
$
|
545,250
|
|
|
$
|
401,821
|
|
CURNA
|
—
|
|
|
10,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
290
|
|
|
10,290
|
|
|
4,827
|
|
EirGen
|
—
|
|
|
560
|
|
|
34,155
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,919
|
|
|
38,634
|
|
|
83,373
|
|
FineTech
|
2,700
|
|
|
—
|
|
|
14,200
|
|
|
—
|
|
|
1,500
|
|
|
400
|
|
|
—
|
|
|
18,800
|
|
|
11,623
|
|
OPKO Biologics
|
—
|
|
|
590,200
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
590,200
|
|
|
139,784
|
|
OPKO
Chile
|
—
|
|
|
—
|
|
|
3,945
|
|
|
5,829
|
|
|
—
|
|
|
1,032
|
|
|
—
|
|
|
10,806
|
|
|
5,441
|
|
OPKO Diagnostics
|
44,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,400
|
|
|
17,977
|
|
OPKO Health Europe
|
3,017
|
|
|
1,459
|
|
|
436
|
|
|
2,930
|
|
|
187
|
|
|
349
|
|
|
—
|
|
|
8,378
|
|
|
8,062
|
|
OPKO Lab
|
1,370
|
|
|
—
|
|
|
3,860
|
|
|
—
|
|
|
6,900
|
|
|
1,830
|
|
|
70
|
|
|
14,030
|
|
|
29,629
|
|
OPKO Renal
|
—
|
|
|
191,530
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
210
|
|
|
191,740
|
|
|
2,411
|
|
Transition Therapeutics
|
—
|
|
|
41,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,000
|
|
|
3,453
|
|
Weighted average amortization period
|
8-12 years
|
|
|
Indefinite
|
|
|
6-20 years
|
|
|
9 years
|
|
|
5 years
|
|
|
4-5 years
|
|
|
3-10 years
|
|
|
|
|
Indefinite
|
|
All of the intangible assets and goodwill acquired relate to our acquisitions of principally OPKO Renal, OPKO Biologics, EirGen and Bio-Reference. We do not anticipate capitalizing the cost of product registration renewals, rather we expect to expense these costs, as incurred. Our goodwill is not tax deductible for income tax purposes in any jurisdiction we operate in.
We reclassified
$187.6 million
of IPR&D related to
Rayaldee
from In-process research and development to Intangible assets, net in our Consolidated Balance Sheet upon the FDA’s approval of
Rayaldee
in June 2016. In addition, we made certain purchase price allocation adjustments related to the Bio-Reference acquisition during the
year ended December 31, 2016
. Refer to Note 4. Other changes in value of the intangible assets and goodwill during 2016 are primarily due to foreign currency fluctuations between the Chilean and Mexican pesos, the Euro and the Shekel against the U.S. dollar. For the year ended December 31,
2015
, the changes in value of the intangible assets and goodwill are primarily due to the acquisitions of Bio-Reference and EirGen and foreign currency fluctuations between the Chilean and Mexican pesos, the Euro and the Shekel against the U.S. dollar.
The following table reflects the changes in the allowance for doubtful accounts, provision for inventory reserve and tax valuation allowance accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Beginning
balance
|
|
Charged
to
expense
|
|
Written-off
|
|
Charged
to other
|
|
Ending
balance
|
2016
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
(25,168
|
)
|
|
(83,463
|
)
|
|
68,840
|
|
|
3,523
|
|
|
$
|
(36,268
|
)
|
Inventory reserve
|
$
|
(1,051
|
)
|
|
(20
|
)
|
|
296
|
|
|
(170
|
)
|
|
$
|
(945
|
)
|
Tax valuation allowance
|
$
|
(42,147
|
)
|
|
7,726
|
|
|
—
|
|
|
(20,994
|
)
|
|
$
|
(55,415
|
)
|
2015
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
(1,906
|
)
|
|
(24,548
|
)
|
|
928
|
|
|
358
|
|
|
$
|
(25,168
|
)
|
Inventory reserve
|
$
|
(639
|
)
|
|
(926
|
)
|
|
435
|
|
|
79
|
|
|
$
|
(1,051
|
)
|
Tax valuation allowance
|
$
|
(131,931
|
)
|
|
—
|
|
|
—
|
|
|
89,784
|
|
|
$
|
(42,147
|
)
|
The following table summarizes the changes in Goodwill during the
years ended December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(In thousands)
|
Balance at January 1st
|
|
Purchase accounting adjustments
|
|
Foreign exchange
|
|
Balance at December 31st
|
|
Balance at January 1
|
|
Purchase accounting adjustments
|
|
Foreign exchange
|
|
Balance at December 31
|
Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURNA
|
$
|
4,827
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,827
|
|
|
$
|
4,827
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,827
|
|
EirGen
|
81,139
|
|
|
—
|
|
|
(2,781
|
)
|
|
78,358
|
|
|
—
|
|
|
83,373
|
|
|
(2,234
|
)
|
|
81,139
|
|
FineTech
|
11,698
|
|
|
—
|
|
|
—
|
|
|
11,698
|
|
|
11,698
|
|
|
—
|
|
|
—
|
|
|
11,698
|
|
OPKO Biologics
|
139,784
|
|
|
—
|
|
|
—
|
|
|
139,784
|
|
|
139,784
|
|
|
—
|
|
|
—
|
|
|
139,784
|
|
OPKO Chile
|
4,517
|
|
|
—
|
|
|
268
|
|
|
4,785
|
|
|
5,283
|
|
|
—
|
|
|
(766
|
)
|
|
4,517
|
|
OPKO Health Europe
|
7,191
|
|
|
—
|
|
|
(255
|
)
|
|
6,936
|
|
|
8,013
|
|
|
—
|
|
|
(822
|
)
|
|
7,191
|
|
OPKO Mexico
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
(100
|
)
|
|
—
|
|
OPKO Renal
|
2,069
|
|
|
—
|
|
|
—
|
|
|
2,069
|
|
|
2,069
|
|
|
—
|
|
|
—
|
|
|
2,069
|
|
SciVac
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,553
|
|
|
—
|
|
|
(1,553
|
)
|
|
—
|
|
Transition Therapeutics
|
—
|
|
|
3,453
|
|
|
(93
|
)
|
|
3,360
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bio-Reference
|
441,158
|
|
|
(39,337
|
)
|
|
—
|
|
|
401,821
|
|
|
—
|
|
|
441,158
|
|
|
—
|
|
|
441,158
|
|
OPKO Diagnostics
|
17,977
|
|
|
—
|
|
|
—
|
|
|
17,977
|
|
|
17,977
|
|
|
—
|
|
|
—
|
|
|
17,977
|
|
OPKO Lab
|
32,988
|
|
|
—
|
|
|
—
|
|
|
32,988
|
|
|
32,988
|
|
|
—
|
|
|
—
|
|
|
32,988
|
|
|
$
|
743,348
|
|
|
$
|
(35,884
|
)
|
|
$
|
(2,861
|
)
|
|
$
|
704,603
|
|
|
$
|
224,292
|
|
|
$
|
524,531
|
|
|
$
|
(5,475
|
)
|
|
$
|
743,348
|
|
Note 6 Debt
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional buyers and accredited investors (collectively, the “Purchasers”) in a private placement in reliance on exemptions from registration under the Securities Act of 1933, (the “Securities Act”). The 2033 Senior Notes were issued on
January 30, 2013
. The 2033 Senior Notes, which totaled
$175.0 million
in original principal amount, bear interest at the rate of
3.00%
per year, payable semiannually on February 1 and August 1 of each year. The 2033 Senior Notes will mature on
February 1, 2033
, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the Indenture, dated as of January 30, 2013, by and between the Company and Wells Fargo Bank N.A., as trustee, governing the 2033 Senior Notes (the "Indenture"), subject to certain exceptions, the holders may require us to repurchase all or any portion of their 2033 Senior Notes for cash at a repurchase price equal to
100%
of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued and unpaid interest to but not including the fundamental change repurchase date.
The following table sets forth information related to the 2033 Senior Notes which is included in our Consolidated Balance Sheet
as of December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Embedded conversion option
|
|
2033 Senior Notes
|
|
Discount
|
|
Debt Issuance Cost
|
|
Total
|
Balance at December 31, 2015
|
$
|
23,737
|
|
|
$
|
32,200
|
|
|
$
|
(6,525
|
)
|
|
$
|
(426
|
)
|
|
$
|
48,986
|
|
Amortization of debt discount
|
—
|
|
|
—
|
|
|
1,913
|
|
|
153
|
|
|
2,066
|
|
Change in fair value of embedded derivative
|
(7,001
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,001
|
)
|
Conversion
|
—
|
|
|
(350
|
)
|
|
—
|
|
|
—
|
|
|
(350
|
)
|
Balance at December 31, 2016
|
$
|
16,736
|
|
|
$
|
31,850
|
|
|
$
|
(4,612
|
)
|
|
$
|
(273
|
)
|
|
$
|
43,701
|
|
The following table sets forth information related to the 2033 Senior Notes which is included in our Consolidated Balance Sheet
as of December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Embedded conversion option
|
|
2033 Senior Notes
|
|
Discount
|
|
Debt Issuance Cost
|
|
Total
|
Balance at December 31, 2014
|
$
|
65,947
|
|
|
$
|
87,642
|
|
|
$
|
(22,135
|
)
|
|
$
|
(1,638
|
)
|
|
$
|
129,816
|
|
Amortization of debt discount
|
—
|
|
|
—
|
|
|
2,613
|
|
|
233
|
|
|
2,846
|
|
Change in fair value of embedded derivative
|
36,587
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,587
|
|
Conversion
|
(78,797
|
)
|
|
(55,442
|
)
|
|
12,997
|
|
|
979
|
|
|
(120,263
|
)
|
Balance at December 31, 2015
|
$
|
23,737
|
|
|
$
|
32,200
|
|
|
$
|
(6,525
|
)
|
|
$
|
(426
|
)
|
|
$
|
48,986
|
|
The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second scheduled trading day immediately preceding the maturity date, at the option of the holders. Additionally, holders may convert their 2033 Senior Notes prior to the close of business on the scheduled trading day immediately preceding November 1, 2032, under the following circumstances: (1) conversion based upon satisfaction of the trading price condition relating to the 2033 Senior Notes; (2) conversion based on the Common Stock price; (3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior Notes for redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of cash and shares of Common Stock, at our election unless we have made an irrevocable election of net share settlement. The initial conversion rate for the 2033 Senior Notes will be
141.48
shares of Common Stock per
$1,000
principal amount of 2033 Senior Notes (equivalent to an initial conversion price of approximately
$7.07
per share of Common Stock), and will be subject to adjustment upon the occurrence of certain events. In addition, we will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes in connection with a make-whole fundamental change (as defined in the Indenture) and holders who convert upon the occurrence of certain specific events prior to February 1, 2017 (other than in connection with a make-whole fundamental change). Holders of the 2033 Senior Notes may require us to repurchase the 2033 Senior Notes for
100%
of their principal amount, plus accrued and unpaid interest, on February 1, 2019, February 1, 2023 and February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the 2033 Senior Notes.
We may not redeem the 2033 Senior Notes prior to February 1, 2017. On or after February 1, 2017 and before February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes but only if the last reported sale price of our Common Stock exceeds
130%
of the applicable conversion price for at least
20
trading days during the
30
consecutive trading day period ending on the trading day immediately prior to the date on which we deliver the redemption notice. The redemption
price will equal
100%
of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest to but not including the redemption date. On or after February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes at a redemption price of
100%
of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest up to but not including the redemption date.
The terms of the 2033 Senior Notes, include, among others: (i) rights to convert into shares of our Common Stock, including upon a fundamental change; and (ii) a coupon make-whole payment in the event of a conversion by the holders of the 2033 Senior Notes on or after February 1, 2017 but prior to February 1, 2019. We have determined that these specific terms are considered to be embedded derivatives. Embedded derivatives are required to be separated from the host contract, the 2033 Senior Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. We have concluded that the embedded derivatives within the 2033 Senior Notes meet these criteria and, as such, must be valued separate and apart from the 2033 Senior Notes and recorded at fair value each reporting period.
For accounting and financial reporting purposes, we combine these embedded derivatives and value them together as one unit of accounting. At each reporting period, we record these embedded derivatives at fair value which is included as a component of the 2033 Senior Notes on our Consolidated Balance Sheet.
In August 2013,
one
of the conversion rights in the 2033 Senior Notes was triggered. Holders of the 2033 Senior Notes converted
$16.9 million
principal amount into
2,396,145
shares of the Company’s Common Stock. In June 2014, we entered into an exchange agreement with a holder of the Company’s 2033 Senior Notes pursuant to which such holder exchanged
$70.4 million
in aggregate principal amount of 2033 Senior Notes for
10,974,431
shares of the Company’s Common Stock and approximately
$0.8 million
in cash representing accrued interest through the date of completion of the exchange. During 2015, pursuant to a conversion right or through exchange agreements we entered with certain holders of our 2033 Senior Notes, holders of our 2033 Senior Notes converted or exchanged
$55.4 million
in aggregate principal amount of 2033 Senior Notes for
8,118,062
shares of the Company’s Common Stock.
On April 1, 2015, we initially announced that our 2033 Senior Notes were convertible through June 2015 by holders of such notes. This conversion right was triggered because the closing price per share of our Common Stock exceeded
$9.19
, or
130%
of the initial conversion price of
$7.07
, for at least
20
of
30
consecutive trading days during the applicable measurement period. We have elected to satisfy our conversion obligation under the 2033 Senior Notes in shares of our Common Stock. Our 2033 Senior Notes continued to be convertible by holders of such notes for the remainder of 2015 and 2016 and continue to be convertible for the first quarter of 2017, and may be convertible thereafter, if
one
or more of the conversion conditions specified in the Indenture is satisfied during future measurement periods. Pursuant to the Indenture, a holder who elects to convert the 2033 Senior Notes will receive
141.4827
shares of our Common Stock plus such number of additional shares as is applicable on the conversion date per $1,000 principal amount of 2033 Senior Notes based on the early conversion provisions in the Indenture. See further discussion in Note 14.
We used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. A binomial lattice model generates two probable outcomes — one up and another down —arising at each point in time, starting from the date of valuation until the maturity date. A lattice model was initially used to determine if the 2033 Senior Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the 2033 Senior Notes will be converted early if the conversion value is greater than the holding value; or (ii) the 2033 Senior Notes will be called if the holding value is greater than both (a) the redemption price (as defined in the Indenture) and (b) the conversion value plus the coupon make-whole payment at the time. If the 2033 Senior Notes are called, then the holders will maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2) converting the 2033 Senior Notes.
Using this lattice model, we valued the embedded derivatives using the “with-and-without method,” where the value of the 2033 Senior Notes including the embedded derivatives is defined as the “with,” and the value of the 2033 Senior Notes excluding the embedded derivatives is defined as the “without.” This method estimates the value of the embedded derivatives by looking at the difference in the values between the 2033 Senior Notes with the embedded derivatives and the value of the 2033 Senior Notes without the embedded derivatives.
The lattice model requires the following inputs: (i) price of our Common Stock; (ii) Conversion Rate (as defined in the Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.
The following table sets forth the inputs to the lattice model used to value the embedded derivative:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
December 31, 2014
|
Stock price
|
$9.30
|
|
$10.05
|
|
$9.99
|
Conversion Rate
|
141.4827
|
|
141.4827
|
|
141.4827
|
Conversion Price
|
$7.07
|
|
$7.07
|
|
$7.07
|
Maturity date
|
February 1, 2033
|
|
February 1, 2033
|
|
February 1, 2033
|
Risk-free interest rate
|
1.22%
|
|
1.33%
|
|
1.40%
|
Estimated stock volatility
|
47%
|
|
50%
|
|
39%
|
Estimated credit spread
|
765 basis points
|
|
1,142 basis points
|
|
1,081 basis points
|
The following table sets forth the fair value of the 2033 Senior Notes with and without the embedded derivatives, and the fair value of the embedded derivatives at
December 31, 2016
,
2015
and
2014
. At
December 31, 2016
,
2015
and
2014
, the principal amount of the 2033 Senior Notes was
$31.9 million
,
$32.2 million
and
$87.6 million
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
December 31, 2014
|
Fair value of 2033 Senior Notes:
|
|
|
|
|
|
With the embedded derivatives
|
$
|
45,204
|
|
|
$
|
48,384
|
|
|
$
|
129,009
|
|
Without the embedded derivatives
|
$
|
28,468
|
|
|
$
|
24,647
|
|
|
$
|
63,062
|
|
Estimated fair value of the embedded derivatives
|
$
|
16,736
|
|
|
$
|
23,737
|
|
|
$
|
65,947
|
|
Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded derivatives. For example, a decrease in our estimated credit spread results in an increase in the estimated value of the embedded derivatives. Conversely, a decrease in the price of our Common Stock results in a decrease in the estimated fair value of the embedded derivatives. For the year ended December 31,
2016
, we observed a decrease in the market price of our Common Stock which primarily resulted in a
$7.0 million
decrease in the estimated fair value of our embedded derivatives recorded in Fair value changes of derivative instruments, net in our Consolidated Statement of Operations. For the year ended December 31,
2015
, we observed an increase in the market price of our Common Stock which primarily resulted in a
$36.6 million
increase in the estimated fair value of our embedded derivatives recorded in Fair value changes of derivative instruments, net in our Consolidated Statement of Operations.
On November 5, 2015, Bio-Reference and certain of its subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A. (“CB”), as lender and administrative agent, as amended (the “Credit Agreement”), which replaced Bio-Reference’s prior credit facility. The Credit Agreement provides for a
$175.0 million
secured revolving credit facility and includes a
$20.0 million
sub-facility for swingline loans and a
$20.0 million
sub-facility for the issuance of letters of credit. Bio-Reference may increase the credit facility to up to
$275.0 million
on a secured basis, subject to the satisfaction of specified conditions. The Credit Agreement matures on November 5, 2020 and is guaranteed by all of Bio-Reference’s domestic subsidiaries. The Credit Agreement is also secured by substantially all assets of Bio-Reference and its domestic subsidiaries, as well as a non-recourse pledge by us of our equity interest in Bio-Reference. Availability under the Credit Agreement is based on a borrowing base comprised of eligible accounts receivables of Bio-Reference and certain of its subsidiaries, as specified therein. Principal under the Credit Agreement is due upon maturity on November 5, 2020.
At Bio-Reference’s option, borrowings under the Credit Agreement (other than swingline loans) will bear interest at (i) the CB floating rate (defined as the higher of (a) the prime rate and (b) the LIBOR rate (adjusted for statutory reserve requirements for Eurocurrency liabilities) for an interest period of one month plus
2.50%
) plus an applicable margin of
0.35%
for the first 12 months and
0.50%
thereafter or (ii) the LIBOR rate (adjusted for statutory reserve requirements for Eurocurrency liabilities) plus an applicable margin of
1.35%
for the first 12 months and
1.50%
thereafter. Swingline loans will bear interest at the CB floating rate plus the applicable margin. The Credit Agreement also calls for other customary fees and charges, including an unused commitment fee of
0.25%
of the lending commitments.
The Credit Agreement contains customary covenants and restrictions, including, without limitation, covenants that require Bio-Reference and its subsidiaries to maintain a minimum fixed charge coverage ratio if availability under the new credit facility falls below a specified amount and to comply with laws and restrictions on the ability of Bio-Reference and its subsidiaries to incur additional indebtedness or to pay dividends and make certain other distributions to the Company, subject to certain exceptions as specified therein. Failure to comply with these covenants would constitute an event of default under the Credit Agreement, notwithstanding the ability of Bio-Reference to meet its debt service obligations. The Credit Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment
of outstanding amounts under the Credit Agreement and execution upon the collateral securing obligations under the Credit Agreement. Substantially all the assets of Bio-Reference and its subsidiaries are restricted from sale, transfer, lease, disposal or distributions to the Company, subject to certain exceptions. Bio-Reference and its subsidiaries net assets as of
December 31, 2016
were approximately
$1.0 billion
, which includes goodwill of
$401.8 million
and intangible assets of
$488.7 million
.
In addition to the Credit Agreement with CB, we have line of credit agreements with
ten
other financial institutions as of
December 31, 2016
and
ten
other financial institutions as of
December 31, 2015
in United States, Chile and Spain. These lines of credit are used primarily as a source of working capital for inventory purchases.
The following table summarizes the amounts outstanding under the Bio-Reference, Chilean and Spanish lines of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Balance Outstanding
|
Lender
|
|
Interest rate on
borrowings at December 31, 2016
|
|
Credit line
capacity
|
|
December 31,
2016
|
|
December 31,
2015
|
JP Morgan Chase
|
|
3.75%
|
|
$
|
175,000
|
|
|
$
|
38,809
|
|
|
$
|
72,107
|
|
Itau Bank
|
|
5.50%
|
|
1,450
|
|
|
419
|
|
|
282
|
|
Bank of Chile
|
|
6.60%
|
|
2,500
|
|
|
1,619
|
|
|
2,313
|
|
BICE Bank
|
|
5.50%
|
|
2,000
|
|
|
1,538
|
|
|
1,502
|
|
BBVA Bank
|
|
5.50%
|
|
2,300
|
|
|
1,063
|
|
|
1,825
|
|
Security Bank
|
|
N/A
|
|
—
|
|
|
—
|
|
|
145
|
|
Estado Bank
|
|
5.50%
|
|
2,400
|
|
|
1,870
|
|
|
2,210
|
|
Santander Bank
|
|
5.50%
|
|
3,000
|
|
|
1,196
|
|
|
1,345
|
|
Scotiabank
|
|
5.00%
|
|
1,300
|
|
|
789
|
|
|
939
|
|
Corpbanca
|
|
5.00%
|
|
500
|
|
|
18
|
|
|
—
|
|
Banco Bilbao Vizcaya
|
|
2.90%
|
|
263
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
$
|
190,713
|
|
|
$
|
47,321
|
|
|
$
|
82,668
|
|
At
December 31, 2016
and
2015
, the weighted average interest rate on our lines of credit was approximately
4.7%
and
4.3%
, respectively.
At
December 31, 2016
and
2015
, we had notes payable and other debt (excluding the 2033 Senior Notes, the Credit Agreement and amounts outstanding under lines of credit) as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31,
2016
|
|
December 31,
2015
|
Current portion of notes payable
|
$
|
3,681
|
|
|
$
|
1,054
|
|
Other long-term liabilities
|
2,090
|
|
|
1,963
|
|
Total
|
$
|
5,771
|
|
|
$
|
3,017
|
|
The notes and other debt mature at various dates ranging from
2017
through
2024
bearing variable interest rates from
1.8%
up to
6.3%
. The weighted average interest rate on the notes and other debt at
December 31, 2016
and
2015
, was
3.2%
and
4.3%
, respectively. The notes are secured by our office space in Barcelona.
Note 7 Shareholders’ Equity
Our authorized capital stock consists of
750,000,000
shares of Common Stock, par value
$0.01
per share, and
10,000,000
shares of Preferred Stock, par value
$0.01
per share.
Common Stock
Subject to the rights of the holders of any shares of Preferred Stock currently outstanding or which may be issued in the future, the holders of the Common Stock are entitled to receive dividends from our funds legally available when, as and if declared by our Board of Directors, and are entitled to share ratably in all of our assets available for distribution to holders of Common Stock upon the liquidation, dissolution or winding-up of our affairs subject to the liquidation preference, if any, of any then outstanding shares of Preferred Stock. Holders of our Common Stock do not have any preemptive, subscription, redemption or conversion rights. Holders of our Common Stock are entitled to one vote per share on all matters which they are entitled to vote upon at meetings of stockholders or upon actions taken by written consent pursuant to Delaware corporate law. The holders of our Common Stock do not have cumulative voting rights, which means that the holders of a plurality of the outstanding shares can elect all of our directors. All of the shares of our Common Stock currently issued and outstanding are fully-paid and nonassessable. No dividends have been paid to holders of our Common Stock since our incorporation, and no cash dividends are anticipated to be declared or paid on our Common Stock in the reasonably foreseeable future.
In addition to our equity-based compensation plans, we have issued warrants to purchase our Common Stock. Refer to Note 9 for additional information on our share-based compensation plans. The table below provides additional information for warrants outstanding as of
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
Warrants
|
Number of
warrants
|
|
Weighted
average
exercise price
|
|
Expiration date
|
Outstanding at December 31, 2015
|
2,173,723
|
|
|
$
|
0.86
|
|
|
Various from
January 2017 through
March 2017
|
Exercised
|
(1,534,125
|
)
|
|
0.86
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
Outstanding and Exercisable at December 31, 2016
|
639,598
|
|
|
$
|
0.86
|
|
|
Various from
January 2017 through
March 2017
|
Of the
1,534,125
Common Stock warrants exercised,
2,564
shares were surrendered in lieu of a cash payment via the net exercise feature of the warrant agreements.
Preferred Stock
Under our certificate of incorporation, our Board of Directors has the authority, without further action by stockholders, to designate up to
10 million
shares of Preferred Stock in one or more series and to fix or alter, from time to time, the designations, powers and rights of each series of Preferred Stock and the qualifications, limitations or restrictions of any series of Preferred Stock, including dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preference of any wholly issued series of Preferred Stock, any or all of which may be greater than the rights of the Common Stock, and to establish the number of shares constituting any such series.
Of the authorized Preferred Stock,
4,000,000
shares,
500,000
shares and
2,000,000
shares were designated Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively. As of December 31, 2016 and 2015, there were
no
shares of Series A Preferred Stock, Series C Preferred Stock or Series D Preferred Stock issued or outstanding.
Note 8 Accumulated Other Comprehensive Income (Loss)
For the year ended
December 31, 2016
, changes in Accumulated other comprehensive income (loss), net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign
currency translation
|
|
Unrealized
gain (loss) in
Accumulated
OCI
|
|
Total
|
Balance at December 31, 2015
|
$
|
(21,791
|
)
|
|
$
|
(746
|
)
|
|
$
|
(22,537
|
)
|
Other comprehensive income (loss) before reclassifications
|
(4,955
|
)
|
|
(3,810
|
)
|
|
(8,765
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
|
—
|
|
|
4,293
|
|
|
4,293
|
|
Net other comprehensive loss
|
(4,955
|
)
|
|
483
|
|
|
(4,472
|
)
|
Balance at December 31, 2016
|
$
|
(26,746
|
)
|
|
$
|
(263
|
)
|
|
$
|
(27,009
|
)
|
Amounts reclassified from Accumulated other comprehensive income (loss) for the year ended
December 31, 2016
includes other-than-temporary impairment charges on our investments in Xenetic, ARNO and RXi as discussed in Note 4. Amounts reclassified for our available for sale investments were based on the specific identification method.
For the
year ended December 31, 2015
, changes in Accumulated other comprehensive income, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign
currency translation
|
|
Unrealized
gain (loss) in
Accumulated
OCI
|
|
Total
|
Balance at December 31, 2014
|
$
|
(6,717
|
)
|
|
$
|
(5,675
|
)
|
|
$
|
(12,392
|
)
|
Other comprehensive income (loss) before reclassifications
|
(15,074
|
)
|
|
(2,378
|
)
|
|
(17,452
|
)
|
Amounts reclassified from accumulated other comprehensive income, net of tax
|
—
|
|
|
7,307
|
|
|
7,307
|
|
Net other comprehensive loss
|
(15,074
|
)
|
|
4,929
|
|
|
(10,145
|
)
|
Balance at December 31, 2015
|
$
|
(21,791
|
)
|
|
$
|
(746
|
)
|
|
$
|
(22,537
|
)
|
Amounts reclassified from Accumulated other comprehensive income (loss) for the year ended
December 31, 2015
includes an other-than-temporary impairment charge on our investment in RXi as discussed in Note 4. Amounts reclassified for our available for sale investments were based on the specific identification method.
Note 9 Equity-Based Compensation
We maintain
six
equity-based incentive compensation plans, the 2016 Equity Incentive Plan, the Acuity Pharmaceuticals, Inc. 2003 Equity Incentive Plan, the 2007 Equity Incentive Plan, the 2000 Stock Option Plan, the Modigene Inc. 2005 Stock Incentive Plan and the Modigene Inc. 2007 Equity Incentive Plan that provide for grants of stock options and restricted stock to our directors, officers, key employees and certain outside consultants. Equity awards granted under our 2016 Equity Incentive Plan are exercisable for a period of up to
10
years from the date of grant. Equity awards granted under our 2007 Equity Incentive Plan are exercisable for a period of either
7
years or
10
years from the date of grant. Equity awards granted under our 2000 Stock Option Plan, 2003 Equity Incentive Plan and the
two
Modigene Plans are exercisable for a period of up to
10
years from date of grant. Vesting periods range from immediate to
5
years.
We classify the cash flows resulting from the tax benefit that arises when the tax deductions exceed the compensation cost recognized for those equity awards (excess tax benefits) as financing cash inflows. There were
no
excess tax benefits for the years ended
December 31, 2016
,
2015
, and
2014
.
Equity-based compensation arrangements to non-employees are accounted for at their fair value on the measurement date. The measurement of equity-based compensation to non-employees is subject to periodic adjustment over the vesting period of the equity instruments.
Valuation and Expense Information
We recorded equity-based compensation expense of
$42.7 million
,
$26.1 million
and
$14.8 million
for the
years ended December 31, 2016
,
2015
, and
2014
, respectively, all of which were reflected as operating expenses. Of the
$42.7 million
of equity based compensation expense recorded in the year ended
December 31, 2016
,
$33.4 million
was recorded as selling, general and administrative expenses,
$7.5 million
was recorded as research and development expenses and
$1.8 million
was recorded as a cost of revenue. Of the
$26.1 million
of equity based compensation expense recorded in the year ended
December 31, 2015
,
$17.4 million
was recorded as selling, general and administrative expense and
$7.9 million
was recorded as research and development expenses and
$0.8 million
was recorded as a cost of revenue. Of the
$14.8 million
of equity based compensation expense recorded in the year ended
December 31, 2014
,
$9.7 million
was recorded as selling, general and administrative expense and
$5.0 million
was recorded as research and development expenses.
We estimate forfeitures of stock options and recognize compensation cost only for those awards expected to vest. Forfeiture rates are determined for all employees and non-employee directors based on historical experience and our estimate of future vesting. Estimated forfeiture rates are adjusted from time to time based on actual forfeiture experience.
As of
December 31, 2016
, there was
$72.6 million
of unrecognized compensation cost related to the stock options granted under our equity-based incentive compensation plans. Such cost is expected to be recognized over a weighted-average period of approximately
3.0 years
.
Stock Options
We estimate the fair value of each stock option on the date of grant using the Black-Scholes-Merton Model option-pricing formula and amortize the fair value to expense over the stock option’s vesting period using the straight-line attribution approach for employees and non-employee directors, and for awards issued to non-employees we recognize compensation expense on a graded basis, with most of the compensation expense being recorded during the initial periods of vesting. We apply the following assumptions in our Black-Scholes-Merton Model option-pricing formula:
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
Year Ended
December 31,
2015
|
|
Year Ended
December 31,
2014
|
Expected term (in years)
|
1.0 - 10.0
|
|
1.0 - 10.0
|
|
1.0 - 10.0
|
Risk-free interest rate
|
0.71% - 2.51%
|
|
0.26% - 2.42%
|
|
0.10% - 2.65%
|
Expected volatility
|
38% - 64%
|
|
32% - 64%
|
|
31% - 72%
|
Expected dividend yield
|
0%
|
|
0%
|
|
0%
|
Expected Term: For the expected term of options granted to employees and non-employee directors, we used an estimate of the expected option life based on historical experience. The expected term of stock options issued to non-employee consultants is the remaining contractual life of the options issued.
Risk-Free Interest Rate: The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the option.
Expected Volatility: The expected volatility for stock options was based on the historical volatility of our Common Stock.
Expected Dividend Yield: We do not intend to pay dividends on Common Stock for the foreseeable future. Accordingly, we used a dividend yield of zero in the assumptions.
We maintain incentive stock plans that provide for the grants of stock options to our directors, officers, employees and non-employee consultants. As of
December 31, 2016
, there were
26,866,484
shares of Common Stock reserved for issuance under our 2016 Equity Incentive Plan and our 2007 Equity Incentive Plan. We intend to issue new shares upon the exercise of stock options. Stock options granted under these plans have been granted at an option price equal to the closing market value of the stock on the date of the grant. Stock options granted under these plans to employees typically become exercisable over four years in equal annual installments after the date of grant, and stock options granted to non-employee directors become exercisable in full one-year after the grant date, subject to, in each case, continuous service with us during the applicable vesting period. We assumed stock options to grant Common Stock as part of the mergers with Acuity Pharmaceuticals, Inc., Froptix, Inc., OPKO Biologics and Bio-Reference, which reflected various vesting schedules, including monthly vesting to employees and non-employee consultants.
A summary of option activity under our stock option plans as of
December 31, 2016
, and the changes during the year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
Number of
options
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term (years)
|
|
Aggregate
intrinsic value
(in thousands)
|
Outstanding at December 31, 2015
|
31,286,787
|
|
|
$
|
9.55
|
|
|
6.97
|
|
$
|
63,902
|
|
Granted
|
7,945,500
|
|
|
$
|
10.22
|
|
|
|
|
|
Exercised
|
(1,836,572
|
)
|
|
$
|
4.67
|
|
|
|
|
|
Forfeited
|
(1,472,314
|
)
|
|
$
|
11.28
|
|
|
|
|
|
Expired
|
(1,282,887
|
)
|
|
$
|
1.53
|
|
|
|
|
|
Outstanding at December 31, 2016
|
34,640,514
|
|
|
$
|
10.18
|
|
|
6.79
|
|
$
|
32,984
|
|
Vested and expected to vest at December 31, 2016
|
31,724,227
|
|
|
$
|
10.07
|
|
|
6.64
|
|
$
|
32,477
|
|
Exercisable at December 31, 2016
|
14,494,573
|
|
|
$
|
8.59
|
|
|
4.50
|
|
$
|
29,385
|
|
The total intrinsic value of stock options exercised for the
years ended December 31, 2016
,
2015
, and
2014
was
$9.9 million
,
$69.9 million
and
$14.6 million
, respectively.
The weighted average grant date fair value of stock options granted for the
years ended December 31, 2016
,
2015
, and
2014
was
$4.78
,
$5.00
, and
$4.64
, respectively. The total fair value of stock options vested during the
years ended December 31, 2016
,
2015
, and
2014
was
$30.2 million
,
$13.3 million
and
$10.9 million
, respectively.
Note 10 Income Taxes
We operate and are required to file tax returns in the U.S. and various foreign jurisdictions.
The benefit (provision) for incomes taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Current
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
430
|
|
|
$
|
225
|
|
State
|
(2,931
|
)
|
|
(2,157
|
)
|
|
247
|
|
Foreign
|
(2,438
|
)
|
|
(8,134
|
)
|
|
(1,514
|
)
|
|
(5,369
|
)
|
|
(9,861
|
)
|
|
(1,042
|
)
|
Deferred
|
|
|
|
|
|
Federal
|
25,739
|
|
|
109,286
|
|
|
—
|
|
State
|
10,657
|
|
|
12,327
|
|
|
(167
|
)
|
Foreign
|
25,088
|
|
|
1,923
|
|
|
1,185
|
|
|
61,484
|
|
|
123,536
|
|
|
1,018
|
|
Total, net
|
$
|
56,115
|
|
|
$
|
113,675
|
|
|
$
|
(24
|
)
|
Deferred income tax assets and liabilities as of
December 31, 2016
and
2015
are comprised of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
Deferred income tax assets:
|
|
|
|
Federal net operating loss
|
$
|
76,792
|
|
|
$
|
71,658
|
|
State net operating loss
|
36,285
|
|
|
14,227
|
|
Foreign net operating loss
|
32,895
|
|
|
33,701
|
|
Research and development expense
|
3,246
|
|
|
5,138
|
|
Tax credits
|
20,894
|
|
|
7,388
|
|
Stock options
|
36,485
|
|
|
24,756
|
|
Accruals
|
8,306
|
|
|
7,086
|
|
Equity investments
|
7,011
|
|
|
4,420
|
|
Bad debts
|
14,283
|
|
|
38,809
|
|
Lease liability
|
3,233
|
|
|
7,022
|
|
Foreign credits
|
10,253
|
|
|
—
|
|
Available for sale securities
|
4,792
|
|
|
—
|
|
Other
|
7,795
|
|
|
7,104
|
|
Deferred income tax assets
|
262,270
|
|
|
221,309
|
|
Deferred income tax liabilities:
|
|
|
|
Intangible assets
|
(354,043
|
)
|
|
(386,588
|
)
|
Fixed assets
|
(13,710
|
)
|
|
(17,072
|
)
|
Other
|
(2,121
|
)
|
|
(1,538
|
)
|
Deferred income tax liabilities
|
(369,874
|
)
|
|
(405,198
|
)
|
Net deferred income tax liabilities
|
(107,604
|
)
|
|
(183,889
|
)
|
Valuation allowance
|
(55,415
|
)
|
|
(42,147
|
)
|
Net deferred income tax liabilities *
|
$
|
(163,019
|
)
|
|
$
|
(226,036
|
)
|
|
|
|
|
* The components of December 31, 2016 Net deferred income tax liability is presented on the Consolidated Balance Sheet as follows: $(165,331) within Deferred tax liabilities, net and $2,312 within Other assets.
|
|
|
|
The changes in deferred income tax assets, liabilities and valuation allowances at
December 31, 2016
reflect the acquisition of various legal entities, including the tax attributes. The acquisitions were accounted for under U.S. GAAP as stock acquisitions and business combinations. As of
December 31, 2016
, we have federal, state and foreign net operating loss carryforwards of approximately
$409.3 million
,
$406.6 million
and
$186.6 million
, respectively, that expire at various dates through 2036. Included in the foreign net operating losses is
$98.6 million
related to OPKO Biologics. As of
December 31, 2016
, we have research and development tax credit carryforwards of approximately
$18.5 million
that expire in varying amounts through 2036. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.
As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of
December 31, 2016
and
2015
, that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by
$33.7
million if and when such deferred tax assets are ultimately realized. The Company uses ASC 740 ordering when determining when excess tax benefits have been realized.
Under Section 382 of the Internal Revenue Code of 1986, as amended, certain significant changes in ownership may restrict the future utilization of our income tax loss carryforwards and income tax credit carryforwards in the U.S. The annual limitation is equal to the value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date occurs). This limitation may be increased under the IRC Section 338 Approach (IRS approved methodology for determining recognized Built-In Gain). As a result, federal net operating losses and tax credits may expire before we are able to fully utilize them.
During 2008, we conducted a study to determine the impact of the various ownership changes that occurred during 2007 and 2008. As a result, we have concluded that the annual utilization of our net operating loss carryforwards (“NOLs”) and tax credits is subject to a limitation pursuant to Internal Revenue Code Section 382. Under the tax law, such NOLs and tax credits are subject to expiration from
15
to
20
years after they were generated. As a result of the annual limitation that may be imposed on such tax attributes and the statutory expiration period, some of these tax attributes may expire prior to our being able to use them. There is no current impact on these financial statements as a result of the annual limitation. This study did not conclude whether OPKO's predecessor, eXegenics, pre-merger NOLs were limited under Section 382. As such, of the
$409.3 million
of federal net operating loss carryforwards, at least approximately
$53.4 million
may not be able to be utilized.
Uncertain Income Tax Positions
We file federal income tax returns in the U.S. and various foreign jurisdictions, as well as with various U.S. states and the Ontario and Quebec provinces in Canada. We are subject to routine tax audits in all jurisdictions for which we file tax returns. Tax audits by their very nature are often complex and can require several years to complete. It is reasonably possible that some audits will close within the next twelve months, which we do not believe would result in a material change to our accrued uncertain tax positions.
U.S. Federal: Under the tax statute of limitations applicable to the Internal Revenue Code, we are no longer subject to U.S. federal income tax examinations by the Internal Revenue Service for years before 2013. However, because we are carrying forward income tax attributes, such as net operating losses and tax credits from 2013 and earlier tax years, these attributes can still be audited when utilized on returns filed in the future.
State: Under the statute of limitations applicable to most state income tax laws, we are no longer subject to state income tax examinations by tax authorities for years before 2013 in states in which we have filed income tax returns. Certain states may take the position that we are subject to income tax in such states even though we have not filed income tax returns in such states and, depending on the varying state income tax statutes and administrative practices, the statute of limitations in such states may extend to years before 2013.
Foreign: Under the statute of limitations applicable to our foreign operations, we are generally no longer subject to tax examination for years before 2011 in jurisdictions where we have filed income tax returns.
Unrecognized Tax Benefits
As of
December 31, 2016
,
2015
, and
2014
, the total amount of gross unrecognized tax benefits was approximately
$27.5 million
,
$8.6 million
, and
$5.9 million
, respectively. As of
December 31, 2016
, the total gross unrecognized tax benefit of
$27.5 million
consisted of increases of
$19.9 million
as a result of current year activity, and decreases of
$0.3 million
as a result of the lapse of statutes of limitations. As of
December 31, 2016
, the total amount of unrecognized tax benefits that, if recognized, would affect our effective income tax rate was
$6.1 million
. We account for any applicable interest and penalties on uncertain tax positions as a component of income tax expense and we recognized
$0.1 million
and
$0.3 million
of interest expense for the years ended
December 31, 2016
and
2015
, respectively. As of
December 31, 2015
and
2014
,
$0.7 million
and
$0.9 million
of the unrecognized tax benefits, if recognized, would have affected our effective income tax rate. We believe it is reasonably possible that approximately
$4.1 million
of unrecognized tax benefits may be recognized within the next
twelve
months.
The following summarizes the changes in our gross unrecognized income tax benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Unrecognized tax benefits at beginning of period
|
$
|
8,595
|
|
|
$
|
5,890
|
|
|
$
|
9,231
|
|
Gross increases – tax positions in prior period
|
1,443
|
|
|
955
|
|
|
524
|
|
Gross increases – tax positions in current period
|
18,472
|
|
|
2,543
|
|
|
193
|
|
Gross decreases – tax positions in prior period
|
(671
|
)
|
|
(176
|
)
|
|
(396
|
)
|
Lapse of Statute of Limitations
|
(294
|
)
|
|
(617
|
)
|
|
(472
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
(3,190
|
)
|
Unrecognized tax benefits at end of period
|
$
|
27,545
|
|
|
$
|
8,595
|
|
|
$
|
5,890
|
|
Other Income Tax Disclosures
The significant elements contributing to the difference between the federal statutory tax rate and the effective tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
5.2
|
%
|
|
2.8
|
%
|
|
2.5
|
%
|
Foreign income tax
|
1.2
|
%
|
|
(7.8
|
)%
|
|
(10.3
|
)%
|
Research and development tax credits
|
5.4
|
%
|
|
—
|
%
|
|
1.1
|
%
|
Non-Deductible components of Convertible Debt
|
2.2
|
%
|
|
(9.4
|
)%
|
|
(3.8
|
)%
|
Valuation allowance
|
9.5
|
%
|
|
61.1
|
%
|
|
(25.3
|
)%
|
Rate change effect
|
21.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Non-deductible foreign stock compensation
|
(1.9
|
)%
|
|
(0.7
|
)%
|
|
—
|
%
|
Other
|
(8.7
|
)%
|
|
(1.0
|
)%
|
|
0.8
|
%
|
Total
|
69.1
|
%
|
|
80.0
|
%
|
|
—
|
%
|
The following table reconciles our losses before income taxes between U.S. and foreign jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Pre-tax income (loss):
|
|
|
|
|
|
U.S.
|
$
|
(92,175
|
)
|
|
$
|
(113,612
|
)
|
|
$
|
(84,075
|
)
|
Foreign
|
10,977
|
|
|
(30,091
|
)
|
|
(87,567
|
)
|
Total
|
$
|
(81,198
|
)
|
|
$
|
(143,703
|
)
|
|
$
|
(171,642
|
)
|
We intend to indefinitely reinvest the earnings from our foreign subsidiaries, primarily for purposes of continuing significant research and development activities related to intellectual property owned and developed by our foreign subsidiaries. The accumulated earnings are the most significant component of the basis difference which is indefinitely reinvested. The aggregate undistributed earnings of our foreign subsidiaries for which no deferred tax liability has been recorded is approximately
$31.2 million
as of December 31, 2016. Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable because of the complexities of the hypothetical calculation.
Note 11 Related Party Transactions
We hold investments in Zebra (ownership
28%
), Sevion (
3%
), Neovasc (
4%
), ChromaDex Corporation (
2%
), MabVax (
4%
), COCP (
8%
), ARNO (
5%
), NIMS
1%
and BioCardia (
5%
). These investments were considered related party transactions as a result of our executive management’s ownership interests and/or board representation in these entities. See further discussion of our investments in Note 4. In July 2015, we made an additional
$0.5 million
investment in a private placement transaction with Sevion pursuant to which we acquired
66,667
shares of Series C Convertible Preferred Stock convertible into
666,667
shares of common stock and warrants to purchase
333,333
shares of common stock. In October 2015, we made an additional
$0.4 million
investment in MabVax pursuant to which we acquired
340,909
shares of common stock at
$1.10
and
170,454
warrants to purchase shares of common stock. In November 2015, we made an additional
$1.0 million
investment in Zebra pursuant to which we acquired
420,000
shares of Series A-2 Preferred Stock. In January 2016, we invested an additional
$0.3 million
in ARNO for
714,285
shares of its common stock and in August 2016, we invested an additional
$0.3 million
in ARNO for
714,285
shares of its common stock and warrants to purchase
357,142
shares of its common stock. In August 2016 we invested an additional
$1.0 million
in MabVax for
207,900
shares of its common stock and warrants to purchase
415,800
shares of its common stock. In September 2016, we invested an additional
$2.0 million
in COCP for
4,878,050
shares of its common stock.
In October 2016, we entered into a consulting agreement to provide strategic advisory services to BioCardia. In connection with the consulting agreement, BioCardia granted us
5,027,726
common stock options. In December 2016, we purchased
19,230,769
shares of BioCardia from Dr. Frost for
$2.5 million
. We have also purchased shares of BioCardia in the open market. BioCardia is a related party as a result of our executive management’s ownership interest and board representation in BioCardia and its predecessor, Tiger X Medical, Inc. In October 2016, BioCardia completed its merger with Tiger X Medical, Inc., to which Tiger X Medical, Inc. was the surviving entity and the name of the issuer was changed to BioCardia.
In November 2016, we made a
$0.2 million
loan to Sevion which was considered a related party transaction as a result of our executive management’s ownership interests and board representation in Sevion.
In November 2016, we entered into a Pledge Agreement with the Museum of Science, Inc. and the Museum of Science Endowment Fund, Inc. pursuant to which we will contribute an aggregate of
$1.0 million
over a four-year period for constructing, equipping and the general operation of the Frost Science Museum. Dr. Frost and Mr. Pfenniger serve on the Board of Trustees of the Frost Science Museum and Mr. Pfenniger is the Vice Chairman of the Board of Trustees.
We lease office space from Frost Real Estate Holdings, LLC (“Frost Holdings”) in Miami, Florida, where our principal executive offices are located. Effective May 28, 2015, we entered into an amendment to our lease agreement with Frost Holdings. The lease, as amended, is for approximately
25,000
square feet of space. The lease provides for payments of approximately
$66 thousand
per month in the first year increasing annually to
$75 thousand
per month in the fifth year, plus applicable sales taxes. The rent is inclusive of operating expenses, property taxes and parking. The rent was reduced by
$0.2 million
for the cost of tenant improvements.
Our wholly-owned subsidiary, Bio-Reference, purchases and uses certain products acquired from InCellDx, Inc., a company in which we hold a
27%
minority interest.
We reimburse Dr. Frost for Company-related use by Dr. Frost and our other executives of an airplane owned by a company that is beneficially owned by Dr. Frost. We reimburse Dr. Frost for out-of-pocket operating costs for the use of the airplane by Dr. Frost or Company executives for Company-related business. We do not reimburse Dr. Frost for personal use of the airplane by Dr. Frost or any other executive. For the
years ended December 31, 2016
,
2015
, and
2014
, we recognized approximately
$298 thousand
,
$595 thousand
, and
$175 thousand
, respectively, for Company-related travel by Dr. Frost and other OPKO executives.
Note 12 Employee Benefit Plans
Effective January 1, 2007, the OPKO Health Savings and Retirement Plan (the “Plan”) permits employees to contribute up to
100%
of qualified pre-tax annual compensation up to annual statutory limitations. The discretionary company match for employee contributions to the Plan is
100%
up to the first
4%
of the participant’s earnings contributed to the Plan. Our matching contributions to the Plan were approximately
$0.7 million
,
$0.8 million
and
$0.6 million
for the years ended
December 31, 2016
,
2015
, and
2014
respectively.
Bio-Reference Laboratories, Inc. sponsors a 401(k) Profit-Sharing Plan (the “Bio-Reference Plan”). Employees become eligible for participation after attaining the age of eighteen and completing one year of service. Participants may elect to contribute up to
60%
of their compensation, as defined in the Bio-Reference Plan, to a maximum allowed by the Internal Revenue Service. Bio-Reference makes a matching contribution to the plan for each participant who has elected to make tax-deferred contributions. The discretionary company match for employee contributions to the Bio-Reference Plan is
100%
up to the first
3%
of the participant’s earnings contributed to the Bio-Reference Plan, with an annual maximum match of
$1 thousand
. Bio-Reference Laboratories, Inc. elected to make a matching contribution which amounted to
$1.8 million
for the year ended
December 31, 2016
.
GeneDx, Inc. sponsors a 401(k) Profit-Sharing Plan (the “GeneDx Plan”). Employees become eligible for participation after attaining the age of eighteen and completing one month of service. Participants may elect to contribute up to
100%
of their compensation, as defined in the GeneDx Plan, to a maximum allowed by the Internal Revenue Service. GeneDx, Inc. makes a matching contribution to the plan for each participant who has elected to make tax-deferred contributions. The discretionary company match for employee contributions to the GeneDx Plan is
100%
up to the first
3%
, plus
50%
of the next
2%
of the participant’s earnings contributed to the GeneDx Plan. GeneDx, Inc. elected to make a matching contribution which amounted to
$1.0 million
for the year ended
December 31, 2016
.
Note 13 Commitments and Contingencies
In connection with our acquisitions of CURNA, OPKO Diagnostics, OPKO Health Europe and OPKO Renal, we agreed to pay future consideration to the sellers upon the achievement of certain events. As a result,
as of December 31, 2016
, we recorded
$45.1 million
as contingent consideration, with
$0.3 million
recorded within Accrued expenses and
$44.8 million
recorded within Other long-term liabilities in the accompanying Consolidated Balance Sheet. Refer to Note 5. During the year ended December 31, 2016, we satisfied a
$25.0 million
contingent payment to the former owners of OPKO Renal through the issuance of
2,611,648
shares of our common stock. During the year ended
December 31, 2015
, we satisfied a
$20.0 million
contingent payment to the former owners of OPKO Renal through the issuance of
1,194,337
shares of our common stock.
On or around October 21, 2014, we received a Civil Investigative Demand (“Demand”) from the U.S. Attorney’s Office for the Middle District of Tennessee (“Attorney’s Office”). The Demand concerns an investigation of allegations that the Company or one of its affiliated entities or other parties submitted false claims for payment related to services provided to government healthcare program beneficiaries in violation of the False Claims Act, 31 U.S.C. Section 3729. We entered into a settlement agreement resolving the matter in May 2016, and it did not have a financial impact on the Company.
Following the announcement of entry into an agreement and plan of merger with Bio-Reference, four putative class action complaints challenging the merger were filed in the Superior Court of New Jersey in Bergen County (the “Court”). In September 2015, the parties executed a stipulation and agreement of compromise, settlement and release resolving all matters between them. In January 2016, the Court entered an order finally approving the settlement. The settlement did not have a material impact on our business, financial condition, results of operations or cash flows.
Under a license agreement one of our subsidiaries has with Washington University in St. Louis, we are obligated to pay Washington University a single digit percentage of any sublicensing payment we receive in connection with a sublicense of our rights to Washington University patents subject to certain exceptions. In connection with the Pfizer Transaction, we sublicensed to Pfizer the sole remaining patent licensed to us by Washington University and paid to Washington University the sublicensing payment we believe is due under the license agreement. Washington University disagreed with the computation of the sublicense payment and notified us that it wanted to review additional information relating to the sublicense and the Pfizer Transaction to determine whether additional amounts were owed to it. In May 2016, the parties entered into a settlement agreement resolving the matter. The settlement did not have a material impact on our business, financial condition, results of operations or cash flows.
On December 18, 2013, Bio-Reference filed an action in the Superior Court of New Jersey against Horizon, captioned Bio-Reference Laboratories, Inc. v. Horizon Healthcare Services, Inc. d/b/a Horizon Blue Cross Blue Shield of New Jersey, Docket No. BER L-009748-13 (N.J. Super. Ct. Bergen County). Bio-Reference has been an in-network provider with Horizon’s PPO network for more than
20
years and filed the lawsuit after attempts to resolve its dispute with Horizon were unsuccessful.
The parties have agreed to a full and final settlement of the matter with an effective date of March 31, 2016, based on an execution date of May 11, 2016. Among other consideration, under the terms of the settlement, Horizon paid Bio-Reference a negotiated settlement for the disputed claims and Bio-Reference’s current PPO contract will remain in effect through December 31, 2018. The settlement was not material to Revenue from services in our Consolidated Statement of Operations for the year ended
December 31, 2016
.
We accrue a liability for legal contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced in the paragraph below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, we provide disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, we will provide disclosure to that effect.
From time to time, we may receive inquiries, document requests, or subpoenas from the Department of Justice, the Office of Inspector General and Office for Civil Rights (“OCR”) of the Department of Health and Human Services, the Centers for Medicare and Medicaid Services, various payors and fiscal intermediaries, and other state and federal regulators regarding investigations, audits and reviews. In addition to the matters discussed in this note, we are currently responding to subpoenas or document requests for various matters relating to our laboratory operations. In addition, we are subject to other claims and lawsuits arising in the ordinary course of our business. Some pending or threatened proceedings against us may involve potentially substantial amounts as well as the possibility of civil, criminal, or administrative fines, penalties, or other sanctions, which could be material. Settlements of suits involving the types of issues that we routinely confront may require monetary payments as well as corporate integrity agreements. Additionally, qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. Also, from time to time, we may detect issues of non-compliance with federal healthcare laws pertaining to claims submission and reimbursement practices and/or financial relationships with physicians, among other things. We may avail ourselves of various mechanisms to address these issues, including participation in voluntary disclosure protocols. Participating in voluntary disclosure protocols can have the potential for significant settlement obligations or even enforcement action. The Company generally has cooperated, and intends to continue to cooperate, with appropriate regulatory authorities as and when investigations, audits and inquiries arise. We are a party to other litigation in the ordinary course of business. We do not believe that any such litigation will have a material adverse effect on our business, financial condition, results of operations or cash flows.
We expect to continue to incur substantial research and development expenses, including expenses related to the hiring of personnel and additional clinical trials. We expect that selling, general and administrative expenses will also increase as we expand our sales, marketing and administrative staff and add infrastructure, particularly as it relates to the launch of
Rayaldee
. We do not anticipate that we will generate substantial revenue from the sale of proprietary pharmaceutical products or certain of our diagnostic products for some time and we have generated only limited revenue from our pharmaceutical operations in Chile, Mexico, Israel, Spain, and Ireland, and from sale of the
4Kscore
test. If we acquire additional assets or companies, accelerate our product development programs or initiate additional clinical trials, we will need additional funds. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials or research and development programs or possible acquisitions.
We have employment agreements with certain executives of Bio-Reference which provide for compensation and certain other benefits and for severance payments under certain circumstances. During the
year ended December 31, 2016
, we recognized
$17.9 million
of severance costs pursuant to these employment agreements as a component of Selling, general and administrative expense.
At
December 31, 2016
, we were committed to make future purchases for inventory and other items in 2017 that occur in the ordinary course of business under various purchase arrangements with fixed purchase provisions aggregating
$90.3 million
.
Note 14 Strategic Alliances
Vifor Fresenius Medical Renal Care Pharma Ltd
We plan to develop a portfolio of product candidates through a combination of internal development and external partnerships. In May 2016, EirGen, our wholly-owned subsidiary, and Vifor Fresenius Medical Renal Care Pharma Ltd (“VFMCRP”), entered into a Development and License Agreement (the “VFMCRP Agreement”) for the development and
marketing of
Rayaldee
(the “Product”) worldwide, except for (i) the United States, (ii) any country in Central America or South America (excluding Mexico), (iii) Russia, (iv) China, (v) Japan, (vi) Ukraine, (vii) Belorussia, (viii) Azerbaijan, (ix) Kazakhstan, and (x) Taiwan (the “Territory”). The license to VFMCRP potentially covers all therapeutic and prophylactic uses of the Product in human patients (the “Field”), provided that initially the license is for the use of the Product for the treatment or prevention of secondary hyperparathyroidism related to patients with stage 3 or 4 chronic kidney disease and vitamin D insufficiency/deficiency (the “Initial Indication”).
Under the terms of the VFMCRP Agreement, EirGen granted to VFMCRP an exclusive license in the Territory in the Field to use certain EirGen patents and technology to make, have made, use, sell, offer for sale, and import Products and to develop, commercialize, have commercialized, and otherwise exploit the Product. EirGen received a non-refundable and non-creditable initial payment of
$50 million
. EirGen is also eligible to receive up to an additional
$37 million
in regulatory milestones (“Regulatory Milestones”) and
$195 million
in launch and sales-based milestones (“Sales Milestones”), and will receive tiered, double digit royalty payments or a minimum royalty, whichever is greater, upon the commencement of sales of the Product within the Territory and in the Field.
As part of the arrangement, the companies will share responsibility for the conduct of trials specified within an agreed-upon development plan, with each company leading certain activities within the plan. EirGen will lead the manufacturing activities within and outside the Territory and the commercialization activities outside the Territory and outside the Field in the Territory and VFMCRP will lead the commercialization activities in the Territory and the Field. For the initial development plan, the companies have agreed to certain cost sharing arrangements. VFMCRP will be responsible for all other development costs that VFMCRP considers necessary to develop the Product for the use of the Product for the Initial Indication in the Territory in the Field except as otherwise provided in the VFMCRP Agreement.
The VFMCRP Agreement will remain in effect with respect to the Product in each country of the Territory, on a country by country basis, until the date on which VFMCRP shall have no further payment obligations to EirGen under the terms of the VFMCRP Agreement, unless earlier terminated pursuant to the VFMCRP Agreement. VFMCRP’s royalty obligations expire on a country-by-country and product-by-product basis on the later of (i) expiration of the last to expire valid claim covering the Product sold in such country, (ii) expiration of all regulatory and data exclusivity applicable to the Product in the country of sale, and (c) ten (
10
) years after the Product first commercial sale in such country. In addition to termination rights for material breach and bankruptcy, VFMCRP is permitted to terminate the VFMCRP Agreement in its entirety, or with respect to one or more countries in the Territory, after a specified notice period, provided that VFMCRP shall not have the right to terminate the VFMCRP Agreement with respect to certain major countries without terminating the entire VFMCRP Agreement. If the VFMCRP Agreement is terminated by EirGen or VFMCRP, provision has been made for transition of product and product responsibilities to EirGen.
In connection with the VFMCRP Agreement, the parties entered into a letter agreement (the “Letter Agreement”) pursuant to which EirGen granted to VFMCRP an exclusive option (the “Option”) to acquire an exclusive license under certain EirGen patents and technology to use, import, offer for sale, sell, distribute and commercialize the Product in the United States solely for the treatment of secondary hyperparathyroidism in dialysis patients with chronic kidney disease and vitamin D insufficiency (the “Dialysis Indication”). Upon exercise of the Option, VFMCRP will reimburse EirGen for all of the development costs incurred by EirGen with respect to the Product for the Dialysis Indication in the United States. VFMCRP would also pay EirGen up to an additional aggregate amount of
$555 million
upon the achievement of certain milestones and would be obligated to pay certain double digit royalties on VFMCRP’s sales in the United States for the Dialysis Indication.
The Option is exercisable until the earlier of (i) the date that EirGen submits a new drug application or supplemental new drug application or their then equivalents to the U.S. Food and Drug Administration for the Product for the Dialysis Indication in the United States, (ii) the parties mutually agree to discontinue development of Product for the Dialysis Indication, or (iii) VFMCRP provides notice to OPKO that it has elected not to exercise the Option.
OPKO has guaranteed the performance of certain of EirGen’s obligations under the VFMCRP Agreement and the Letter Agreement.
For revenue recognition purposes, we evaluated the various agreements with Vifor to determine whether there were multiple deliverables in the arrangement. The VFMCRP Agreement provides for the following: (1) an exclusive license in the Territory in the Field to use certain patents and technology to make, have made, use, sell, offer for sale, and import Products and to develop, commercialize, have commercialized, and otherwise exploit the Product; (2) EirGen will supply Products to support the development, sale and commercialization of the Products to VFMCRP in the Territory (the “Manufacturing Services”); and (3) the Option to acquire an exclusive license under certain EirGen patents and technology to use, import, offer for sale, sell, distribute and commercialize the Product in the United States solely for the Dialysis Indication. Based on our evaluation, the exclusive license is the only deliverable at the outset of the arrangement. We concluded the Manufacturing
Services were a contingent deliverable dependent on the future regulatory and commercial action by VFMCRP and the Option was substantive and not considered a deliverable under the license arrangement.
We recognized the
$50.0 million
upfront license payment in Revenue from transfer of intellectual property in our Consolidated Statement of Operations for the year ended
December 31, 2016
. Revenues related to the Manufacturing Services will be recognized as Product is sold to VFMCRP. No revenue related to the Option will be recognized unless and until VFMCRP exercises its Option under the Letter Agreement.
We determined that the cost sharing arrangement for development of the Dialysis Indication is not a deliverable in the VFMCRP Agreement. Payments for the Dialysis Indication will be recorded as Research and development expense as incurred.
EirGen is also eligible to receive up to an additional
$37 million
in Regulatory Milestones and
$195 million
in Sales Milestones. Payments received for Regulatory Milestones and Sales Milestones are non-refundable. The Regulatory Milestones are payable if and when VFMCRP obtains approval from certain regulatory authorities and will be recognized as revenue in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. We account for the Sales Milestones as royalties and Sales Milestones payments will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. To date,
no
revenue has been recognized related to the achievement of the milestones.
Pfizer Inc.
In December 2014, we entered into an exclusive worldwide agreement with Pfizer Inc. (“Pfizer”) for the development and commercialization of our long-acting hGH-CTP for the treatment of growth hormone deficiency (“GHD”) in adults and children, as well as for the treatment of growth failure in children born small for gestational age (“SGA”) (the “Pfizer Transaction”).
The Pfizer Transaction closed in January 2015 following the termination of the waiting period under the Hart-Scott-Rodino Act. Under the terms of the Pfizer Transaction, we received non-refundable and non-creditable upfront payments of
$295.0 million
and are eligible to receive up to an additional
$275.0 million
upon the achievement of certain regulatory milestones. Pfizer received the exclusive license to commercialize hGH-CTP worldwide. In addition, we are eligible to receive initial tiered royalty payments associated with the commercialization of hGH-CTP for Adult GHD with percentage rates ranging from the high teens to mid-twenties. Upon the launch of hGH-CTP for Pediatric GHD in certain major markets, the royalties will transition to regional, tiered gross profit sharing for both hGH-CTP and Pfizer’s Genotropin®.
The agreement with Pfizer will remain in effect until the last sale of the licensed product, unless earlier terminated as permitted under the agreement. In addition to termination rights for material breach and bankruptcy, Pfizer is permitted to terminate the Agreement in its entirety, or with respect to one or more world regions, without cause after a specified notice period. If the Agreement is terminated by us for Pfizer’s uncured material breach, or by Pfizer without cause, provision has been made for transition of product and product responsibilities to us for the terminated regions, as well as continued supply of product by Pfizer or transfer of supply to us in order to support the terminated regions.
We will lead the clinical activities and will be responsible for funding the development programs for the key indications, which includes Adult and Pediatric GHD and Pediatric SGA. Pfizer will be responsible for all development costs for additional indications as well as all post-marketing studies. In addition, Pfizer will fund the commercialization activities for all indications and lead the manufacturing activities covered by the global development plan.
For revenue recognition purposes, we viewed the Pfizer Transaction as a multiple-element arrangement. Multiple-element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting. We evaluated whether a delivered element under an arrangement has standalone value and qualifies for treatment as a separate unit of accounting. Deliverables that do not meet these criteria are not evaluated separately for the purpose of revenue recognition. For a single unit of accounting, payments received are recognized in a manner consistent with the final deliverable. We determined that the deliverables under the Pfizer Transaction, including the licenses granted to Pfizer, as well as our obligations to provide various research and development services, will be accounted for as a single unit of account. This determination was made because the ongoing research and development services to be provided by us are essential to the overall arrangement as we have significant knowledge and technical know-how that is important to realizing the value of the licenses granted. The performance period over which the revenue will be recognized is expected to continue from the first quarter of 2015 through 2019, when we anticipate completing the various research and development services that are specified in the Pfizer Transaction and our performance obligations are completed. We will continue to review the timing of when our research and development services will be completed in order to assess that the estimated performance period over which the revenue is to be recognized is appropriate. Any significant changes in the timing of the performance period will result in a change in the revenue recognition period.
We are recognizing the non-refundable
$295.0 million
upfront payments on a straight-line basis over the performance period. We recognized
$70.6 million
of revenue related to the Pfizer Transaction in Revenue from transfer of intellectual property in our Consolidated Statement of Operations during the
year ended December 31, 2016
, and had deferred revenue related to the Pfizer Transaction of
$158.9 million
at
December 31, 2016
. As of
December 31, 2016
,
$70.6 million
of deferred revenue related to the Pfizer Transaction was classified in Accrued expenses and
$88.3 million
was classified in Other long-term liabilities in our Consolidated Balance Sheet. During the
year ended December 31, 2016
, we incurred
$45.9 million
in research and development expenses related to hGH-CTP.
The Pfizer Transaction includes milestone payments of
$275.0 million
upon the achievement of certain milestones. The milestones range from
$20.0 million
to
$90.0 million
each and are based on achievement of regulatory approval in the U.S. and regulatory approval and price approval in other major markets. We evaluated each of these milestone payments and believe that all of the milestones are substantive as (i) there is substantive uncertainty at the close of the Pfizer Transaction that the milestones would be achieved as approval from a regulatory authority must be received to achieve the milestones which would be commensurate with the enhancement of value of the underlying intellectual property, (ii) the milestones relate solely to past performance and (iii) the amount of the milestone is reasonable in relation to the effort expended and the risk associated with the achievement of the milestone. The milestone payments will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. To date, no revenue has been recognized related to the achievement of the milestones.
In the first quarter of 2015, we made a payment of
$25.9 million
to the Office of the Chief Scientist of the Israeli Ministry of Economy (“OCS”) in connection with repayment obligations resulting from grants previously made by the OCS to OPKO Biologics to support development of hGH-CTP and the outlicense of the technology outside of Israel. We recognized the
$25.9 million
payment in Grant repayment expense in our Consolidated Statement of Operations during the year ended December 31, 2015.
TESARO
In November 2009, we entered into an asset purchase agreement (the “NK-1 Agreement”) under which we acquired VARUBI™ (rolapitant) and other neurokinin-1 (“NK-1”) assets from Merck. In December 2010, we entered into an exclusive license agreement with TESARO, in which we out-licensed the development, manufacture, commercialization and distribution of our lead NK-1 candidate, VARUBI™ (the “TESARO License”). Under the terms of the license, we received a
$6.0 million
upfront payment from TESARO and are eligible to receive milestone payments of up to
$30.0 million
upon achievement of certain regulatory and commercial sale milestones (of which
$20.0 million
has been received to date) and additional commercial milestone payments of up to
$85.0 million
if specified levels of annual net sales are achieved. During the
years ended December 31,
2016,
2015
and
2014
,
$0.0 million
,
$15.0 million
and
$5.0 million
of revenue, respectively, has been recognized related to the achievement of the milestones under the TESARO License. TESARO is also obligated to pay us tiered royalties on annual net sales achieved in the United States and Europe at percentage rates that range from the low double digits to the low twenties, and outside of the United States and Europe at low double-digit percentage rates. TESARO assumed responsibility for clinical development and commercialization of licensed products at its expense. Under the Agreement, we will continue to receive royalties on a country-by-country and product-by-product basis until the later of the date that all of the patent rights licensed from us and covering VARUBI™ expire, are invalidated or are not enforceable and
12
years from the first commercial sale of the product.
If TESARO elects to develop and commercialize VARUBI™ in Japan through a third-party licensee, TESARO will share equally with us all amounts it receives in connection with such activities, subject to certain exceptions and deductions.
The term of the license will remain in force until the expiration of the royalty term in each country, unless we terminate the license earlier for TESARO’s material breach of the license or bankruptcy. TESARO has a right to terminate the license at any time during the term for any reason on three months’ written notice.
TESARO’s New Drug Application (“NDA”) for approval of oral VARUBI™, a neurokinin-1 receptor antagonist in development for the prevention of chemotherapy-induced nausea and vomiting, was approved by the U.S. FDA in September 2015, and in November 2015, TESARO announced the commercial launch of VARUBI™ in the United States. Under the terms of the NK-1 Agreement, upon approval by the FDA of the TESARO’s NDA for oral VARUBI™, we were required to pay Merck a
$5.0 million
milestone payment. In addition,
$5.0 million
will be due and payable each year thereafter for the next four (
4
) years on the anniversary date of the NDA approval. We recognized the present value of the milestone payments on FDA approval of
$23.0 million
as an intangible asset which will be amortized to expense over the expected useful life of the asset, which is approximately
13
years. The present value of the future payments to Merck of
$14.0 million
at
December 31, 2016
is recorded as a liability in our Consolidated Balance Sheet with
$4.9 million
in Accrued expenses and
$9.1 million
in Other long-term liabilities.
Pharmsynthez
In April 2013, we entered into a series of concurrent transactions with Pharmsynthez, a Russian pharmaceutical company traded on the Moscow Stock Exchange pursuant to which we acquired an equity method investment in Pharmsynthez (ownership
17%
). We also granted rights to certain technologies in the Russian Federation, Ukraine, Belarus, Azerbaijan and Kazakhstan (the “Territories”) to Pharmsynthez and agreed to perform certain development activities. We will receive from Pharmsynthez royalties 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.
In July 2015, we entered into a Note Purchase Agreement with Pharmsynthez pursuant to which we delivered
$3.0 million
to Pharmsynthez in exchange for a
$3.0 million
note (the “Pharmsynthez Note Receivable”). The Pharmsynthez Note Receivable will be settled in 2017 and Pharmsynthez may satisfy the note either in cash or shares of its capital stock. We recorded the Pharmsynthez Note Receivable within Other current assets and prepaid expenses in our Consolidated Balance Sheet.
RXi Pharmaceuticals Corporation
In March 2013, we completed the sale to RXi of substantially all of our assets in the field of RNA interference (the “RNAi Assets”) (collectively, the “Asset Purchase Agreement”). 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.
Other
We have completed strategic deals with numerous institutions and commercial partners. In connection with these agreements, upon the achievement of certain milestones we are obligated to make certain payments and have royalty obligations upon sales of products developed under the license agreements. At this time, we are unable to estimate the timing and amounts of payments as the obligations are based on future development of the licensed products.
Note 15 Leases
Operating leases
We conduct certain of our operations under operating lease agreements. Rent expense under operating leases was approximately
$18.8 million
,
$7.8 million
, and
$2.6 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
As of
December 31, 2016
, the aggregate future minimum lease payments under all non-cancelable operating leases with initial or remaining lease terms in excess of one year are as follows:
|
|
|
|
|
Year Ending
|
(In thousands)
|
2017
|
$
|
16,751
|
|
2018
|
12,396
|
|
2019
|
9,967
|
|
2020
|
4,761
|
|
2021
|
2,964
|
|
Thereafter
|
6,173
|
|
Total minimum operating lease commitments
|
$
|
53,012
|
|
Capital leases
We acquired various assets under capital leases in connection with our acquisition of Bio-Reference in 2015. Capital leases are included within Property, plant and equipment, net in our Consolidated Balance Sheet with imputed interest rates of approximately
2%
as follows:
|
|
|
|
|
Capital leases
|
Year ended December 31, 2016
|
Automobiles
|
$
|
10,342
|
|
Less: Accumulated Depreciation
|
(3,291
|
)
|
Net capital leases in Property, plant and equipment
|
$
|
7,051
|
|
As of
December 31, 2016
, the aggregate future minimum lease payments under all non-cancelable capital leases with initial or remaining lease terms in excess of one year are as follows:
|
|
|
|
|
Year Ending
|
(In thousands)
|
2017
|
$
|
3,143
|
|
2018
|
2,720
|
|
2019
|
2,184
|
|
2020
|
1,426
|
|
2021
|
488
|
|
Thereafter
|
570
|
|
Total minimum capital lease commitments
|
10,531
|
|
Less: Amounts representing interest
|
290
|
|
Net capital liability
|
$
|
10,241
|
|
|
|
Current
|
$
|
3,025
|
|
Long-term
|
$
|
7,216
|
|
Note 16 Segments
We manage our operations in
two
reportable segments, pharmaceutical and diagnostics. The pharmaceutical segment consists of our pharmaceutical operations we acquired in Chile, Mexico, Ireland, Israel and Spain and our pharmaceutical research and development. The diagnostics segment primarily consists of our clinical laboratory operations we acquired through the acquisitions of Bio-Reference and OPKO Lab and our point-of-care operations. There are
no
significant inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is
no
inter-segment allocation of interest expense and income taxes.
Information regarding our operations and assets for our operating segments and the unallocated corporate operations as well as geographic information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Revenue from services:
|
|
|
|
|
|
Pharmaceutical
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Diagnostics
|
1,012,129
|
|
|
329,599
|
|
|
8,426
|
|
Corporate
|
—
|
|
|
140
|
|
|
240
|
|
|
$
|
1,012,129
|
|
|
$
|
329,739
|
|
|
$
|
8,666
|
|
Revenue from products:
|
|
|
|
|
|
Pharmaceutical
|
$
|
83,467
|
|
|
$
|
80,146
|
|
|
$
|
76,983
|
|
Diagnostics
|
—
|
|
|
—
|
|
|
—
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
83,467
|
|
|
$
|
80,146
|
|
|
$
|
76,983
|
|
Revenue from transfer of intellectual property:
|
|
|
|
|
|
Pharmaceutical
|
$
|
126,065
|
|
|
$
|
81,853
|
|
|
$
|
5,285
|
|
Diagnostics
|
—
|
|
|
—
|
|
|
191
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
126,065
|
|
|
$
|
81,853
|
|
|
$
|
5,476
|
|
Operating (loss) income:
|
|
|
|
|
|
Pharmaceutical
|
$
|
(9,841
|
)
|
|
$
|
(40,395
|
)
|
|
$
|
(94,401
|
)
|
Diagnostics
|
(3,393
|
)
|
|
(10,294
|
)
|
|
(21,647
|
)
|
Corporate
|
(60,041
|
)
|
|
(46,512
|
)
|
|
(27,725
|
)
|
Less: Operating loss attributable to noncontrolling interests
|
—
|
|
|
(1,280
|
)
|
|
(2,042
|
)
|
|
$
|
(73,275
|
)
|
|
$
|
(98,481
|
)
|
|
$
|
(145,815
|
)
|
Depreciation and amortization:
|
|
|
|
|
|
Pharmaceutical
|
$
|
18,254
|
|
|
$
|
10,245
|
|
|
$
|
7,936
|
|
Diagnostics
|
78,233
|
|
|
31,918
|
|
|
6,894
|
|
Corporate
|
89
|
|
|
85
|
|
|
97
|
|
|
$
|
96,576
|
|
|
$
|
42,248
|
|
|
$
|
14,927
|
|
Loss from investment in investees:
|
|
|
|
|
|
Pharmaceutical
|
$
|
(7,665
|
)
|
|
$
|
(7,105
|
)
|
|
$
|
(3,587
|
)
|
Diagnostics
|
13
|
|
|
—
|
|
|
—
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
(7,652
|
)
|
|
$
|
(7,105
|
)
|
|
$
|
(3,587
|
)
|
Revenues:
|
|
|
|
|
|
United States
|
$
|
1,014,389
|
|
|
$
|
344,464
|
|
|
$
|
14,142
|
|
Ireland
|
137,785
|
|
|
78,989
|
|
|
—
|
|
Chile
|
35,364
|
|
|
29,885
|
|
|
29,154
|
|
Spain
|
15,812
|
|
|
16,622
|
|
|
21,323
|
|
Israel
|
15,317
|
|
|
18,107
|
|
|
20,638
|
|
Mexico
|
2,988
|
|
|
3,671
|
|
|
5,807
|
|
Other
|
6
|
|
|
—
|
|
|
61
|
|
|
$
|
1,221,661
|
|
|
$
|
491,738
|
|
|
$
|
91,125
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31,
2016
|
|
December 31,
2015
|
Assets:
|
|
|
|
Pharmaceutical
|
$
|
1,294,916
|
|
|
$
|
1,258,011
|
|
Diagnostics
|
1,408,522
|
|
|
1,479,841
|
|
Corporate
|
63,181
|
|
|
61,336
|
|
|
$
|
2,766,619
|
|
|
$
|
2,799,188
|
|
Goodwill:
|
|
|
|
Pharmaceutical
|
$
|
251,817
|
|
|
$
|
251,225
|
|
Diagnostics
|
452,786
|
|
|
492,123
|
|
Corporate
|
—
|
|
|
—
|
|
|
$
|
704,603
|
|
|
$
|
743,348
|
|
During the year ended December 31,
2016
,
no
customer represented more than
10%
of our total consolidated revenue. During the year ended December 31,
2015
, revenue recognized under the Pfizer Transaction represented
13%
of our total consolidated revenue. During the year ended December 31, 2014,
one
customer of our pharmaceutical segment represented
13%
of our total consolidated revenue. As of both December 31, 2016 and December 31, 2015,
one
customer represented more than
10%
of our accounts receivable balance.
The following table reconciles our Property, plant and equipment, net between U.S. and foreign jurisdictions:
|
|
|
|
|
|
|
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
PP&E:
|
|
|
|
U.S.
|
$
|
100,716
|
|
|
$
|
113,307
|
|
Foreign
|
22,115
|
|
|
18,491
|
|
Total
|
$
|
122,831
|
|
|
$
|
131,798
|
|
Note 17 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 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 December 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
|
$
|
3,409
|
|
|
$
|
1,313
|
|
|
$
|
(194
|
)
|
|
$
|
4,528
|
|
Total assets
|
$
|
3,409
|
|
|
$
|
1,313
|
|
|
$
|
(194
|
)
|
|
$
|
4,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (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
December 31, 2016
, we have money market funds that qualify as cash equivalents, forward foreign currency exchange contracts for inventory purchases (Refer to Note 18) 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 agreements with Neovasc and BioCardia, we record the related Neovasc and BioCardia options at fair value as well as the warrants from COCP, ARNO, Sevion, MabVax, InCellDx, Inc., Xenetic and RXi.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of December 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
|
$
|
5,314
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,314
|
|
Common stock investments, available for sale
|
4,528
|
|
|
—
|
|
|
—
|
|
|
4,528
|
|
Common stock options/warrants
|
—
|
|
|
4,017
|
|
|
—
|
|
|
4,017
|
|
Forward contracts
|
—
|
|
|
39
|
|
|
—
|
|
|
39
|
|
Total assets
|
$
|
9,842
|
|
|
$
|
4,056
|
|
|
$
|
—
|
|
|
$
|
13,898
|
|
Liabilities:
|
|
|
|
|
|
|
|
Embedded conversion option
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,736
|
|
|
$
|
16,736
|
|
Contingent consideration:
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,076
|
|
|
45,076
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,812
|
|
|
$
|
61,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
Carrying
Value
|
|
Total
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
2033 Senior Notes
|
$
|
27,238
|
|
|
$
|
28,468
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(In thousands)
|
Carrying
Value
|
|
Total
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
2033 Senior Notes
|
$
|
25,676
|
|
|
$
|
24,647
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,647
|
|
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
December 31, 2016
and
2015
, the carrying value of our other assets and liabilities approximates their fair value due to their short-term nature or variable rates of interest.
The following tables reconcile the beginning and ending balances of our Level 3 assets and liabilities as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
Contingent
consideration
|
|
Embedded
conversion
option
|
Balance at December 31, 2015
|
$
|
54,422
|
|
|
$
|
23,737
|
|
Total losses (gains) for the period:
|
|
|
|
Included in results of operations
|
16,954
|
|
|
(7,001
|
)
|
Foreign currency impact
|
(1
|
)
|
|
—
|
|
Payments
|
(26,299
|
)
|
|
—
|
|
Conversion
|
—
|
|
|
—
|
|
Balance at December 31, 2016
|
$
|
45,076
|
|
|
$
|
16,736
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(In thousands)
|
Contingent
consideration
|
|
Embedded
conversion
option
|
Balance at December 31, 2014
|
$
|
71,567
|
|
|
$
|
65,947
|
|
Total losses (gains) for the period:
|
|
|
|
Included in results of operations
|
5,050
|
|
|
36,587
|
|
Foreign currency impact
|
(269
|
)
|
|
—
|
|
Payments
|
(21,926
|
)
|
|
—
|
|
Conversion
|
—
|
|
|
(78,797
|
)
|
Balance at December 31, 2015
|
$
|
54,422
|
|
|
$
|
23,737
|
|
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
$2.7 million
. As of
December 31, 2016
, of
the
$45.1 million
of contingent consideration,
$0.3 million
is recorded in Accrued expenses and
$44.8 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.
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.
Note 18 Derivative Contracts
The following table summarizes the fair values and the presentation of our derivative financial instruments in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance Sheet Component
|
|
December 31,
2016
|
|
December 31,
2015
|
Derivative financial instruments:
|
|
|
|
|
|
Common stock options/warrants
|
Investments, net
|
|
$
|
4,017
|
|
|
$
|
5,338
|
|
Embedded conversion option
|
2033 Senior Notes, net of discount and estimated fair value of embedded derivatives
|
|
$
|
16,736
|
|
|
$
|
23,737
|
|
Forward contracts
|
Unrealized gains on forward contracts are recorded in Other current assets and prepaid expenses. Unrealized (losses) on forward contracts are recorded in Accrued expenses.
|
|
$
|
39
|
|
|
$
|
9
|
|
We enter into foreign currency forward exchange contracts to cover the risk of exposure to exchange rate differences arising from inventory purchases on letters of credit. Under these forward contracts, for any rate above or below the fixed rate, we receive or pay the difference between the spot rate and the fixed rate for the given amount at the settlement date.
To qualify the derivative instrument as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At
December 31, 2016
and
2015
, our derivative financial instruments do not meet the documentation requirements to be designated as hedges. Accordingly, we recognize the changes in Fair value of derivative instruments, net in our Consolidated Statement of Operations. The following table summarizes the losses and gains recorded for the
years ended December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Derivative gain (loss):
|
|
|
|
|
|
Common stock options/warrants
|
$
|
(4,262
|
)
|
|
$
|
(2,854
|
)
|
|
$
|
1,193
|
|
2033 Senior Notes
|
7,001
|
|
|
(36,588
|
)
|
|
(12,213
|
)
|
Forward contracts
|
$
|
39
|
|
|
$
|
359
|
|
|
$
|
388
|
|
Total
|
$
|
2,778
|
|
|
$
|
(39,083
|
)
|
|
$
|
(10,632
|
)
|
Note 19 Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2016 Quarters Ended
|
(In thousands, except per share data)
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Total revenues
|
$
|
291,037
|
|
|
$
|
357,100
|
|
|
$
|
298,035
|
|
|
$
|
275,489
|
|
Total costs and expenses
|
318,555
|
|
|
328,834
|
|
|
321,658
|
|
|
325,889
|
|
Net income (loss)
|
(11,978
|
)
|
|
15,533
|
|
|
(14,977
|
)
|
|
(13,661
|
)
|
Net income (loss) attributable to common shareholders
|
(11,978
|
)
|
|
15,533
|
|
|
(14,977
|
)
|
|
(13,661
|
)
|
Earnings (loss) per share, basic
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
Earnings (loss) per share, diluted
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
For the 2015 Quarters Ended
|
(In thousands, except per share data)
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Total revenues
|
$
|
30,084
|
|
|
$
|
42,429
|
|
|
$
|
143,034
|
|
|
$
|
276,191
|
|
Total costs and expenses
|
86,998
|
|
|
67,838
|
|
|
151,257
|
|
|
284,126
|
|
Net income (loss)
|
(118,037
|
)
|
|
(43,241
|
)
|
|
128,247
|
|
|
1,603
|
|
Net income (loss) attributable to common shareholders
|
(117,112
|
)
|
|
(42,766
|
)
|
|
128,247
|
|
|
1,603
|
|
Earnings (loss) per share, basic
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.26
|
|
|
$
|
—
|
|
Earnings (loss) per share, diluted
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.18
|
|
|
$
|
—
|
|
Note 20 Subsequent Events
On January 3, 2017, we announced that our 2033 Senior Notes continue to be convertible by holders of such 2033 Senior Notes through March 31, 2017. We have elected to satisfy the conversion obligation in shares of our Common Stock. This conversion right has been extended because the closing price per share of our Common Stock has exceeded
$9.19
, or
130%
of the applicable conversion price of
$7.07
, for at least
20
of
30
consecutive trading days during the quarter ended on
December 31, 2016
. We previously announced that this conversion right had been triggered each quarter during the quarters ended March 31, 2015 through September 30, 2016. The 2033 Senior Notes will continue to be convertible until March 31, 2017, and may be convertible thereafter, if
one
or more of the conversion conditions specified in the Indenture is satisfied during future measurement periods. Pursuant to the Indenture, a holder who elects to convert the 2033 Senior Notes will receive
141.4827
shares of our Common Stock plus such number of additional shares as is applicable on the conversion date per $1,000 principal amount of 2033 Senior Notes based on the early conversion provisions in the Indenture.
We have reviewed all subsequent events and transactions that occurred after the date of our
December 31, 2016
Consolidated Balance Sheet date, through the time of filing this Annual Report on Form 10-K.