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EX-32.1 - EXHIBIT 32.1 - Opko Health, Inc.opk-6302014xex321.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number 001-33528
 
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
75-2402409
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
4400 Biscayne Blvd.
Miami, FL 33137
(Address of Principal Executive Offices) (Zip Code)
 
(305) 575-4100
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  YES    ¨  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  YES    ¨  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
(in Rule 12b-2 of the Exchange Act) (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):   ¨  YES    ý  NO
As of August 1, 2014, the registrant had 429,195,973 shares of common stock outstanding.

 


TABLE OF CONTENTS
Page
 
 
 
EX-31.1
Section 302 Certification of CEO
 
EX-31.2
Section 302 Certification of CFO
 
EX-32.1
Section 906 Certification of CEO
 
EX-32.2
Section 906 Certification of CFO
 
EX-101.INS
XBRL Instance Document
 
EX-101.SCH
XBRL Taxonomy Extension Schema Document
 
EX-101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
EX-101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
EX-101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
EX-101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013, and described from time to time in our other reports filed with the Securities and Exchange Commission. Except as required by law, we do not undertake any obligation to update forward-looking statements. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
We have a history of operating losses and we do not expect to become profitable in the near future.
Our technologies are in an early stage of development and are unproven.
Our business is substantially dependent on our ability to develop, launch and generate revenue from our pharmaceutical and diagnostic programs.
Our research and development activities, or that of our investees, may not result in commercially viable products.
The results of previous clinical trials may not be predictive of future results, and our current and planned clinical trials may not satisfy the requirements of the United States (“U.S.”) Food and Drug Administration (“FDA”) or other non-U.S. regulatory authorities.
We may require substantial additional funding, which may not be available to us on acceptable terms, or at all.
We may finance future cash needs primarily through public or private offerings, debt financings or strategic collaborations, which may dilute your stockholdings in the Company.
If our competitors develop and market products that are more effective, safer or less expensive than our future product candidates, our commercial opportunities will be negatively impacted.
The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates.
Failure to recruit and enroll patients for clinical trials may cause the development of our product candidates to be delayed.
Even if we obtain regulatory approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our product candidates, which could materially impair our ability to generate anticipated revenues.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes.
Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our products.
The loss of Phillip Frost, M.D., our Chairman and Chief Executive Officer, could have a material adverse effect on our business and product development.
If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize our product candidates.
In the event that we successfully evolve from a company primarily involved in development to a company also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully.

3


If we fail to acquire and develop other products or product candidates, at all or on commercially reasonable terms, we may be unable to diversify or grow our business.
We have no experience manufacturing our pharmaceutical product candidates other than at one of our Israeli facilities, and at our Mexican, and Spanish facilities, and we have no experience in manufacturing our diagnostic product candidates.  We will therefore likely rely on third parties to manufacture and supply our pharmaceutical and diagnostics product candidates, and we would need to meet various standards to satisfy FDA regulations in order to manufacture on our own.    
We currently have no pharmaceutical or diagnostic marketing, sales or distribution capabilities other than in Chile, Mexico, Spain, Brazil, and Uruguay for sales in those countries and our active pharmaceutical ingredients (“APIs”) business in Israel, and the sales force for our laboratory business based in Nashville, Tennessee. If we are unable to develop our sales and marketing and distribution capability on our own or through collaborations with marketing partners, we will not be successful in commercializing our pharmaceutical and diagnostic product candidates.
Certain elements of our business are dependent on the success of ongoing and planned phase 3 clinical trials for RayaldeeTM (CTAP101), AlpharenTM (Fermagate Tablets), and hGH-CTP.
Independent clinical investigators and contract research organizations that we engage to conduct our clinical trials may not be diligent, careful or timely.
The success of our business is dependent on the actions of our collaborative partners.
Our license agreement with TESARO, Inc. (“TESARO”) is important to our business. If TESARO does not successfully develop and commercialize rolapitant, our business could be adversely affected.
If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
We rely heavily on licenses from third parties.
We license patent rights to certain of our technology from third-party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects will be harmed.
Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.
Adverse results in material litigation matters or governmental inquiries could have a material adverse effect upon our business and financial condition.
If our products have undesirable effects on patients, we could be subject to litigation or product liability claims that could impair our reputation and have a material adverse effect upon our business and financial condition.
Medicare prescription drug coverage legislation and future legislative or regulatory reform of the health care system may adversely affect our ability to sell our products or provide our services profitably.
Failure to obtain and maintain regulatory approval outside the U.S. will prevent us from marketing our product candidates abroad.
We may not have the funding available to pursue acquisitions.
Acquisitions may disrupt our business, distract our management, may not proceed as planned, and may also increase the risk of potential third party claims and litigation.
We may encounter difficulties in integrating acquired businesses.
Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.
Political and economic instability in Europe and Latin America and political, economic, and military instability in Israel or neighboring countries could adversely impact our operations.
We are subject to fluctuations in currency exchange rates in connection with our international businesses.

4


We have a large amount of goodwill and other intangible assets as a result of acquisitions and a significant write-down of goodwill and/or other intangible assets would have a material adverse effect on our reported results of operations and net worth.
Our business may become subject to legal, economic, political, regulatory and other risks associated with international operations.
The market price of our Common Stock may fluctuate significantly.
The conversion and redemption features of our January 2013 convertible senior notes due in 2033 are classified as embedded derivatives and may continue to result in volatility in our financial statements, including having a material impact on our result of operations and recorded derivative liability.
We have reported a material weakness in our internal control over financing reporting which may cause investors and stockholders to lose confidence in our financial reporting.
Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you may not consider to be in your best interests or in the best interests of our stockholders.
Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as they apply to us, or our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and our Common Stock price may suffer.
We may be unable to maintain our listing on the New York Stock Exchange (“NYSE”), which could cause our stock price to fall and decrease the liquidity of our Common Stock.
Future issuances of Common Stock and hedging activities may depress the trading price of our Common Stock.
Provisions in our charter documents and Delaware law could discourage an acquisition of us by a third party, even if the acquisition would be favorable to you.
We do not intend to pay cash dividends on our Common Stock in the foreseeable future.


5


PART I. FINANCIAL INFORMATION
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our wholly-owned subsidiaries.
Item 1. Financial Statements
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share and per share data)
 
June 30, 2014(1)
 
December 31, 2013(1)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
134,010

 
$
185,798

Accounts receivable, net
23,113

 
19,767

Inventory, net
18,334

 
18,079

Prepaid expenses and other current assets
7,553

 
19,084

Total current assets
183,010

 
242,728

Property, plant, equipment, and investment properties, net
17,348

 
17,027

Intangible assets, net
69,059

 
74,533

In-process research and development
793,326

 
793,341

Goodwill
226,001

 
226,373

Investments, net
33,428

 
30,653

Other assets
4,910

 
6,861

Total assets
$
1,327,082

 
$
1,391,516

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,041

 
$
13,414

Accrued expenses
54,964

 
65,874

Current portion of lines of credit and notes payable
14,397

 
12,562

Total current liabilities
79,402

 
91,850

2033 Senior Notes, net of discount and estimated fair value of embedded derivatives
116,365

 
211,912

Other long-term liabilities, principally contingent consideration and deferred tax liabilities
218,490

 
214,775

Total long-term liabilities
334,855

 
426,687

Total liabilities
414,257

 
518,537

Equity:
 
 
 
Common Stock - $0.01 par value, 750,000,000 shares authorized; 427,102,876 and 414,818,195
      shares issued at June 30, 2014 and December 31, 2013, respectively
4,271

 
4,148

Treasury Stock - 1,245,367 and 2,264,063 shares at June 30, 2014 and December 31, 2013,
       respectively
(4,051
)
 
(7,362
)
Additional paid-in capital
1,490,071

 
1,379,383

Accumulated other comprehensive income
304

 
3,418

Accumulated deficit
(573,203
)
 
(503,177
)
Total shareholders’ equity attributable to OPKO
917,392

 
876,410

Noncontrolling interests
(4,567
)
 
(3,431
)
Total shareholders’ equity
912,825

 
872,979

Total liabilities and equity
$
1,327,082

 
$
1,391,516

(1)
As of June 30, 2014 and December 31, 2013, total assets include $7.7 million and $6.7 million, respectively, and total liabilities include $13.5 million and $10.4 million, respectively, related to SciVac Ltd (“SciVac”), previously known as SciGen (I.L.) Ltd, a consolidated variable interest entity. SciVac’s consolidated assets are owned by SciVac and SciVac’s consolidated liabilities have no recourse against us. Refer to Note 5.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
6


OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Products
$
21,392

 
$
18,618

 
$
41,219

 
$
34,145

Revenue from services
2,153

 
3,188

 
4,123

 
6,280

Revenue from transfer of intellectual property

 
2,015

 
476

 
14,772

Total revenues
23,545

 
23,821

 
45,818

 
55,197

Costs and expenses:
 
 
 
 
 
 
 
Costs of revenues
12,565

 
13,103

 
24,955

 
24,860

Selling, general and administrative
14,874

 
13,879

 
28,686

 
26,303

Research and development
16,234

 
9,557

 
37,227

 
19,467

In process research and development
10,055

 

 
10,055

 

Contingent consideration
1,876

 
2,577

 
4,486

 
3,921

Amortization of intangible assets
2,826

 
2,688

 
5,569

 
5,402

Total costs and expenses
58,430

 
41,804

 
110,978

 
79,953

Operating loss
(34,885
)
 
(17,983
)
 
(65,160
)
 
(24,756
)
Other income and (expense), net:
 
 
 
 
 
 
 
Interest income
7

 
90

 
48

 
149

Interest expense
(4,685
)
 
(3,842
)
 
(8,171
)
 
(6,739
)
Fair value changes of derivative instruments, net
10,967

 
12,651

 
452

 
(10,898
)
Other income (expense), net
2,990

 
8,027

 
4,808

 
10,358

Other income and (expense), net
9,279

 
16,926

 
(2,863
)
 
(7,130
)
Loss before income taxes and investment losses
(25,606
)
 
(1,057
)
 
(68,023
)
 
(31,886
)
Income tax provision
(101
)
 
(925
)
 
(714
)
 
(968
)
Loss before investment losses
(25,707
)
 
(1,982
)
 
(68,737
)
 
(32,854
)
Loss from investments in investees
(370
)
 
(2,371
)
 
(2,426
)
 
(6,261
)
Net loss
(26,077
)
 
(4,353
)
 
(71,163
)
 
(39,115
)
Less: Net loss attributable to noncontrolling interests
(597
)
 
(959
)
 
(1,137
)
 
(1,506
)
Net loss attributable to common shareholders before
       preferred stock dividend
(25,480
)
 
(3,394
)
 
(70,026
)
 
(37,609
)
Preferred stock dividend

 

 

 
(420
)
Net loss attributable to common shareholders
$
(25,480
)
 
$
(3,394
)
 
$
(70,026
)
 
$
(38,029
)
Loss per share, basic and diluted:
 
 
 
 
 
 
 
Net loss per share
$
(0.06
)
 
$
(0.01
)
 
$
(0.17
)
 
$
(0.12
)
Weighted average number of common shares outstanding, basic and diluted
413,339,679

 
336,732,215

 
413,125,932

 
324,898,133



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
7


OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Net loss attributable to common shareholders
$
(25,480
)
 
$
(3,394
)
 
$
(70,026
)
 
$
(38,029
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation & OCI from Equity Investments
188

 
(2,085
)
 
(1,613
)
 
(1,762
)
Available for sale investments:
 
 
 
 
 
 
 
Change in other unrealized gains (loss), net
(1,283
)
 
424

 
(948
)
 
1,829

Less: reclassification adjustments for gains included in net loss, net of tax

 
(3,602
)
 
(553
)
 
(4,593
)
Comprehensive loss
$
(26,575
)
 
$
(8,657
)
 
$
(73,140
)
 
$
(42,555
)


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
8


OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 
For the six months ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(71,163
)
 
$
(39,115
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
7,591

 
6,880

Non-cash interest on 2033 Senior Notes
3,557

 
3,120

Amortization of deferred financing costs
1,807

 
343

Losses from investments in investees
2,426

 
6,261

Equity-based compensation – employees and non-employees
6,993

 
7,003

(Recovery of) provision for bad debts
(68
)
 
329

Provision for inventory obsolescence
583

 
1,273

Revenue from receipt of equity
(120
)
 
(12,620
)
Realized gain on sale of equity securities
(1,274
)
 
(10,821
)
Gain on conversion of 3.00% convertible senior notes
(2,668
)
 

Change in fair value of derivatives instruments
(452
)
 
10,898

In-process research and development
10,055



Change in fair value of contingent consideration
4,486

 
3,921

Deferred income tax benefit

 
(602
)
Changes in assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
(4,321
)
 
(1,652
)
Inventory
(1,413
)
 
1,213

Prepaid expenses and other current assets
3,324

 
(2,572
)
Other assets
3,911

 
97

Accounts payable
(3,308
)
 
333

Foreign currency measurement
(824
)
 
450

Accrued expenses
(3,663
)
 
7,130

Net cash used in operating activities
(44,541
)
 
(18,131
)
Cash flows from investing activities:
 
 
 
Investments in investees
(500
)
 
(13,341
)
Proceeds from sale of equity securities
1,331

 
11,496

Acquisition of businesses, net of cash
(1,695
)
 
78

Purchase of marketable securities

 
(50,027
)
Capital expenditures
(2,467
)
 
(2,054
)
Net cash used in investing activities
(3,331
)
 
(53,848
)
Cash flows from financing activities:
 
 
 
Issuance of 2033 Senior Notes, net, including related parties

 
170,184

Payment of Series D dividends, including related parties

 
(3,015
)
Proceeds from the exercise of Common Stock options and warrants
2,747

 
1,519

Contingent consideration payments
(6,435
)
 
(2,539
)
Borrowings on lines of credit
14,258

 
15,354

Repayments of lines of credit
(14,571
)
 
(17,718
)
Net cash (used in) provided by financing activities
(4,001
)
 
163,785

Effect of exchange rate on cash and cash equivalents
85

 
(106
)
Net (decrease) increase in cash and cash equivalents
(51,788
)
 
91,700

Cash and cash equivalents at beginning of period
185,798

 
27,361

Cash and cash equivalents at end of period
$
134,010

 
$
119,061

SUPPLEMENTAL INFORMATION:
 
 
 
Interest paid
$
2,771

 
$
318

Income taxes paid, net
$
796

 
$
242

RXi common stock received
$

 
$
12,500

Pharmsynthez common stock received
$
6,264

 
$

Non-cash financing:
 
 
 
Shares issued upon the conversion of:
 
 
 
Series D Preferred Stock
$

 
$
24,386

2033 Senior Notes
$
95,665

 
$

Common Stock options and warrants, net exercised
$
3,493

 
$
815

Issuance of Common Stock to acquire:
 
 
 
OPKO Renal
$

 
$
146,902

OPKO Brazil
$

 
$
436

Arama Uruguay
$
159

 
$

Inspiro
$
8,566

 
$



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
9


OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a multi-national biopharmaceutical and diagnostics company that seeks to establish industry-leading positions in large and rapidly growing medical markets by leveraging our discovery, development and commercialization expertise and our novel and proprietary technologies. We are developing a range of solutions to diagnose, treat and prevent various conditions, including point-of-care tests, molecular diagnostics tests, laboratory developed tests, and proprietary pharmaceuticals and vaccines. We plan to commercialize these solutions on a global basis in large and high growth markets, including emerging markets.
We own established pharmaceutical platforms in Chile, Spain, Mexico, and Uruguay, which are generating revenue and which we expect to generate positive cash flow and facilitate future market entry for our products currently in development. In addition, we have also established pharmaceutical operations in Brazil. 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 proprietary molecular diagnostic and therapeutic products. In the U.S., we own a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, as amended (“CLIA”), with a urologic focus that generates revenue and serves as the commercial platform for the U.S. launch of our next generation prostate cancer test to improve cancer risk stratification of patient candidates prior to prostate biopsy.
We are incorporated in Delaware and our principal executive offices are located in leased offices in Miami, Florida. We lease office and lab space in Jupiter and Miramar, Florida, and Nes Ziona, Israel, which is where our molecular diagnostics research and development, oligonucleotide research and development and carboxyl terminal peptide research and development operations are based, respectively. We lease office, manufacturing and warehouse space in Woburn, Massachusetts for our point-of-care diagnostics business, and in Nesher, Israel for our API business. We lease laboratory and office space in Nashville, Tennessee and Burlingame, California for our CLIA-certified laboratory business, and we lease office space in Bannockburn, Illinois, and Markham, Ontario for our pharmaceutical business directed to chronic kidney disease (“CKD”). Our Chilean and Uruguayan operations are located in leased offices and warehouse facilities in Santiago and Montevideo, respectively. Our Mexican operations are based in owned offices, an owned manufacturing facility and a leased warehouse facility in Guadalajara and in leased offices in Mexico City. Our Spanish operations are based in owned offices in Barcelona, in an owned manufacturing facility in Banyoles and a leased warehouse facility in Palol de Revardit. Our Brazilian operations are located in leased offices in Sao Paulo.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the Company’s results of operations, financial position and cash flows have been made. The results of operations and cash flows for the three and six months ended June 30, 2014, are not necessarily indicative of the results of operations and cash flows that may be reported for the remainder of 2014 or for future periods. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Reclassifications of certain amounts. During 2013 and the first quarter of 2014, we reported payments for contingent consideration and some deferred payments as cash outflows from operating activities. Amounts paid pertaining to the initial purchase accounting contingent liability have been classified as cash outflows from financing activities, reflecting such payments as financing is more accurate, thus, the change in accounting policy. Amounts paid in excess of the purchase accounting contingent liability have been classified as cash outflows from operating activities. We have adjusted the amounts previously reported in our Form 10-Q for the six months ended June 30, 2013 in conjunction with the filing of this Form10-Q and the six months ended June 30, 2014 by reducing cash outflows from operating activities and increasing cash outflows from financing activities by $6.4 million and $2.5 million for 2014 and 2013, respectively.
Principles of consolidation. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of OPKO Health, Inc. and of our wholly-owned subsidiaries and variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation.

10


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 from those 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.
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired when accounted for by the purchase method of accounting and arose from our acquisitions of Pharma Genexx, S.A. (“OPKO Chile”), Pharmacos Exakta S.A. de C.V. (“Exakta-OPKO”), CURNA, Inc. (“CURNA”), Claros Diagnostics, Inc. (“OPKO Diagnostics”), FineTech Pharmaceuticals, Ltd. (“FineTech”), ALS Distribuidora Limitada (“ALS”), Farmadiet Group Holding, S.L. (“OPKO Spain”), Prost-Data, Inc. (“OPKO Lab”), Cytochroma Inc. (“OPKO Renal”), Silcon Comércio, Importacao E Exportacao de Produtos Farmaceuticos e Cosmeticos Ltda. (“OPKO Brazil”) and PROLOR Biotech, Inc. (“OPKO Biologics”). Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions at June 30, 2014 and December 31, 2013 were $1.1 billion and $1.1 billion, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. 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.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from 3 to 10 years, and review for impairment at least annually, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. 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 from continuing operations was $5.6 million and $5.4 million for the six months ended June 30, 2014 and 2013, respectively.
Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term maturities of these instruments. Investments that are considered available for sale as of June 30, 2014 are carried at fair value.
Short-term investments, which we invest in from time to time, include bank deposits, corporate notes, U.S. treasury securities and U.S. government agency securities with original maturities of greater than 90 days and remaining maturities of less than one year. Long-term investments include corporate notes, U.S. treasury securities and U.S. government agency securities with maturities greater than one year.
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 8.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with certain acquisitions to their fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as contingent consideration income. 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

11


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 Condensed Consolidated Balance Sheet at their fair value and recognize the changes in the fair value in our Condensed 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 June 30, 2014 and December 31, 2013, our forward contracts for 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 Condensed Consolidated Statement of Operations. Refer to Note 9.
Revenue recognition. Generally, we recognize revenue from product sales 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 management’s evaluation of specific factors that may increase or decrease the risk of product returns.
Revenue for laboratory services is recognized on the accrual basis at the time test results are reported, which approximates when services are provided. Services are provided to certain 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 sales 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 three and six months ended June 30, 2014, revenue from services also includes $0.1 million and $0.1 million, respectively, of revenue related to our consulting agreement with Neovasc and to revenue related to molecular diagnostics collaboration agreements. For the three and six months ended June 30, 2013, revenue from services also includes $0.2 million and $0.4 million, respectively, of revenue related to our consulting agreement with Neovasc and to revenue related to molecular diagnostics collaboration agreements. We recognize this revenue on a straight-line basis over the contractual term of the agreements.
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 and milestone payments received through our license, 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 the fair value of our undelivered obligations, if any, can be determined. If the license is considered to have standalone value but the fair value of any of the undelivered items cannot be determined, the license payments are recognized as revenue over the period of our performance for such undelivered items or services. License fees with ongoing involvement or performance obligations 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 obligation 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 quarterly basis. For the six months ended June 30, 2014, we recorded $0.5 million of revenue from the transfer of intellectual property. Refer to Note 5.
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 is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; the milestone relates solely to past performance; and the amount of the milestone 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.

12


Total deferred revenue included in Accrued expenses and Other long-term liabilities was $8.3 million and $8.3 million at June 30, 2014 and December 31, 2013, respectively.
Allowance for doubtful accounts. We analyze accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts using the specific identification method. Our reported net loss is directly affected by our estimate of the collectability of accounts receivable. The amount of the allowance for doubtful accounts was $1.5 million and $1.9 million at June 30, 2014 and December 31, 2013, 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 Condensed 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 rather than 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 is subject to periodic adjustment as the underlying equity instruments vest. During the three months ended June 30, 2014 and 2013, we recorded $3.4 million and $1.8 million, respectively, of equity-based compensation expense. During the six months ended June 30, 2014 and 2013, we recorded $7.0 million and $7.0 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 stock-based compensation expense. Other unallocated 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.
Segment reporting. Our chief operating decision-maker (“CODM”) is comprised of our executive management with the oversight of our Board of Directors. Our CODM reviews our operating results and operating plans and makes resource allocation decisions on a Company-wide or aggregate basis. We currently manage our operations in two reportable segments, pharmaceuticals and diagnostics. The pharmaceutical segment consists of two operating segments, our (i) pharmaceutical research and development segment which is focused on the research and development of pharmaceutical products, and vaccines, and (ii) the pharmaceutical operations we acquired in Chile, Mexico, Israel, Spain, Uruguay and Brazil. The diagnostics segment consists of two operating segments, our (i) pathology operations we acquired through the acquisition of OPKO Lab and (ii) point-of-care and molecular diagnostics operations. There are no 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.
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. Refer to Note 5.
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. 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 Condensed Consolidated Statement of Operations. Refer to Note 5. For investments classified as available for sale, we record changes in their fair value as unrealized gain or loss in Other comprehensive loss based on their closing price per share at the end of each reporting period. Refer to Note 5.
Recent accounting pronouncements. In July 2013, the FASB issued an Accounting Standards Update (“ASU”), ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 is intended to eliminate inconsistent practices regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from the disallowance of a tax position. ASU 2013-11 is effective

13


for our fiscal year beginning January 1, 2014 and subsequent interim periods. The adoption of ASU 2013-11 does not have a material effect on our Condensed Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards ("IFRS") 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 No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach. We are currently evaluating both methods of adoption and the impact, if any, that the adoption of this ASU will have on our condensed 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 No. 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 No. 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Earlier adoption is permitted. The amendments can be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards. We expect to apply the ASU prospectively and do not expect the adoption to have an impact on our condensed consolidated financial statements as our existing share-based payment awards do not fall within the scope of this ASU.
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. Diluted loss per share is computed by dividing our net loss increased by dividends on preferred stock by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options. The dilutive impact of stock options and warrants is determined by applying the “treasury stock” method. In the periods in which their effect would be anti-dilutive, no effect has been given to outstanding options, warrants or convertible Preferred Stock in the diluted computation. Potentially dilutive shares issuable pursuant to the 2033 Senior Notes (defined in Note 6) were not included in the computation of net loss per share for the three and six months ended June 30, 2014, because their inclusion would be anti-dilutive.
Also, a total of 29,132,527 and 29,701,838 potential shares of Common Stock have been excluded from the calculation of diluted net loss per share for the three months ended June 30, 2014 and 2013, respectively, because their inclusion would be anti-dilutive. A total of 29,503,319 and 29,910,492 potential shares of Common Stock have been excluded from the calculation of diluted net loss per share for the six months ended June 30, 2014 and 2013, respectively, because their inclusion would be anti-dilutive.
During the three months ended June 30, 2014, 1,102,741 Common Stock options to purchase shares of our Common Stock were exercised, resulting in the issuance of 782,324 shares of Common Stock. Of the 1,102,741 Common Stock options exercised, 320,417 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
During the six months ended June 30, 2014, 1,705,406 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 1,310,250 shares of Common Stock. Of the 1,705,406 Common Stock options and Common Stock warrants exercised, 395,156 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the warrant agreements.


14


NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands)
June 30,
2014
 
December 31,
2013
Accounts receivable, net
 
 
 
Accounts receivable
$
24,660

 
$
21,652

Less: allowance for doubtful accounts
(1,547
)
 
(1,885
)
 
$
23,113

 
$
19,767

Inventories, net
 
 
 
Finished products
$
12,455

 
$
13,374

Work in-process
1,510

 
1,350

Raw materials
4,948

 
4,132

Less: inventory reserve
(579
)
 
(777
)
 
$
18,334

 
$
18,079

Prepaid expenses and other current assets
 
 
 
Prepaid supplies
$
1,910

 
$
945

Prepaid insurance
1,113

 
892

Pharmsynthez notes receivable

 
6,151

Other receivables
619

 
1,985

Taxes recoverable
1,298

 
3,458

Other
2,613

 
5,653

 
$
7,553

 
$
19,084

Intangible assets, net:
 
 
 
Technologies
$
53,012

 
$
51,660

Customer relationships
22,511

 
22,725

Product registrations
9,687

 
9,692

Tradenames
3,615

 
3,669

Covenants not to compete
8,669

 
8,671

Other
1,190

 
2,519

Less:  accumulated amortization
(29,625
)
 
(24,403
)
 
$
69,059

 
$
74,533

Accrued expenses:
 
 
 
Taxes payable
$
406

 
$
702

Deferred revenue
6,393

 
7,639

Clinical trials
2,616

 
3,342

Professional fees
1,320

 
402

Employee benefits
5,405

 
4,399

Deferred acquisition payments, net of discount

 
5,465

Contingent consideration
24,618

 
28,047

Other
14,206

 
15,878

 
$
54,964

 
$
65,874

 
 
 
 

15


(In thousands)
June 30,
2014
 
December 31,
2013
Other long-term liabilities:
 
 
 
Contingent consideration – OPKO Renal
$
37,141

 
$
34,401

Contingent consideration – OPKO Spain
299

 
504

Contingent consideration – OPKO Diagnostics
10,642

 
8,340

Contingent consideration – CURNA
214

 
316

Mortgages and other debts payable
2,948

 
3,270

Deferred tax liabilities
165,226

 
166,435

Other, including deferred revenue
2,020

 
1,509

 
$
218,490

 
$
214,775

All of the intangible assets and goodwill acquired relate to our acquisitions of OPKO Chile, including the intangible assets and goodwill related to the ALS acquisition, Exakta-OPKO, CURNA, OPKO Diagnostics, FineTech, OPKO Spain, OPKO Lab, OPKO Renal and OPKO Biologics. The pharmaceutical, nutraceutical and veterinary products from ALS and OPKO Spain do not require ongoing product renewals. 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 the U.S., Chile, Canada, Mexico, Spain, or Israel.
At June 30, 2014, the changes in value of the intangible assets and goodwill are primarily due to foreign currency fluctuations between the Chilean and Mexican pesos, the Euro and the Shekel against the U.S. dollar.
The following table summarizes the changes in Goodwill during the six months ended June 30, 2014.
 
2014
(In thousands)
Balance at January 1
 
Acquisitions
 
Foreign exchange, other
 
Balance at June 30
Pharmaceuticals
 
 
 
 
 
 
 
CURNA
$
4,827

 
$

 
$

 
$
4,827

Exakta-OPKO
113

 

 

 
113

OPKO Chile
6,102

 

 
(310
)
 
5,792

OPKO Spain
9,075

 

 
(79
)
 
8,996

FineTech
11,698

 

 

 
11,698

SciVac
1,740

 

 
17

 
1,757

OPKO Renal
2,069

 

 

 
2,069

OPKO Biologics
139,784

 

 

 
139,784

Diagnostics
 
 
 
 
 
 
 
Claros
17,977

 

 

 
17,977

OPKO Lab
32,988

 

 

 
32,988

 
$
226,373

 
$

 
$
(372
)
 
$
226,001



16


NOTE 5 ACQUISITIONS, INVESTMENTS AND LICENSES
Inspiro Medical Ltd. acquisition
On April 17, 2014, we entered into a stock purchase agreement to acquire 100% of the issued and outstanding share capital of Inspiro Medical Ltd. (“Inspiro”), an Israeli medical device company developing a new platform to deliver small molecule drugs such as corticosteroids and beta agonists and larger molecules to treat respiratory diseases.     
In connection with the transaction, we paid $1.5 million in cash and delivered 999,556 shares of our Common Stock valued at $8.6 million based on the closing price per share of our Common Stock as reported by the NYSE on the actual closing date of the acquisition, or $8.57 per share. The transaction closed on May 22, 2014. The number of shares issued was based upon our trading price as reported by the NYSE for the ten trading days immediately preceding the execution date of the purchase agreement, or $9.00 per share.
Inspiro’s Inspiromatic™ is a “smart” easy-to-use dry powder inhaler with several advantages over existing devices. We anticipate that this innovative device will play a valuable role in the improvement of therapy for asthma, chronic obstructive pulmonary disease, cystic fibrosis and other respiratory diseases. We recorded the transaction as an asset acquisition and recorded the assets and liabilities at fair value, and as a result, we recorded $10.1 million of acquired in-process research and development expenses.
OPKO Biologics acquisition
In August 2013, we acquired OPKO Biologics (formerly PROLOR) pursuant to an agreement and plan of merger dated April 23, 2013 (the “Merger Agreement”) in an all-stock transaction. OPKO Biologics is an Israeli-based biopharmaceutical company focused on developing and commercializing longer-acting proprietary versions of already approved therapeutic proteins.
Under the terms of the Merger Agreement, holders of PROLOR common stock received 0.9951 shares of our Common Stock for each share of PROLOR common stock. At closing, we delivered 63,670,805 shares of our Common Stock valued at $540.6 million based on the closing price per share of our Common Stock as reported by the NYSE on the closing date of the acquisition, or $8.49 per share. In addition, each outstanding option and warrant to purchase shares of PROLOR common stock that was outstanding and unexercised immediately prior to the closing date, whether vested or not vested, was converted into 7,889,265 options and warrants to purchase OPKO Common Stock at a fair value of $46.1 million.
Until completion of the acquisition, Dr. Phillip Frost, our Chairman and Chief Executive Officer, was PROLOR’s Chairman of the Board and owned greater than 5% of its stock. Dr. Jane H. Hsiao, our Vice Chairman and Chief Technology Officer, and Mr. Steven Rubin, our Executive Vice President, Administration, were both directors of PROLOR and owned less than 5% of its stock.
OPKO Renal acquisition
In March 2013, we acquired OPKO Renal (formerly Cytochroma, Inc.), whose lead products, both in Phase 3 development, are RayaldeeTM (CTAP101), a vitamin D prohormone to treat secondary hyperparathyroidism in patients with stage 3 or 4 CKD and vitamin D insufficiency, and AlpharenTM (Fermagate Tablets), a non-absorbed phosphate binder to treat hyperphosphatemia in dialysis patients (the “OPKO Renal Acquisition”).
In connection with the OPKO Renal Acquisition, we delivered 20,517,030 of shares of our Common Stock valued at $146.9 million based on the closing price per share of our Common Stock as reported by the NYSE on the actual closing date of the acquisition, or $7.16 per share. The number of shares issued was based on the volume-weighted average price per share of our Common Stock as reported on the NYSE for the 10 trading days immediately preceding the date of the purchase agreement for the OPKO Renal Acquisition, or $4.87 per share.
In addition, the OPKO Renal Acquisition requires payments of up to an additional $190.0 million in cash or additional shares of our Common Stock, at our election, upon the achievement of certain milestones relating to development and annual revenue. As a result, we recorded $47.7 million as contingent consideration at acquisition. We evaluate the contingent consideration on an ongoing basis and the changes in the fair value are recognized in earnings until the milestones are achieved. Refer to Note 8.

17


The following table summarizes the purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the acquisitions of OPKO Renal and OPKO Biologics at the dates of acquisition. The purchase price allocation for OPKO Biologics is subject to change while contingencies that existed on the acquisition date are resolved:
(In thousands)
OPKO Renal
 
OPKO Biologics
Current assets (1)
$
1,224

 
$
21,500

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

 
590,200

Patents
210

 

Total intangible assets
191,740

 
590,200

Goodwill
2,411

 
139,784

Property, plant and equipment
306

 
1,057

Other assets

 
371

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

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

 
$
586,643

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

18


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

 
1,454

 
 
 
Senesco
 
2014
 
Equity method
 
4
%
 
750

 
366

 
 
 
RXi
 
2013
 
Equity method
 
15
%
 
15,000

 
1,918

 
 
 
Pharmsynthez
 
2013
 
Equity method
 
17
%
 
11,300

 
6,405

 
 
 
Zebra
 
2013
 
VIE, equity method
 
19
%
 
2,000

 
840

 
 
 
Cocrystal
 
2009
 
Equity method
 
16
%
 
5,476

 
993

 
 
 
Neovasc options
 
2011
 
Investment available for sale
 
N/A

 
925

 
 
 

$
6.25

ChromaDex
 
2012
 
Investment available for sale
 
1
%
 
1,320

 
 
 
 
$
1.30

ARNO
 
2013
 
Investment available for sale
 
5
%
 
2,000

 
 
 
 
$
1.78

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

 
500

 
 
 
 
 
Senesco warrants
 
2014
 
Investment available for sale
 
N/A

 
228

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

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

 
 
 
 
 
Cocrystal Pharma, Inc.
We previously made investments in Biozone Pharmaceuticals, Inc. (“Biozone”) and Cocrystal Discovery, Inc. (“Cocrystal”). Effective January 2, 2014, Biozone and Cocrystal completed a merger transaction pursuant to which Cocrystal was the surviving entity, and the name of the issuer was changed to Cocrystal Pharma, Inc. (“CPI”). In connection with the transaction, CPI issued to Cocrystal’s former security holders 1,000,000 shares of the CPI’s Series B Convertible Preferred Stock (“Series B”). The Series B shares: (i) automatically convert into shares of the CPI’s common stock at a rate of 205.08308640 shares for each share of Series B at such time that CPI has sufficient authorized capital, (ii) are entitled to vote on all matters submitted to shareholders of CPI and vote on an as converted basis and (iii) have a nominal liquidation preference. The merger was being treated as a reverse merger and recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of the former Biozone’s operations were disposed of immediately prior to the consummation of the merger as reported on a Form 8-K filed on January 8, 2014. Cocrystal is treated as the accounting acquirer as its shareholders control CPI after the Merger.
We have determined that we and our related parties can significantly influence the success of CPI through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over CPI’s operations, we account for our investment in CPI under the equity method.
ARNO
In October 2013, we made an investment in ARNO Therapeutics, Inc. (“ARNO”), a clinical stage company focused on the development of oncology drugs. We invested $2.0 million and received 833,333 ARNO common shares, one year warrants to purchase 833,333 ARNO common shares for $2.40 a share and five year warrants to purchase an additional 833,333 ARNO common shares for $4.00 a share. Our investment was part of a private placement by ARNO. Other investors participating in the private financing included certain related parties. Refer to Note 10. We have determined that our ownership, along with that of our related parties, does not provide us with significant influence over the operations of ARNO and as a result, we account for ARNO as an investment, available for sale, and we record changes in the fair value of ARNO as an unrealized gain or loss in Other comprehensive loss each reporting period. We recorded the warrants on the date of the grant at their estimated fair value of $3.6 million using the Black-Scholes-Merton Model. We record changes in fair value of ARNO warrants in Other income (expense), net in our Condensed Consolidated Statement of Operations.
Neovasc
In 2011, we made an investment in Neovasc, a medical technology company based in Vancouver, Canada. We invested $2.0 million and received two million Neovasc common shares, and two-year warrants to purchase an additional one million shares for $1.25 a share. During the year ended December 31, 2013 we exercised the warrants and paid $1.2 million. We

19


accounted for the warrants as an investment, available for sale and recorded the warrants at fair value on the date of acquisition. We recorded the changes in the fair value of the warrants in Fair value changes of derivatives instruments, net in our Condensed Consolidated Statements of Operations. We have determined that our related parties can significantly influence the success of Neovasc through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over Neovasc’s operations, we account for our investment in Neovasc under the equity method.
2013 licensing agreements
An element of our growth strategy is to leverage our proprietary technology through a combination of internal development, acquisition, and external partnerships to maximize the commercial opportunities for our portfolio of proprietary pharmaceutical and diagnostic products and as such during 2013, we have entered into licensing agreements with Pharmsynthez and RXi.
Pharmsynthez transactions
In April 2013, we entered into a series of concurrent transactions with Pharmsynthez, a Russian pharmaceutical company traded on the Moscow Stock Exchange. The transactions consisted of:
We delivered approximately $9.6 million to Pharmsynthez.
Pharmsynthez issued to us approximately 13.6 million of its common shares.
Pharmsynthez agreed, at its option, to issue approximately 12.0 million common shares to us or to pay us cash in Russian Rubles (“RUR”) 265.0 million ($8.1 million) on or before December 31, 2013 (the “Pharmsynthez Note Receivable”). In January 2014, Pharmsynthez delivered to us approximately 12.0 million shares of its common stock in satisfaction of the Pharmsynthez Notes Receivable.
We had a right to purchase additional shares in Pharmsynthez at a fixed price if Pharmsynthez pays us in cash rather than delivering to us the 12.0 million Pharmsynthez common shares (the “Purchase Option”), however in connection with the settlement of the Pharmsynthez Note Receivable in January 2014, this right terminated. 
We granted rights to certain technologies in the Russian Federation, Ukraine, Belarus, Azerbaijan and Kazakhstan (the “Territories”) to Pharmsynthez. 
We will receive from Pharmsynthez royalty on net sales of products incorporating the technologies in the Territories, as well as a percentage of any sublicense income from third parties for the technologies in the Territories.
Pharmsynthez paid us $9.5 million under the various collaboration and funding agreements for the development of the technologies (the “Collaboration Payments”).
We recorded the shares received in Pharmsynthez as an equity method investment.  We initially recorded the Pharmsynthez Note Receivable, and the Purchase Option, as financial instruments and elected the fair value option for subsequent measurement. Changes in the fair value of the receivable from Pharmsynthez for its common stock or RUR, with the embedded derivative, and the Purchase Option are recorded in Fair value changes of derivative instruments, net in our Condensed Consolidated Statements of Operations. Upon settlement in January 2014, we recorded the additional shares at fair value as an equity method investment.
We have accounted for the license and development activities as a multi-element arrangement, and allocated the total arrangement consideration based on the relative selling prices of the elements. We will record the allocated consideration for development activities as an offset to Research and development expenses over the three-year term of the Collaboration Payments.  We will record revenue in connection with the grant of rights to the technologies proportionately as the payments are received. 
During the six months ended June 30, 2014, we received $1.4 million related to the Collaboration Payments of which we recorded $0.5 million in Revenue from transfer of intellectual property and $0.8 million as an offset to Research and development expenses.
RXi transactions
In March 2013, we completed the sale to RXi Pharmaceuticals, Inc. (“RXi”) of substantially all of our assets in the field of RNA interference (the “RNAi Assets”) (collectively, the “Asset Purchase Agreement”). As consideration for the RNAi Assets, at the closing of the Asset Purchase Agreement, RXi issued to us 50 million shares of its common stock (the “APA Shares”).
Pursuant to the Asset Purchase Agreement, RXi will be required to pay us up to $50.0 million in milestone payments upon the successful development and commercialization of each drug developed by RXi, certain of its affiliates or any of its or

20


their licensees or sublicensees utilizing patents included within the RNAi Assets (each, a “Qualified Drug”). In addition, RXi will also be required to pay us royalties equal to: (a) a mid single-digit percentage of “Net Sales” (as defined in the Asset Purchase Agreement) with respect to each Qualified Drug sold for an ophthalmologic use during the applicable “Royalty Period” (as defined in the Asset Purchase Agreement); and (b) a low single-digit percentage of net sales with respect to each Qualified Drug sold for a non-ophthalmologic use during the applicable royalty period.
In addition to the Asset Purchase Agreement, we purchased 17,241,380 shares of RXi, for $2.5 million, as part of a $16.4 million financing for RXi, which included other related parties. We have determined that our ownership, along with that of our related parties, provides us the ability to exercise significant influence over RXi operations and as such we have accounted for our investment in RXi under the equity method.
Senesco Technologies, Inc
We previously held a variable interest in Fabrus, Inc (“Fabrus”). Effective May 16, 2014 Senesco Technologies, Inc (“Senesco”) acquired Fabrus through a merger, with Fabrus surviving the merger as a wholly-owned subsidiary of Senesco.
Immediately prior to the effective time of the Merger, any unpaid indebtedness pursuant to all outstanding Fabrus convertible promissory notes was canceled and converted into Fabrus common stock. At the effective time of the merger, all outstanding Fabrus stock options were accelerated and terminated by Fabrus and replaced with stock options to acquire shares of Senesco common stock with identical rights and privileges except that the number of shares subject to each Senesco option equal the number of shares subject to the Fabrus option it replaced multiplied by 0.376939. As a part of the Merger consideration, Senesco issued to the Fabrus investors Common Stock Purchase Warrants to purchase shares of the Company’s common stock.
OPKO’s convertible promissory notes in Fabrus were canceled and converted into 80,000 shares of Senesco common stock, and OPKO’s 1,159,380 shares of Fabrus common stock were replaced with 437,016 shares of Senesco common stock. OPKO received a total of 517,016 shares of Senesco common stock and warrants to purchase an additional 267,927 shares of Senesco common stock.
We have determined that we and our related parties can significantly influence the success of Senesco through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over Senesco’s operations, we account for our investment in Senesco under the equity method. Based on our review of the applicable accounting literature, we believe the transaction qualifies for carryover basis.
Investments in variable interest entities

We have determined that we hold variable interests in SciVac Ltd (“SciVac”), previously known as SciGen (I.L.) Ltd, and Zebra Biologics, Inc. (“Zebra”). We made this determination as a result of our assessment that they do not have sufficient resources to carry out their principal activities without additional financial support.
In October 2013, we acquired 840,000 shares of Zebra Series A-2 Preferred Stock for $2.0 million. In connection with the transactions, Dr. Frost also gifted to OPKO 900,000 shares of Zebra restricted common stock which he had received as a founding member of Zebra. Zebra is a privately held biotechnology company focused on the discovery and development of biosuperior antibody therapeutics and complex drugs. After the closing on October 29, 2013, OPKO owns 23.5% of the Series A-2 Preferred stock issued and outstanding of Zebra. Dr. Richard Lerner, M.D., a member of our Board of Directors, is a founder of Zebra and, along with Dr. Frost, serves as a member of Zebra’s Board of Directors.
In order to determine the primary beneficiary of Zebra, we evaluated our investment and our related parties’ investment, as well as our investment combined with the related party group’s investment to identify if we had the power to direct the activities that most significantly impact the economic performance of Zebra. We determined that we do not have the power to direct the activities that most significantly impact Zebra’s economic performance. Based on the capital structure, governing documents and overall business operations of Zebra, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact Zebra’s economic performance. We did determine, however, that we can significantly influence the success of Zebra through our board representation and voting power. Accordingly, as we have the ability to exercise significant influence over Zebra’s operations, we account for our investment in Zebra under the equity method.
Consolidated variable interest entities
In June 2012, we entered into a share and debt purchase agreement whereby in exchange for $0.7 million we acquired shares representing a 50% stock ownership in SciVac from FDS Pharma LLP (“FDS”). SciVac is a privately-held Israeli company that produces a third-generation hepatitis B-vaccine. From November 2012 until June 30, 2014, we loaned to SciVac

21


a combined $2.6 million for working capital purposes. We have determined that we hold variable interests in SciVac based on our assessment that SciVac does not have sufficient resources to carry out its principal activities without financial support. In order to determine the fair market value of our investment in SciVac, we have utilized a business enterprise valuation approach.
In order to determine the primary beneficiary of SciVac, we evaluated our investment to identify if we had the power to direct the activities that most significantly impact the economic performance of SciVac. We have determined that the power to direct the activities that most significantly impact the economic performance of SciVac is conveyed through SciVac’s board of directors. SciVac’s board of directors appoint and oversee SciVac’s management team who carry out the activities that most significantly impact the economic performance of SciVac. As part of the share and debt purchase agreement, SciVac’s board of directors is constituted by 5 members, of which 3 members will be appointed by us, representing 60% of SciVac’s board. Based on this analysis, we determined that we have the power to direct the activities of SciVac and as such we are the primary beneficiary. As a result of this conclusion, we have consolidated the results of operations and financial position of SciVac and recorded a reduction of equity for the portion of SciVac we do not own.
The following table represents the consolidated assets and non-recourse liabilities related to SciVac as of June 30, 2014 and December 31, 2013. These assets are owned by, and these liabilities are obligations of, SciVac, not us.
(In thousands)
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
433

 
$
2

Accounts receivable, net
516

 
283

Inventories, net
1,700

 
1,696

Prepaid expenses and other current assets
529

 
218

Total current assets
3,178

 
2,199

Property, plant and equipment, net
1,412

 
1,374

Intangible assets, net
1,055

 
1,111

Goodwill
1,757

 
1,821

Other assets
263

 
261

Total assets
$
7,665

 
6,766

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,007

 
$
1,136

Accrued expenses
8,298

 
6,498

Notes payable
3,903

 
1,537

Total current liabilities
13,208

 
9,171

Other long-term liabilities
261

 
1,240

Total liabilities
$
13,469

 
$
10,411


22


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 “Purchaser”) in a private placement in reliance on exemptions from registration under the Securities Act of 1933, (the “Securities Act”). The Purchasers of the 2033 Senior Notes include Frost Gamma Investments Trust, a trust affiliated with Dr. Frost, and Hsu Gamma Investment, L.P., an entity affiliated with Dr. Hsiao. The 2033 Senior Notes were issued on January 30, 2013. The 2033 Senior Notes, which total $175.0 million, bear interest at the rate of 3.00% per year, payable semiannually on February 1 and August 1 of each year, beginning August 1, 2013. The 2033 Senior Notes will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the instruments governing the 2033 Senior Notes, 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 our Condensed Consolidated Balance Sheets:
(In thousands)
Embedded conversion option
 
2033 Senior Notes
 
Discount
 
Total
Balance at December 31, 2013
$
101,087

 
$
158,064

 
$
(47,239
)
 
$
211,912

Amortization of debt discount

 

 
3,557

 
3,557

Change in fair value of embedded derivative
(770
)
 

 

 
(770
)
Conversion
(47,353
)
 
(70,422
)
 
19,441

 
(98,334
)
Balance at June 30, 2014
$
52,964

 
$
87,642

 
$
(24,241
)
 
$
116,365

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 141.4827 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. As a result, 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

23


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 Condensed Consolidated Balance Sheets.
In June 2014, we entered into an exchange agreement with a holder of the Company’s Notes pursuant to which such holder exchanged $70.4 million in aggregate principal amount of 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. We recorded a 2.7 million non-cash gain related to the exchange. The gain on exchange is included within Other income (expense) on our Condensed Consolidated Statement of Operations.
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 holder 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:
 
June 30, 2014
Stock price
$8.84
Conversion Rate
141.4827
Conversion Price
$7.07
Maturity date
February 1, 2033
Risk-free interest rate
1.47%
Estimated stock volatility
42%
Estimated credit spread
717 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 June 30, 2014. At June 30, 2014 the principal amount of the 2033 Senior Notes was $87.6 million:
(In thousands)
June 30, 2014
Fair value of 2033 Senior Notes:
 
With the embedded derivatives
$
122,723

Without the embedded derivatives
$
69,759

Estimated fair value of the embedded derivatives
$
52,964

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 six months ended June 30, 2014, we observed an increase in the market price of our

24


Common Stock which primarily resulted in a $0.8 million decrease in the estimated fair value of our embedded derivatives recorded in Fair value changes of derivative instruments, net in our Condensed Consolidated Statements of Operations.

We have line of credit agreements with twelve financial institutions as of June 30, 2014 and fourteen financial institutions as of December 31, 2013 in 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 Chilean and Spanish lines of credit:
(Dollars in thousands)
 
 
 
 
 
 Balance Outstanding
Lender
 
Interest rate on
borrowings at June 30, 2014
 
Credit line
capacity
 
June 30,
2014
 
December 31,
2013
Itau Bank
 
5.00%
 
$1,800
 
$1,476
 
$1,999
Bank of Chile
 
6.40%
 
2,250
 
1,195
 
2,079
BICE Bank
 
5.00%
 
1,700
 
1,868
 
516
Corp Banca
 
—%
 
 
 
(47)
BBVA Bank
 
5.00%
 
2,000
 
1,403
 
523
Penta Bank
 
8.20%
 
1,200
 
1,096
 
946
Security Bank
 
7.26%
 
1,300
 
797
 
1,075
BCI
 
—%
 
 
 
198
Estado Bank
 
5.44%
 
2,800
 
1,709
 
1,772
Sabadell Bank
 
4.50%
 
205
 
 
Bilbao Vizcaya Bank
 
4.72%
 
341
 
 
Banco Popular
 
6.09%
 
273
 
 
Deutsche Bank
 
4.00%
 
204
 
 
Santander Bank
 
4.09%
 
273
 
 
Total
 
 
 
$14,346
 
$9,544
 
$9,061
At June 30, 2014 and December 31, 2013, the weighted average interest rate on our lines of credit was approximately 5.8% and 7.7%, respectively.
At June 30, 2014 and December 31, 2013, we had mortgage notes and other debt related to OPKO Spain as follows:
(In thousands)
June 30,
2014
 
December 31,
2013
Current portion of notes payable
$
950

 
$
1,964

Other long-term liabilities
2,948

 
3,270

Total mortgage notes and other debt
$
3,898

 
$
5,234

The mortgages and other debts mature at various dates ranging from 2015 through 2024 bearing variable interest rates from 2.7% up to 6.1%. The weighted average interest rate on the mortgage notes and other debt at June 30, 2014 and December 31, 2013, was 3.4% and 3.9%, respectively. The mortgages are secured by our office space in Barcelona.

25


NOTE 7 ACCUMULATED OTHER COMPREHENSIVE INCOME
For the six months ended June 30, 2014, changes in Accumulated other comprehensive income, net of tax, were as follows:
(In thousands)
Foreign
currency
 
Unrealized
gains in
Accumulated
OCI
 
Total
Balance at December 31, 2013
$
1,371

 
$
2,047

 
$
3,418

Other comprehensive income before reclassifications, net of tax (1)
(1,613
)
 
(948
)
 
(2,561
)
Amounts reclassified from accumulated other comprehensive income, net of tax (1)

 
(553
)
 
(553
)
Net other comprehensive income
(1,613
)
 
(1,501
)
 
(3,114
)
Balance at June 30, 2014
$
(242
)
 
$
546

 
$
304

(1)
Effective tax rate of 38.47%.
Amounts reclassified from Accumulated other comprehensive income for the six months ended June 30, 2014 related to $1.3 million realized gain on the sales of certain of our investments available for sale. Of the $1.3 million gain on the sales of our investments available for sale, a $0.9 million gain was reclassified from unrealized gains in Accumulated other comprehensive income to Other income (expense), net for the six months ended June 30, 2014.
NOTE 8 FAIR VALUE MEASUREMENTS
We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
A summary of our investments as of June 30, 2014, classified as available for sale and carried at fair value, is as follows:
 
As of June 30, 2014
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Gain/(Loss)
in
Accumulated
Deficit
 
Fair
value
Common stock investments, available for sale
$
3,320

 
$
1,100

 
$
(517
)
 
$

 
$
3,903

Common stock options/warrants
1,425

 
1,575

 

 
2,980

 
5,980

Total assets
$
4,745

 
$
2,675

 
$
(517
)
 
$
2,980

 
$
9,883

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

 
$
2,698

 
$

 
$

 
$
6,074

Common stock options/warrants
925

 
1,041

 

 
4,022

 
5,988

Total assets
$
4,301

 
$
3,739

 
$

 
$
4,022

 
$
12,062

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

26


As of June 30, 2014, we have money market funds that qualify as cash equivalents, forward contracts for inventory purchases (Refer to Note 9) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics, FineTech, OPKO Spain, and OPKO Renal that are required to be measured at fair value on a recurring basis. In addition, in connection with our investment and our consulting agreement with Neovasc, we record the related Neovasc options at fair value as well as the derivative instruments related to our transactions with Pharmsynthez.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
 
Fair value measurements as of June 30, 2014
(In thousands)
Quoted
prices in
active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
112,546

 
$

 
$

 
$
112,546

Certificates of deposit

 
827

 

 
827

Common stock investments, available for sale
3,903

 

 

 
3,903

Common stock options/warrants

 
5,980

 

 
5,980

Total assets
$
116,449

 
$
6,807

 
$

 
$
123,256

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
52,964

 
$
52,964

Forward Contracts

 
55

 

 
55

Deferred acquisition payments, net of discount

 

 

 

Contingent consideration:
 
 
 
 
 
 
 
CURNA

 

 
598

 
598

OPKO Diagnostics

 

 
14,174

 
14,174

OPKO Renal

 

 
56,470

 
56,470

OPKO Spain

 

 
1,672

 
1,672

Total liabilities
$

 
$
55

 
$
125,878

 
$
125,933


27


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

 
$

 
$

 
$
168,418

Certificates of deposit

 
827

 

 
827

Pharmsynthez Notes Receivable & Purchase Option

 
6,151

 

 
6,151

Common stock investments, available for sale
6,074

 

 

 
6,074

Common stock options/warrants

 
5,988

 

 
5,988

Forward contracts

 
49

 

 
49

Total assets
$
174,492

 
$
13,015

 
$

 
$
187,507

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option

 

 
101,087

 
101,087

Deferred acquisition payments, net of discount

 

 
5,465

 
5,465

Contingent consideration:
 
 
 
 
 
 
 
CURNA

 

 
573

 
573

OPKO Diagnostics

 

 
13,776

 
13,776

FineTech

 

 
3,124

 
3,124

OPKO Renal

 

 
53,092

 
53,092

OPKO Spain

 

 
1,043

 
1,043

Total liabilities
$

 
$

 
$
178,160

 
$
178,160

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

 
$
69,759

 
$

 
$

 
$
69,759

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

 
$
5,484

 
$
101,087

Additions

 

 

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

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

Conversion

 

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

 
$

 
$
52,964


28


The estimated fair values of our financial instruments have been determined by using available market information and what we believe to be appropriate valuation methodologies. We use the following methods and assumptions in estimating fair value:
Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash flow model for the expected payments based on estimated timing and expected revenues. We use several discount rates depending on each type of contingent consideration related to FineTech, OPKO Diagnostics, CURNA, OPKO Spain and OPKO Renal transactions. The discount rates used range from 6% to 27% and were based on the weighted average cost of capital for those businesses. If the discount rates were to increase by 1%, on each transaction, the contingent consideration would decrease by $2.1 million. If estimated future sales were to decrease by 10%, the contingent consideration related to CURNA, FineTech and OPKO Renal would decrease by $0.7 million. As of June 30, 2014, of the $72.9 million of contingent consideration, $24.6 million is recorded in Accrued expenses and $48.3 million is recorded in Other long-term liabilities. As of December 31, 2013, of the $71.6 million of contingent consideration, $28.0 million is recorded in Accrued expenses and $43.6 million is recorded in Other long-term liabilities.
Deferred payments – We estimate the fair value of the deferred payments utilizing a discounted cash flow model for the expected payments.
Embedded conversion option – We estimate the fair value of the embedded conversion option related to the 2033 Senior Notes using a binomial lattice model. Refer to Note 6 for detail description of the binomial lattice model and the fair value assumptions used.


29


NOTE 9 DERIVATIVE CONTRACTS
The following table summarizes the fair values and the presentation of our derivative financial instruments in the Condensed Consolidated Balance Sheets:
(In thousands)
Balance Sheet Component
 
June 30,
2014
 
December 31,
2013
Derivative financial instruments:
 
 
 
 
 
Pharmsynthez Note Receivable and Purchase Option
Prepaid expenses and other current assets
 
$

 
$
6,151

Common stock options/warrants
Investments, net
 
$
5,980

 
$
5,988

Embedded conversion option
2033 Senior Notes, net of discount and estimated fair value of embedded derivatives
 
$
52,964

 
$
101,087

Forward contracts (1)
Current portion of lines of credit and notes payable
 
$
3,624

 
$
1,585

(1) 
The loss on forward contracts is recorded in Accrued expenses. The gain on the forward contracts is recorded in Prepaid expenses and other current assets.
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 June 30, 2014 and December 31, 2013, 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 Condensed Consolidated Statements of Operations. The following table summarizes the (losses) and gains recorded during the three and six months ended June 30, 2014 and 2013:
 
Three months ended June 30,
 
Six months ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Derivative gain (loss):
 
 
 
 
 
 
 
Common stock options/warrants
(860
)
 
2,584

 
$
(263
)
 
$
3,844

2033 Senior Notes
11,882

 
9,913

 
770

 
(14,875
)
Forward contracts
(55
)
 
154

 
(55
)
 
133

Total
$
10,967

 
$
12,651

 
$
452

 
$
(10,898
)

The outstanding forward contracts at June 30, 2014 and December 31, 2013, have been recorded at fair value, and their maturity details are as follows:
(In thousands)
Days until maturity
 
Contract value
 
Fair value at
 June 30, 2014
 
Effect on income (loss)
0 to 30
 
$
1,157

 
$
1,146

 
$
(11
)
31 to 60
 
966

 
951

 
(15
)
61 to 90
 
623

 
612

 
(11
)
91 to 120
 
831

 
815

 
(16
)
121 to 180
 
102

 
100

 
(2
)
Total
 
$
3,679

 
$
3,624

 
$
(55
)

30


(In thousands)
Days until maturity
 
Contract value
 
Fair value at
 December 31, 2013
 
Effect on income (loss)
0 to 30
 
$
472

 
$
489

 
$
17

31 to 60
 
562

 
579

 
18

61 to 90
 
503

 
517

 
14

91 to 120
 

 

 

121 to 180
 

 

 

More than 180
 

 

 

Total
 
$
1,537

 
$
1,585

 
$