OPK-9.30.2013-10Q
Table of Contents
 

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 September 30, 2013.
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
¨
Accelerated filer
ý
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 October 31, 2013, the registrant had 407,989,487 shares of common stock outstanding.

 
Table of Contents

TABLE OF CONTENTS
Page
 
 
 
EX-3.1
Amended and Restated Certificate of Incorporation
 
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
Table of Contents

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, 2012, as updated by our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 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.

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•
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 our Israeli, 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, and Brazil 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.
•
The success of our business will be heavily dependent on the success of ongoing and planned Phase 3 clinical trials for RayaldyTM, AlpharenTM 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.
•
We do not have an exclusive arrangement in place with Dr. Tom Kodadek with respect to technology or intellectual property that may be material to our business.
•
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.
•
Medicare prescription drug coverage legislation and future legislative or regulatory reform of the health care system may affect our ability to sell our products and 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.

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•
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 embedded derivatives and may continue to result in volatility in our financial statements, including having a material impact on our result of operations and derivative liability recorded.
•
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.

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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
(In thousands except share and per share data)
 
September 30, 2013(1) (Unaudited)
 
December 31, 2012(1)(Audited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
155,834

 
$
27,361

Marketable securities
25,004

 
—

Accounts receivable, net
21,372

 
21,162

Inventory, net
19,516

 
22,261

Prepaid expenses and other current assets
19,551

 
7,873

Total current assets
241,277

 
78,657

Property, plant, equipment, and investment properties, net
17,027

 
16,526

Intangible assets, net
77,333

 
84,238

In-process research and development
793,312

 
11,546

Goodwill
222,340

 
80,450

Investments, net
24,690

 
15,636

Other assets
7,003

 
2,777

Total assets
$
1,382,982

 
$
289,830

LIABILITIES, SERIES D PREFERRED STOCK, AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,631

 
$
10,200

Accrued expenses
43,269

 
24,656

Current portion of lines of credit and notes payable
14,477

 
17,526

Total current liabilities
71,377

 
52,382

3.00% convertible senior notes, net of discount and estimated fair value of embedded derivatives
208,917

 
—

Other long-term liabilities, principally contingent consideration and deferred tax liabilities
234,762

 
34,168

Total long-term liabilities
443,679

 
34,168

Total liabilities
515,056

 
86,550

Commitments and contingencies:

 

Series D Preferred Stock - $0.01 par value, 2,000,000 shares authorized; no shares issued or
      outstanding at September 30, 2013 and 1,129,032 shares issued and outstanding (liquidation
      value of $30,595) at December 31, 2012
—

 
24,386

Equity:
 
 
 
Series A Preferred Stock - $0.01 par value, 4,000,000 shares authorized; no shares issued or
      outstanding at September 30, 2013 or December 31, 2012
—

 
—

Series C Preferred Stock - $0.01 par value, 500,000 shares authorized; no shares issued or
      outstanding at September 30, 2013 or December 31, 2012
—

 
—

Common Stock - $0.01 par value, 500,000,000 shares authorized; 408,903,912 and 305,560,763
      shares issued at September 30, 2013 and December 31, 2012, respectively
4,089

 
3,056

Treasury Stock - 2,293,056 shares at both September 30, 2013 and December 31, 2012
(7,457
)
 
(7,457
)
Additional paid-in capital
1,357,235

 
565,201

Accumulated other comprehensive income
3,237

 
7,356

Accumulated deficit
(486,377
)
 
(388,770
)
Total shareholders’ equity
870,727

 
179,386

Noncontrolling interests
(2,801
)
 
(492
)
Total equity
867,926

 
178,894

Total liabilities, Series D Preferred Stock, and equity
$
1,382,982

 
$
289,830

(1)
As of September 30, 2013 and December 31, 2012, total assets include $5.9 million and $5.6 million, respectively, and total liabilities include $8.7 million and $5.5 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.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Products
$
16,563

 
$
11,495

 
$
50,708

 
$
30,051

Revenue from services
2,770

 
100

 
9,050

 
332

Revenue from transfer of intellectual property
1,308

 
200

 
16,080

 
400

Total revenues
20,641

 
11,795

 
75,838

 
30,783

Costs and expenses:
 
 
 
 
 
 
 
Costs of revenues
11,952

 
7,487

 
36,812

 
19,028

Selling, general and administrative
13,572

 
7,322

 
39,875

 
17,428

Research and development
11,085

 
3,621

 
30,552

 
12,942

Contingent consideration
252

 
556

 
4,173

 
2,665

Amortization of intangible assets
2,790

 
2,178

 
8,192

 
6,277

Total costs and expenses
39,651

 
21,164

 
119,604

 
58,340

Operating loss from continuing operations
(19,010
)
 
(9,369
)
 
(43,766
)
 
(27,557
)
Other income and (expense), net:
 
 
 
 
 
 
 
Interest income
88

 
49

 
237

 
123

Interest expense
(3,409
)
 
(393
)
 
(10,148
)
 
(975
)
Fair value changes of derivative instruments, net
(27,793
)
 
169

 
(38,691
)
 
1,309

Other income (expense), net
(7,787
)
 
55

 
2,571

 
(30
)
Other income and (expense), net
(38,901
)
 
(120
)
 
(46,031
)
 
427

Loss from continuing operations before income taxes
       and investment losses
(57,911
)
 
(9,489
)
 
(89,797
)
 
(27,130
)
Income tax provision (benefit)
1,290

 
(128
)
 
2,258

 
89

Loss from continuing operations before investment losses
(59,201
)
 
(9,361
)
 
(92,055
)
 
(27,219
)
Loss from investments in investees
(1,600
)
 
(468
)
 
(7,861
)
 
(1,464
)
Loss from continuing operations
(60,801
)
 
(9,829
)
 
(99,916
)
 
(28,683
)
Income from discontinued operations, net of tax
—

 
183

 
—

 
183

Net loss
(60,801
)
 
(9,646
)
 
(99,916
)
 
(28,500
)
Less: Net loss attributable to noncontrolling interests
(803
)
 
—

 
(2,309
)
 
—

Net loss attributable to common shareholders before
       preferred stock dividend
(59,998
)
 
(9,646
)
 
(97,607
)
 
(28,500
)
Preferred stock dividend
—

 
(560
)
 
(420
)
 
(1,680
)
Net loss attributable to common shareholders
$
(59,998
)
 
$
(10,206
)
 
$
(98,027
)
 
$
(30,180
)
Loss per share, basic and diluted:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.17
)
 
$
(0.03
)
 
$
(0.29
)
 
$
(0.10
)
Income from discontinued operations
—

 
—

 
—

 
—

Net loss per share
$
(0.17
)
 
$
(0.03
)
 
$
(0.29
)
 
$
(0.10
)
Weighted average number of common shares outstanding,
        basic and diluted
360,638,527

 
298,103,882

 
336,942,515

 
297,762,469



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
Net loss attributable to common shareholders
$
(59,998
)
 
$
(10,206
)
 
$
(98,027
)
 
$
(30,180
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation
367

 
1,960

 
(1,395
)
 
2,570

Available for sale investments:
 
 
 
 
 
 
 
Change in other unrealized gains, net
40

 
322

 
1,869

 
5,527

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

 
—

 
(4,593
)
 
—

Comprehensive loss
$
(59,591
)
 
$
(7,924
)
 
$
(102,146
)
 
$
(22,083
)


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In thousands, except share and per share data)
For the nine months ended September 30, 2013

 
Common Stock
 
Treasury
 
Additional
Paid-In
Capital
 
Accumulated Other
Comprehensive
Income
 
Accumulated
Deficit
 
Noncontrolling
Interests
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
 
Balance at December 31, 2012
305,560,763

 
$
3,056

 
(2,293,056
)
 
$
(7,457
)
 
$
565,201

 
$
7,356

 
$
(388,770
)
 
$
(492
)
 
$
178,894

Equity-based compensation expense
—

 
—

 
—

 
—

 
7,411

 
—

 
—

 
—

 
7,411

Exercise of Common Stock options
3,604,783

 
36

 
—

 
—

 
4,399

 
—

 
—

 
—

 
4,435

Exercise of Common Stock warrants
1,213,679

 
12

 
—

 
—

 
614

 
—

 
—

 
—

 
626

Series D Preferred Stock dividend
—

 
—

 
—

 
—

 
(3,015
)
 
—

 
—

 
—

 
(3,015
)
Conversion of Series D Preferred Stock
11,290,320

 
113

 
—

 
—

 
24,273

 
—

 
—

 
—

 
24,386

Conversion of 3.00% convertible senior
    notes
2,396,145

 
24

 
—

 
—

 
20,815

 
—

 
—

 
—

 
20,839

Issuance of Common Stock in connection
    with OPKO Brazil acquisition at $6.73
    per share
64,684

 
1

 
—

 
—

 
435

 
—

 
—

 
—

 
436

Issuance of Common Stock in connection
    with Cytochroma acquisition at $7.16
    per share
20,517,030

 
205

 
—

 
—

 
146,697

 
—

 
—

 
—

 
146,902

Issuance of Common Stock in connection
    with PROLOR acquisition at $8.49 per
    share and fair value of stock
    options and warrants exchanged
63,670,805

 
637

 
—

 
—

 
586,006

 
—

 
—

 
—

 
586,643

Issuance of Common Stock in connection
    with Farmadiet's first Deferred Payment
    at $7.52 per share
585,703

 
5

 
—

 
—

 
4,399

 
—

 
—

 
—

 
4,404

Net loss attributable to common
    shareholders before preferred stock
    dividend
—

 
—

 
—

 
—

 
—

 
—

 
(97,607
)
 
—

 
(97,607
)
Net loss attributable to noncontrolling
    interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,309
)
 
(2,309
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(4,119
)
 
—

 
—

 
(4,119
)
Balance at September 30, 2013 (unaudited)
408,903,912

 
$
4,089

 
(2,293,056
)
 
$
(7,457
)
 
$
1,357,235

 
$
3,237

 
$
(486,377
)
 
$
(2,801
)
 
$
867,926



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 
For the nine months ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net loss
$
(99,916
)
 
$
(28,500
)
Income from discontinued operations, net of tax
—

 
(183
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
10,648

 
7,447

Non-cash interest on convertible senior notes
4,250

 
—

Amortization of deferred financing costs
993

 
—

Losses from investments in investees
7,861

 
1,464

Equity-based compensation – employees and non-employees
7,411

 
3,281

Provision for bad debts
810

 
11

Provision for inventory obsolescence
1,529

 
1,520

Revenue from receipt of equity
(12,680
)
 
(159
)
Realized gain on sale of equity securities
(10,953
)
 
—

Loss on conversion of 3.00% convertible senior notes
8,688

 
—

Loss on sale of property, plant and equipment
56

 
—

Change in fair value of derivatives instruments
38,691

 
(1,309
)
Change in fair value of contingent consideration
4,173

 
2,665

Deferred income tax benefit
(197
)
 
—

Changes in assets and liabilities of continuing operations, net of the
effects of acquisitions:
 
 
 
Accounts receivable
(724
)
 
(184
)
Inventory
952

 
(4,443
)
Prepaid expenses and other current assets
(2,081
)
 
(1,312
)
Other assets
525

 
77

Accounts payable
2,303

 
(331
)
Foreign currency measurement
(1,409
)
 
(204
)
Accrued expenses
6,928

 
459

Cash used in operating activities of continuing operations
(32,142
)
 
(19,701
)
Cash used in operating activities of discontinued operations
—

 
14

Net cash used in operating activities
(32,142
)
 
(19,687
)
Cash flows from investing activities:
 
 
 
Investments in investees
(13,341
)
 
(2,700
)
Proceeds from sale of equity securities
11,628

 
—

Acquisition of businesses, net of cash
20,528

 
(10,512
)
Purchase of marketable securities
(50,027
)
 
(28,923
)
Maturities of short-term marketable securities
25,016

 
10,000

Proceeds from the sale of property, plant and equipment
631

 
—

Capital expenditures
(2,991
)
 
(1,064
)
Net cash used in investing activities
(8,556
)
 
(33,199
)
Cash flows from financing activities:
 
 
 
Issuance of 3.00% convertible 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
5,061

 
1,702

Borrowings on lines of credit
24,613

 
29,389

Repayments of lines of credit
(27,706
)
 
(26,108
)
Net cash provided by financing activities
169,137

 
4,983

Effect of exchange rate on cash and cash equivalents
34

 
(185
)
Net increase (decrease) in cash and cash equivalents
128,473

 
(48,088
)
Cash and cash equivalents at beginning of period
27,361

 
71,516

Cash and cash equivalents at end of period
$
155,834

 
$
23,428

SUPPLEMENTAL INFORMATION:
 
 
 
Interest paid
$
3,126

 
$
613

Income taxes paid, net
$
316

 
$
515

RXi common stock received
$
12,500

 
$
—

Non-cash financing:
 
 
 
Shares issued upon the conversion of:
 
 
 
Series D Preferred Stock
$
24,386

 
$
—

3.00% convertible senior notes
$
20,839

 
$
—

Common Stock warrants, net exercised
$
815

 
$
7

Issuance of Common Stock, Common Stock options and warrants to
      acquire PROLOR
$
586,643

 
$
—

Issuance of Common Stock to acquire:
 
 
 
Cytochroma
$
146,902

 
$
—

OPKO Brazil
$
436

 
$
—

Farmadiet
$
4,404

 
$
805



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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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 molecular diagnostics tests, laboratory developed tests, point-of-care 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 Spain, Chile and Mexico, 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 recently established pharmaceutical operations in Brazil. We also operate a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect to play a valuable role in the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and therapeutic products. We operate a laboratory business with laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), that has a strong presence in the U.S. urologic pathology market, and will provide us with a platform to commercialize certain of our novel diagnostics tests currently in development.
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. Our Chilean operations are located in leased offices and warehouse facilities in Santiago. 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 nine months ended September 30, 2013, are not necessarily indicative of the results of operations and cash flows that may be reported for the remainder of 2013 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, 2012.
Reclassifications and correction of an error. Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2013 presentation. Due to the acquisition of OPKO OURLab, LLC (formerly Prost-Data, Inc.), our CLIA certified laboratory business (“OURLab”) in December 2012, we changed our segment presentation to include diagnostics as a reportable segment. As a result of this change in reportable segments, we restated certain prior year amounts in the condensed consolidated financial statements to conform with the 2013 presentation. These reclassifications had no impact on our results of operations. Refer to Note 12.
The condensed consolidated statements of operations for the three and nine months ended September 30, 2013 include a $2.7 million, or $0.01 per share, reduction of research and development expense. This reduction is the resulting of correcting the cumulative effect of an error in calculating equity based compensation expense for certain performance based stock options granted to a non-employee. The effect of this error was not material to the financial statements of any prior annual or quarterly periods nor is it material to 2013 financial statements presented herein; and as such, the cumulative effect of such error was recorded as a reduction to research and development expense in the three and nine months ended September 30, 2013.


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Principles of consolidation. The accompanying unaudited condensed consolidated financial statements include the accounts of OPKO Health, Inc., 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.
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. Goodwill and other intangible assets acquired in business combinations, licensing and other transactions at September 30, 2013 and December 31, 2012 were $1.1 billion and $0.2 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 in-process research and development (“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, on an enterprise level 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.
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 September 30, 2013 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 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 September 30, 2013 and

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December 31, 2012, 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 in Fair value changes of 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 are 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 nine months ended September 30, 2013, revenue from services also includes $0.2 million and $0.6 million, respectively, of revenue related to our consulting agreement with Neovasc, Inc. (“Neovasc”) and to revenue related to molecular diagnostics collaboration agreements. For the three and nine months ended September 30, 2012, revenue from services included $0.1 million and $0.3 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 nine months ended September 30, 2013, we recorded $16.1 million of revenue from the transfer of intellectual property, of which $12.5 million related to the sale of substantially all of our assets in the field of RNA interference to RXi Pharmaceuticals Corporation (“RXi”) and $3.2 million related to the rights granted to OAO Pharmsynthez ("Pharmsynthez") of certain technologies. 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.
Total deferred revenue included in Accrued expenses and Other long-term liabilities was $7.9 million and $1.9 million at September 30, 2013 and December 31, 2012, 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

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amount of the allowance for doubtful accounts was $1.1 million and $0.5 million at September 30, 2013 and December 31, 2012, 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 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 September 30, 2013 and 2012, we recorded $0.4 million and $1.1 million , respectively, of equity-based compensation expense. During the nine months ended September 30, 2013 and 2012, we recorded $7.4 million, and $3.3 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 pharmaceuticals 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 and Brazil. The diagnostics segment consists of two operating segments, our (i) pathology operations we acquired through the acquisition of OURLab 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 VIEs 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 February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, (“ASU 2013-2”). ASU 2013-2 requires the presentation of reclassifications out of accumulated other comprehensive income in either (1)the notes or (2)the face of the financial statements. We adopted ASU 2013-2 for our first quarter ended March 31, 2013. The adoption of ASU 2013-2 did not have a material impact in our condensed consolidated financial statements, but did require certain additional disclosures. Refer to Note 7.
In July 2013, the FASB issued 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 2013-11is 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 dis-allowance of a tax position. This ASU will be effective for our fiscal year beginning January 1, 2014 and subsequent interim periods. The adoption of ASU 2013-11 is not expected to have a material effect on our condensed consolidated financial statements.

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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 by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options. The dilutive impact of common stock options and common stock warrants is determined by applying the “treasury stock” method. Potentially dilutive shares issuable pursuant to the Notes (defined in Note 6) were not included in the computation of net loss per share for the three and nine months ended September 30, 2013, because their inclusion would be anti-dilutive.
Also, a total of 35,157,966 and 26,022,072 potential shares of Common Stock have been excluded from the calculation of diluted net loss per share for the three months ended September 30, 2013 and 2012, respectively, because their inclusion would be anti-dilutive. A total of 31,659,650 and 26,836,546 potential shares of Common Stock have been excluded from the calculation of net loss per share for the nine months ended September 30, 2013 and 2012, respectively, because their inclusion would be anti-dilutive.
During the three months ended September 30, 2013, 3,206,230 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised and issued. During the three months ended September 30, 2012, 161,264 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 160,411 shares of Common Stock. Of the 161,264 Common Stock options and Common Stock warrants exercised, 853 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the warrant agreements.
During the nine months ended September 30, 2013, 4,933,976 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 4,818,462 shares of Common Stock. Of the 4,933,976 Common Stock options and Common Stock warrants exercised, 115,514 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the warrant agreements. During nine months ended September 30, 2012, 750,162 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 748,783 shares of Common Stock. Of the 750,162 Common Stock options and Common Stock warrants exercised, 1,379 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the warrant agreements.

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NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands)
September 30,
2013
 
December 31,
2012
Accounts receivable, net:
 
 
 
Accounts receivable
$
22,506

 
$
21,636

Less: allowance for doubtful accounts
(1,134
)
 
(474
)
 
$
21,372

 
$
21,162

Inventories, net:
 
 
 
Finished products
$
14,775

 
$
17,963

Work in-process
1,450

 
688

Raw materials
4,426

 
4,923

Less: inventory reserve
(1,135
)
 
(1,313
)
 
$
19,516

 
$
22,261

Prepaid expenses and other current assets:
 
 
 
Prepaid supplies
$
839

 
$
443

Prepaid insurance
843

 
301

Pharmsynthez Note Receivable and Purchase Option
6,755

 
—

Other receivables
3,818

 
886

Taxes recoverable
2,992

 
1,493

Other
4,304

 
4,750

 
$
19,551

 
$
7,873

Intangible assets, net:
 
 
 
Technologies
$
52,947

 
$
52,810

Customer relationships
22,883

 
23,088

Product registrations
9,861

 
9,637

Tradenames
3,702

 
3,746

Covenants not to compete
8,667

 
8,662

Other
1,177

 
367

Less:  accumulated amortization
(21,904
)
 
(14,072
)
 
$
77,333

 
$
84,238

Accrued expenses:
 
 
 
Taxes payable
$
3,225

 
$
1,614

Deferred revenue
7,040

 
1,518

Clinical trials
3,543

 
50

Professional fees
7,203

 
675

Employee benefits
6,416

 
3,319

Deferred acquisition payments, net of discount
5,335

 
6,172

Contingent consideration
3,695

 
5,126

Interest payable related to the Notes
925

 
—

Other
5,887

 
6,182

 
$
43,269

 
$
24,656

 
 
 
 

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(In thousands)
September 30,
2013
 
December 31,
2012
Other long-term liabilities:
 
 
 
Contingent consideration – Cytochroma
$
51,447

 
$
—

Contingent consideration – Farmadiet
542

 
532

Contingent consideration – OPKO Diagnostics
12,976

 
11,310

Contingent consideration – FineTech
—

 
2,578

Contingent consideration – CURNA
549

 
510

Deferred acquisition payments, net of discount
—

 
3,931

Mortgages and other debts payable
3,350

 
5,150

Deferred tax liabilities
164,892

 
9,777

Other, including deferred revenue
1,006

 
380

 
$
234,762

 
$
34,168

The change in value of the intangible assets is primarily due to the acquisitions of Cytochroma Inc. (“Cytochroma”) PROLOR Biotech, Inc. ("PROLOR") and OPKO Do Brasil Comércio De Produtos Farmacéuticos Ltda ("OPKO Brazil"), previously known as Silcon Comércio, Importacao E Exportacao de Produtos Farmacéuticos e Cosmeticos Ltda, as well as the foreign currency fluctuations between the Chilean and Mexican pesos, the Brazilian Reals, the Euro and the Shekel against the U.S. dollar at September 30, 2013 and December 31, 2012.
NOTE 5 ACQUISITIONS, INVESTMENTS AND LICENSES
PROLOR acquisition
In August 2013, we acquired PROLOR pursuant to an Agreement and Plan of Merger dated as of April 23, 2013 (the "PROLOR Merger Agreement") in an all-stock transaction. PROLOR 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 PROLOR 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 of PROLOR, Dr. Phillip Frost, our Chairman and Chief Executive Officer, was PROLOR’s Chairman of the Board and a greater than 5% stockholder of PROLOR. 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 less than 5% stockholders of PROLOR.
Cytochroma acquisition
In March 2013, we acquired Cytochroma, a corporation located in Markham, Canada, whose lead products, both in Phase 3 development, are RayaldyTM, a vitamin D prohormone to treat secondary hyperparathyroidism in patients with stage 3 or 4 chronic kidney disease and vitamin D insufficiency, and AlpharenTM, a non-absorbed phosphate binder to treat hyperphosphatemia in dialysis patients (the “Cytochroma Acquisition”).
In connection with the Cytochroma 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 Cytochroma Acquisition, or $4.87 per share. The Cytochroma Agreement contains customary representations, warranties, conditions to closing, indemnification rights and obligations of the parties.
In addition, the Cytochroma 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. 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.

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The following table summarizes the preliminary purchase price allocation and the estimated fair value of the net assets acquired and liabilities assumed in the acquisitions of Cytochroma and PROLOR at the dates of acquisition, which are subject to change while contingencies that existed on the acquisition date are resolved:
(In thousands)
Cytochroma
 
PROLOR
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 Cytochroma and PROLOR acquisitions, respectively.
Goodwill from the acquisition of PROLOR 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 Cytochroma principally relates to the assembled workforce. Goodwill is not tax deductible for income tax purposes.
OPKO Brazil asset acquisition
In February 2013, we acquired the assets of OPKO Brazil, a Brazilian pharmaceutical company, pursuant to a purchase agreement entered into on December 26, 2012. Pursuant to the purchase agreement, we paid $0.3 million in cash and delivered 64,684 shares of our Common Stock at closing valued at $0.4 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 $6.73 per share. The number of shares issued was based on the average closing price per share of Common Stock as reported on the NYSE for the 10 trading days immediately preceding the execution of the purchase agreement, or $4.64 per share.
We accounted for this acquisition as an asset acquisition rather than a business combination. As a result we recorded the assets at fair value, with most of the value being allocated to the most significant asset, its pharmaceutical business licenses.
OURLab acquisition
In October 2012, we entered into a definitive merger agreement to acquire OURLab, a Nashville-based CLIA laboratory. In December 2012, we paid $9.4 million in cash and delivered 7,072,748 shares of our Common Stock at closing valued of $32.9 million based on the closing sales price per share of our Common Stock as reported by the NYSE on the actual closing date of the acquisition, or $4.65 per share. The number of shares issued was based on the average closing price per share of our Common Stock as reported on the NYSE for the 15 trading days immediately preceding the execution of the purchase agreement, or $4.33 per share. Pursuant to the merger agreement, 1,732,102 shares of Common Stock issued in the transaction are being held in a separate escrow account to secure indemnification obligations of the OURLab seller.
Farmadiet acquisition
In August 2012, we entered into a stock purchase agreement pursuant to which we acquired all of the outstanding stock of Farmadiet Group Holding, S.L. (“Farmadiet”), a Spanish company engaged in the development, manufacture, marketing, and sale of pharmaceutical, nutraceutical, and veterinary products in Europe (the “Farmadiet Transaction”).
In connection with the Farmadiet Transaction, we agreed to pay an aggregate purchase price of €13.5 million (approximately $16.0 million), of which (i) 50% ($8.4 million) was paid in cash at closing, and (ii) 50% (the “Deferred Payments”) will be paid, at our option, in cash or shares of our Common Stock as follows: (x) 25% to be paid on the first anniversary of the closing date; and (y) 25% to be paid 18 months after the closing date. On the date of acquisition, we recorded the €6.8 million Deferred Payments at $7.8 million, net of a discount of $0.6 million. The discount will be amortized as interest expense through the respective payment dates. The Deferred Payments are required to be paid in Euro and as such, the final U.S. dollar amount to be paid will be based on the exchange rate at the time the Deferred Payments are made. In the

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event we elect to pay the Deferred Payments in shares of our Common Stock, the number of shares issuable shall be calculated using the average closing price per share of our Common Stock as reported on the NYSE for the 10 trading days immediately preceding the applicable payment date. On August 2, 2013, we issued 585,703 shares of our Common Stock, in accordance with the first Deferred Payment. The number of shares issued was based on the average closing price per share of our Common Stock as reported on the NYSE for the 10 trading days up to and including August 1, 2013, or $7.61 per share. We have the right to hold back up to €2.8 million (approximately $3.6 million as of September 30, 2013) from the Deferred Payment to satisfy indemnity claims.
In connection with the Farmadiet Transaction, we also entered into two ancillary transactions (the “Ancillary Transactions”). In exchange for a 40% interest held by one of the sellers in one of Farmadiet’s subsidiaries, we agreed to issue up to an aggregate of 250,000 shares of our Common Stock, of which (a) 125,000 shares were issued on the closing date, and (b) 125,000 will be issued upon achieving certain milestones. In addition, we acquired an interest held by an affiliate of Farmadiet in a product in development in exchange for which we agreed to pay up to an aggregate of €1.0 million ($1.3 million) payable at our option in cash or shares of our Common Stock, of which (a) 25% ($0.3 million) was paid at closing through delivery of 70,421 shares of our Common Stock, and 75% ($1.0 million) will be paid in cash or shares of our Common Stock upon achieving certain milestones. As a result, we recorded $1.2 million as contingent consideration for the future consideration. We evaluate the contingent consideration on an ongoing basis and the changes in fair value are recognized in earnings until the milestones are achieved. Refer to Note 8. The final U.S. dollar amount to be paid will be based on the exchange rate at the time the milestones are achieved. The number of shares of our Common Stock issued is determined based on the average closing sales price for our Common Stock on the NYSE for the 10 trading days preceding the required payment date.
ALS acquisition
In April 2012, we completed the acquisition of ALS Distribuidora Limitada (“ALS”), a privately-held Chilean pharmaceutical company, pursuant to a stock purchase agreement entered into in January 2012. In connection with the transaction, we agreed to pay up to a total of $4.0 million in cash to the sellers. Pursuant to the purchase agreement, we paid (i) $2.4 million in cash at the closing, less certain liabilities, and (ii) $0.8 million in cash at the closing into a separate escrow account to satisfy possible indemnity claims. During the nine months ended September 30, 2013, we paid the remaining $0.8 million that we had agreed to pay upon the legal registration in the name of ALS of certain trademarks and product registrations previously held by the former owner of ALS, Arama Laboratorios y Compañía Limitada.
Pro forma disclosure for acquisitions
The following table includes the pro forma results for the three and nine months ended September 30, 2013 and 2012 of the combined companies as though the acquisition of Cytochroma and PROLOR had been completed as of the beginning of each period, respectively.
 
For the three months ended September 30,
 
For the nine months ended September 30,
(In thousands)
2013
 
2012
 
2013
 
2012
Revenues
$
20,641

 
$
13,976

 
$
75,838

 
$
37,327

Net loss
$
(75,858
)
 
$
(15,745
)
 
$
130,118

 
$
(43,864
)
Net loss attributable to common shareholders
$
(75,055
)
 
$
(16,302
)
 
$
(128,229
)
 
$
(45,534
)
Basic and diluted loss per share
$
(0.19
)
 
$
(0.04
)
 
$
(0.32
)
 
$
(0.12
)
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.
We incurred a pre-tax loss related to the activities of Cytochroma and PROLOR of $15.6 million and $2.5 million, respectively, from the date of our acquisitions through September 30, 2013.

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Investments
The total assets, liabilities, and net losses of our equity method investees as of and for the nine months ended September 30, 2013 were $105.5 million, $39.6 million, and $51.2 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 September 30, 2013:
(Dollars in thousands, except per share prices)
Investee name
 
Year
invested
 
Accounting method
 
Ownership at
September 30,
2013
 
Investment
 
Underlying equity in net assets
 
Closing share price
at September 30, 2013
for investments
available for sale
Sorrento
 
2009
 
Equity method
 
14
%
 
$
2,300

 
$
821

 
 
 
Cocrystal
 
2009
 
Equity method
 
16
%
 
2,500

 
358

 
 
 
Neovasc
 
2011
 
Equity method
 
6
%
 
3,798

 
454

 
 
 
Fabrus
 
2010
 
VIE, equity method
 
13
%
 
650

 
(108
)
 
 
 
BZNE common stock
 
2012
 
VIE, equity method
 
11
%
 
1,276

 
(1,184
)
 
 
 
RXi
 
2013
 
Equity method
 
19
%
 
15,000

 
2,847

 
 
 
Pharmsynthez
 
2013
 
Equity method
 
11
%
 
5,036

 
5,156

 
 
 
TESARO
 
2010
 
Investment available for sale
 
1
%
 
56

 
 
 
 
$
38.74

Neovasc options
 
2011
 
Investment available for sale
 
N/A

 
925

 
 
 
CA
$
2.35

BZNE Note and conversion feature
 
2012
 
VIE, investment available for sale
 
N/A

 
1,700

 
 
 
 


ChromaDex
 
2012
 
Investment available for sale
 
1
%
 
1,320

 
 
 
 
$
0.81

Plus unrealized/realized gains on investments, options and warrants, net
 
2,708

 
 
 
 
 
Less accumulated losses in investees
 
(12,579
)
 
 
 
 
 
Total carrying value of equity method investees and investments, available for sale
 
$
24,690

 
 
 
 
 
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 nine months ended September 30, 2013 we exercised the warrants and paid $1.2 million. We 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.
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 Russian Rubles (“RUR”) 265.0 million ($8.1 million) on or before December 31, 2013 (the "Pharmsynthez Note Receivable").
• We have 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”). 
• We granted rights to certain technologies in the Russian Federation, Ukraine, Belorussia, Azerbaidjan 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.

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•Pharmsynthez will pay us $9.5 million under the various collaboration and funding agreements for the development of the technologies (the “Collaboration Payments”).
We recorded the initial shares received in Pharmsynthez as an equity method investment.  We 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 for the three and nine months ended September 30, 2013.
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 three and nine months ended September 30, 2013, no payments were received for the Pharmsynthez Notes Receivable. During the three and nine months ended September 30, 2013, we received $3.4 million and $6.8 million, respectively, related to the Collaboration Payments of which we recorded $1.3 million and $3.2 million, respectively, in Revenue from transfer of intellectual property and $0.4 million and $0.7 million, respectively, as an offset to Research and development expenses.
RXi transactions
In March 2013, we completed the sale to RXi of substantially all of our assets in the field of RNA interference (the “RNAi Assets”) (collectively, the “Asset Purchase Agreement”). 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”). In accounting for the sale of the RNAi Assets, we determined that we did not have any continuing involvement in the development of the RNAi Assets or any other future performance obligations and, as a result, during the nine months ended September 30, 2013, we recognized the APA Shares as $12.5 million of revenue from transfer of intellectual property in our Condensed Consolidated Statement of Operations.
Pursuant to the Asset Purchase Agreement, RXi will be required to pay us up to $50.0 million in milestone payments upon the successful development and commercialization of each drug developed by RXi, certain of its affiliates or any of its or their licensees or sublicensees utilizing patents included within the RNAi Assets (each, a “Qualified Drug”). In addition, RXi will also be required to pay us royalties equal to: (a) a mid single-digit percentage of “Net Sales” (as defined in the Asset Purchase Agreement) with respect to each Qualified Drug sold for an ophthalmologic use during the applicable “Royalty Period” (as defined in the Asset Purchase Agreement); and (b) a low single-digit percentage of net sales with respect to each Qualified Drug sold for a non-ophthalmologic use during the applicable royalty period.
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.
Investments in variable interest entities
We have determined that we hold variable interests in Fabrus, Inc. (“Fabrus”), Biozone Pharmaceutical, Inc. (“BZNE”) and SciVac Ltd ("SciVac"), previously known as SciGen (I.L.) Ltd. 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 order to determine the primary beneficiary of BZNE, we evaluated our investment and our related parties’ investments, as well as our investment combined with the related party group’s investments to identify if we had the power to direct the activities that most significantly impact the economic performance of BZNE. We determined that power to direct the activities that most significantly impact BZNE’s economic performance is conveyed through the board of directors of BZNE and no entity is able to appoint the BZNE governing body that oversees its executive management team. Based on the capital structure, governing documents and overall business operations of BZNE, we determined that, while a VIE, no single entity has the power to direct the activities that most significantly impact BZNE’s economic performance. However, we determined that we and our related parties can significantly influence the success of BZNE through our voting power. As such, we account for investment in BZNE under the equity method.
In order to determine the primary beneficiary of Fabrus, 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 Fabrus. We determined that power to direct the activities that most significantly impact Fabrus’s economic performance is conveyed through the board of directors of Fabrus as no entity

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is able to appoint the Fabrus governing body that oversees its executive management team. Based on the capital structure, governing documents and overall business operations of Fabrus, we determined that, while a VIE, no single entity has the power to direct the activities that most significantly impact Fabrus’s economic performance. We did determine, however, that our related parties can significantly influence the success of Fabrus through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over Fabrus’ operations, we account for our investment in Fabrus 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 45% stock ownership in SciVac from FDS Pharma LLP (“FDS”). SciVac is a privately-held Israeli company that produces a third-generation hepatitis B-vaccine. In November 2012 and during the nine months ended September 30, 2013, we loaned to SciVac a combined $1.8 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 September 30, 2013 and December 31, 2012. These assets are owned by, and these liabilities are obligations of, SciVac, not us.
(In thousands)
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
136

 
$
174

Accounts receivable, net
205

 
387

Inventories, net
1,653

 
1,092

Prepaid expenses and other current assets
185

 
199

Total current assets
2,179

 
1,852

Property, plant and equipment, net
1,410

 
1,539

Intangible assets, net
1,122

 
1,154

Goodwill
841

 
796

Other assets
312

 
231

Total assets
$
5,864

 
$
5,572

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,129

 
$
1,108

Accrued expenses
5,969

 
2,859

Notes payable
1,284

 
—

Total current liabilities
8,382

 
3,967

Other long-term liabilities
279

 
1,529

Total liabilities
$
8,661

 
$
5,496


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NOTE 6 DEBT
The following table sets forth information related to the 3.00% convertible senior notes which is included our Condensed Consolidated Balance Sheets:
(In thousands)
Embedded conversion option
 
Convertible Notes
 
Discount
 
Total
Balance at December 31, 2012
$
—

 
$
—

 
$
—

 
$
—

Issuance of 3.00% convertible notes
59,204

 
175,000

 
(59,204
)
 
175,000

Amortization of debt discount
—

 
—

 
4,866

 
4,866

Debt discount write-off associated with conversion
    of debt
—

 
—

 
5,368

 
5,368

Change in fair value of embedded derivative
41,818

 
—

 
—

 
41,818

Conversion
(1,199
)
 
(16,936
)
 
—

 
(18,135
)
Balance at September 30, 2013
$
99,823

 
$
158,064

 
$
(48,970
)
 
$
208,917

In January 2013, we entered into note purchase agreements (the “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 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 Notes were issued on January 30, 2013. The 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 Notes will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the instruments governing the Notes, subject to certain exceptions, the holders may require us to repurchase all or any portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest to but not including the fundamental change repurchase date.
The 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 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 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 Notes for redemption. The 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 Notes will be 141.4827 shares of Common Stock per $1,000 principal amount of 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 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).
On August 30, 2013, one of the conversion rights of the Notes was triggered. As a result, holders of the Notes converted $16.9 million principal amount into 2,396,145 shares of our Common Stock at a rate of 141.4827 shares of Common Stock per $1,000 principal amount of Notes. We recorded an $8.7 million loss on early conversion of the Notes in Other income (expense), net in our Condensed Consolidated Statement of Operations. The Notes were convertible through September 6, 2013 and may be convertible thereafter, if one or more of the conversion conditions are satisfied.
We may not redeem the 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 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 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 Notes at a redemption price of 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest up to but not including the redemption date.
The terms of the 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 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 Notes, and carried at fair

23
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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 Notes meet these criteria and, as such, must be valued separate and apart from the Notes and recorded at fair value each reporting period.
For purposes of accounting and financial reporting, 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 Notes on our Condensed Consolidated Balance Sheets.
We have used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 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 was initially used to determine if the Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the Notes will be converted early if the conversion value is greater than the holding value; or (ii) the 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 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 Notes.
Using this lattice, we valued the embedded derivatives using the “with-and-without method,” where the value of the Notes including the embedded derivatives is defined as the “with,” and the value of the 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 Notes with the embedded derivatives and the value of the 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:
 
September 30, 2013
 
Issuance Date
Stock price
$
8.81

 
$
6.20

Conversion Rate
141.4827

 
141.4827

Conversion Price
$
7.07

 
$
7.07

Maturity date
February 1, 2033

 
February 1, 2033

Risk-free interest rate
1.50
%
 
1.12
%
Estimated stock volatility
40
%
 
40
%
Estimated credit spread
948 basis points

 
944 basis points

The following table sets forth the fair value of the Notes with and without the embedded derivatives, and the fair value of the embedded derivatives as of the issuance date and September 30, 2013. At September 30, 2013 and at issuance date the principal amount of the Notes was $158.1 million and $175.0 million, respectively:
(In thousands)
September 30, 2013
 
Issuance Date
Fair value of Notes:
 
 
 
With the embedded derivatives
$
210,105

 
$
175,000

Without the embedded derivatives
$
110,282

 
$
115,796

Estimated fair value of the embedded derivatives
$
99,823

 
$
59,204

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. From the date the Notes were issued through September 30, 2013, we observed an increase in the market price of our Common Stock which primarily resulted in a $41.8 million increase 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.


24
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We have entered into line of credit agreements with fifteen financial institutions 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 lines of credit:
(Dollars in thousands)
 
 
 
 
 
 Balance Outstanding
Lender
 
Interest rate on
borrowings
 
Credit line
capacity
 
September 30,
2013
 
December 31,
2012
Itau Bank
 
8.04
%
 
$
3,000

 
$
2,207

 
$
2,738

Bank of Chile
 
7.80
%
 
3,000

 
1,967

 
2,292

BICE Bank
 
5.50
%
 
1,500

 
867

 
2,451

Corp Banca
 
5.50
%
 
—

 
28

 
1,248

BBVA Bank
 
8.29
%
 
2,500

 
1,230

 
2,823

Penta Bank
 
9.48
%
 
800

 
992

 
833

Security Bank
 
7.56
%
 
1,500

 
1,063

 
—

BCI
 
5.50
%
 
1,000

 
1,216

 
—

Estado Bank
 
6.88
%
 
2,000

 
1,732

 
1,963

Sabadell Bank
 
7.60
%
 
203

 
—

 
3

Bilbao Vizcaya Bank
 
4.90
%
 
406

 
91

 
377

Banco Popular
 
8.25
%
 
406

 
—

 
260

Santander Bank
 
6.00
%
 
203

 
—

 
—

Banesto
 
5.80
%
 
203

 
4

 
163

Banca March
 
6.25
%
 
270

 
—

 
44

Total
 
 
 
$
16,991

 
$
11,397

 
$
15,195

At September 30, 2013 and December 31, 2012, the weighted average interest rate on our lines of credit was approximately 7.4% and 6.5%, respectively.
At September 30, 2013 and December 31, 2012, we had mortgage notes and other debt payables related to Farmadiet as follows:
(In thousands)
September 30,
2013
 
December 31,
2012
Current portion of lines of credit and notes payable
$
1,796

 
$
2,331

Other long-term liabilities
3,350

 
3,916

Total mortgage notes and other debt payables
$
5,146

 
$
6,247

The mortgages and other debts payable mature at various dates ranging from 2015 through 2024 bearing variable interest rates from 2.7% up to 6.3%. The weighted average interest rate on the mortgage notes and other debt payable at September 30, 2013 and December 31, 2012, was 4.2% and 4.5%, respectively.

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NOTE 7 ACCUMULATED OTHER COMPREHENSIVE INCOME
For the nine months ended September 30, 2013, changes in Accumulated other comprehensive income, net of tax, were as follows:
(In thousands)
Foreign
currency
 
Unrealized
gains in
Accumulated
OCI
Balance at December 31, 2012
$
3,196

 
$
4,160

Other comprehensive income before reclassifications, net of tax (1)
(1,395
)
 
1,869

Amounts reclassified from accumulated other comprehensive income, net of tax (1)
—

 
(4,593
)
Net other comprehensive income
(1,395
)
 
(2,724
)
Balance at September 30, 2013
$
1,801

 
$
1,436

(1)
Effective tax rate of 38.47%.
Amounts reclassified from Accumulated other comprehensive income for the nine months ended September 30, 2013 related to $10.8 million realized gain on the sales of certain of our investments available for sale. Of the $10.8 million gain on the sales of our investments available for sale, a $7.5 million gain was reclassified from unrealized gains in Accumulated other comprehensive income to Other income (expense), net for the nine months ended September 30, 2013.
NOTE 8 FAIR VALUE MEASUREMENTS
We record fair value 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 September 30, 2013, classified as available for sale, and carried at fair value is as follows:
 
As of September 30, 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
$
1,376

 
$
1,417

 
$
—

 
$
—

 
$
2,793

BZNE Note and conversion feature
1,700

 
53

 
—

 
287

 
2,040

Neovasc common stock options
925

 
714

 
(202
)
 
181

 
1,618

U.S. Treasury securities
25,004

 
—

 
—

 
—

 
25,004

Total assets
$
29,005

 
$
2,184

 
$
(202
)
 
$
468

 
$
31,455

A summary of our investments as of December 31, 2012, classified as available for sale, and carried at fair value is as follows:
 
As of December 31, 2012
(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
$
2,051

 
$
6,185

 
$
—

 
$
—

 
$
8,236

BZNE Note and conversion feature
1,700

 
53

 
—

 
287

 
2,040

Neovasc common stock options
925

 
293

 
—

 
176

 
1,394

Neovasc common stock warrants
659

 
194

 
—

 
(375
)
 
478

Total assets
$
5,335

 
$
6,725

 
$
—

 
$
88

 
$
12,148


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Any future fluctuation in fair value related to these instruments that is judged to be temporary, including any recoveries of previous write-downs, will be recorded in Accumulated other comprehensive income or loss. If we determine that any future valuation adjustment was other-than-temporary, we will record a loss during the period such determination is made.
As of September 30, 2013, 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, Inc. (“CURNA”), Claros Diagnostics, Inc. (“OPKO Diagnostics”), FineTech Pharmaceuticals, Ltd. (“FineTech”), Farmadiet, and Cytochroma 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 and warrants 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 September 30, 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
$
116,477

 
$
—

 
$
—

 
$
116,477

U.S. Treasury securities
—

 
25,004

 
—

 
25,004

Certificates of deposit
—

 
827

 
—

 
827

Pharmsynthez Note Receivable and Purchase Option
—

 
6,755

 
—

 
6,755

Common stock investments, available for sale
2,793

 
—

 
—

 
2,793

BZNE Note and conversation feature
—

 
—

 
2,040

 
2,040

Neovasc common stock options
—

 
1,618

 
—

 
1,618

Total assets
$
119,270

 
$
34,204

 
$
2,040

 
$
155,514

Liabilities:
 
 
 
 
 
 
 
Forward contracts
$
—

 
$
(25
)
 
$
—

 
$
(25
)
Embedded conversion option
—

 
—

 
99,823

 
99,823

Deferred acquisition payments, net of discount
—

 
—

 
5,335

 
5,335

Contingent consideration:
 
 
 
 
 
 
 
CURNA
—

 
—

 
549

 
549

OPKO Diagnostics
—

 
—

 
12,976

 
12,976

FineTech
—

 
—

 
2,862

 
2,862

Cytochroma
—

 
—

 
51,447

 
51,447

Farmadiet
—

 
—

 
1,375

 
1,375

Total liabilities
$
—

 
$
(25
)
 
$
174,367

 
$
174,342


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Table of Contents

 
Fair value measurements as of December 31, 2012
(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
$
18,716

 
$
—

 
$
—

 
$
18,716

Certificates of deposit
—

 
820

 
—

 
820

Common stock investments, available for sale
8,236

 
—

 
—

 
8,236

BZNE Note and conversation feature
—

 
—

 
2,040

 
2,040

Neovasc common stock options
—

 
1,394

 
—

 
1,394

Neovasc common stock warrants
—

 
478

 
—

 
478

Total assets
$
26,952

 
$
2,692

 
$
2,040

 
$
31,684

Liabilities:
 
 
 
 
 
 
 
Forward contracts
$
—

 
$
10

 
$
—

 
$
10

Deferred acquisition payments, net of discount
—

 
—

 
10,103

 
10,103

Contingent consideration: