OPK-3.31.2014-10Q
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 March 31, 2014.
OR
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-33528
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
Delaware | | 75-2402409 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
|
|
4400 Biscayne Blvd. Miami, FL 33137 (Address of Principal Executive Offices) (Zip Code) |
|
(305) 575-4100 (Registrant’s Telephone Number, Including Area Code) |
|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý YES ¨ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý YES ¨ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
(in Rule 12b-2 of the Exchange Act) (Check one):
|
| | | |
Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ¨ YES ý NO
As of May 1, 2014, the registrant had 413,750,781 shares of common stock outstanding.
TABLE OF CONTENTS
|
| | | |
| Page |
| | |
| |
| |
| |
| |
| |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
| EX-31.1 | Section 302 Certification of CEO |
| EX-31.2 | Section 302 Certification of CFO |
| EX-32.1 | Section 906 Certification of CEO |
| EX-32.2 | Section 906 Certification of CFO |
| EX-101.INS | XBRL Instance Document |
| EX-101.SCH | XBRL Taxonomy Extension Schema Document |
| EX-101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| EX-101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| EX-101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| EX-101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013, and described from time to time in our other reports filed with the Securities and Exchange Commission. Except as required by law, we do not undertake any obligation to update forward-looking statements. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
| |
• | We have a history of operating losses and we do not expect to become profitable in the near future. |
| |
• | Our technologies are in an early stage of development and are unproven. |
| |
• | Our business is substantially dependent on our ability to develop, launch and generate revenue from our pharmaceutical and diagnostic programs. |
| |
• | Our research and development activities, or that of our investees, may not result in commercially viable products. |
| |
• | The results of previous clinical trials may not be predictive of future results, and our current and planned clinical trials may not satisfy the requirements of the United States (“U.S.”) Food and Drug Administration (“FDA”) or other non-U.S. regulatory authorities. |
| |
• | We may require substantial additional funding, which may not be available to us on acceptable terms, or at all. |
| |
• | We may finance future cash needs primarily through public or private offerings, debt financings or strategic collaborations, which may dilute your stockholdings in the Company. |
| |
• | If our competitors develop and market products that are more effective, safer or less expensive than our future product candidates, our commercial opportunities will be negatively impacted. |
| |
• | The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates. |
| |
• | Failure to recruit and enroll patients for clinical trials may cause the development of our product candidates to be delayed. |
| |
• | Even if we obtain regulatory approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our product candidates, which could materially impair our ability to generate anticipated revenues. |
| |
• | We may not meet regulatory quality standards applicable to our manufacturing and quality processes. |
| |
• | Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our products. |
| |
• | The loss of Phillip Frost, M.D., our Chairman and Chief Executive Officer, could have a material adverse effect on our business and product development. |
| |
• | If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize our product candidates. |
| |
• | In the event that we successfully evolve from a company primarily involved in development to a company also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully. |
| |
• | If we fail to acquire and develop other products or product candidates, at all or on commercially reasonable terms, we may be unable to diversify or grow our business. |
| |
• | We have no experience manufacturing our pharmaceutical product candidates other than at one of our Israeli facilities, and at our Mexican, and Spanish facilities, and we have no experience in manufacturing our diagnostic product candidates. We will therefore likely rely on third parties to manufacture and supply our pharmaceutical and diagnostics product candidates, and we would need to meet various standards to satisfy FDA regulations in order to manufacture on our own. |
| |
• | We currently have no pharmaceutical or diagnostic marketing, sales or distribution capabilities other than in Chile, Mexico, Spain, Brazil, and Uruguay for sales in those countries and our active pharmaceutical ingredients (“APIs”) business in Israel, and the sales force for our laboratory business based in Nashville, Tennessee. If we are unable to develop our sales and marketing and distribution capability on our own or through collaborations with marketing partners, we will not be successful in commercializing our pharmaceutical and diagnostic product candidates. |
| |
• | Certain elements of our business are dependent on the success of ongoing and planned phase 3 clinical trials for RayaldeeTM (CTAP101), AlpharenTM (Fermagate Tablets), and hGH-CTP. |
| |
• | Independent clinical investigators and contract research organizations that we engage to conduct our clinical trials may not be diligent, careful or timely. |
| |
• | The success of our business is dependent on the actions of our collaborative partners. |
| |
• | Our license agreement with TESARO, Inc. (“TESARO”) is important to our business. If TESARO does not successfully develop and commercialize rolapitant, our business could be adversely affected. |
| |
• | If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed. |
| |
• | 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. |
| |
• | If our products have undesirable effects on patients, we could be subject to litigation or product liability claims that could impair our reputation and have a material adverse effect upon our business and financial condition. |
| |
• | Medicare prescription drug coverage legislation and future legislative or regulatory reform of the health care system may adversely affect our ability to sell our products or provide our services profitably. |
| |
• | Failure to obtain and maintain regulatory approval outside the U.S. will prevent us from marketing our product candidates abroad. |
| |
• | We may not have the funding available to pursue acquisitions. |
| |
• | Acquisitions may disrupt our business, distract our management, may not proceed as planned, and may also increase the risk of potential third party claims and litigation. |
| |
• | We may encounter difficulties in integrating acquired businesses. |
| |
• | Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability. |
| |
• | Political and economic instability in Europe and Latin America and political, economic, and military instability in Israel or neighboring countries could adversely impact our operations. |
| |
• | We are subject to fluctuations in currency exchange rates in connection with our international businesses. |
| |
• | We have a large amount of goodwill and other intangible assets as a result of acquisitions and a significant write-down of goodwill and/or other intangible assets would have a material adverse effect on our reported results of operations and net worth. |
| |
• | Our business may become subject to legal, economic, political, regulatory and other risks associated with international operations. |
| |
• | The market price of our Common Stock may fluctuate significantly. |
| |
• | The conversion and redemption features of our January 2013 convertible senior notes due in 2033 are classified as embedded derivatives and may continue to result in volatility in our financial statements, including having a material impact on our result of operations and recorded derivative liability. |
| |
• | We have reported a material weakness in our internal control over financing reporting which may cause investors and stockholders to lose confidence in our financial reporting. |
| |
• | Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you may not consider to be in your best interests or in the best interests of our stockholders. |
| |
• | Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses. |
| |
• | If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as they apply to us, or our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and our Common Stock price may suffer. |
| |
• | We may be unable to maintain our listing on the New York Stock Exchange (“NYSE”), which could cause our stock price to fall and decrease the liquidity of our Common Stock. |
| |
• | Future issuances of Common Stock and hedging activities may depress the trading price of our Common Stock. |
| |
• | Provisions in our charter documents and Delaware law could discourage an acquisition of us by a third party, even if the acquisition would be favorable to you. |
| |
• | We do not intend to pay cash dividends on our Common Stock in the foreseeable future. |
PART I. FINANCIAL INFORMATION
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our wholly-owned subsidiaries.
Item 1. Financial Statements
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share and per share data)
|
| | | | | | | |
| March 31, 2014(1) | | December 31, 2013(1) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 156,396 |
| | $ | 185,798 |
|
Accounts receivable, net | 19,664 |
| | 19,767 |
|
Inventory, net | 18,865 |
| | 18,079 |
|
Prepaid expenses and other current assets | 10,347 |
| | 19,084 |
|
Total current assets | 205,272 |
| | 242,728 |
|
Property, plant, equipment, and investment properties, net | 16,881 |
| | 17,027 |
|
Intangible assets, net | 71,921 |
| | 74,533 |
|
In-process research and development | 793,339 |
| | 793,341 |
|
Goodwill | 226,062 |
| | 226,373 |
|
Investments, net | 35,697 |
| | 30,653 |
|
Other assets | 6,520 |
| | 6,861 |
|
Total assets | $ | 1,355,692 |
| | $ | 1,391,516 |
|
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 14,696 |
| | $ | 13,414 |
|
Accrued expenses | 58,772 |
| | 65,874 |
|
Current portion of lines of credit and notes payable | 11,032 |
| | 12,562 |
|
Total current liabilities | 84,500 |
| | 91,850 |
|
2033 Senior Notes, net of discount and estimated fair value of embedded derivatives | 224,801 |
| | 211,912 |
|
Other long-term liabilities, principally contingent consideration and deferred tax liabilities | 215,142 |
| | 214,775 |
|
Total long-term liabilities | 439,943 |
| | 426,687 |
|
Total liabilities | 524,443 |
| | 518,537 |
|
Equity: | | | |
Common Stock - $0.01 par value, 750,000,000 shares authorized; 415,346,120 and 414,818,195 shares issued at March 31, 2014 and December 31, 2013, respectively | 4,154 |
| | 4,148 |
|
Treasury Stock - 2,244,923 and 2,264,063 shares at March 31, 2014 and December 31, 2013, respectively | (7,300 | ) | | (7,362 | ) |
Additional paid-in capital | 1,384,694 |
| | 1,379,383 |
|
Accumulated other comprehensive income | 1,399 |
| | 3,418 |
|
Accumulated deficit | (547,727 | ) | | (503,177 | ) |
Total shareholders’ equity attributable to parent | 835,220 |
| | 876,410 |
|
Noncontrolling interests | (3,971 | ) | | (3,431 | ) |
Total shareholders’ equity | 831,249 |
| | 872,979 |
|
Total liabilities and equity | $ | 1,355,692 |
| | $ | 1,391,516 |
|
| |
(1) | As of March 31, 2014 and December 31, 2013, total assets include $6.8 million and $6.7 million, respectively, and total liabilities include $11.4 million and $10.4 million, respectively, related to SciVac Ltd (“SciVac”), previously known as SciGen (I.L.) Ltd, a consolidated variable interest entity. SciVac’s consolidated assets are owned by SciVac and SciVac’s consolidated liabilities have no recourse against us. Refer to Note 5. |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
6
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Revenues: | | | |
Products | $ | 19,828 |
| | $ | 15,527 |
|
Revenue from services | 1,970 |
| | 3,092 |
|
Revenue from transfer of intellectual property | 476 |
| | 12,757 |
|
Total revenues | 22,274 |
| | 31,376 |
|
Costs and expenses: | | | |
Costs of revenues | 12,391 |
| | 11,757 |
|
Selling, general and administrative | 13,812 |
| | 12,424 |
|
Research and development | 20,994 |
| | 9,910 |
|
Contingent consideration | 2,610 |
| | 1,344 |
|
Amortization of intangible assets | 2,744 |
| | 2,714 |
|
Total costs and expenses | 52,551 |
| | 38,149 |
|
Operating loss | (30,277 | ) | | (6,773 | ) |
Other income and (expense), net: | | | |
Interest income | 40 |
| | 59 |
|
Interest expense | (3,486 | ) | | (2,897 | ) |
Fair value changes of derivative instruments, net | (10,515 | ) | | (23,549 | ) |
Other income (expense), net | 1,817 |
| | 2,331 |
|
Other income and (expense), net | (12,144 | ) | | (24,056 | ) |
Loss before income taxes and investment losses | (42,421 | ) | | (30,829 | ) |
Income tax benefit (provision) | (614 | ) | | (43 | ) |
Loss before investment losses | (43,035 | ) | | (30,872 | ) |
Loss from investments in investees | (2,056 | ) | | (3,890 | ) |
Net loss | (45,091 | ) | | (34,762 | ) |
Less: Net loss attributable to noncontrolling interests | (540 | ) | | (547 | ) |
Net loss attributable to common shareholders before preferred stock dividend | (44,551 | ) | | (34,215 | ) |
Preferred stock dividend | — |
| | (420 | ) |
Net loss attributable to common shareholders | $ | (44,551 | ) | | $ | (34,635 | ) |
Loss per share, basic and diluted: | | | |
Net loss per share | $ | (0.11 | ) | | $ | (0.11 | ) |
Weighted average number of common shares outstanding, basic and diluted | 412,909,809 |
| | 312,932,561 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
7
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Net loss attributable to common shareholders | $ | (44,551 | ) | | $ | (34,635 | ) |
Other comprehensive income (loss), net of tax: | | | |
Change in foreign currency translation | (1,801 | ) | | 323 |
|
Available for sale investments: | | | |
Change in other unrealized gains, net | 335 |
| | 414 |
|
Less: reclassification adjustments for gains included in net loss, net of tax | (553 | ) | | — |
|
Comprehensive loss | $ | (46,570 | ) | | $ | (33,898 | ) |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
8
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Cash flows from operating activities: | | | |
Net loss | $ | (45,091 | ) | | $ | (34,762 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 3,564 |
| | 3,429 |
|
Non-cash interest on 2033 Senior Notes | 1,777 |
| | 1,303 |
|
Amortization of deferred financing costs | 177 |
| | 145 |
|
Losses from investments in investees | 2,056 |
| | 3,890 |
|
Equity-based compensation – employees and non-employees | 3,579 |
| | 5,205 |
|
Provision for (recovery of) bad debts | (74 | ) | | 381 |
|
Provision for inventory obsolescence | 337 |
| | 939 |
|
Revenue from receipt of equity | (60 | ) | | (12,540 | ) |
Realized gain on sale of equity securities | (1,273 | ) | | (2,347 | ) |
Change in fair value of derivatives instruments | 10,515 |
| | 23,549 |
|
Change in fair value of contingent consideration | 2,610 |
| | 1,344 |
|
Deferred income tax benefit | — |
| | 98 |
|
Changes in assets and liabilities, net of the effects of acquisitions: | | | |
Accounts receivable | (557 | ) | | (558 | ) |
Inventory | (1,676 | ) | | (1,439 | ) |
Prepaid expenses and other current assets | 1,145 |
| | (2,570 | ) |
Other assets | 1,429 |
| | 71 |
|
Accounts payable | 1,479 |
| | (103 | ) |
Foreign currency measurement | (976 | ) | | (340 | ) |
Accrued expenses | (8,007 | ) | | (440 | ) |
Net cash used in operating activities | (29,046 | ) | | (14,745 | ) |
Cash flows from investing activities: | | | |
Investments in investees | (500 | ) | | (2,500 | ) |
Proceeds from sale of equity securities | 1,297 |
| | 2,528 |
|
Acquisition of businesses, net of cash | (200 | ) | | 78 |
|
Capital expenditures | (861 | ) | | (755 | ) |
Net cash provided by (used in) investing activities | (264 | ) | | (649 | ) |
Cash flows from financing activities: | | | |
Issuance of 2033 Senior Notes, net, including related parties | — |
| | 170,184 |
|
Payment of Series D dividends, including related parties | — |
| | (3,015 | ) |
Proceeds from the exercise of Common Stock options and warrants | 1,639 |
| | 995 |
|
Borrowings on lines of credit | 4,250 |
| | 8,428 |
|
Repayments of lines of credit | (5,985 | ) | | (6,951 | ) |
Net cash provided by financing activities | (96 | ) | | 169,641 |
|
Effect of exchange rate on cash and cash equivalents | 4 |
| | (12 | ) |
Net (decrease) increase in cash and cash equivalents | (29,402 | ) | | 154,235 |
|
Cash and cash equivalents at beginning of period | 185,798 |
| | 27,361 |
|
Cash and cash equivalents at end of period | $ | 156,396 |
| | $ | 181,596 |
|
SUPPLEMENTAL INFORMATION: | | | |
Interest paid | $ | 2,420 |
| | $ | 242 |
|
Income taxes paid (refunded), net | $ | 377 |
| | $ | (118 | ) |
RXi common stock received | $ | — |
| | $ | 12,500 |
|
Pharmsynthez common stock received | $ | 6,264 |
| | $ | — |
|
Non-cash financing: | | | |
Shares issued upon the conversion of: | | | |
Series D Preferred Stock | $ | — |
| | $ | 24,386 |
|
Common Stock options and warrants, net exercised | $ | 657 |
| | $ | 815 |
|
Issuance of Common Stock to acquire: | | | |
OPKO Renal | $ | — |
| | $ | 146,902 |
|
OPKO Brazil | $ | — |
| | $ | 436 |
|
Arama Uruguay | $ | 159 |
| | $ | — |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
9
OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a multi-national biopharmaceutical and diagnostics company that seeks to establish industry-leading positions in large and rapidly growing medical markets by leveraging our discovery, development and commercialization expertise and our novel and proprietary technologies. We are developing a range of solutions to diagnose, treat and prevent various conditions, including point-of-care tests, molecular diagnostics tests, laboratory developed tests, and proprietary pharmaceuticals and vaccines. We plan to commercialize these solutions on a global basis in large and high growth markets, including emerging markets.
We own established pharmaceutical platforms in Chile, Spain, Mexico, and Uruguay, which are generating revenue and which we expect to generate positive cash flow and facilitate future market entry for our products currently in development. In addition, we have also established pharmaceutical operations in Brazil. We own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and therapeutic products. In the U.S., we own a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, as amended (“CLIA”), with a urologic focus that generates revenue and serves as the commercial platform for the U.S. launch of our next generation prostate cancer test to improve cancer risk stratification of patient candidates prior to prostate biopsy.
We are incorporated in Delaware and our principal executive offices are located in leased offices in Miami, Florida. We lease office and lab space in Jupiter and Miramar, Florida, and Nes Ziona, Israel, which is where our molecular diagnostics research and development, oligonucleotide research and development and carboxyl terminal peptide research and development operations are based, respectively. We lease office, manufacturing and warehouse space in Woburn, Massachusetts for our point-of-care diagnostics business, and in Nesher, Israel for our API business. We lease laboratory and office space in Nashville, Tennessee and Burlingame, California for our CLIA-certified laboratory business, and we lease office space in Bannockburn, Illinois, and Markham, Ontario for our pharmaceutical business directed to chronic kidney disease (“CKD”). Our Chilean and Uruguayan operations are located in leased offices and warehouse facilities in Santiago and Montevideo, respectively. Our Mexican operations are based in owned offices, an owned manufacturing facility and a leased warehouse facility in Guadalajara and in leased offices in Mexico City. Our Spanish operations are based in owned offices in Barcelona, in an owned manufacturing facility in Banyoles and a leased warehouse facility in Palol de Revardit. Our Brazilian operations are located in leased offices in Sao Paulo.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the Company’s results of operations, financial position and cash flows have been made. The results of operations and cash flows for the three months ended March 31, 2014, are not necessarily indicative of the results of operations and cash flows that may be reported for the remainder of 2014 or for future periods. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Principles of consolidation. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of OPKO Health, Inc. and of our wholly-owned subsidiaries and variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents. Cash and cash equivalents include short-term, interest-bearing instruments with original maturities of 90 days or less at the date of purchase. We also consider all highly liquid investments with original maturities at the date of purchase of 90 days or less as cash equivalents. These investments include money markets, bank deposits, certificates of deposit and U.S. treasury securities.
Inventories. Inventories are valued at the lower of cost or market (net realizable value). Cost is determined by the first-in, first-out method. We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and current market conditions to determine whether inventories are stated at the lower of cost or market.
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired when accounted for by the purchase method of accounting and arose from our acquisitions of Pharma Genexx, S.A. (“OPKO Chile”), Pharmacos Exakta S.A. de C.V. (“Exakta-OPKO”), CURNA, Inc. (“CURNA”), Claros Diagnostics, Inc. (“OPKO Diagnostics”), FineTech Pharmaceuticals, Ltd. (“FineTech”), ALS Distribuidora Limitada (“ALS”), Farmadiet Group Holding, S.L. (“OPKO Spain”), Prost-Data, Inc. (“OPKO Lab”), Cytochroma Inc. (“OPKO Renal”), Silcon Comércio, Importacao E Exportacao de Produtos Farmaceuticos e Cosmeticos Ltda. (“OPKO Brazil”) and PROLOR Biotech, Inc. (“OPKO Biologics”). Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions at March 31, 2014 and December 31, 2013 were $1.1 billion and $1.1 billion, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. We determined the fair value of intangible assets, including IPR&D, using the “income method.”
Goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from 3 to 10 years, and review for impairment at least annually, or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use the straight-line method of amortization as there is no reliably determinable pattern in which the economic benefits of our intangible assets are consumed or otherwise used up. Amortization expense from continuing operations was $2.7 million at March 31, 2014 and 2013, respectively.
Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term maturities of these instruments. Investments that are considered available for sale as of March 31, 2014 are carried at fair value.
Short-term investments, which we invest in from time to time, include bank deposits, corporate notes, U.S. treasury securities and U.S. government agency securities with original maturities of greater than 90 days and remaining maturities of less than one year. Long-term investments include corporate notes, U.S. treasury securities and U.S. government agency securities with maturities greater than one year.
In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. Refer to Note 8.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with certain acquisitions to their fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as contingent consideration income. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments 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 March 31, 2014 and December 31, 2013, our forward contracts for inventory purchases did not meet the documentation requirements to be designated as hedges. Accordingly, we recognize all changes in the fair values of our derivatives instruments, net, in our Condensed Consolidated Statement of Operations. Refer to Note 9.
Revenue recognition. Generally, we recognize revenue from product sales when goods are shipped and title and risk of loss transfer to our customers. Our estimates for sales returns and allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales from which they originated, and management’s evaluation of specific factors that may increase or decrease the risk of product returns.
Revenue for laboratory services is recognized on the accrual basis at the time test results are reported, which approximates when services are provided. Services are provided to certain patients covered by various third-party payer programs including various managed care organizations, as well as the Medicare and Medicaid programs. Billings for services under third-party payer programs are included in sales net of allowances for contractual discounts and allowances for differences between the amounts billed and estimated program payment amounts. Adjustments to the estimated payment amounts based on final settlement with the programs are recorded upon settlement as an adjustment to revenue. For the three months ended March 31, 2014 and 2013, revenue from services also includes $0.1 million and $0.2 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 three months ended March 31, 2014, we recorded $0.5 million of revenue from the transfer of intellectual property. Refer to Note 5.
Revenue from milestone payments related to arrangements under which we have continuing performance obligations are recognized as Revenue from transfer of intellectual property upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; there was substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; the milestone is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; the milestone relates solely to past performance; and the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are not considered to be substantive and are, therefore, deferred and recognized as Revenue from transfer of intellectual property over the term of the arrangement as we complete our performance obligations.
Total deferred revenue included in Accrued expenses and Other long-term liabilities was $8.6 million and $8.3 million at March 31, 2014 and December 31, 2013, respectively.
Allowance for doubtful accounts. We analyze accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts using the specific identification method. Our reported net loss is directly affected by our estimate of the collectability of accounts receivable. The amount of the allowance for doubtful accounts was $1.6 million and $1.9 million at March 31, 2014 and December 31, 2013, respectively.
Equity-based compensation. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Condensed Consolidated Statement of Operations over the period during which an employee is required to provide service in exchange for the award. We record excess tax benefits, realized from the exercise of stock options as a financing cash inflow rather than as a reduction of taxes paid in cash flow from operations. Equity-based compensation arrangements to non-employees are recorded at their fair value on the measurement date. The measurement of equity-based compensation is subject to periodic adjustment as the underlying
equity instruments vest. During the three months ended March 31, 2014 and 2013, we recorded $3.6 million and $5.2 million, respectively, of equity-based compensation expense.
Research and development expenses. Research and development expenses include external and internal expenses, partially offset by third-party grants and fundings arising from collaboration agreements. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. Research and development employee-related expenses include salaries, benefits and stock-based compensation expense. Other unallocated internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period in which the actual services are received. As such, accrued liabilities related to third party research and development activities are recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third party contract.
Segment reporting. Our chief operating decision-maker (“CODM”) is comprised of our executive management with the oversight of our Board of Directors. Our CODM reviews our operating results and operating plans and makes resource allocation decisions on a Company-wide or aggregate basis. We currently manage our operations in two reportable segments, pharmaceuticals and diagnostics. The pharmaceutical segment consists of two operating segments, our (i) pharmaceutical research and development segment which is focused on the research and development of pharmaceutical products, and vaccines, and (ii) the pharmaceutical operations we acquired in Chile, Mexico, Israel, Spain, Uruguay and Brazil. The diagnostics segment consists of two operating segments, our (i) pathology operations we acquired through the acquisition of OPKO Lab and (ii) point-of-care and molecular diagnostics operations. There are no inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes.
Variable interest entities. The consolidation of variable interest entities (“VIE”) is required when an enterprise has a controlling financial interest. A controlling financial interest in a VIE will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE. Refer to Note 5.
Investments. We have made strategic investments in development stage and emerging companies. We record these investments as equity method investments or investments available for sale based on our percentage of ownership and whether we have significant influence over the operations of the investees. For investments classified under the equity method of accounting, we record our proportionate share of their losses in Losses from investments in investees in our Condensed Consolidated Statement of Operations. Refer to Note 5. For investments classified as available for sale, we record changes in their fair value as unrealized gain or loss in Other comprehensive loss based on their closing price per share at the end of each reporting period. Refer to Note 5.
Recent accounting pronouncements. In July 2013, the FASB issued an Accounting Standards Update (“ASU”), ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 is intended to eliminate inconsistent practices regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from the disallowance of a tax position. ASU 2013-11 is effective for our fiscal year beginning January 1, 2014 and subsequent interim periods. The adoption of ASU 2013-11 does not have a material effect on our Condensed Consolidated Financial Statements.
NOTE 3 LOSS PER SHARE
Basic loss per share is computed by dividing our net loss by the weighted average number of shares outstanding during the period. Diluted loss per share is computed by dividing our net loss increased by dividends on preferred stock by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options. The dilutive impact of stock options and warrants is determined by applying the “treasury stock” method. In the periods in which their effect would be anti-dilutive, no effect has been given to outstanding options, warrants or convertible Preferred Stock in the diluted computation. Potentially dilutive shares issuable pursuant to the 2033 Senior Notes (defined in Note 6) were not included in the computation of net loss per share for the three months ended March 31, 2014, because their inclusion would be anti-dilutive.
Also, a total of 29,874,112 and 30,119,145 potential shares of Common Stock have been excluded from the calculation of diluted net loss per share for the three months ended March 31, 2014 and 2013, respectively, because their inclusion would be anti-dilutive.
During the three months ended March 31, 2014, 602,665 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 527,926 shares of Common Stock. Of the 602,665 Common Stock options and Common Stock warrants exercised, 74,739 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the warrant agreements.
NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
|
| | | | | | | |
(In thousands) | March 31, 2014 | | December 31, 2013 |
Accounts receivable, net | | | |
Accounts receivable | $ | 21,230 |
| | $ | 21,652 |
|
Less: allowance for doubtful accounts | (1,566 | ) | | (1,885 | ) |
| $ | 19,664 |
| | $ | 19,767 |
|
Inventories, net | | | |
Finished products | $ | 12,880 |
| | $ | 13,374 |
|
Work in-process | 1,112 |
| | 1,350 |
|
Raw materials | 5,355 |
| | 4,132 |
|
Less: inventory reserve | (482 | ) | | (777 | ) |
| $ | 18,865 |
| | $ | 18,079 |
|
Prepaid expenses and other current assets | | | |
Prepaid supplies | $ | 1,919 |
| | $ | 945 |
|
Prepaid insurance | 902 |
| | 892 |
|
Pharmsynthez notes receivable | — |
| | 6,151 |
|
Other receivables | 605 |
| | 1,985 |
|
Taxes recoverable | 1,266 |
| | 3,458 |
|
Other | 5,655 |
| | 5,653 |
|
| $ | 10,347 |
| | $ | 19,084 |
|
Intangible assets, net: | | | |
Technologies | $ | 53,020 |
| | $ | 51,660 |
|
Customer relationships | 22,525 |
| | 22,725 |
|
Product registrations | 9,731 |
| | 9,692 |
|
Tradenames | 3,621 |
| | 3,669 |
|
Covenants not to compete | 8,670 |
| | 8,671 |
|
Other | 1,173 |
| | 2,519 |
|
Less: accumulated amortization | (26,819 | ) | | (24,403 | ) |
| $ | 71,921 |
| | $ | 74,533 |
|
Accrued expenses: | | | |
Taxes payable | $ | 124 |
| | $ | 702 |
|
Deferred revenue | 8,112 |
| | 7,639 |
|
Clinical trials | 4,710 |
| | 3,342 |
|
Professional fees | 1,108 |
| | 402 |
|
Employee benefits | 5,451 |
| | 4,399 |
|
Deferred acquisition payments, net of discount | 840 |
| | 5,465 |
|
Contingent consideration | 25,722 |
| | 28,047 |
|
Other | 12,705 |
| | 15,878 |
|
| $ | 58,772 |
| | $ | 65,874 |
|
| | | |
|
| | | | | | | |
(In thousands) | March 31, 2014 | | December 31, 2013 |
Other long-term liabilities: | | | |
Contingent consideration – OPKO Renal | $ | 36,127 |
| | $ | 34,401 |
|
Contingent consideration – OPKO Spain | 248 |
| | 504 |
|
Contingent consideration – OPKO Diagnostics | 8,593 |
| | 8,340 |
|
Contingent consideration – CURNA | 326 |
| | 316 |
|
Mortgages and other debts payable | 3,101 |
| | 3,270 |
|
Deferred tax liabilities | 166,068 |
| | 166,435 |
|
Other, including deferred revenue | 679 |
| | 1,509 |
|
| $ | 215,142 |
| | $ | 214,775 |
|
All of the intangible assets and goodwill acquired relate to our acquisitions of OPKO Chile, including the intangible assets and goodwill related to the ALS acquisition, Exakta-OPKO, CURNA, OPKO Diagnostics, FineTech, OPKO Spain, OPKO Lab, OPKO Renal and OPKO Biologics. The pharmaceutical, nutraceutical and veterinary products from ALS and OPKO Spain do not require ongoing product renewals. We do not anticipate capitalizing the cost of product registration renewals, rather we expect to expense these costs, as incurred. Our goodwill is not tax deductible for income tax purposes in the U.S., Chile, Canada, Mexico, Spain, or Israel.
At March 31, 2014, the changes in value of the intangible assets and goodwill are primarily due to foreign currency fluctuations between the Chilean and Mexican pesos, the Euro and the Shekel against the U.S. dollar.
The following table summarizes the changes in Goodwill during the three months ended March 31, 2014.
|
| | | | | | | | | | | | | | | |
| 2014 |
(In thousands) | Balance at January 1 | | Acquisitions | | Foreign exchange, other | | Balance at March 31 |
Pharmaceuticals | | | | | | | |
CURNA | $ | 4,827 |
| | $ | — |
| | $ | — |
| | $ | 4,827 |
|
Exakta-OPKO | 113 |
| | — |
| | — |
| | 113 |
|
OPKO Chile | 6,102 |
| | — |
| | (294 | ) | | 5,808 |
|
OPKO Spain | 9,075 |
| | — |
| | (9 | ) | | 9,066 |
|
FineTech | 11,698 |
| | — |
| | — |
| | 11,698 |
|
SciVac | 1,740 |
| | — |
| | (8 | ) | | 1,732 |
|
OPKO Renal | 2,069 |
| | — |
| | — |
| | 2,069 |
|
OPKO Biologics | 139,784 |
| | — |
| | — |
| | 139,784 |
|
Diagnostics | | | | | | | |
Claros | 17,977 |
| | — |
| | — |
| | 17,977 |
|
OPKO Lab | 32,988 |
| | — |
| | — |
| | 32,988 |
|
| $ | 226,373 |
| | $ | — |
| | $ | (311 | ) | | $ | 226,062 |
|
NOTE 5 ACQUISITIONS, INVESTMENTS AND LICENSES
OPKO Biologics acquisition
In August 2013, we acquired OPKO Biologics (formerly PROLOR) pursuant to an agreement and plan of merger dated April 23, 2013 (the “Merger Agreement”) in an all-stock transaction. OPKO Biologics is an Israeli-based biopharmaceutical company focused on developing and commercializing longer-acting proprietary versions of already approved therapeutic proteins.
Under the terms of the Merger Agreement, holders of PROLOR common stock received 0.9951 shares of our Common Stock for each share of PROLOR common stock. At closing, we delivered 63,670,805 shares of our Common Stock valued at $540.6 million based on the closing price per share of our Common Stock as reported by the NYSE on the closing date of the acquisition, or $8.49 per share. In addition, each outstanding option and warrant to purchase shares of PROLOR common stock that was outstanding and unexercised immediately prior to the closing date, whether vested or not vested, was converted into 7,889,265 options and warrants to purchase OPKO Common Stock at a fair value of $46.1 million.
Until completion of the acquisition, Dr. Phillip Frost, our Chairman and Chief Executive Officer, was PROLOR’s Chairman of the Board and owned greater than 5% of its stock. Dr. Jane H. Hsiao, our Vice Chairman and Chief Technology Officer, and Mr. Steven Rubin, our Executive Vice President, Administration, were both directors of PROLOR and owned less than 5% of its stock.
OPKO Renal acquisition
In March 2013, we acquired OPKO Renal (formerly Cytochroma, Inc.), whose lead products, both in Phase 3 development, are RayaldeeTM (CTAP101), a vitamin D prohormone to treat secondary hyperparathyroidism in patients with stage 3 or 4 CKD and vitamin D insufficiency, and AlpharenTM (Fermagate Tablets), a non-absorbed phosphate binder to treat hyperphosphatemia in dialysis patients (the “OPKO Renal Acquisition”).
In connection with the OPKO Renal Acquisition, we delivered 20,517,030 of shares of our Common Stock valued at $146.9 million based on the closing price per share of our Common Stock as reported by the NYSE on the actual closing date of the acquisition, or $7.16 per share. The number of shares issued was based on the volume-weighted average price per share of our Common Stock as reported on the NYSE for the 10 trading days immediately preceding the date of the purchase agreement for the OPKO Renal Acquisition, or $4.87 per share.
In addition, the OPKO Renal Acquisition requires payments of up to an additional $190.0 million in cash or additional shares of our Common Stock, at our election, upon the achievement of certain milestones relating to development and annual revenue. As a result, we recorded $47.7 million as contingent consideration at acquisition. We evaluate the contingent consideration on an ongoing basis and the changes in the fair value are recognized in earnings until the milestones are achieved. Refer to Note 8.
The following table summarizes the purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the acquisitions of OPKO Renal and OPKO Biologics at the dates of acquisition. The purchase price allocation for OPKO Biologics is subject to change while contingencies that existed on the acquisition date are resolved:
|
| | | | | | | |
(In thousands) | OPKO Renal | | OPKO Biologics |
Current assets (1) | $ | 1,224 |
| | $ | 21,500 |
|
Intangible assets: | | | |
In-process research and development | 191,530 |
| | 590,200 |
|
Patents | 210 |
| | — |
|
Total intangible assets | 191,740 |
| | 590,200 |
|
Goodwill | 2,411 |
| | 139,784 |
|
Property, plant and equipment | 306 |
| | 1,057 |
|
Other assets | — |
| | 371 |
|
Accounts payable and accrued expenses | (1,069 | ) | | (9,866 | ) |
Deferred tax liability | — |
| | (156,403 | ) |
Total purchase price | $ | 194,612 |
| | $ | 586,643 |
|
(1)Current assets include cash of $0.4 million and $20.5 million related to the OPKO Renal and OPKO Biologics acquisitions, respectively.
Goodwill from the acquisition of OPKO Biologics principally relates to the deferred tax liability generated as a result of this being a stock transaction and the assembled workforce. Goodwill from the acquisition of OPKO Renal principally relates to the assembled workforce. Goodwill is not tax deductible for income tax purposes.
Pro forma disclosure for acquisitions
The following table includes the pro forma results for the three months ended March 31, 2013 of the combined companies as though the acquisition of OPKO Renal and OPKO Biologics had been completed as of the beginning of the period presented.
|
| | | |
| March 31, |
(In thousands) | 2013 |
Revenues | $ | 31,376 |
|
Loss from continuing operations | — |
|
Net loss | (41,379 | ) |
Net loss attributable to common shareholders | (41,252 | ) |
Basic and diluted loss from continued operations per share | 0.11 |
|
Basic and diluted loss per share | $ | (0.11 | ) |
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.
Investments
The total assets, liabilities, and net losses of our equity method investees for three months ended March 31, 2014 were $119.1 million, $41.2 million, and $12.5 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 March 31, 2014:
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share prices) Investee name | | Year invested | | Accounting method | | Ownership at March 31, 2014 | | Investment | | Underlying equity in net assets | | Closing share price at March 31, 2014 for investments available for sale |
Neovasc | | 2011 | | Equity method | | 6 | % | | 3,798 |
| | 1,558 |
| | | |
Fabrus | | 2010 | | VIE, equity method | | 12 | % | | 750 |
| | (362 | ) | | | |
RXi | | 2013 | | Equity method | | 17 | % | | 15,000 |
| | 1,841 |
| | | |
Pharmasynthez | | 2013 | | Equity method | | 17 | % | | 11,300 |
| | 6,405 |
| | | |
Zebra | | 2013 | | VIE, equity method | | 19 | % | | 2,000 |
| | 840 |
| | | |
Cocrystal | | 2009 | | Equity method | | 16 | % | | 5,476 |
| | 20 |
| | | |
Neovasc options | | 2011 | | Investment available for sale | | N/A |
| | 925 |
| | | | CA | $ | 4.10 |
|
ChromaDex | | 2012 | | Investment available for sale | | 1 | % | | 1,320 |
| | | | | $ | 1.83 |
|
ARNO | | 2013 | | Investment available for sale | | 5 | % | | 2,000 |
| | | | | $ | 2.22 |
|
Cocrystal 10 yr warrants | | 2014 | | Investment available for sale | | N/A |
| | 500 |
| | | | | |
Plus unrealized gains on investments, options and warrants, net | | 13,120 |
| | | | | |
Less accumulated losses in investees | | (20,492 | ) | | | | | |
Total carrying value of equity method investees and investments, available for sale | | $ | 35,697 |
| | | | | |
Cocrystal Pharma, Inc.
We previously made investments in Biozone Pharmaceuticals, Inc. (“Biozone”) and Cocrystal Discovery, Inc. (“Cocrystal”). Effective January 2, 2014, Biozone and Cocrystal completed a merger transaction pursuant to which Cocrystal was the surviving entity, and the name of the issuer was changed to Cocrystal Pharma, Inc. (“CPI”). In connection with the transaction, CPI issued to Cocrystal’s former security holders 1,000,000 shares of the CPI’s Series B Convertible Preferred Stock (“Series B”). The Series B shares: (i) automatically convert into shares of the CPI’s common stock at a rate of 205.08308640 shares for each share of Series B at such time that CPI has sufficient authorized capital, (ii) are entitled to vote on all matters submitted to shareholders of CPI and vote on an as converted basis and (iii) have a nominal liquidation preference. The merger was being treated as a reverse merger and recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of the former Biozone’s operations were disposed of immediately
prior to the consummation of the merger as reported on a Form 8-K filed on January 8, 2014. Cocrystal is treated as the accounting acquirer as its shareholders control CPI after the Merger.
We have determined that we and our related parties can significantly influence the success of CPI through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over CPI’s operations, we account for our investment in CPI under the equity method.
ARNO
In October 2013, we made an investment in ARNO Therapeutics, Inc. (“ARNO”), a clinical stage company focused on the development of oncology drugs. We invested $2.0 million and received 833,333 ARNO common shares, one year warrants to purchase 833,333 ARNO common shares for $2.40 a share and five year warrants to purchase an additional 833,333 ARNO common shares for $4.00 a share. Our investment was part of a private placement by ARNO. Other investors participating in the private financing included certain related parties. Refer to Note 10. We have determined that our ownership, along with that of our related parties, does not provide us with significant influence over the operations of ARNO and as a result, we account for ARNO as an investment, available for sale, and we record changes in the fair value of ARNO as an unrealized gain or loss in Other comprehensive loss each reporting period. We recorded the warrants on the date of the grant at their estimated fair value of $3.6 million using the Black-Scholes-Merton Model. We record changes in fair value of ARNO warrants in Other income (expense), net in our Condensed Consolidated Statement of Operations.
Neovasc
In 2011, we made an investment in Neovasc, a medical technology company based in Vancouver, Canada. We invested $2.0 million and received two million Neovasc common shares, and two-year warrants to purchase an additional one million shares for $1.25 a share. During the year ended December 31, 2013 we exercised the warrants and paid $1.2 million. We accounted for the warrants as an investment, available for sale and recorded the warrants at fair value on the date of acquisition. We recorded the changes in the fair value of the warrants in Fair value changes of derivatives instruments, net in our Condensed Consolidated Statements of Operations. We have determined that our related parties can significantly influence the success of Neovasc through our board representation and voting power. Accordingly, as we and our related parties have the ability to exercise significant influence over Neovasc’s operations, we account for our investment in Neovasc under the equity method.
2013 licensing agreements
An element of our growth strategy is to leverage our proprietary technology through a combination of internal development, acquisition, and external partnerships to maximize the commercial opportunities for our portfolio of proprietary pharmaceutical and diagnostic products and as such during 2013, we have entered into licensing agreements with Pharmsynthez and RXi.
Pharmsynthez transactions
In April 2013, we entered into a series of concurrent transactions with Pharmsynthez, a Russian pharmaceutical company traded on the Moscow Stock Exchange. The transactions consisted of:
•We delivered approximately $9.6 million to Pharmsynthez.
•Pharmsynthez issued to us approximately 13.6 million of its common shares.
•Pharmsynthez agreed, at its option, to issue approximately 12.0 million common shares to us or to pay us RussianRubles (“RUR”) 265.0 million ($8.1 million) on or before December 31, 2013 (the “Pharmsynthez Note Receivable”). In January 2014, Pharmsynthez delivered to us approximately 12.0 million shares of its common stock in satisfaction of the Pharmsynthez Notes Receivable.
• We had a right to purchase additional shares in Pharmsynthez at a fixed price if Pharmsynthez pays us in cash rather than delivering to us the 12.0 million Pharmsynthez common shares (the “Purchase Option”), however in connection with the settlement of the Pharmsynthez Note Receivable in January 2014, this right terminated.
• We granted rights to certain technologies in the Russian Federation, Ukraine, 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.
•Pharmsynthez paid us $9.5 million under the various collaboration and funding agreements for the development of the technologies (the “Collaboration Payments”).
We recorded the shares received in Pharmsynthez as an equity method investment. We initially recorded the Pharmsynthez Note Receivable, and the Purchase Option, as financial instruments and elected the fair value option for subsequent measurement. Changes in the fair value of the receivable from Pharmsynthez for its common stock or RUR, with the embedded derivative, and the Purchase Option are recorded in Fair value changes of derivative instruments, net in our Condensed Consolidated Statements of Operations. Upon settlement in January 2014, we recorded the additional shares at fair value as an equity method investment.
We have accounted for the license and development activities as a multi-element arrangement, and allocated the total arrangement consideration based on the relative selling prices of the elements. We will record the allocated consideration for development activities as an offset to Research and development expenses over the three-year term of the Collaboration Payments. We will record revenue in connection with the grant of rights to the technologies proportionately as the payments are received.
During the three months ended March 31, 2014, we received $1.4 million related to the Collaboration Payments of which we recorded $0.5 million in Revenue from transfer of intellectual property and $0.4 million as an offset to Research and development expenses.
RXi transactions
In March 2013, we completed the sale to RXi Pharmaceuticals, Inc. (“RXi”) of substantially all of our assets in the field of RNA interference (the “RNAi Assets”) (collectively, the “Asset Purchase Agreement”). As consideration for the RNAi Assets, at the closing of the Asset Purchase Agreement, RXi issued to us 50 million shares of its common stock (the “APA Shares”).
Pursuant to the Asset Purchase Agreement, RXi will be required to pay us up to $50.0 million in milestone payments upon the successful development and commercialization of each drug developed by RXi, certain of its affiliates or any of its or 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”), SciVac Ltd (“SciVac”), previously known as SciGen (I.L.) Ltd, and Zebra Biologics, Inc. (“Zebra”). We made this determination as a result of our assessment that they do not have sufficient resources to carry out their principal activities without additional financial support.
In October 2013, we acquired 840,000 shares of Zebra Series A-2 Preferred Stock for $2.0 million. In connection with the transactions, Dr. Frost also gifted to OPKO 900,000 shares of Zebra restricted common stock which he had received as a founding member of Zebra. Zebra is a privately held biotechnology company focused on the discovery and development of biosuperior antibody therapeutics and complex drugs. After the closing on October 29, 2013, OPKO owns 23.5% of the Series A-2 Preferred stock issued and outstanding of Zebra. Dr. Richard Lerner, M.D., a member of our Board of Directors, is a founder of Zebra and, along with Dr. Frost, serves as a member of Zebra’s Board of Directors.
In order to determine the primary beneficiary of Zebra, we evaluated our investment and our related parties’ investment, as well as our investment combined with the related party group’s investment to identify if we had the power to direct the activities that most significantly impact the economic performance of Zebra. We determined that we do not have the power to direct the activities that most significantly impact Zebra’s economic performance. Based on the capital structure, governing documents and overall business operations of Zebra, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact Zebra’s economic performance. We did determine, however, that we can significantly influence the success of Zebra through our board representation and voting power. Accordingly, as we have the ability to exercise significant influence over Zebra’s operations, we account for our investment in Zebra under the equity method.
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’ economic performance is conveyed through the board of directors of Fabrus as no entity
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’ 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 50% stock ownership in SciVac from FDS Pharma LLP (“FDS”). SciVac is a privately-held Israeli company that produces a third-generation hepatitis B-vaccine. From November 2012 until March 31, 2014, we loaned to SciVac a combined $2.5 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 March 31, 2014 and December 31, 2013. These assets are owned by, and these liabilities are obligations of, SciVac, not us.
|
| | | | | | | |
(In thousands) | March 31, 2014 | | December 31, 2013 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 123 |
| | $ | 2 |
|
Accounts receivable, net | 103 |
| | 283 |
|
Inventories, net | 1,704 |
| | 1,696 |
|
Prepaid expenses and other current assets | 337 |
| | 218 |
|
Total current assets | 2,267 |
| | 2,199 |
|
Property, plant and equipment, net | 1,441 |
| | 1,374 |
|
Intangible assets, net | 1,073 |
| | 1,111 |
|
Goodwill | 1,732 |
| | 1,821 |
|
Other assets | 268 |
| | 261 |
|
Total assets | $ | 6,781 |
| | 6,766 |
|
Liabilities | | | |
Current liabilities: | | | |
Accounts payable | $ | 1,223 |
| | $ | 1,136 |
|
Accrued expenses | 7,800 |
| | 6,498 |
|
Notes payable | 2,101 |
| | 1,537 |
|
Total current liabilities | 11,124 |
| | 9,171 |
|
Other long-term liabilities | 266 |
| | 1,240 |
|
Total liabilities | $ | 11,390 |
| | $ | 10,411 |
|
NOTE 6 DEBT
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional buyers and accredited investors (collectively the “Purchaser”) in a private placement in reliance on exemptions from registration under the Securities Act of 1933, (the “Securities Act”). The Purchasers of the 2033 Senior Notes include Frost Gamma Investments Trust, a trust affiliated with Dr. Frost, and Hsu Gamma Investment, L.P., an entity affiliated with Dr. Hsiao. The 2033 Senior Notes were issued on January 30, 2013. The 2033 Senior Notes, which total $175.0 million, bear interest at the rate of 3.00% per year, payable semiannually on February 1 and August 1 of each year, beginning August 1, 2013. The 2033 Senior Notes will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the instruments governing the 2033 Senior Notes, subject to certain exceptions, the holders may require us to repurchase all or any portion of their 2033 Senior Notes for cash at a repurchase price equal to 100% of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued and unpaid interest to but not including the fundamental change repurchase date.
The following table sets forth information related to the 2033 Senior Notes which is included our Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | |
(In thousands) | Embedded conversion option | | 2033 Senior Notes | | Discount | | Total |
Balance at December 31, 2013 | $ | 101,087 |
| | $ | 158,064 |
| | $ | (47,239 | ) | | $ | 211,912 |
|
Amortization of debt discount | — |
| | — |
| | 1,777 |
| | 1,777 |
|
Change in fair value of embedded derivative | 11,112 |
| | — |
| | — |
| | 11,112 |
|
Balance at March 31, 2014 | $ | 112,199 |
| | $ | 158,064 |
| | $ | (45,462 | ) | | $ | 224,801 |
|
The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second scheduled trading day immediately preceding the maturity date, at the option of the holders. Additionally, holders may convert their 2033 Senior Notes prior to the close of business on the scheduled trading day immediately preceding November 1, 2032, under the following circumstances: (1) conversion based upon satisfaction of the trading price condition relating to the 2033 Senior Notes; (2) conversion based on the Common Stock price; (3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior Notes for redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of cash and shares of Common Stock, at our election unless we have made an irrevocable election of net share settlement. The initial conversion rate for the 2033 Senior Notes will be 141.4827 shares of Common Stock per $1,000 principal amount of 2033 Senior Notes (equivalent to an initial conversion price of approximately $7.07 per share of Common Stock), and will be subject to adjustment upon the occurrence of certain events. In addition, we will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes in connection with a make-whole fundamental change (as defined in the Indenture) and holders who convert upon the occurrence of certain specific events prior to February 1, 2017 (other than in connection with a make-whole fundamental change).
We may not redeem the 2033 Senior Notes prior to February 1, 2017. On or after February 1, 2017 and before February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes but only if the last reported sale price of our Common Stock exceeds 130% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date on which we deliver the redemption notice. The redemption price will equal 100% of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest to but not including the redemption date. On or after February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes at a redemption price of 100% of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest up to but not including the redemption date.
The terms of the 2033 Senior Notes, include, among others: (i) rights to convert into shares of our Common Stock, including upon a fundamental change; and (ii) a coupon make-whole payment in the event of a conversion by the holders of the 2033 Senior Notes on or after February 1, 2017 but prior to February 1, 2019. We have determined that these specific terms are considered to be embedded derivatives. As a result, embedded derivatives are required to be separated from the host contract, the 2033 Senior Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. We have concluded that the embedded derivatives within the 2033 Senior Notes meet these criteria and, as such, must be valued separate and apart from the 2033 Senior Notes and recorded at fair value each reporting period.
For accounting and financial reporting purposes, we combine these embedded derivatives and value them together as one unit of accounting. At each reporting period, we record these embedded derivatives at fair value which is included as a component of the 2033 Senior Notes on our Condensed Consolidated Balance Sheets.
We used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. A binomial lattice model generates two probable outcomes — one up and another down —arising at each point in time, starting from the date of valuation until the maturity date. A lattice was initially used to determine if the 2033 Senior Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the 2033 Senior Notes will be converted early if the conversion value is greater than the holding value; or (ii) the 2033 Senior Notes will be called if the holding value is greater than both (a) the redemption price (as defined in the Indenture) and (b) the conversion value plus the coupon make-whole payment at the time. If the 2033 Senior Notes are called, then the holder will maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2) converting the 2033 Senior Notes.
Using this lattice model, we valued the embedded derivatives using the “with-and-without method,” where the value of the 2033 Senior Notes including the embedded derivatives is defined as the “with,” and the value of the 2033 Senior Notes excluding the embedded derivatives is defined as the “without.” This method estimates the value of the embedded derivatives by looking at the difference in the values between the 2033 Senior Notes with the embedded derivatives and the value of the 2033 Senior Notes without the embedded derivatives.
The lattice model requires the following inputs: (i) price of our Common Stock; (ii) Conversion Rate (as defined in the Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.
The following table sets forth the inputs to the lattice model used to value the embedded derivative:
|
| | | |
| March 31, 2014 | | Issuance Date |
Stock price | $9.32 | | $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 | 1.66% | | 1.12% |
Estimated stock volatility | 50% | | 40% |
Estimated credit spread | 823 basis points | | 944 basis points |
The following table sets forth the fair value of the 2033 Senior Notes with and without the embedded derivatives, and the fair value of the embedded derivatives as of the issuance date and March 31, 2014. At March 31, 2014 and at issuance date the principal amount of the 2033 Senior Notes was $158.1 million and $175.0 million, respectively:
|
| | | | | | | |
(In thousands) | March 31, 2014 | | Issuance Date |
Fair value of 2033 Senior Notes: | | | |
With the embedded derivatives | $ | 230,362 |
| | $ | 175,000 |
|
Without the embedded derivatives | $ | 118,163 |
| | $ | 115,796 |
|
Estimated fair value of the embedded derivatives | $ | 112,199 |
| | $ | 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 2033 Senior Notes were issued through March 31, 2014, we observed an increase in the market price of our Common Stock which primarily resulted in a $11.1 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.
We have entered into line of credit agreements with twelve 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 Chilean and Spanish lines of credit:
|
| | | | | | | | |
(Dollars in thousands) | | | | | | Balance Outstanding |
Lender | | Interest rate on borrowings at March 31, 2014 | | Credit line capacity | | March 31, 2014 | | December 31, 2013 |
Itau Bank | | 5.00% | | $3,000 | | $1,628 | | $1,999 |
Bank of Chile | | 6.40% | | 2,250 | | 1,534 | | 2,079 |
BICE Bank | | 5.00% | | 1,700 | | 1,315 | | 516 |
Corp Banca | | —% | | — | | — | | (47) |
BBVA Bank | | 5.00% | | 2,000 | | 998 | | 523 |
Penta Bank | | 8.20% | | 1,000 | | 907 | | 946 |
Security Bank | | 7.26% | | 1,300 | | 907 | | 1,075 |
BCI | | —% | | — | | — | | 198 |
Estado Bank | | 5.44% | | 2,000 | | 858 | | 1,772 |
Sabadell Bank | | 4.50% | | 206 | | — | | — |
Bilbao Vizcaya Bank | | 4.72% | | 344 | | — | | — |
Banco Popular | | 6.09% | | 275 | | — | | — |
Deutsche Bank | | 4.00% | | 206 | | — | | — |
Santander Bank | | 4.50% | | 275 | | — | | — |
Total | | | | $14,556 | | $8,147 | | $9,061 |
At March 31, 2014 and December 31, 2013, the weighted average interest rate on our lines of credit was approximately 5.9% and 7.7%, respectively.
At March 31, 2014 and December 31, 2013, we had mortgage notes and other debt related to OPKO Spain as follows:
|
| | | | | | | |
(In thousands) | March 31, 2014 | | December 31, 2013 |
Current portion of notes payable | $ | 631 |
| | $ | 1,964 |
|
Other long-term liabilities | 3,101 |
| | 3,270 |
|
Total mortgage notes and other debt | $ | 3,732 |
| | $ | 5,234 |
|
The mortgages and other debts mature at various dates ranging from 2015 through 2024 bearing variable interest rates from 2.7% up to 6.3%. The weighted average interest rate on the mortgage notes and other debt at March 31, 2014 and December 31, 2013, was 3.4% and 3.9%, respectively. The mortgages are secured by our office space in Barcelona.
NOTE 7 ACCUMULATED OTHER COMPREHENSIVE INCOME
For the three months ended March 31, 2014, changes in Accumulated other comprehensive income, net of tax, were as follows:
|
| | | | | | | | | | | |
(In thousands) | Foreign currency | | Unrealized gains in Accumulated OCI | | Total |
Balance at December 31, 2013 | $ | 1,371 |
| | $ | 2,047 |
| | $ | 3,418 |
|
Other comprehensive income before reclassifications, net of tax (1) | (1,801 | ) | | 335 |
| | (1,466 | ) |
Amounts reclassified from accumulated other comprehensive income, net of tax (1) | — |
| | (553 | ) | | (553 | ) |
Net other comprehensive income | (1,801 | ) | | (218 | ) | | (2,019 | ) |
Balance at March 31, 2014 | $ | (430 | ) | | $ | 1,829 |
| | $ | 1,399 |
|
| |
(1) | Effective tax rate of 38.47%. |
Amounts reclassified from Accumulated other comprehensive income for the three months ended March 31, 2014 related to $1.3 million realized gain on the sales of certain of our investments available for sale. Of the $1.3 million gain on the sales of our investments available for sale, a $0.9 million gain was reclassified from unrealized gains in Accumulated other comprehensive income to Other income (expense), net for the three months ended March 31, 2014.
NOTE 8 FAIR VALUE MEASUREMENTS
We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
A summary of our investments as of March 31, 2014, classified as available for sale and carried at fair value, is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| As of March 31, 2014 |
(In thousands) | Amortized Cost | | Gross unrealized gains in Accumulated OCI | | Gross unrealized losses in Accumulated OCI | | Gain/(Loss) in Accumulated Deficit | | Fair value |
Common stock investments, available for sale | $ | 3,320 |
| | $ | 2,035 |
| | $ | (150 | ) | | $ | — |
| | $ | 5,205 |
|
Common stock options/warrants | 1,425 |
| | 1,610 |
| | — |
| | 3,762 |
| | 6,797 |
|
Total assets | $ | 4,745 |
| | $ | 3,645 |
| | $ | (150 | ) | | $ | 3,762 |
| | $ | 12,002 |
|
A summary of our investments as of December 31, 2013, classified as available for sale and carried at fair value is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2013 |
(In thousands) | Amortized Cost | | Gross unrealized gains in Accumulated OCI | | Gross unrealized losses in Accumulated OCI | | Gain/(Loss) in Accumulated Deficit | | Fair value |
Common stock investments, available for sale | $ | 3,376 |
| | $ | 2,698 |
| | $ | — |
| | $ | — |
| | $ | 6,074 |
|
Common stock options/warrants | 925 |
| | 1,041 |
| | — |
| | 4,022 |
| | 5,988 |
|
Total assets | $ | 4,301 |
| | $ | 3,739 |
| | $ | — |
| | $ | 4,022 |
| | $ | 12,062 |
|
Any future fluctuation in fair value related to these instruments that is judged to be temporary, including any recoveries of previous write-downs, will be recorded in Accumulated other comprehensive income or loss. If we determine that any future valuation adjustment was other-than-temporary, we will record a loss during the period such determination is made.
As of March 31, 2014, we have money market funds that qualify as cash equivalents, forward contracts for inventory purchases (Refer to Note 9) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics, FineTech, OPKO Spain, and OPKO Renal that are required to be measured at fair value on a recurring basis. In addition, in connection with our investment and our consulting agreement with Neovasc, we record the related Neovasc options at fair value as well as the derivative instruments related to our transactions with Pharmsynthez.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
|
| | | | | | | | | | | | | | | |
| Fair value measurements as of March 31, 2014 |
(In thousands) | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total |
Assets: | | | | | | | |
Money market funds | $ | 132,343 |
| | $ | — |
| | $ | — |
| | $ | 132,343 |
|
Certificates of deposit | — |
| | 816 |
| | — |
| | 816 |
|
Common stock investments, available for sale | 5,205 |
| | — |
| | — |
| | 5,205 |
|
Common stock options/warrants | — |
| | 6,797 |
| | — |
| | 6,797 |
|
Forward contracts | — |
| | 1 |
| | — |
| | 1 |
|
Total assets | $ | 137,548 |
| | $ | 7,614 |
| | $ | — |
| | $ | 145,162 |
|
Liabilities: | | | | | | | |
Embedded conversion option | $ | — |
| | $ | — |
| | $ | 112,199 |
| | $ | 112,199 |
|
Deferred acquisition payments, net of discount | — |
| | — |
| | 840 |
| | 840 |
|
Contingent consideration: | | | | | | | |
CURNA | — |
| | — |
| | 583 |
| | 583 |
|
OPKO Diagnostics | — |
| | — |
| | 14,193 |
| | 14,193 |
|
OPKO Renal | — |
| | — |
| | 54,819 |
| | 54,819 |
|
OPKO Spain | — |
| | — |
| | 1,421 |
| | 1,421 |
|
Total liabilities | $ | — |
| | $ | — |
| | $ | 184,055 |
| | $ | 184,055 |
|
|
| | | | | | | | | | | | | | | |
| Fair value measurements as of December 31, 2013 |
(In thousands) | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total |
Assets: | | | | | | | |
Money market funds | $ | 168,418 |
| | $ | — |
| | $ | — |
| | $ | 168,418 |
|
Certificates of deposit | — |
| | 827 |
| | — |
| | 827 |
|
Pharmsynthez Notes Receivable & Purchase Option | — |
| | 6,151 |
| | — |
| | 6,151 |
|
Common stock investments, available for sale | 6,074 |
| | — |
| | — |
| | 6,074 |
|
Common stock options/warrants | — |
| | 5,988 |
| | — |
| | 5,988 |
|
Forward contracts | — |
| | 49 |
| | — |
| | 49 |
|
Total assets | $ | 174,492 |
| | $ | 13,015 |
| | $ | — |
| | $ | 187,507 |
|
Liabilities: | | | | | | | |
Embedded conversion option | — |
| | — |
| | 101,087 |
| | 101,087 |
|
Deferred acquisition payments, net of discount | — |
| | — |
| | 5,465 |
| | 5,465 |
|
Contingent consideration: | | | | | | | |
CURNA | — |
| | — |
| | 573 |
| | 573 |
|
OPKO Diagnostics | — |
| | — |
| | 13,776 |
| | 13,776 |
|
FineTech | — |
| | — |
| | 3,124 |
| | 3,124 |
|
OPKO Renal | — |
| | — |
| | 53,092 |
| | 53,092 |
|
OPKO Spain | — |
| | — |
| | 1,043 |
| | 1,043 |
|
Total liabilities | $ | — |
| | $ | — |
| | $ | 178,160 |
| | $ | 178,160 |
|
The carrying amount and estimated fair value of our long-term debt, as well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the 2033 Senior Notes is determined using a binomial lattice approach in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. Refer to Note 6.
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
(In thousands) | Carrying Value | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
2033 Senior Notes | $ | 112,602 |
| | $ | 118,163 |
| | $ | — |
| | $ | — |
| | $ | 118,163 |
|
As of March 31, 2014 and December 31, 2013, the carrying value of our other assets and liabilities approximates their fair value due to their short-term nature.
The following tables reconcile the beginning and ending balances of our Level 3 assets and liabilities as of March 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | |
| March 31, 2014 |
(In thousands) | Contingent consideration | | Deferred acquisition payments, net of discount | | Embedded conversion option |
Balance at December 31, 2013 | $ | 71,620 |
| | $ | 5,484 |
| | $ | 101,087 |
|
Additions | — |
| | — |
| | — |
|
Total losses (gains) for the period: | | | | | |
Included in results of operations | 2,610 |
| | — |
| | 11,112 |
|
Payments | (3,214 | ) | | (4,644 | ) | | — |
|
Balance at March 31, 2014 | $ | 71,016 |
| | $ | 840 |
| | $ | 112,199 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
(In thousands) | BZNE Note and conversion feature | | Contingent consideration | | Deferred acquisition payments, net of discount | | Embedded conversion option |
Balance at December 31, 2012 | $ | 2,040 |
| | $ | 20,056 |
| | $ | 10,103 |
| | $ | — |
|
Additions | — |
| | 47,710 |
| | — |
| | 59,204 |
|
Total losses (gains) for the period: | | | | | | | |
Included in results of operations | — |
| | 6,947 |
| | 829 |
| | 43,082 |
|
Foreign currency impact | — |
| | 31 |
| | — |
| | — |
|
Conversion | (2,040 | ) | | — |
| | — |
| | (1,199 | ) |
Payments | — |
| | (3,124 | ) | | (5,448 | ) | | — |
|
Balance at December 31, 2013 | $ | — |
| | $ | 71,620 |
| | $ | 5,484 |
| | $ | 101,087 |
|
The estimated fair values of our financial instruments have been determined by using available market information and what we believe to be appropriate valuation methodologies. We use the following methods and assumptions in estimating fair value:
Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash flow model for the expected payments based on estimated timing and expected revenues. We use several discount rates depending on each type of contingent consideration related to FineTech, OPKO Diagnostics, CURNA, OPKO Spain and OPKO Renal transactions. The discount rates used range from 6% to 27% and were based on the weighted average cost of capital for those businesses. If the discount rates were to increase by 1%, on each transaction, the contingent consideration would decrease by $1.7 million. If estimated future sales were to decrease by 10%, the contingent consideration related to CURNA, FineTech and OPKO Renal would decrease by $0.5 million. As of March 31, 2014, of the $71.0 million of contingent consideration, $25.7 million is recorded in Accrued expenses and $45.3 million is recorded in Other long-term liabilities. As of December 31, 2013, of the $71.6 million of contingent consideration, $28.0 million is recorded in Accrued expenses and $43.6 million is recorded in Other long-term liabilities.
Deferred payments – We estimate the fair value of the deferred payments utilizing a discounted cash flow model for the expected payments.
Embedded conversion option – We estimate the fair value of the embedded conversion option related to the 2033 Senior Notes using a binomial lattice model. Refer to Note 6 for detail description of the binomial lattice model and the fair value assumptions used.
NOTE 9 DERIVATIVE CONTRACTS
The following table summarizes the fair values and the presentation of our derivative financial instruments in the Condensed Consolidated Balance Sheets:
|
| | | | | | | | | |
(In thousands) | Balance Sheet Component | | March 31, 2014 | | December 31, 2013 |
Derivative financial instruments: | | | | | |
Common stock options/warrants | Investment, net | | $ | 6,797 |
| | $ | 5,988 |
|
Embedded conversion option | 2033 Senior Notes, net of discount and estimated fair value of embedded derivatives | | $ | 112,199 |
| | $ | 101,087 |
|
Forward contracts (1) | Current portion of lines of credit and notes payable | | $ | 2,436 |
| | $ | 1,585 |
|
| |
(1) | The loss on forward contracts is recorded in Accrued expenses. The gain on the forward contracts is recorded in Prepaid expenses and other current assets. |
We enter into foreign currency forward exchange contracts to cover the risk of exposure to exchange rate differences arising from inventory purchases on letters of credit. Under these forward contracts, for any rate above or below the fixed rate, we receive or pay the difference between the spot rate and the fixed rate for the given amount at the settlement date.
To qualify the derivative instrument as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At March 31, 2014 and December 31, 2013, our derivative financial instruments do not meet the documentation requirements to be designated as hedges. Accordingly, we recognize the changes in Fair value of derivative instruments, net in our Condensed Consolidated Statements of Operations. The following table summarizes the (losses) and gains recorded during the three months ended March 31, 2014 and 2013:
|
| | | | | | | |
| Three months ended March 31, |
(In thousands) | 2014 | | 2013 |
Derivative gain (loss): | | | |
Common stock options/warrants | $ | 596 |
| | $ | 1,260 |
|
2033 Senior Notes | (11,112 | ) | | (24,788 | ) |
Forward contracts | 1 |
| | (21 | ) |
Total | $ | (10,515 | ) | | $ | (23,549 | ) |
The outstanding forward contracts at March 31, 2014 and December 31, 2013, have been recorded at fair value, and their maturity details are as follows:
|
| | | | | | | | | | | | |
(In thousands) Days until maturity | | Contract value | | Fair value at March 31, 2014 | | Effect on income (loss) |
0 to 30 | | $ | 285 |
| | $ | 294 |
| | $ | 9 |
|
31 to 60 | | 952 |
| | 957 |
| | 5 |
|
61 to 90 | | 121 |
| | 120 |
| | (1 | ) |
91 to 120 | | 921 |
| | 911 |
| | (10 | ) |
121 to 180 | | 156 |
| | 154 |
| | (2 | ) |
Total | | $ | 2,435 |
| | $ | 2,436 |
| | $ | 1 |
|
|
| | | | | | | | | | | | |
(In thousands) Days until maturity | | Contract value | | Fair value at December 31, 2013 | | Effect on income (loss) |
0 to 30 | | $ | 472 |
| | $ | 489 |
| | $ | 17 |
|
31 to 60 | | 562 |
| | 579 |
| | 18 |
|
61 to 90 | | 503 |
| | 517 |
| | 14 |
|
91 to 120 | | — |
| | — |
| | — |
|
121 to 180 | | — |
| | — |
| | — |
|
More than 180 | | — |
| | — |
| | — |
|
Total | | $ | 1,537 |
| | $ | 1,585 |
| | $ | 49 |
|
NOTE 10 RELATED PARTY TRANSACTIONS
In October, 2013, we paid the $170,000 filing fee to the Federal Trade Commission (the “FTC”) in connection with filings made by us and Dr. Hsiao, our Vice Chairman of the Board and Chief Technical Officer, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”).
In October 2013, we entered into an agreement with ARNO pursuant to which we invested $2.0 million as part of an approximate $30 million financing. In exchange for our investment, we received 833,333 shares of ARNO common stock, one-year warrants to purchase 833,333 shares of ARNO common stock, for $2.40 a share and five-year warrants to purchase an additional 833,333 shares of ARNO common stock for $4.00 a share. Other investors participating in the private financing included Frost Gamma Investments Trust, a trust affiliated with Dr. Frost (the “Gamma Trust”), Hsu Gamma Investment, L.P., an entity affiliated with Dr. Hsiao (the “Hsu Gamma”), and other members of our board of directors and management. In connection with the transaction, ARNO agreed that for so long as we continue to hold at least 3% of the total number of outstanding shares of ARNO’s common stock on a fully-diluted basis, we will have the right to appoint a non-voting observer to attend all meetings of ARNO’s board of directors and we shall have a right of first negotiation that provides us with exclusive rights to negotiate with ARNO for a 45-day period regarding any potential strategic transactions that ARNO’s board of directors elects to pursue.
In October 2013, we made an investment in Zebra pursuant to which we acquired 840,000 shares of Zebra’s Series A-2 Preferred stock for $2.0 million. Zebra is a privately held biotechnology company focused on the discovery and development of biosuperior antibody therapeutics and complex drugs. Zebra’s patented platform is an advanced version of a core technology developed at The Scripps Research Institute (“TSRI”) by Dr. Lerner (the “TSRI Technology”). Zebra acquired the license to the TSRI Technology from a third party who had licensed such rights from TSRI. In connection with its acquisition of rights to the TSRI Technology, Zebra agreed to make certain research funding payments to Dr. Lerner’s laboratory at TSRI to further support development of the TSRI Technology. Dr. Lerner also participated in the Series A-2 Preferred Stock financing on the same financial terms as the Company. Each of Drs. Frost and Lerner serve as members of the board of directors and scientific consultants to Zebra. After the closing, we own 23.5% of the Series A-2 Preferred stock issued and outstanding by Zebra. Each of Drs. Frost and Lerner received 900,000 restricted shares of Zebra common stock in connection with their roles as founders and scientific consultants to Zebra. Dr. Frost gifted his 900,000 shares of Zebra restricted common stock to OPKO.
Effective May 1, 2013, we entered into an agreement with Dr. Hsiao pursuant to which we have the right to utilize approximately 5,000 square feet of laboratory space in Taiwan, inclusive of any and all utility costs, taxes and building maintenance fees. In addition, Dr. Hsiao provides certain other services to us relating to government grant work in Taiwan, as well as the coordination of work flow between the our U.S. and Taiwanese operations. The term of the agreement is for five years and obligates us to pay Dr. Hsiao approximately $60,000 annually.
In August 2013, we acquired OPKO Biologics (formerly PROLOR) pursuant to an Agreement and Plan of Merger dated as of April 23, 2013 in an all-stock transaction. Until completion of the acquisition, Dr. Frost was PROLOR’s Chairman of the Board and a greater than 5% stockholder of PROLOR. Dr. Hsiao and Mr. Rubin were also directors and less than 5% stockholders of PROLOR.
In January 2013, we sold $175.0 million aggregate principal amount of 2033 Senior Notes in a private placement in reliance on exemptions from registration under the Securities Act. The Purchasers of the 2033 Senior Notes include The Gamma Trust and Hsu Gamma. The 2033 Senior Notes were issued on January 30, 2013.
In December 2012, we entered into a five-year lease agreement with AVI Properties, LLC (“AVI”), an entity affiliated with Dr. Jonathan Oppenheimer, who previously served as OPKO Lab’s Chief Executive Officer and currently serves as Strategic Director. The lease is for approximately 44,000 square feet of laboratory and office space in Nashville, Tennessee, where OPKO Lab is based. The lease provides for payments of approximately $18 thousand per month in the first year, increasing annually if the consumer price index exceeds 5%, plus applicable sales tax. In addition to the rent, we pay a portion of operating expenses, property taxes and parking.
During the three months ended March 31, 2014 and the year ended December 31, 2013, FineTech recorded revenue of $0.1 million and $0.3 million, respectively, for the sale of APIs to Teva Pharmaceutical Industries, Limited (“Teva”). Dr. Frost serves as the Chairman of the Board of Directors of Teva.
In February 2012, we entered into a cooperative research funding and option agreement with TSRI to support research for the development of novel oligomeric compounds relating to our molecular diagnostics technology (the “Research Agreement”). Pursuant to the Research Agreement, we agreed to provide funding of approximately $0.9 million annually over a five year period. In conjunction with entering into the Research Agreement, we also entered into a license agreement with TSRI for technology relating to libraries of peptide tertiary amides. In addition, we entered into a second license with TSRI for technology relating to highly selective inhibitors of c-Jun-N-Terminal Kinases that may be useful for the treatment of various diseases, including Parkinson’s disease. We also entered into a research funding and option agreement to provide funding of approximately $0.2 million annually over three years to support further development of the technology. Dr. Frost served as a Trustee for TSRI until November 2012 and Dr. Lerner, a member of our Board of Directors, served as its President until December 2011.
In February 2012, we made a $1.0 million investment in ChromaDex. Other investors participating in the private financing included the Gamma Trust, Hsu Gamma, and Dr. Lerner. Following our investment, we own 1.5% of ChromaDex, the Gamma Trust owns approximately 16% of ChromaDex; Hsu Gamma owns approximately 1%; and certain of our directors own less than 1% of ChromaDex.
In February 2012, we purchased from Biozone, now known as CPI, $1.7 million of 10% secured convertible promissory notes (the “Biozone Notes”), convertible into Biozone common stock at a price equal to $0.20 per common share, which Biozone Notes are due and payable on February 24, 2014 and ten year warrants to purchase 8.5 million shares of Biozone common stock at an exercise price of $0.40 per share.
In December 2013, we converted the Biozone Notes into approximately 10 million shares of Biozone common stock. In July 2012, we exercised the Biozone Warrants utilizing the net exercise feature and received approximately 7,700,000 shares of Biozone common stock. We also entered into a license agreement pursuant to which we acquired a world-wide license for the development and commercialization of products utilizing Biozone’s proprietary drug delivery technology, including a technology called QuSomes, exclusively for OPKO in the field of ophthalmology and non-exclusive for all other therapeutic fields, subject in each case to certain excluded products.
On January 2, 2014, Biozone sold substantially all of its operating assets, including its QuSomes technology, to MusclePharm Corporation (OTCQB: MSLP), an international, award-winning sports nutrition company (“Musclepharm”)
in exchange for 1.2 million shares of Musclepharm’s common stock. Effective January 3, 2014, Biozone completed a merger with Cocrystal, another entity in which we have an equity investment. In connection with the merger, Biozone issued to Cocrystal’s security holders 1,000,000 shares of Biozone Series B Convertible Preferred Stock (“Series B”). The Series B shares: (i) automatically convert into shares of Biozone’s common stock at a rate of 205.08308640 shares for each share of Series B at such time that Biozone has sufficient authorized capital, (ii) are entitled to vote on all matters submitted to shareholders of Biozone and vote on an as converted basis and (iii) have a nominal liquidation preference. Effective January 16, 2014, we invested an additional $0.5 million in the company as part of a $2.75 million private placement and received 1 million shares of common stock and 1 million 10-year warrants exercisable at $0.50 per share.
In August 2011, we made an investment in Neovasc. Dr. Frost and other members of our management are shareholders of Neovasc. Prior to the investment, Dr. Frost beneficially owned approximately 36% of Neovasc, Dr. Hsiao owned approximately 6%, and Mr. Rubin owned less than 1%. Dr. Hsiao and Mr. Rubin also serve on the board of directors of Neovasc.
In November 2010, we made an investment in Fabrus. In exchange for the investment, we acquired approximately 13% of Fabrus on a fully diluted basis. Our investment was part of a $2.1 million financing for Fabrus. Other investors participating in the financing include the Gamma Trust and Hsu Gamma. In connection with the financing, Drs. Frost and Hsiao joined the Fabrus Board of Managers. Dr. Lerner owns approximately 5% of Fabrus. Mr. Vaughn Smider, Founder and CEO of Fabrus, is an Assistant Professor at TSRI. Dr. Frost served as a Trustee for TSRI until November 2012, and Dr. Lerner served as President of TSRI until December 2011. In October 2013, we made loans totaling $0.1 million to Fabrus, which loans are due and payable in January, 2014 and accrue interest as a rate of 7% per annum. No payments have been made to date.
In June 2010, we entered into a cooperative research and development agreement with Academia Sinica, Taipei, Taiwan (“Academia Sinica”), for pre-clinical work for a compound against various forms of cancer. Dr. Alice Yu, a member of our Board of Directors, previously served as a Distinguished Research Fellow and Associate Director at the Genomics Research Center, Academia Sinica (“Genomics Research Center”). In connection with the Academia Sinica Agreement, we are required to pay Academia Sinica approximately $0.2 million over the term of the agreement.
Effective in September 2009, we entered into an agreement pursuant to which we invested $2.5 million in Cocrystal (now CPI) in exchange for 1,701,723 shares of Cocrystal’s Convertible Series A Preferred Stock. A group of investors, led by the Frost Group LLC, which is an entity controlled by Dr. Frost, Dr. Hsiao and Mr. Rubin, (the “Cocrystal Investors”), previously invested $5.0 million in Cocrystal, and agreed to invest an additional $5.0 million payable in two equal installments in September 2009 and March 2010. As a result of an amendment to the Cocrystal Investors’ agreements dated June 9, 2009, we, rather than the Cocrystal Investors, made the first installment investment ($2.5 million) on September 21, 2009. As discussed above, effective January 2014, Cocrystal completed a merger with Biozone and is now known as Cocrystal Pharma, Inc.
In June 2009, we entered into a stock purchase agreement with Sorrento, pursuant to which we invested $2.3 million in Sorrento Therapeutics, Inc. (“Sorrento”). In exchange for the investment, we acquired approximately one-third of the outstanding common shares of Sorrento and received a fully-paid, exclusive license to the Sorrento antibody library for the discovery and development of therapeutic antibodies in the field of ophthalmology. On September 21, 2009, Sorrento entered into a merger transaction with Quikbyte Software, Inc. (“Quikbyte”). Prior to the merger transaction, certain investors, including Dr. Frost and other members of our management group, made an investment in Quikbyte. Dr. Lerner serves as a consultant and scientific advisory board member to Sorrento and owns less than one percent of its shares. In December 2013, we completed the sale of our stake in Sorrento and recorded a gain on the sale of $17.2 million and other income of $2.7 million related to an early termination fee under a license agreement with Sorrento.
In November 2007, we entered into an office lease with Frost Real Estate Holdings, LLC (“Frost Holdings”), an entity affiliated with Dr. Frost. The lease was for approximately 8,300 square feet of space in an office building in Miami, Florida, where our principal executive offices are located. The lease provided for payments of approximately $18 thousand per month in the first year increasing annually to $24 thousand per month in the fifth year, plus applicable sales tax. The rent was inclusive of operating expenses, property taxes and parking. The rent for the first year was reduced to reflect a $30 thousand credit for the costs of tenant improvements. In August 2012, we entered into a six-month extension on the same terms as the 2007 expiring lease and in February 2013, we agreed to extend the lease on a month-to-month basis. Effective January 1, 2014, we entered into a new lease agreement with Frost Holdings for approximately 11,000 square feet of space. The lease provides for payments of approximately $30 thousand per month in the first year increasing annually to $34 thousand per month in the fifth year, plus applicable sales tax. As in the original lease, the rent is inclusive of operating expenses, property taxes and parking. The rent will be reduced by $155,200 for the cost of tenant improvements, of which approximately $68 thousand will be credited against rent payments over a period of 12 months.
We reimburse Dr. Frost for Company-related use by Dr. Frost and our other executives of an airplane owned by a company that is beneficially owned by Dr. Frost. We reimburse Dr. Frost in an amount equal to the cost of a first class airline ticket between the travel cities for each executive, including Dr. Frost, traveling on the airplane for Company-related business. We do not reimburse Dr. Frost for personal use of the airplane by Dr. Frost or any other executive; nor do we pay for any other fixed or variable operating costs of the airplane. We reimbursed Dr. Frost approximately $13 thousand and $13 thousand for Company-related travel by Dr. Frost and other OPKO executives during the three months ended March 31, 2014 and 2013.
NOTE 11 COMMITMENTS AND CONTINGENCIES
In connection with our acquisitions of CURNA, OPKO Diagnostics, OPKO Spain, and OPKO Renal, we agreed to pay future consideration to the sellers upon the achievement of certain events. As a result, as of March 31, 2014 , we recorded $71.0 million as contingent consideration, with $25.7 million recorded within Accrued expenses and $45.3 million recorded within Other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. Refer to Note 4.
On April 29, 2013, we were named in a putative class action filed in the Eighth Judicial District Court in and for Clark County, Nevada against PROLOR (now known as OPKO Biologics), the members of the PROLOR Board of Directors, individually (including Drs. Frost and Hsiao and Steven Rubin), and the Company. From May 1, 2013 through May 6, 2013, we were named in an additional five putative class actions suits filed in the Eighth Judicial District Court in and for Clark County, Nevada against the same defendants. On July 17, 2013, these suits were consolidated, for all purposes, into an amended class action complaint. The lawsuit is brought by purported holders of PROLOR’s common stock, both individually and on behalf of a putative class of PROLOR’s stockholders, asserting claims that PROLOR’s Board of Directors breached its fiduciary duties in connection with the merger by purportedly failing to maximize stockholder value, that PROLOR and its Board of Directors failed to disclose material information to PROLOR’s stockholders, and that the Company aided and abetted the alleged breaches of fiduciary duty. The lawsuit seeks monetary damages, including increased consideration to PROLOR’s stockholders, equitable relief, including, among other things, rescission of the Merger Agreement along with rescissionary damages, and an award of all costs, including reasonable attorneys’ fees. On May 5, 2014, the court issued an order dismissing all claims as to all defendants without prejudice.
In July 2012, OPKO Lab received a letter from AdvanceMed Corporation (“AdvanceMed”) regarding a post-payment review conducted by AdvanceMed (the “Post-Payment Review Letter”). The Post-Payment Review Letter originated with a post payment review audit by AdvanceMed of 183 claims submitted by OPKO Lab to the Medicare program. OPKO Lab believes that its billing practices were appropriate and it is following the appeal process set forth by Medicare. OPKO Lab received a partially favorable determination, which reduced the amount of the alleged overpayment, and it continues to appeal the remaining alleged overpayments. No assurances can be given about the outcome of the appeal.
We are a party to other litigation in the ordinary course of business. We do not believe that any such litigation will have a material adverse effect on our business, financial condition, or results of operations.
We expect to incur substantial losses as we continue the development of our product candidates, continue our other research and development activities, and establish a sales and marketing infrastructure in anticipation of the commercialization of our diagnostic and pharmaceutical product candidates. We currently have limited commercialization capabilities, and it is possible that we may never successfully commercialize any of our diagnostic and pharmaceutical product candidates. We do not currently generate revenue from any of our diagnostic and pharmaceutical product candidates. Our research and development activities are budgeted to expand over a period of time and will require further resources if we are to be successful. As a result, we believe that our operating losses are likely to be substantial over the next several years. We may need to obtain additional funds to further develop our research and development programs, and there can be no assurance that additional capital will be available to us on acceptable terms, or at all.
NOTE 12 SEGMENTS
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, Brazil, and Uruguay. The diagnostics segment consists of two operating segments, our (i) pathology operations we acquired through the acquisition of OPKO Lab and (ii) point-of-care and molecular diagnostics operations. There are no inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes.
Information regarding our operations and assets for our operating segments and the unallocated corporate operations as well as geographic information are as follows:
|
| | | | | | | |
| For the three months ended March 31, |
(In thousands) | 2014 | | 2013 |
Product revenues: | | | |
Pharmaceuticals | $ | 19,828 |
| | $ | 15,527 |
|
Diagnostics | — |
| | — |
|
Corporate | — |
| | — |
|
| $ | 19,828 |
| | $ | 15,527 |
|
Revenue from services: | | | |
Pharmaceuticals | $ | — |
| | $ | — |
|
Diagnostics | 1,910 |
| | 3,052 |
|
Corporate | 60 |
| | 40 |
|
| $ | 1,970 |
| | $ | 3,092 |
|
Revenue from transfer of intellectual property: | | | |
Pharmaceuticals | $ | 285 |
| | $ | 12,500 |
|
Diagnostics | 191 |
| | 257 |
|
Corporate | — |
| | — |
|
| $ | 476 |
| | $ | 12,757 |
|
Operating (loss) income: | | | |
Pharmaceuticals | $ | (16,573 | ) | | $ | 8,483 |
|
Diagnostics | (7,078 | ) | | (9,634 | ) |
Corporate | (6,137 | ) | | (5,025 | ) |
Less: Operating loss attributable to noncontrolling interests | (489 | ) | | (597 | ) |
| $ | (30,277 | ) | | $ | (6,773 | ) |
Depreciation and amortization: | | | |
Pharmaceuticals | $ | 1,849 |
| | $ | 1,695 |
|
Diagnostics | 1,691 |
| | 1,689 |
|
Corporate | 24 |
| | 45 |
|
| $ | 3,564 |
| | $ | 3,429 |
|
Revenues: | | | |
United States | $ | 2,446 |
| | $ | 15,849 |
|
Chile | 7,285 |
| | 7,741 |
|
Spain | 6,150 |
| | 4,324 |
|
Israel | 4,546 |
| | 2,572 |
|
Mexico | 1,831 |
| | 890 |
|
Uruguay | 16 |
|
| — |
|
| $ | 22,274 |
| | $ | 31,376 |
|
|
| | | | | | | |
(In thousands) | March 31, 2014 | | December 31, 2013 |
Assets: | | | |
Pharmaceuticals | $ | 1,067,848 |
| | $ | 1,065,033 |
|
Diagnostics | 113,515 |
| | 116,944 |
|
Corporate | 174,329 |
| | 209,539 |
|
| $ | 1,355,692 |
| | $ | 1,391,516 |
|
Goodwill: |
| |
|
|